In 1941, Puerto Rico passed the Puerto Rico Electric Power Authority Act, which created PREPA, a public electric utility. In 1974, PREPA executed a Trust Agreement with a bank, under which PREPA agreed to repay certain bondholders over time by raising money through revenue bonds pursuant to the Authority Act. In 2017, PREPA defaulted on its obligations under the Trust Agreement. Under the Authority Act and Trust Agreement, the trustee had various options for remedies, including suits at law and equity to enforce contractual covenants. However, Congress enacted the Puerto Rice Oversight, Management, and Economic Stability Act (PROMESA). This act created the Board, which filed an adversary proceeding to define the “rights and remedies that bondholders had against PREPA” in 2019. After negotiating a restructuring agreement, the board agreed not to prosecute the proceeding. The Commonwealth unilaterally terminated this agreement in 2022, so the board filed an amended complaint, reviving the action. The Title III court granted partial summary judgment, concluding that the Trust Agreement only granted security interests in money in the Sinking Fund and Subordinate Fund, not broader security interests. It also held that bondholders could sue PREPA to recover money outside of these funds because of the equitable specific performance remedy outlined in section 804 of the Trust Agreement. The court estimated this remedy to be about $2.4 billion. In its final summary judgment order, the Title III court held that the bondholders had failed to state a claim for breach of trust and were not entitled to an accounting of the misappropriated money. The bondholders appealed, and the board cross-appealed.
In Fin. Oversight & Mgmt. Bd. for P.R. v. U.S. Bank N.A. (In Re Fin. Oversight & Mgmt. Bd. for P.R.), 104 F.4th 367 (1st Cir. 2024), the court affirmed the dismissal of the breach of trust claim but reversed the dismissal of the accounting claim. The court first found that the Trust Agreement granted the bondholders a lien of PREPA’s revenue, even if it was not in the Sinking or Subordinate Funds. The Trust Agreement’s Preamble was not a mere introduction; rather, it contained relevant clauses of the contract. The language was sufficient to create a security interest, and this was not exclusive to money in the Sinking and Subordinate Funds. All Net Revenues acquired in the future would be subject to the pledge in the Trust Agreement. The court also held that the lien was unavoidable under 11 U.S.C. § 544(a). If the Net Revenue lien has been perfected, it cannot be avoided. The lower court did not address whether the lien was perfected because it had determined the lien did not exist. Here, the court found that the lien was perfected and unavoidable. Lastly, the court found that the bondholders could recover the face value of the Revenue Bonds plus matured interest. It held that the claim resembled a “liquidated claim” and that the amount of the claim should be based on the contract from which it arose. Therefore, the dismissal of the breach of trust claim had been proper. Regarding the accounting claim, the court held that the concept was not defined in the Trust Agreement, the Authority Act, or Puerto Rico law. However, such a claim is historically an equitable remedy. The Trust Agreement and Authority Act permited equitable actions, and the claim had been properly made. Therefore, the accounting claim should not have been dismissed.
By Sara Williams [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott: [email protected]