Fiscal board files reply supporting Boston appeals court overturning ruling favoring PREPA bondholders

A petition filed by the Financial Oversight and Management Board in the U.S. First Circuit Court of Appeals in Boston seeks to overturn a ruling that found that holders of Puerto Rico Electric Power Authority bonds have a secured claim of $8.5 billion against the utility’s current and future net revenues.

By The Star Staff

The Financial Oversight and Management Board has filed a reply supporting its petition for a rehearing on the Puerto Rico Electric Power Authority’s (PREPA) lien and recourse challenge, according to a court document.

The petition filed in the U.S. First Circuit Court of Appeals in Boston seeks to overturn a ruling that found that holders of PREPA bonds have a secured claim of $8.5 billion against the utility’s current and future net revenues.

In a recent 14-page petition, the oversight board argued for a rehearing regarding the bondholders’ security interest in PREPA’s net revenues, with the sole issue being whether the interest in net revenues includes PREPA’s “right to receive net revenues,” or just revenues after receipt and reduction by current expenses.

“The trust agreement, by its own terms, limits net revenues to ‘moneys received’ after payment of current expenses. That should end the inquiry,” the oversight board said. “No one asserts a security interest in ‘moneys received’ as original collateral can be perfected with financing statements. Perfection of such a security interest requires possession of the money or control of the bank deposit accounts into which the money has been deposited -- and both are lacking here.”

But the court ruled, the oversight board said, that the bonds are not secured by revenues, only by net revenues.

“PREPA lacks a cause of action against customers for ‘Net Revenues,’” the document notes. “PREPA could not pledge an account it did not have and that does not exist. No authority has been cited indicating that the words ‘moneys received’ extend to the ‘right to receive’ money or that ‘moneys received’ is an account.”

The board said in the filing that security interest is unperfected because PREPA lacks possession of the funds or control of the deposit accounts.

Bondholders could have perfected their interest through control agreements but failed to do so, the oversight board argued in the document filed last Friday.

It said the panel should grant the rehearing, recognizing that the bondholders’ security interest in net revenues is limited to actual funds received and their proceeds after the allocation of expenses, which remain unperfected under the Uniform Commercial Code.