PREPA bondholder lien rights are narrow, board, others argue

Puerto Rico Electric Power Authority bondholder’s lien rights are narrow, the Puerto Rico Oversight Board and the Official Committee of Unsecured Creditors argued in filings late Friday with the U.S. Appeals Court for the First Circuit.

In June a panel of three judges ruled PREPA bondholders have a lien on the authority’s net revenues. The board, committee, and Puerto Rico Fiscal Agency and Financial Advisory Authority filed requests the panel rehear the case. In early August, the bond parties filed responses to the requests. Friday’s filings were replies to the responses.

Perfection of a security interest in moneys received “requires possession of the money or control of the bank deposit accounts into which the money has been deposited and both are lacking here,” the board said in its reply. “There is no such thing as an ‘account’ constituting the ‘right to receive net revenues’ … from PREPA’s customers or anyone else.”

The judges’ ruling that the term “moneys received” gives bondholders “a security interest in an ‘account’ … should be corrected,” the board said.

Net revenues, the board argued, is what’s left after funds were received and expenses paid.

Similarly, the committee argued the bondholders’ security interest is on PREPA’s net revenues, which are “receipts, not receivables.” Receipts differ from accounts “because ‘accounts’ are statutorily defined as a type of receivable,” while “receipts are, by their very nature, funds on hand, and must be either money or deposit accounts.”

“Through sleight of hand — or, in this case, sleight of words — the bondholders mischaracterize appellees’ arguments, then respond to those mischaracterizations,” the committee said.

“A lien on municipal revenues equals a future right to payment,” under the bankruptcy code, said Puerto Rico Clearinghouse Principal Cate Long. “The Oversight Board erroneously contends that Congress only wanted the lien to cover revenues once they were received, netted after payment of operating expenses and deposited in an account controlled by the trustee. The statute does not say that.”

She agreed with the circuit court decision the “PREPA lien (as do all revenue bonds …) equals the bondholders’ future right to payment.” Long said, “The market has operated this way for decades and the Oversight Board’s fancy linguistic footwork is unlikely to sway the First Circuit.”