PREPA judge tells parties to look at the past before the future

U.S. District Judge Laura Taylor Swain ordered the parties in the Puerto Rico Electric Power Authority bankruptcy to focus on legal issues concerning the past rather than the bondholders' claim, which she said depends partly on future events. 

The Puerto Rico Oversight Board and the bondholders both have said goals for the bankruptcy should be methodology for valuing the bondholders' secured claim and determining the actual value, Swain said in her order issued Monday. "The court agrees that valuation of that claim is an essential step for progress in PREPA's Title III [bankruptcy] case, but there are substantial methodological issues that must first be resolved."

If parties simply went forward with litigation to determine a figure for the claim, there is a risk the figure would be undermined by updated economic data and projections, she said. "The only litigation matter proposed by the parties that does not require reference to changing economic data and projections is the bondholders' accounting counterclaim." 

Accordingly, Swain said parties should first litigate the bondholders' counterclaim, with arguments based on limited discovery determining bondholders' net revenues. "The initial goal should be to resolve the parties' disputes concerning the interpretation of terms under the trust agreement and provisions of the bankruptcy code and other applicable law in the context of the types of income and expenses that PREPA has incurred."

The bondholders have pointed to PREPA reports that indicated substantial net revenues. Swain said, "At this juncture, the court is not persuaded that the past reporting methodology for the monthly operating reports is determinative of the parties' current rights and obligations, nor that the past reporting methodology is entirely irrelevant to the interpretation and application of the Trust Agreement's terms." 

Swain noted the bondholders in late March renewed their call for the lifting of the bankruptcy's stay on their right to appoint a receiver for PREPA. She said she would consider the matter at a May 20 omnibus hearing. 

Swain set a schedule through May 12 for the PREPA bankruptcy. 

"For decades, PREPA neglected maintaining Puerto Rico's grid and power generation because it did not have sufficient revenue for adequate upkeep," the Oversight Board said in a comment to The Bond Buyer. "It ended in the collapse of Puerto Rico's energy system — and in PREPA's bankruptcy. All stakeholders in the PREPA Title III proceeding must ensure PREPA is emerging from bankruptcy as a financially healthy institution with the resources necessary to restore and maintain an energy system that serves the people of Puerto Rico properly."

Assured Guaranty, which is the biggest bondholder party, didn't immediately responded to a request for a comment on Swain's order.

Swain denied a bondholders' motion for an administrative expense claim in March. Bond parties have since appealed to the U.S. Court of Appeals for the First Circuit.