Fin. Oversight & Mgmt. Bd. v. U.S. Bank N.A. (In re Fin. Oversight & Mgmt. Bd.)
- Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
- 1 month 3 weeks ago
- Case Type:
- Business
- Case Status:
- Affirmed in part and Reversed in part
- Citation:
- 23-2036, 23-2049, 23-2050, 23-2052, 23-2053, 23-2054, 23-2057 (1st Circuit, Nov 13,2024) Published
- Tag(s):
-
- Ruling:
- The U.S. Circuit Court for the First Circuit held (1) parties holding revenue bonds issued by the Puerto Rico Electric Power Authority (PREPA) have a non-recourse claim on PREPA's estate for the principal amount of the bonds (almost $9B), plus matured interest; (2) the bondholders' claims are secured-to an undecided extent-by PREPA's "net revenues" and liens on certain funds in accordance with a trust agreement; and (3) the bondholders could pursue a claim against PREPA for an accounting to determine if funds were wrongly diverted from debt service.
- Procedural context:
- On summary judgment at the trial level, the district court overseeing the restructuring process (also called the "Title III court") held (1) the trust agreement governing the revenue bonds only granted the bondholders security interests in money deposited in the "Sinking Fund" or "Subordinate Funds" (explained in the Facts section below); (2) the Board could avoid unperfected security interests under 11 U.S.C. § 544(a); (3) the bondholders could sue PREPA to recover moneys held outside the Sinking Fund and the Subordinate Funds; (4) for purposes of claim allowance, the bondholders had an unsecured claim on net revenues of about $2.4 billion (as opposed to almost $9 billion, the bonds' face value); and (5) the bondholders failed to state a claim against PREPA for breach of trust and were not entitled to an accounting. Both sides appealed to the First Circuit.
- Facts:
- PREPA is the sole electric utility in Puerto Rico. An Act allows PREPA to issue bonds secured by its entire gross or net revenues and present or future income. PREPA raised funds by issuing revenue bonds pursuant to a trust agreement. The trust agreement called for PREPA to cover debt service from the "Sinking Fund," but provided that if insufficient money existed in the Sinking Fund, PREPA could draw on "Subordinate Funds" to service debt. Other provisions of the trust agreement granted security interests in certain funds to bondholders. Moreover, the trust agreement provided remedies to bondholders in the event bond obligations were unpaid. The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was enacted in 2016 to allow Puerto Rico to restructure its debt. It is akin to Chapter 9 of the Bankruptcy Code. PROMESA created the Financial Oversight and Management Board to place troubled entities into the restructuring process. After PREPA defaulted on its obligations to bondholders in 2017, and PREPA entered the restructuring process, PROMESA prevented the bondholders from pursuing remedies against PREPA under the trust agreement. The Board asked the Title III court for a declaratory judgment concerning the bondholders' rights and remedies against PREPA, and the bondholders filed counterclaims. Litigation ended in the Title III court at summary judgment.
- Judge(s):
- Kayatta, Howard, and Rikelman
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