FOMB v. AmeriNational Community Services, LLC District Court of Puerto Rico, San Juan
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 23-1747 (1st Circuit, Jul 17,2024) Published
- Tag(s):
-
- Ruling:
- Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act does not alter the legal standard, found in both New York and Puerto Rico law, that the terms of a final contract supersedes terms that were contained in prior drafts of the contract.
- Procedural context:
- The United States District Court for the District of Puerto Rico, exercising its authority under the federal Puerto Rico Oversight, Management, and Economic Stability Act, approved the "Qualifying Modification" of debts of Puerto Rico's Public Finance Corporation and overruled the objection of two creditors. The creditors appealed.
- Facts:
- Puerto Rico has two entities relevant to the dispute: (a) the Government Development Bank ("GDB"); and (b) the Public Finance Corporation ("PFC"), which is a subsidiary of the GDB.
In 2011 and 2012, GDB issued standby letters of credit to certain creditors of PFC. In 2016, the Government of Puerto Rico implemented a moratorium on debt-service payments, including GDB's payments on the letters of credit. Congress then enacted the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). GDB and its parent ("AAFAF") then began trying to restructure GDB's debts.
PROMESA has two mechanisms that would allow Puerto Rico and its entities to restructure debt: (a) Title III, which mirrors traditional bankruptcy court proceedings; and (b) Title VI, which allows municipal entities to enter into voluntary and binding restructuring agreements called Qualifying Modifications. Qualifying Modifications become binding only after the Financial Oversight and Management Board ("FOMB") for Puerto Rico certifies that the debt restructuring complies with PROMESA and the federal district court approves the debt restructuring. Once approved, a Qualified Modification is binding on all affected creditors, even if they did not consent to the debt restructuring.
Negotiations between GDB and its creditors resulted in a Restructuring Support Agreement ("RSA") that was executed in May 2017. The RSA required existing creditors to swap their claims for bonds, worth 55% of the debt, that would be issued by an independent public trust known as the Debt Recovery Authority ("DRA"). The RSA required GDB to transfer most of its assets to the DRA to provide collateral for the DRA's bonds.
Schedule 2 to the RSA term sheet provided in part that PFC's creditors were eligible to receive a "pro rata distribution" of the DRA bonds in satisfaction of GDB's obligations, including the obligations arising from the letters of credit. The term sheet stated that the new bonds would be issued after the letter of credit beneficiaries demonstrated that they had "valid claims" (the "Valid Claim Requirement").
The term sheet included standard language that it did not constitute a binding commitment, was subject to the execution of definitive agreements ("Definitive Documents"), and was subject to the PROMESA approval requirements.
GDB then solicited creditor approvals for the Qualifying Modifications. The solicitation materials disclosed the requirement that the PFC creditors holding letters of credit from GDB would have to demonstrate that they had "valid claims" and that the final terms would be set forth in a Bond Indenture.
GDB and AAFAF began proceedings in the federal district court to approve the GDB Qualifying Modification. The draft bond indenture and draft master transfer agreement that were submitted to the court did not include the Valid Claim Requirement.
The district court approved the GDB Qualifying Modification. In its order, the district court approved the terms in the RSA, as "described in the Solicitation Statement." The Order also stated that the Qualifying Modification was "expressly conditioned" on the execution of definitive documents "in form and substance satisfactory to GDB" and a supermajority of the "GDB Bondholders."
GDB and the required creditors subsequently closed the bond transaction. The Master Transfer Agreement ("MTA"), which governed the transfer of GDB's assets to the trust, and the Bond Indenture authorized the issuance of Additional Bonds to PFC's creditors that held letters of credit from GDB. The MTA included a standard merger clause, which stated that the MTA, the bond indenture, and other specified documents contained the "full and entire understanding and agreement of the Parties."
GDB's creditors negotiated the Definitive Documents and had the opportunity to object to the draft Bond Indenture that did not include the Valid Claim Requirement.
In late 2022, the PFC proposed the PFC Qualifying Modification. This Qualifying Modification provided for treatment of the 2011 and 2012 bonds for which GDB subsequently issued letters of credit, replacing the bonds with new bonds worth about $47.7 million. The FOMB commenced proceedings in the district court for approval of the PFC Qualifying Modification.
Two of PFC's creditors objected to the PFC Qualifying Modification, arguing that none of PFC's creditors seeking new bonds had satisfied the Valid Claim Requirement. The district court overruled this objection because the Definitive Documents (i.e., the final, executed agreements) did not include the Valid Claim Requirement.
- Judge(s):
- Montecalvo, Lipez, and Rikelman, Circuit Judges
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