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

104 F.4th 367

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

as Representative for the Commonwealth of Puerto Rico;

The Financial Oversight and Management Board for Puerto Rico,

as Representative for the Puerto Rico Sales Tax Financing Corporation,

a/k/a Cofina; The Financial Oversight and Management Board for Puerto Rico,

as Representative for the Employees Retirement System of the Government

of the Commonwealth of Puerto Rico; The Financial Oversight

and Management Board for Puerto Rico,

as Representative for the Puerto Rico Highways

and Transportation Authority; The Financial Oversight and Management

Board for Puerto Rico, as Representative for the Puerto Rico Electric

Power Authority (PREPA); The Financial Oversight and Management

Board for Puerto Rico, as Representative of the Puerto Rico Public Buildings Authority, Debtors,

The Financial Oversight and Management Board for Puerto Rico,

as representative of the Puerto Rico Electric Power Authority;

Puerto Rico Fiscal Agency and Financial Advisory Authority;

The Official Committee of Unsecured Creditors of All Title III Debtors, Plaintiffs, Appellees/Cross-Appellants,

Cortland Capital Market Services LLC,

as Administrative Agent; SOLA LTD.;

Solus Opportunities Fund 5 LP; Ultra Master LTD;

Ultra NB LCC; Union De Trabajadores De La Industria Electrica Y Riego Inc. (UTIER);

Sistema De Retiro De Los Empleados De La Autoridad De Energia Electica (SREAEE), Plaintiffs, Appellees, v. U.S. Bank National Association, as Trustee;

Assured Guaranty Corp.; Assured Guaranty Municipal Corp.;

GoldenTree Asset Management LP; Syncora Guarantee, Inc.;

AllianceBernstein L.P.; Aristeia Capital, L.L.C.;

Capital Research and Management Company;

Columbia Management Investment Advisors, LLC;

Delaware Management Company, a series of Macquarie Investment Management Business Trust;

Ellington Management Group, L.L.C.; Goldman Sachs Asset Management L.P.;

Invesco Advisers, Inc.; Mackay Shields LLC;

Massachusetts Financial Services Company;

Russell Investment Company; SIG Structured Products, LCC;

T. Rowe Price; Tower Bay Asset Management, Defendants, Appellants/Cross-Appellees,

National Public Finance Guarantee Corporation;

Black Rock Financial Management, Inc.; Franklin Advisers, Inc.;

Nuveen Asset Management, LCC; Taconic Capital Advisors L.P.;

Whitebox Advisors LLC, Defendants, Appellees.

No. 23-2036

No. 23-2049

No. 23-2050

No. 23-2052

No. 23-2053

No. 23-2054

No. 23-2057

United States Court of Appeals, First Circuit

June 12, 2024

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO Hon. Laura Taylor Swain,^* U.S. District Judge

Martin J. Bienenstock, with whom Mark D. Harris, Margaret A. Dale, Dietrich L. Snell, Ehud Barak, Shiloh Rainwater, Henrique N. Carneiro, Timothy W. Mungovan, John E. Roberts, Elliot R. Stevens, Lucas Kowalczyk, and Proskauer Rose LLP were on brief, for appellee/cross-appellant the Financial Oversight and Management Board for Puerto Rico, as representative of the Puerto Rico Electric Power Authority.

Peter Friedman, with whom Maria J. DiConza, Elizabeth L. McKeen, Ashley M. Pavel, Jason Zarrow, O'Melveny & Myers LLP, Luis C. Marini-Biaggi, Carolina Velaz-Rivero, and Marini Pietrantoni Muñiz LLC were on brief, for appellee/cross-appellant the Puerto Rico Fiscal Agency and Financial Advisory Authority.

Pedro A. Jimenez, with whom Luc A. Despins, Eric D. Stolze, Stephen B. Kinnaird, Stephen Sepinuck, Paul Hastings LLP, Juan J. Casillas Ayala, Israel Fernández Rodríguez, Juan C. Nieves González, and Casillas, Santiago & Torres LLC were on brief, for appellee/cross-appellant The Official Committee of Unsecured Creditors of All Title III Debtors.

Richard G. Mason, Amy R. Wolf, Emil A. Kleinhaus, Angela K. Herring, Michael H. Cassel, Wachtell, Lipton, Rosen & Katz, Nayuan Zouairabani, Victoria Rivera Llorens, and McConnell Valdés LLC on brief for appellee Cortland Capital Market Services LLC.

Sarah E. Phillips, Simpson Thacher & Bartlett LLP, Jose L. Ramirez-Coll, and Antonetti Montalvo & Ramirez Coll on brief for appellees SOLA LTD, Solus Opportunities Fund 5 LP, Ultra Master LTD, and Ultra NB LLC.

Michael C. McCarthy and Maslon LLP on brief for appellant/cross-appellee U.S. Bank National Association.

Matthew D. McGill, with whom Jeremy M. Christiansen, Lochlan F. Shelfer, Gibson, Dunn & Crutcher LLP, Howard R. Hawkins, Jr., Mark C. Ellenberg, Casey J. Servais, William J. Natbony, Thomas J. Curtin, Cadwalader, Wickersham & Taft LLP, Heriberto Burgos Perez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, and Casellas Alcover & Burgos P.S.C. were on brief, for appellants/cross-appellees Assured Guaranty Corp. and Assured Guaranty Municipal Corp.

Glenn M. Kurtz, with whom Claudine Columbres, Isaac Glassman, Thomas E. MacWright, Thomas E. Lauria, John K. Cunningham, Keith Wofford, Michael C. Shepherd, Jesse L. Green, White & Case LLP, and Lydia M. Ramos Cruz were on brief, for appellant/cross-appellee GoldenTree Asset Management LP.

Susheel Kirpalani, Eric Kay, Quinn Emanuel Urquhart & Sullivan, LLP, Rafael Escalera, Carlos R. Rivera-Ortiz, and Reichard & Escalera on brief for appellant/cross-appellee Syncora Guarantee, Inc.

G. Eric Brunstad, Jr., with whom Stephen D. Zide, David A. Herman, Dechert LLP, Dora L. Monserrate-Peñagarícano, Fernando J. Gierbolini-González, Richard J. Schell, and Monserrate Simonet & Gierbolini, LLC were on brief, for appellants/cross-appellees Massachusetts Financial Services Company, Capital Research and Management Company, Aristeia Capital, LLC, AllianceBernstein L.P., Columbia Management Investment Advisers, LLC, Delaware Management Company, Ellington Management Group, L.L.C., Goldman Sachs Asset Management L.P., MacKay Shields LLC, Russell Investment Company, SIG Structured Products, LLC, T. Rowe Price and Tower Bay Asset Management.

Kevin Carroll, Laura E. Appleby, Kyle R. Hosmer, and Faegre Drinker Biddle & Reath LLP on brief for Securities Industry and Financial Markets Association, amicus curiae.

Jason S. Miyares, Attorney General of Virginia, Andrew N. Ferguson, Solicitor General of Virginia, Kevin M. Gallagher, Deputy Solicitor General of Virginia, Brendan T. Chestnut, Special Assistant to the Solicitor General of Virginia, Steve Marshall, Attorney General of Alabama, Christopher M. Carr, Attorney General of Georgia, Kris Kobach, Attorney General of Kansas, Michael T. Hilgers, Attorney General of Nebraska, Gentner F. Drummond, Attorney General of Oklahoma, Ken Paxton, Attorney General of Texas, Patrick Morrisey, Attorney General of West Virginia, Ashley Moody, Attorney General of Florida, Brenna Bird, Attorney General of Iowa, Austin Knudsen, Attorney General of Montana, Dave Yost, Attorney General of Ohio, Alan Wilson, Attorney General of South Carolina, Sean D. Reyes, Attorney General of Utah, on brief for the Commonwealth of Virginia and 13 Other States, amici curiae.

Before Kayatta, Howard, and Rikelman, Circuit Judges.

KAYATTA, Circuit Judge.

In this opinion, we consider the rights of parties holding certain revenue bonds, which were issued by the Puerto Rico Electric Power Authority ("PREPA" or "the Authority") before it entered reorganization proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). 48 U.S.C. §§ 2161-78. We hold that these bondholders have a non-recourse claim on PREPA's estate for the principal amount of the bonds, plus matured interest. We also hold that this claim is secured by PREPA's Net Revenues -- as that term is defined by the underlying bond agreement -- and by liens on certain funds created by that bond agreement. We do not decide what effect, if any, confirmation of a plan of reorganization will have on the bondholders' security interest, nor do we attempt to estimate the economic value of that security interest. Our reasoning follows.

I.

A.

Puerto Rico passed the Puerto Rico Electric Power Authority Act ("Authority Act") in 1941. See P.R. Laws Ann. tit. 22, § 191. The Authority Act created PREPA, a public electric utility. Id. § 193(a). More than eighty years later, PREPA remains the "sole electric utility in Puerto Rico." Puerto Rico Electric Power Authority (PREPA), P.R. Fiscal Agency & Fin. Advisory Auth., https://perma.cc/F7HA-QNVH. It owns electrical generation, transmission, and distribution assets in the Commonwealth, and serves around 1.5 million customers. Id.

The Authority Act permits PREPA to raise money by issuing revenue bonds secured by its "entire gross or net revenues and present or future income." P.R. Laws Ann. tit. 22, § 206(e)(1); see also id. § 196(o). In this manner, PREPA can raise money without granting a lien on its physical assets, such as power plants or transmission lines. Pursuant to the Authority Act, PREPA in 1974 executed the Trust Agreement with First National City Bank, which was then acting as trustee.¹ Under the Trust Agreement, PREPA raised money to finance its system by issuing revenue bonds (the "Revenue Bonds"). PREPA promised to repay the bondholders over time,² in accordance with the Trust Agreement. Several articles of the Trust Agreement frame the issue before us.

First, the Trust Agreement opens with a Preamble,³ the text and meaning of which we discuss in detail in Part II.A.1 of this opinion.

Second, Article I of the Trust Agreement defines key terms, including "Revenues" and "Net Revenues." PREPA's "Revenues" are (1) "all moneys received by [PREPA] in connection with or as a result of its ownership or operation" of its electricity generation and distribution system, (2) "any proceeds of use and occupancy insurance on the System or any part thereof, and (3) "income from investments made under" either the Trust Agreement or a 1947 predecessor agreement.⁴ PREPA's "Net Revenues" are any Revenues remaining after deducting reasonable and necessary operating expenses. Article I also defines the phrase "Opinion of Counsel," which means any opinion filed by PREPA's counsel to "authenticate bonds under [the Trust] Agr...