PREPA bondholders eyeing action against Puerto Rico government

Bloomberg News

Puerto Rico Electric Power Authority bondholders stated their case for action against Puerto Rico's central government before the U.S. Appeals Court for the First Circuit on Thursday, and the panel of three judges seemed sympathetic.

Two of the arbiters seemed at least willing to entertain the bondholders' argument and one may have shown some sympathy. 

At issue is whether section 510(b) of the U.S. bankruptcy code, which was included in the Puerto Rico Oversight, Management and Economic Stability Act, forecloses the bondholders' claim against the island's central government for alleged illegal actions that reduced bondholder recoveries. 

Appellate Judge Julie Rikelman cited precedents when the issue is "investment damages," that arise from the transaction, 510(b) prevents investors' double attack on the same issue holds. "But … the argument here is there was a completely separate act. It wasn't really investment-related when the commonwealth came in and set up all these rules that couldn't be foreseen." 

In their brief, the Ad Hoc Group of PREPA bondholders said Puerto Rico pledged in the 1974 Trust Agreement for the bonds, it would not "limit or alter the rights or powers hereby vested in [PREPA] until all such bonds … are met and discharged." But, decades later, the commonwealth withdrew PREPA's ability to set its own rates, they charge. "In addition, the commonwealth interfered with PREPA's ability to collect its revenues, including by permitting government entities to avoid paying their utility bills." 

Attorney for the Ad Hoc Group G. Eric Brunstad, Jr. said the bondholders' claim stems from the Puerto Rico central government's wrongdoing and not from bondholders' original bond purchase. 

Section 510(b) authorizes subordination "for damages arising from the purchase or sale of [a] security."

Another judge asked Puerto Rico Oversight Board attorney Mark Harris if he thought there was a distinction between the words "arising from" and "relating to." Harris said some judges have ruled the former wording is narrower in scope than the latter, but in this case the bondholders' claim was clearly covered. 

Harris said 510(b) was set up to stop securities holders from making a second claim for the same security and the bondholders were trying to do that in this case.

The bondholders want the circuit court to overrule the U.S. District Court and allow them to press their case against Puerto Rico's central government over its actions on PREPA.