Court of Appeals remands request for Puerto Rico power utility receivership to District Court
SAN JUAN – The U.S. First Circuit Court of Appeals has overturned a lower court ruling, granting Puerto Rico Electric Power Authority (Prepa) bondholders and bond insurers a relief from the bankruptcy stay to seek that the utility be placed in receivership.
The appeals court on Wednesday remanded the case to the district court, noting it was up to it to decide what to do about the request.
After Prepa defaulted on its payments in July 2017, the bondholders accused the public company of failing to seek a promised rate increase sufficient to cover debt payments, of collecting on customer accounts, and of mismanaging operations. For these reasons, the bondholders and the monolines asked the district court overseeing the Title III bankruptcy case that Prepa be put into receivership.
U.S. District Court Judge Laura Taylor Swain ruled in September 2017 against a request from the Ad Hoc Group of Prepa bondholders and monolines Assured Guaranty, National Public Finance Guarantee and Syncora Guarantee, stating that Sections 305 and 306 of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa) prevented the court from granting the relief. The judge said she could not transfer Prepa’s assets to a receiver without the consent of the Financial Oversight and Management Board. The plaintiffs appealed.
Using certain case law, the Court of Appeals said the text of Section 305 states specifically what that court may not do: “interfere with” certain powers and assets of the debtor “by any stay, order, or decree.”
“The bondholders’ principal request for relief does not ask the Title III court to issue any such stay, order, or decree that itself interferes with the debtor’s powers or assets. Rather, the bondholders ask the Title III court to stand aside–by lifting the stay–to allow another court under Commonwealth law to decide whether to do what the Title III court is assumed not to be able to do. Nothing in that text plainly calls for us to read a prohibition on interference by the Title III court so broadly…,” the ruling reads.
Although the court said it shares the Title III court’s concerns about the impact that a receivership outside the Title III court’s control might have on efforts to adjust the debtor’s affairs, “those concerns are best addressed in deciding whether, precisely to what extent, and for what purpose relief from the automatic stay might be granted. In other words, it might be possible to grant tailored relief for the creditor to seek a receivership provided that the receiver only take specific steps necessary to protect the creditor’s collateral.”
Turning to the Title III court’s holding that the “exclusive jurisdiction provision” contained in Promesa or Section 306 prohibits a court from entering an order to lift the stay after if the relief sought is the appointment of a receiver even if there is inadequate protection, the court said it is the general rule of bankruptcies.
“This grant of exclusive jurisdiction has to our knowledge never limited the bankruptcy court’s power to allow others to act on the debtor’s property with the permission of the bankruptcy court,” the middle court said.
The Appeals Court said that if Section 306 is read as precluding the Title III court from allowing a Commonwealth court to protect a creditor’s collateral from actions of the debtor, then creditors will have no forum to obtain protection of their collateral.