The First Circuit Court of Appeals upheld U.S. District Court Judge Laura Taylor Swain's ruling against Puerto Rico Electric Power Authority bondholders in their lawsuit aimed at getting relief from Puerto Rico's central government.
The three judge panel in their ruling Wednesday said PREPA bondholders' trustee, U.S. Bank, N.A., could not make certain claims against Puerto Rico now because the trustee was a party to the 2022 Puerto Rico central government plan of adjustment in which it waived the right to object to the central government's treatment of PREPA.
U.S. Bank served as bond trustee in the central government bankruptcy as well.
The plan of adjustment included a claims class based on the U.S. bankruptcy code section 510(b) arising or relating to the purchase of securities from the debtor or an affiliate. In the Puerto Rico government plan of adjustment, no money was provided for such claims. Since PREPA is an affiliate of the Puerto Rico government, the trustee effectively waived its claims in 2022 and cannot revive them, even if they might otherwise be legitimate, the appeals court said.
"This is a very narrow and technical decision on a claim against the commonwealth [of Puerto Rico], not PREPA," said Puerto Rico-based attorney John Mudd. The circuit court argued that the PREPA bondholders' case is covered by section 510(b) because they allege Puerto Rico impaired its promises that encouraged them to purchase the revenue bonds, Mudd said.
The
In their appeal, the bond parties said the Puerto Rico Oversight Board filed its motion to enforce a year after the deadline and contended the district court had misinterpreted section 510(b). The circuit court rejected both arguments.
The district court had stayed all litigation related to the bondholders' classification argument after they raised it, the circuit court judges said in rejecting the too-late argument.
"We reject the bondholders' front-line position that the 'plain text' of section 510(b) encompasses only those claims alleging misconduct at the time of the security transaction itself and does not extend to claims concerning 'subsequent intervening wrongdoing,'" the circuit court wrote.
The bondholders cited Khan v. Barton, a case in which a court said subsequent debtor misdeed was ineligible for protection by 510(b). The circuit court said in that case the debtor's action was completely independent of the original actions protected by 510(b). In this case the trustee is alleging Puerto Rico impaired rights it had granted to induce the bondholders to purchase the PREPA bonds, the circuit court said.
The
The board, Puerto Rico Fiscal Agency and Financial Advisory Authority and a publicist for the PREPA bondholders didn't immediately respond to requests for comment.
