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  • Writer's pictureThe San Juan Daily Star

US to again defend constitutionality of PROMESA in energy utility bankruptcy

Principal Deputy Assistant Attorney General Brian Boynton

By The Star Staff

The United States will defend the constitutionality of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) in constitutional challenges resulting from the Puerto Rico Electric Power Authority (PREPA) Title III bankruptcy process.

Brian Boynton, principal deputy assistant attorney general, and U.S. Attorney W. Stephen Muldrow said in a notice this week that the U.S. would participate in the bankruptcy process to defend PROMESA.

On June 14 and June 15 of this year, the court certified to the U.S. Attorney various challenges to the constitutionality of PREPA’s Plan of Adjustment proposed by the Financial Oversight and Management Board under PROMESA. In accordance with a July 27 court order, the United States will file its memorandum of law by Oct. 6.

Monoline insurers Assured Guaranty Corp. and Assured Guaranty Municipal Corp. in June objected to PREPA’s debt plan. They said their objection calls into question the constitutionality of PROMESA on the grounds that it violates the uniformity requirement of the Constitution’s Bankruptcy Clause because it treats Puerto Rico differently from other U.S. jurisdictions.

That argument has previously been rejected, but, Assured argued, the earlier ruling has been superseded by other events, including that the court agreed with the oversight board’s contention in the bond lien and recourse challenge that the board had the status of a trustee in bankruptcy.

“Moreover, the Oversight Board is now judicially estopped [barred] from arguing that PROMESA is not a bankruptcy law, because it argued in the Amended Lien & Recourse Challenge that the Oversight Board qualified as a ‘trustee in bankruptcy’ on account of its powers under PROMESA,” Assured said. “Having prevailed in its position that PROMESA is a bankruptcy law, giving the Oversight Board the powers of a ‘bankruptcy trustee,’ the Oversight Board is now estopped from taking a contrary position.”

In August the oversight board filed a third debt adjustment plan for PREPA to restructure some $10 billion in debt. The confirmation hearing is slated for 2024.

Meanwhile, Syncora Guarantee and GoldenTree Asset Management have filed an appeal notice of a ruling by U.S. District Judge Laura Taylor Swain that rejected their request for a removal of a stay order that prevents appointment of a receiver for PREPA.

Swain ruled in the bond lien ruling earlier this year that payment of the $8.4 billion PREPA bonded debt is not secured by a 1974 trust agreement, noting that bondholders have an unsecured claim against the utility to be liquidated by “reference to the value of future net revenues.”

The ruling was part of an adversary proceeding between U.S. Bank National Association as Trustee, the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp. and Syncora Guarantee Inc. against the oversight board seeking a judgment that the $8.4 billion in PREPA bonds was secured.

The oversight board as part of the case wanted a determination from the court seeking a disallowance of the bonded debt to the extent that it purports to be secured by any PREPA property aside from certain moneys currently deposited in a so-called sinking fund, which is a fund created by the trust agreement, and a limited number of certain other funds explicitly made subject to liens by the terms of the trust agreement.

The bondholders, in turn, contended that they have a claim for the face amount of the bonds that is secured by all of PREPA’s current and future revenues, to which they can look for payment in perpetuity. The determination enabled the oversight board to file a new plan of adjustment that cut PREPA’s debt by almost 80%.

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