Fin. Oversight & Mgmt. Bd. for P.R. v. U.S. Bank N.A. (In re Fin. Oversight & Mgmt. Bd. for P.R.)

• Docket Number: 17 BK 3283-LTS (Jointly Administered),17 BK 4780-LTS,Adv. Proc. No. 19-00391-LTS
• Decision Date: 26 June 2023
• Citation: 678 F.Supp.3d 269
• Parties: IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of the Commonwealth of Puerto Rico et al., Debtors. In re: the Financial Oversight and Management Board for Puerto Rico, as representative of Puerto Rico Electric Power Authority, Debtor. The Financial Oversight and Management Board for Puerto Rico, as representative of Puerto Rico Power Electric Authority, Plaintiff/Counterclaim-Defendant, Puerto Rico Fiscal Agency and Financial Advisory Authority, the Official Committee of Unsecured Creditors of All Title III Debtors, Cortland Capital Market Services, SOLA LTD., Solus Opportunities Fund 5 LP, Ultra Master LTD, Ultra NB LLC, Union de Trabajadores de la Industria Electrica y Riego Inc., and Sistema de Retiro de los Empleados de la Autoridad de Energia Electica, Intervenor-Plaintiffs, v. U.S. Bank National Association, as Trustee, Defendant/Counterclaim-Plaintiff, The Ad Hoc Group of Prepa Bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corporation, and Syncora Guarantee, Inc., Intervenor-Defendants/Counterclaim-Plaintiffs.
• Court: U.S. District Court — District of Puerto Rico

678 F.Supp.3d 269

IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO,

as representative of the Commonwealth of Puerto Rico et al., Debtors.

In re: the Financial Oversight and Management Board for Puerto Rico,

as representative of Puerto Rico Electric Power Authority, Debtor.

The Financial Oversight and Management Board for Puerto Rico,

as representative of Puerto Rico Power Electric Authority, Plaintiff/Counterclaim-Defendant,

Puerto Rico Fiscal Agency and Financial Advisory Authority,

the Official Committee of Unsecured Creditors of All Title IIIDebtors, Cortland Capital Market Services,SOLA LTD., Solus Opportunities Fund 5 LP, Ultra Master LTD, Ultra NB LLC,Union de Trabajadores de la Industria Electrica y Riego Inc.,and Sistema de Retiro de los Empleados de la Autoridad de Energia Electica, Intervenor-Plaintiffs, v. U.S. Bank National Association, as Trustee, Defendant/Counterclaim-Plaintiff,

The Ad Hoc Group of Prepa Bondholders, Assured Guaranty Corp.,

Assured Guaranty Municipal Corp., National Public Finance Guarantee Corporation,

and Syncora Guarantee, Inc., Intervenor-Defendants/Counterclaim-Plaintiffs.

No. 17 BK 3283-LTS (Jointly Administered)

No. 17 BK 4780-LTS

Adv. Proc. No. 19-00391-LTS

United States District Court, D. Puerto Rico

Signed June 26, 2023

OF COUNSEL FOR A&S LEGAL STUDIO, PSC, By: Luis F. del Valle-Emmanuelli, 434 Avenida Hostos, San Juan, PR 00918, PROSKAUER ROSE LLP, By: Martin J. Bienenstock, Ehud Barak, Margaret Dale, Jeffrey W. Levitan, Michael T. Mervis, Daniel S. Desatnik, Elliot R. Stevens, Eleven Times Square, New York, NY 10036 and Steven O. Weise, 2029 Century Park East, Suite 2400, Los Angeles, CA 90067 and Paul V. Possinger, 70 West Madison, Suite 3800, Chicago, IL 60602 and Jared M. DuBosar, 2255 Glades Road, Suite 421 Atrium, Boca Raton, FL 33431, Attorneys for the Financial Oversight and Management Board as Representative for PREPA.

CASILLAS, SANTIAGO & TORRES LLC, By: Juan J. Casillas Ayala, Israel Fernández Rodríguez, Juan C. Nieves González, Cristina B. Fernández Niggemann, PO Box 195075, San Juan, PR 00919, PAUL HASTINGS LLP, By: Luc A. Despins, Nicholas A. Bassett, G. Alexander Bongartz, 200 Park Avenue, New York, New York 10166, Counsel to the Official Committee of Unsecured Creditors.

MARINI PIETRANTONI MUÑIZ LLC, By: Luis C. Marini-Biaggi, Carolina Velaz-Rivero, 250 Ponce de León Ave., Suite 900, San Juan, Puerto Rico 00918, O'MELVENY & MYERS LLP, By: John J. Rapisardi, Maria J. DiConza, Gabriel L. Olivera, 7 Times Square, New York, NY 10036 and Peter Friedman, 1625 Eye Street, NW, Washington, DC 20006 and Elizabeth L. McKeen, Ashley M. Pavel, 610 Newport Center Drive, 17th Floor, Newport Beach, CA 92660, Attorneys for the Puerto Rico Fiscal Agency and Financial Advisory Authority.

MCCONNELL VALDÉS LLC, By: Nayuan Zouairabani, 270 Muñoz Rivera Avenue, Suite 7, Hato Rey, Puerto Rico 00918, WACHTELL, LIPTON, ROSEN & KATZ, By: Richard G. Mason, Amy R. Wolf, Emil A. Kleinhaus, Angela K. Herring, Michael H. Cassel, 51 West 52nd Street, New York, New York 10019, Attorneys for Cortland Capital Market Services LLC, as Administrative Agent.

SIMPSON THACHER & BARTLETT LLP, By: Nicholas Baker, 425 Lexington Avenue, New York, New York 10017, Attorneys for Cortland Capital Market Services

LLC, as Administrative Agent and SOLA LTD, Solus Opportunities Fund 5 LP, Ultra Master LTD and Ultra NB LLC.

TORO COLÓN MULLET P.S.C., By: Manuel Fernández-Bared, Linette Figueroa-Torres, Nayda Perez-Roman, P.O. Box 195383, San Juan, PR 00919-5383, KRAMER LEVIN NAFTALIS & FRANKEL LLP, By: Amy Caton, Thomas Moers Mayer, Alice J. Byowitz, 1177 Avenue of the Americas, New York, New York 10036 and Gary A. Orseck, Matthew M. Madden, 2000 K Street NW, 4th Floor, Washington DC 20006, Counsel for the Ad Hoc Group of PREPA Bondholders.

REICHARD & ESCALERA, LLC, By: Rafael Escalera, Sylvia M. Arizmendi, Carlos.R. Rivera-Ortiz, 255 Ponce de León Avenue, MCS Plaza, 10th Floor, San Juan, PR 00917-1913, QUINN EMANUEL URQUHART & SULLIVAN, LLP, By: Susheel Kirpalani, Daniel Salinas, Eric Kay, 51 Madison Avenue, 22nd Floor, New York, New York 10010-1603, Counsel for Syncora Guarantee, Inc.

CASELLAS ALCOVER & BURGOS P.S.C., By: Heriberto Burgos Pérez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, P.O. Box 364924, San Juan, PR 00936-4924, CADWALADER, WICKERSHAM & TAFT LLP, By: Howard R. Hawkins, Jr., Mark C. Ellenberg, Casey J. Servais, William J. Natbony, Thomas J. Curtin, 200 Liberty Street, New York, New York 10281, Counsel for Assured Guaranty Corp. and Assured Guaranty Municipal Corp.

RIVERA, TULLA AND FERRER, LLC, By: Eric A. Tulla, Rivera Tulla & Ferrer Building, 50 Quisqueya Street, San Juan, PR 00917-1212, MASLON LLP, By: Clark T. Whitmore, Michael C. McCarthy, John Duffey, Jason M. Reed, 90 South Seventh Street, Suite 3300, Minneapolis, MN 55402, Attorneys for U.S. Bank National Association, in its Capacity as Trustee.

ORTIZ MENDOZA & FARINACCI, FERNÓS, LLC, By: Rafael A. Ortiz-Mendoza, Edificio Banco Cooperativo Plaza, 623 Ponce de León Ave., Suite 701-B, San Juan, PR 00917-4820, Co-counsel to SREAEE.

BUFETE EMMANUELLI, C.S.P., By: Rolando Emmanuelli-Jiménez, Jessica E. Méndez-Colberg, Zoé C. Negrón-Comas, P.O. Box 10779, Ponce, Puerto Rico 00732, Counsel UTIER Co-counsel to SREAEE.

PROMESATitle III

ORDER CONCERNING BONDHOLDERS' UNSECURED NET REVENUE CLAIM ESTIMATION

LAURA TAYLOR SWAIN, United States District Judge

On March 22, 2023, the Court issued its Opinion and Order Granting in Part and Denying in Part the Financial Oversight and Management Board for Puerto Rico's Motion for Summary Judgment and the Defendant's and Intervenor-Defendants' Cross-Motion for Summary Judgment(Docket EntryNo. 147)²(the "Summary Judgment Order").³In the Summary Judgment Order, addressing cross-motions for summary judgment on Counts I-VII of the Oversight Board's First Amended Complaint Objecting to Defendant's Claims and Seeking Related Relief(Docket EntryNo. 26)(the "FAC"), and Counts I & II of the counterclaim complaint included in the Bondholder Defendants'⁴Defendant's and Intervenor-Defendants' Answer, Affirmative Defenses, and Counterclaims(Docket EntryNo. 47)(the "Defendants' Answer and Counterclaim Complaint"), the Court held, interalia, that:

(a) the Trust Agreement granted the Bondholders security interests only in moneys actually deposited to the Sinking Fund, Self-insurance Fund, Capital Improvement Fund, Reserve Maintenance Fund, and Construction Fund (as defined in the Trust Agreement); (b) the Bondholders have perfected their liens in the Sinking Fund, Self-insurance Fund, and Reserve Maintenance Fund, over which the Trustee has established control (as discussed below);[⁵](c) the Bondholders have no security interest in the covenants and remedies provided for by the Trust Agreement; but (d) based on PREPA's payment and equitable relief covenants in the Trust Agreement, the Bondholders have an unsecured claim (within the meaning of 11 U.S.C. § 101(5)(B)) to be liquidated by reference to the value of future Net Revenues (as defined in the Trust Agreement) that would, under the waterfall provisions of the Trust Agreement and applicable nonbankruptcy law, have become collateral upon being deposited in the specified funds and payable to the Bondholders over the remainder of the term of the Bonds (the "Unsecured Net Revenue Claim").

(Summary Judgment Orderat 13-14(emphasis added).)The Court held that the value of the Unsecured Net Revenue Claim must be determined "either consensually or through proceedings under section 502 of the Bankruptcy Code."⁶(Summary Judgment Orderat 62, 70.)The parties have not reached consensus, and the Court now proceeds, after briefing and an evidentiary hearing, to estimate the value of the Unsecured Net Revenue Claim.

The Court has subject matter jurisdiction of this matter pursuant to section 306(a) of PROMESA.48 U.S.C. § 2166(a).The Court has considered carefully all the parties' submissions,⁷ and for the following reasons the Court's estimation of the value of the Unsecured Net Revenue Claim as of July 3, 2017(the "Estimation Date"),⁸ is $2,388,000,000.00.

I.PROCEDURAL BACKGROUND AND PRE-HEARING GUIDANCE ON CLAIM ESTIMATION

The factual background underlying this adversary proceeding is set forth in the Summary Judgment Order; the Court assumes readers' familiarity with that Order.(SeeSummary Judgment Orderat 14-19.)In addition to the summarized holding above, the Court made the following statements in the Summary Judgment Order with respect to valuing the Unsecured Net Revenue Claim:

• By operation of the remedies of the Trust Agreement, providing the means to potentially generate moneys from outside of the liened Funds by a judgment for specific performance, and by virtue of section 101(5)(b) of the Bankruptcy Code, the Bondholders are entitled to a general unsecured claim.(Summary Judgment Orderat 59.)

• In the event that the Bondholders obtained specific performance and a receiver raised rates to satisfy payment of the Bonds, the Revenues received would not be paid ahead of Current Expenses, and the receiver would not have the freedom to charge rates that are not "reasonable"((TA § 502) 22 L.P.R.A. § 196(l)) or be completely untethered from the Trust Agreement—any such remedies and Revenues would still be subject to the payment restrictions and priorities of the Trust Agreement.(E.g., TA§§ 503, 506-507.)Any equitable claim reduced to payment arising from the Trust Agreement must have no greater value than the value that could be achieved through the application of the equitable remedies to fulfill the Trust Agreement's unsecured covenant to pay the Bonds from the Net Revenues of the System.(Summary Judgment Orderat 60(emphasis added).)

• The value of the Unsecured Net Revenue Claim must be determined with reference to the value of Net Revenues that would, under the waterfall provisions of the Trust Agreement and applicable nonbankruptcy law,

...