PREPA bondholders appeal order blocking receiver

Puerto Rico Electric Power Authority bondholders appealed a court decision and order blocking their efforts to either appoint a receiver for the authority or to dismiss the current bankruptcy.

U.S. District Judge Laura Taylor Swain ruled against the bondholders orally on May 20 and in writing on May 26.

Assured Guaranty (AGO), National Public Finance Guarantee, GoldenTree Asset Management, Syncora Guarantee, bond trustee U.S. Bank, N.A., the PREPA Ad Hoc Group and the Majority Member PREPA Ad Hoc Group filed notices of their appeals of Swain's ruling to the U.S. Court of Appeals for the First District Wednesday evening.

"Bondholders seem to believe that the First Circuit will be more sympathetic to their arguments than Judge Swain," said John Mudd, an attorney and commentator in Puerto Rico. "Whether this is true remains to be seen, but the more challenges are brought, [the] greater the likelihood of success, other things being equal."

The bond parties had sought the court to lift the stay on their power to seek dismissal of the bankruptcy or to seek the appointment of a receiver. They sought the dismissal of the bankruptcy because they believed this would allow them to gain control of the authority through their appointment of a receiver.

In her May 26 rejection of the bondholders, Swain argued that the law gives her authority as to when to lift stays in bankruptcies.

Swain said she was lifting the stay on the bond parties' pursuing an accounting counterclaim to determine the amount of PREPA's net revenues.

"Given the potential for the resolution of the accounting counterclaim to offer further clarity and promote progress in PREPA's Title III [bankruptcy] case, including with respect to assessing the feasibility of a proposed plan of adjustment and any determinations regarding adequate protection, the court declines to lift the PREPA litigation stay as to the lift stay motions at the time."

"Prosecution of the accounting counterclaim, with a focus on the methodology for determining net revenues, should lead to a formula that will permit the parties and the court to determine whether net revenues have historically existed, whether they currently exist in the form of available funds and, ultimately, the value of the bondholders' secured claim," Swain said.

The bond parties said part of the bankruptcy code said the court had the responsibility to act promptly with regards to their lift stay request. However, Swain said the bond parties through their actions in the case have waived their rights to require prompt action on the topic.

Swain also said that part of the code applies "only to requests for relief from the stay of 'any act against property of the estate.' ? The court is not persuaded that the lift stay motions, which both ultimately seek the appointment of a receiver, seek relief concerning an action against property of the debtor within the meaning of [the bankruptcy section.]"

Swain has scheduled a hearing on cross-motions for summary judgement on the accounting counterclaim litigation for Nov. 18.