Sun 11/12/2023 16:56 PM
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Relevant Document:
Complaint (District Court)

Bondholder parties GoldenTree Asset Management and Syncora Guarantee filed a complaint today in the U.S. District Court for the District of Puerto Rico against the commonwealth, Gov. Pedro Pierluisi, the Puerto Rico Fiscal Agency and Financial Advisory Authority, or AAFAF, and AAFAF Executive Director Omar Marrero asserting claims for violations of Puerto Rico law and the plaintiffs’ rights under the U.S. Constitution and Puerto Rico Constitution relating to the “creation and submission” of the 2022 and 2023 fiscal plans for the Puerto Rico Electric Power Authority, or PREPA. According to the complaint, the defendants’ actions in connection with the PREPA fiscal plans “caused tremendous damages … and resulted in a taking of their property interests without just compensation.”

The complaint, which includes causes of action for breach of the commonwealth’s non-interference covenant under the Puerto Rico Electric Power Authority Act, or the Authority Act, tortious interference with contractual rights under the trust agreement for PREPA’s bonds, violation of the Authority Act through fault or negligence, just compensation for the taking of private property and declaratory relief for ultra vires acts in violation of Puerto Rico law, comes on the heels of a separate adversary complaint by certain GoldenTree funds and Syncora in the Title III court seeking to disqualify votes on PREPA’s proposed third amended plan of adjustment by certain settling creditors.

The plaintiffs, who hold or insure approximately 11%, or $908.8 million, of the principal amount of PREPA’s outstanding bonds, allege that they have been “denied payment of millions of dollars in revenues to which they are entitled and are facing permanent losses in the hundreds of millions of dollars” as a result of the defendants’ actions. In addition to damages, the plaintiffs seek equitable relief “enjoining Defendants from future violations of the Authority Act and Plaintiffs’ constitutional rights.”

The complaint explains that the Authority Act “requires PREPA to comply with its obligation to repay [its] Bonds and to take all actions necessary to be able to repay the Bonds” and “prohibits the Commonwealth from interfering in PREPA’s fulfillment of its obligations with respect to the Bonds.” The complaint adds that PREPA also promised under the trust agreement to “collect revenues sufficient to repay the Bonds.” According to the plaintiffs, those revenues are required by the trust agreement to be credited to sinking fund accounts earmarked for bond repayment after accounting for PREPA’s current expenses.

Highlighting the commonwealth’s alleged “historical disregard for Plaintiffs’ rights, assurances to induce Plaintiffs into delaying remedies, and unexpected about-face shortly after the confirmation of the Commonwealth’s plan of adjustment,” the complaint states that the commonwealth “breached its non-interference obligations under the Authority Act” and “caused PREPA to breach its obligations under the Authority Act with respect to the Bonds.”

Among other things, the commonwealth, acting in part through the PROMESA oversight board, caused PREPA to stop paying its bonds, misappropriate billions of dollars in revenues, prepare fiscal plans and budgets that “wrongfully and artificially constrict” PREPA’s ability to repay its bonds and pursue a plan of adjustment that would “wrongfully and permanently eliminate” PREPA’s bond obligations, according to the complaint.

The plaintiffs stress that the governor “shares responsibility for the Commonwealth’s illegal conduct,” noting that he is responsible for submitting fiscal plans to the oversight board and developing the commonwealth’s budgets. AAFAF and its executive director also share responsibility because of their roles in the “creation, execution, supervision and oversight of fiscal plans and budgets,” say the plaintiffs.

The plaintiffs allege that the defendants proposed and adopted fiscal plans for FY 2022 and FY 2023 based on “inaccurate projections of how much debt PREPA can afford in order to minimize Bondholder recoveries” and used fiscal plans and budgets to compel PREPA “not to credit Net Revenues to the accounts comprising the Sinking Fund … despite PREPA’s accrual of substantial sums for that purpose.” According to the complaint, this resulted in damages to the plaintiffs, including for “the amounts PREPA was required, from and after March 16, 2022, to deposit as Net Revenues to be credited to the applicable accounts comprising the Sinking Fund but did not because of Defendants’ actions.”

Stressing that PREPA “cannot take any actions—including paying Bondholders by making deposits of Net Revenues to be credited to the applicable accounts comprising the Sinking Fund—unless it is authorized to do so by Defendants in the budgets and fiscal plans,” the plaintiffs note that the fiscal plans and budgets at issue “make no provision for PREPA to credit the applicable accounts comprising the Sinking Fund as it is obligated to do” and do not forecast or make provisions for debt service.

The plaintiffs contend that the debt sustainability analyses underpinning the 2022 and 2023 PREPA fiscal plans are not adequately supported and artificially reduced the revenues available to pay bondholders. The complaint highlights that after the oversight board was unable to obtain support for a 2022 proposal to pay PREPA bondholders 71.65% of the face amount of their bond claims, PREPA’s debt capacity under the 2023 fiscal plan was reduced to $2.36 billion from $5.1 billion under the 2022 fiscal plan.

According to the complaint, this reduction formed the basis for the current PREPA plan of adjustment, which would distribute approximately $2.36 billion to creditors instead of the $5.4 billion contemplated by the first plan of adjustment filed in December 2022, “eviscerat[ing] the value of Plaintiffs’ property interest in PREPA’s Revenue and destroy[ing] the value of Plaintiffs’ claim in PREPA’s Title III case.”

The complaint alleges that in addition to violating the Authority Act and constituting tortious interference with the plaintiffs’ rights under the trust agreement, the defendants’ collective actions resulted in violations of the U.S. Constitution and Puerto Rico Constitution through takings of the plaintiffs’ property interests in “PREPA’s contractual covenants to fund the Sinking Fund” and the plaintiffs’ claim in PREPA’s Title III proceeding without just compensation. They are also contrary to Puerto Rico law, constituting ultra vires acts that entitle the plaintiffs to damages, according to the complaint.

The plaintiffs assert that the commonwealth “does not have immunity from suit” under the Eleventh Amendment of the U.S. Constitution, arguing that although states are separate sovereigns, U.S. territories “are not sovereigns distinct from the United States.” However, the complaint notes that the U.S. Court of Appeals for the First Circuit has “assumed (without substantial analysis) that the Commonwealth is treated as a state for Eleventh Amendment purposes.”

Citing the Eleventh Amendment’s text and a statement by Justice Clarence Thomas in his recent dissent in the Centro de Periodismo Investigativo decision that “it is difficult to see how the same inherent sovereign immunity that the States enjoy in federal court would apply to Puerto Rico,” the plaintiffs state that the complaint “seeks to clarify this important area of the law by a remedy ruling consistent with latest Supreme Court pronouncements on this issue.”
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