Bonds

Hurdles cleared in PREPA bankruptcy case

The judge in the Puerto Rico Electric Power Authority bankruptcy rejected five bondholder arguments Tuesday, bringing approval of the Oversight Board’s plan of adjustment closer.

U.S. District Judge Laura Taylor Swain granted the Oversight Board’s motion to dismiss the bond parties’ — bond trustee U.S. Bank N.A., Assured Guaranty, Syncora Guarantee and the now defunct Ad Hoc Group of PREPA Bondholders — five remaining counterclaims from a 2019 adversary proceeding. Some of the Ad Hoc group’s members — like GoldenTree Asset Management — are actively working against the board’s proposed plan of adjustment.

One attorney not involved in the case was not surprised by the ruling, noting Swain consistently rules against bondholders.

U.S. District Judge Laura Taylor Swain’s latest ruling removed further hurdles to her approval of the proposed PREPA plan of adjustment.

The timing of the ruling is “interesting,” said Puerto Rico Clearinghouse Principal Cate Long, coming “just days before the First Circuit [Court of Appeals] hears oral argument on GoldenTree’s lift stay” motion.

The bond parties claimed PREPA was in breach of its obligations to increase rates so that its revenues were sufficient to pay bondholders. Swain said the authority is not required to raise rates to pay bonds although it has the power to do so.

The bond parties argued their claims stemmed from statutory obligations and were non-dischargeable in a bankruptcy, but Swain ruled the claims were not statutory, and even if they were, would be dischargeable.

Swain also ruled the authority’s pledge of money to the bondholders in the bond document was an “unsecured promise.”

The bond parties said the trust agreement’s use of the words “held in trust” made the authority a “trustee” for the bondholders, but Swain said this wasn’t the case.

In another claim, the bond parties argued Puerto Rico law’s doctrine of “dolo” — Spanish for fraud — made PREPA liable. Swain said the bond parties failed to plead that fraud, deception, or bad faith has occurred.

On the topic of “rescission,” Swain said the bond parties are invoking an “inexact translation” they “never proffered” of a statute they had not earlier “cited,” which fails to meet federal law’s “basic notice pleading requirements.”

On the bond parties’ claims based on the takings clause, Swain said, traditionally takings clause claims are used only when there is collateral, and the bondholders’ collateral is just some PREPA funds.

“Utilization of Title III [of the Puerto Rico Oversight, Management, and Economic Stability Act] by a debtor does not by itself give rise to takings claims against PREPA any more than utilization of Chapter 9 [of federal bankruptcy code] gives rise to takings claims against a municipality,” Swain said.

In March Swain ruled against bondholder claims of a lien on the authority’s gross revenues but not the five claims in Tuesday’s decision.

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