IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO (2023)

PROMESA

Title III

Opinion and Order Granting the Financial Oversight and Management Board for Puerto Rico's Motion to Dismiss Counts III Through VII of the Defendant's and Intervenor-Defendants’ Counterclaim Complaint

Before the Court is a motion to dismiss certain counts of the Defendant's and Intervenor-Defendants’ Answer, Affirmative Defenses, and Counterclaims (Docket Entry No. 47 in Adv. Proc. No. 19-00391)³ (the “Counterclaim Complaint”)⁴ that were not addressed in this Court's March 22, 2023 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 Entry No. 147) (the “Summary Judgment Order”).⁵ The Notice of Motion and Motion of the Financial Oversight and Management Board for Puerto Rico to Dismiss Counts III Through VII of the Counterclaim Complaint (Docket Entry No. 211) (the “FOMB Motion” or the “Motion to Dismiss”), and its accompanying memorandum of law, the Memorandum of Law of in Support of the Financial Oversight and Management Board for Puerto Rico's Motion to Dismiss Counts III Through VII of the Counterclaim Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6) (Docket Entry No. 212) (the “FOMB Memorandum” or “Memorandum”), were filed by the Puerto Rico Electric Power Authority (“PREPA”)⁶ by and through the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”). The Defendants’ and Counterclaim-Plaintiffs’ Memorandum in Opposition to the Motion of the Financial Oversight and Management Board for Puerto Rico to Dismiss Counts III Through VII of the Counterclaim Complaint (Docket Entry No. 309) (the “BH Response” or the “Response”), was filed by U.S. Bank National Association as Trustee (the “Trustee”), the Ad Hoc Group of PREPA Bondholders (the “Ad Hoc Group” or the “AHG”),⁷ Assured Guaranty Corp. and Assured Guaranty Municipal Corp. (“Assured”), and Syncora Guarantee Inc. (“Syncora,” and together with the Trustee, Ad Hoc Group, Assured, and National, the “Bondholders” or the “Defendants”).⁸ In the FOMB Motion, the Oversight Board seeks dismissal of Counts III-VII of the Counterclaim Complaint under, inter alia, Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).⁹

The Court has subject matter jurisdiction of this action pursuant to section 306(a) of PROMESA. 48 U.S.C. § 2166(a). The Court has considered carefully all the parties’ submissions ¹⁰ and, for the following reasons, the Oversight Board's Motion to Dismiss is granted with respect to Counts III through VII of the Counterclaim Complaint. All other matters in the adversary proceeding having previously been resolved, judgment will be entered and the Adversary Proceeding will be closed.

I.

Background

A. Summary Judgment Order

The factual background underlying this adversary proceeding is set forth in the Summary Judgment Order and the Court assumes readers’ familiarity with that Order and the Estimation Order (as defined below) to the extent not detailed herein. (See Summary Judgment Order at 14-19.) The Summary Judgment Order addressed cross-motions for summary judgment with respect to the allowance or disallowance of Proof of Claim No. 18449, which was filed by the Trustee as a fully secured claim in the amount of $8,477,156,729.56, consisting of principal in the aggregate amount of $8,258,614,158.00, and prepetition accrued and unpaid interest in the aggregate amount of $218,542,581.56 (additional amounts accruing postpetition are also demanded) (the “Master PREPA Bond Claim”),¹¹ asserting a secured claim on behalf of all PREPA bondholders for amounts due pursuant to that certain trust agreement between PREPA and the Trustee (as successor trustee), dated as of January 1, 1974, as amended and supplemented (the “Trust Agreement” or “TA”).¹²

In the Summary Judgment Order, this Court held, inter alia, 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[13] (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);[14] (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 Order at 13-14 (emphasis added).) The Court further 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.” (Summary Judgment Order at 62, 70.)

The parties were unable to reach consensus as to the value of the Net Revenue Claim. On June 26, 2023, after a three-day hearing held earlier that month, this Court issued its Order Concerning Bondholders’ Unsecured Net Revenue Claim Estimation (Docket Entry No. 315) (the “Estimation Order”), liquidating the Unsecured Net Revenue Claim in the amount of $2,388,000,000.00. (Estimation Order at 47.)

On May 15, 2023, the Oversight Board filed the FOMB Motion and FOMB Memorandum, asserting that Counts III through VII of the Counterclaim Complaint “either (i) were resolved through this Court's [Summary Judgment Order]; (ii) fail to state a claim; (iii) are time-barred; or (iv) are preempted by the Bankruptcy Code.” (FOMB Mot. at 1-2.)

B. Counts of the Counterclaim Complaint

The Oversight Board has moved to dismiss the following counts of the Counterclaim Complaint:

Counterclaim Count III – Declaratory Judgment that PREPA is in Breach of Statutory Obligations and Contractual Covenants to Adjust and Revise Rates so that its Revenues are Sufficient to Pay Bondholders and to Deposit Revenues to the Credit of the Sinking Fund (28 U.S.C. § 2201; 31 L.P.R.A. § 9754; 22 L.P.R.A. § 208; Trust Agreement § 804; Fed. R. Bankr. P. 7001(1), (9))

Counterclaim Count IV – Declaratory Judgment that PREPA is in Breach of Trust with Respect to Funds Pledged to Payment of the Bonds and Credited to the Sinking Funds and Other Funds (28 U.S.C. § 2201; 32 L.P.R.A. §§ 3353k, 3353d; Fed. R. Bankr. P. 7001(1), (9))

Counterclaim Count V – Declaratory Judgment that PREPA is Liable Under the Doctrine of Dolo in the Performance of Contracts (28 U.S.C. § 2201; 31 L.P.R.A. §§ 9316, 9332; Fed. R. Bankr. P. 7001(1), (9))

Counterclaim Count VI – Declaratory Judgment for Rescission of Contract (28 U.S.C. § 2201; 31 L.P.R.A. §§ 6303, 9823; Fed. R. Bankr. P. 7001(1), (9))

Counterclaim Count VII – Declaratory Judgment that, Should PREPA Succeed in Restricting the Trustee's and Bondholders’ Recourse, it has Unconstitutionally Taken Trustee's and Bondholders’ Property Without Just Compensation (28 U.S.C. § 2201; 42 U.S.C. § 1983; U.S. Const. amend. V, XIV; P.R. Const. art. III, sec. 9; Fed. R. Bankr. P. 7001(1), (9))

II.

Discussion

A. Standards of Review

1. Applicability of Federal Rule of Civil Procedure 12(b)(1)

Although the Oversight Board has not specifically referenced Federal Rule 12(b)(1) as a basis for dismissal, it argues that any requested declaratory judgments with respect to Counts III and VII of the Counterclaim Complaint were rendered moot by the Summary Judgment Order; and that Count IV was resolved by the Summary Judgment Order. (See, e.g., FOMB Br. ¶¶ 1-2, 39-49.) As with the discussion of ripeness in the Summary Judgment Order, this Court considers these arguments as bearing on the Court's subject matter jurisdiction. (See Summary Judgment Order at 21.)

a. Jurisdiction

In resolving a Rule 12(b)(1) motion to dismiss an action for lack of jurisdiction, the Court must “credit the plaintiff's well-pled factual allegations and draw all reasonable inferences in the plaintiff's favor.” Sanchez ex rel. D.R.-S. v. United States, 671 F.3d 86, 92 (1st Cir. 2012). Article III, Section 2 of the Constitution of the United States limits the exercise of federal judicial power to actual cases and controversies. U.S. Const. art. III, § 2; Aetna Life Ins. Co. of Hartford, Conn. v. Haworth, 300 U.S. 227, 239-41, 57 S.Ct. 461, 81 L.Ed. 617 (1937). “The doctrine of mootness enforces the mandate that an actual controversy must be extant at all stages of the review, not merely at the time the complaint is filed.” ACLU of Mass. v. U.S. Conf. of Cath. Bishops, 705 F.3d 44, 52 (1st Cir. 2013) (quoting Mangual v. Rotger-Sabat, 317 F.3d 45, 60 (1st Cir. 2003)). In other words, “a case is moot when the court cannot give any effectual relief to the potentially prevailing party.” Town of Portsmouth, R.I. v. Lewis, 813 F.3d 54, 58 (1st Cir. 2016). Accordingly, “[i]f events have transpired to render a court opinion merely advisory, Article III considerations require dismissal of the case.” ACLU of Mass., 705 F.3d at 52-53 (quoting Mangual, 317 F.3d at 60).

b. Prudential Standing with Respect to Declaratory Judgments

The authority conferred on federal courts by the Declaratory Judgment Act, 28 U.S.C. section 2201, is likewise limited to controversies that are within the constitutionally constrained scope of federal jurisdiction. Aetna, 300 U.S. at 240, 57 S.Ct. 461. To be justiciable, a controversy must be “a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion what the law would be upon a hypothetical state of facts.” Id. at 241, 57 S.Ct. 461. Federal courts are not empowered to issue advisory opinions where there is no actual controversy of this nature. See id.; Golden v. Zwickler, 394 U.S. 103, 108, 89 S.Ct. 956, 22 L.Ed.2d 113 (1969); Shell Oil Co. v. Noel, 608 F.2d 208, 213 (1st Cir. 1979).

c. Nonduplicative Arguments Concerning the Remaining Counts of the Counterclaim Complaint are not Moot

There is no bar to the Court's consideration of the counts of the Counterclaim Complaint, under constitutional or prudential standing doctrines. The Oversight Board is correct that the Bondholders’ contract claims under the Trust Agreement have been valued. However, the Oversight Board appears to conflate a circumstance in which the Court does not have jurisdiction to grant further relief with a circumstance in which the Court has the power to do so, does not do so, or cannot do so because of insufficient pleading, and explains the reasoning underlying its conclusions. In the remaining counts of the Counterclaim Complaint, the Bondholders seek, inter alia, to enlarge the size of their claim beyond the Court's estimate and/or have the claim declared nondischargeable based upon various sections of the Authority Act and Trust Agreement, as well as the Takings Clause of the Fifth Amendment of the Constitution of the United States. Were the Court to take up any of these arguments, the Summary Judgment Order and the Estimation Order would present no jurisdictional or prudential bar to the effectual relief the Court could afford the Bondholders.

In the course of addressing the cross-motions for summary judgment—which facially only pertained to Counts I and II of the Counterclaim Complaint but also resolved several additional arguments which the parties incorporated into briefing—and holding that the Bondholders’ unsecured claim extended only to the value of a right to payment arising from their equitable remedies, the Summary Judgment Order ruled on several other topics, including holding that the Bondholders have no present property right in the mere expectancy of future PREPA revenues (Summary Judgment Order at 42 & n.25) and granting summary judgment with respect to certain counts of the FAC on the basis that the Bondholders had no security interest in the covenants and remedies in the Trust Agreement (and had abandoned their argument that they had liens thereon) (Summary Judgment Order at 45 n.26). Certain parties to the Title III case noted overlap between the rulings in the Summary Judgment Order and relief sought by the counts not yet litigated in the Counterclaim Complaint. (See Docket Entry No. 170 ¶ 9 n.4.) It is true that certain rulings requested by the Bondholders have been addressed by the Court's previous orders; that overlap could have been avoided by amendment of the Counterclaim Complaint to take into account the Summary Judgment Order. As a result, certain rulings herein resolving the remaining counts may be repetitive or partly duplicative of prior rulings.¹⁵ Further, as discussed below, in several instances the Bondholders responded to the Motion to Dismiss with facts, theories, and even invocations of statutes not asserted in the Counterclaim Complaint. However, the Bondholders “cannot amend their complaint by asserting new facts or theories for the first time in opposition to [a] motion to dismiss.” K.D. ex rel. Duncan v. White Plains Sch. Dist., 921 F. Supp. 2d 197, 209 n.8 (S.D.N.Y. 2013); Ortiz v. Jimenez-Sanchez, 98 F. Supp. 3d 357, 366 (D.P.R. 2015) (“the plaintiffs’ oppositions introduce a plethora of new factual allegations and legal theories. But the plaintiffs cannot, of course, add allegations or claims by furnishing them for the first time in an opposition to a motion to dismiss.”).

The Court will note duplication where necessary, and will not herein reconsider its previous orders. However, for the sake of a thorough appraisal of the many theories presented—and although none changes the outcome of the previously issued orders—the Court has considered the Bondholders’ nonduplicative arguments.

2. Standard Under Federal Rule of Civil Procedure 12(b)(6)

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The court accepts as true the non-conclusory factual allegations in the complaint and draws all reasonable inferences in the plaintiff's favor. Miss. Pub. Emps.’ Ret. Sys. v. Boston Sci. Corp., 523 F.3d 75, 85 (1st Cir. 2008). The court “may consider ‘documents the authenticity of which are not disputed by the parties,’ ‘documents central to plaintiffs’ claim,’ and ‘documents sufficiently referred to in the complaint.’ ” Claudio-De Leon v. Sistema Universitario Ana G. Mendez, 775 F.3d 41, 46 (1st Cir. 2014) (quoting Alternative Energy, Inc. v. St. Paul Fire & Marine Ins. Co., 267 F.3d 30, 33 (1st Cir. 2001)). The complaint must allege enough factual content to nudge a claim “across the line from conceivable to plausible.” Ashcroft v. Iqbal, 556 U.S. 662, 680, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 570, 127 S.Ct. 1955). On a motion to dismiss, courts “are not bound to accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).

3. Court Discretion in Issuing Declaratory Judgments

Each Count of the Counterclaim Complaint that is targeted by the Motion to Dismiss is pled as a request for a declaratory judgment. (Counterclaim Compl. at 58-66.) The Court has “substantial discretion” to decide whether to entertain a declaratory judgment action. See Covidien LP v. Esch, 993 F.3d 45, 52, 57 (1st Cir. 2021); Cámara de Mercadeo, Industria, y Distribución de Alimentos v. Vázquez, No. 11-1978-BJM, 2013 WL 5652076, at *14 (D.P.R. Oct. 16, 2013) (“Since its inception, the Declaratory Judgment Act has been understood to confer on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants.”) (quoting Wilton v. Seven Falls Co., 515 U.S. 277, 286, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995)). Declaratory relief should be denied when it will neither serve a useful purpose in clarifying or settling legal relations in issue nor terminate the proceedings and afford relief from the uncertainty and controversy faced by the parties. See In re CFB Liquidating Corp., 561 B.R. 500 (Bankr. N.D. Cal. 2016) (citing to U.S. v. State of Wash., 759 F.2d 1353, 1357 (9th Cir. 1985)).

B. The Puerto Rico Civil Code

In 2020, well after PREPA's Title III case was underway, Puerto Rico enacted a new civil code (the “2020 PR Civil Code”), replacing the previous code, which had been enacted in 1930 (the “1930 PR Civil Code”). The Counterclaim Complaint pleads counts based mainly upon the 2020 PR Civil Code. (See Counterclaim Compl. at 58 (Counterclaim Count IV), 60 (Counterclaim Count V), 62 (Counterclaim Count VI).) The Bondholders have provided no certified translations of the statutes cited, for which no official translations are readily available.¹⁶

The Oversight Board has, in places, responded to the Bondholders’ arguments by directly addressing the 2020 PR Civil Code provisions that the Bondholders have pled. (See Counterclaim Compl. at 60 (citing 31 L.P.R.A. § 9316 of the 2020 PR Civil Code in Counterclaim Count V); FOMB Mem. ¶ 60 (discussing 31 L.P.R.A. § 9316).) In their response, the Bondholders provided, as an exhibit to the Natbony Declaration, the 2020 PR Civil Code version of the Puerto Rico statute pertaining to dolo. (Natbony Decl. Ex. 2 (31 L.P.R.A. § 9316).) The Bondholders have, curiously, highlighted the Oversight Board's responses without acknowledging that the Bondholders themselves had invoked the inapposite provisions of the 2020 PR Civil Code, stating that:

The Oversight Board cites to Puerto Rico's new 2020 Civil Code for this proposition and elsewhere in its dolo arguments. However, the 2020 Civil Code itself provides that ‘[t]he provisions of this Code are not applicable to contracts in the process of execution at the time it goes into effect,’ meaning that contracts executed prior to the efficacy of the [2020 PR] Civil Code will be interpreted according to the provisions of the Civil Code in effect at the time they were executed. 31 L.P.R.A. § 11718.

(BH Resp. ¶ 46 n.26.)

The Bondholders further state that “Defendants will refer to the provisions of the [1930 PR] Civil Code” in their Response (despite citing to the 2020 PR Civil Code in the Counterclaim Complaint) “rather than the new Civil Code, although there are no relevant differences between the old and new codes.” (BH Resp. ¶ 46 n.26.)

Accordingly, the Trust Agreement will be interpreted according to the provisions of the 1930 PR Civil Code notwithstanding the Bondholders’ citations of the 2020 PR Civil Code in their pleading. The Oversight Board has not, by responding to the statutes pled by the Bondholders, conceded that the statutes were appropriate for citation or that they govern consideration of the Counterclaim Complaint. Nor has the Court determined that there are no relevant differences between the 1930 and 2020 Civil Codes.

C. Relevant Sections of the Authority Act and the Trust Agreement

The Court next identifies the provisions and terms of the Authority Act ¹⁷ and the Trust Agreement that are most relevant to the counts of the Counterclaim Complaint.

1. Section 196 & (l) of the Authority Act

Section 196 & (l) of the Authority Act provides:

The Authority is hereby conferred, and shall have and exercise, the rights and powers necessary or convenient to achieve the aforementioned purposes, including the following:

(l) To propose and collect just, reasonable, nondiscriminatory rates and fees, and other charges approved by the Bureau, for the use of the facilities of the Authority, or for electric power services, or other commodities sold, loaned, or provided by the Authority, that are sufficient to cover reasonable expenses incurred by the Authority in the development, improvement, extension, repair, conservation, and operation of its facilities and properties, for the payment of the principal of and interest on its bonds, and for fulfilling the terms and provisions of the agreements entered into with or for the benefit of purchasers or holders of any bonds of the Authority and other creditors ․

22 L.P.R.A. § 196 & (l) (emphasis added).¹⁸

2. Section 208(a) of the Authority Act—Remedies of Bondholders

Section 208(a) of the Authority Act, titled “Remedies of Bondholders” provides:

(a) Subject to any contractual limitations binding upon the holders of any issue of bonds, or trustees therefor, including but not limited to the restriction of the exercise of any remedy to a specified proportion or percentage of such holders, any holder of bonds, or trustee therefor, shall have the right and power, for the equal benefit and protection of all holders of bonds similarly situated:

(1) By mandamus or other suit, action, or proceeding at law or in equity to enforce his rights against the Authority and its Board, officers, agents, or employees to perform and carry out its and their duties and obligations under §§ 191-217 of this title and its and their covenants and agreements with bondholders;

(2) by action or suit in equity to require the Authority and the Board thereof to account as if they were the trustee of an express trust;

(3) by action or suit in equity to enjoin any acts or things which may be unlawful or in violation of the rights of the bondholders, and

(4) to bring suit upon the bonds.

22 L.P.R.A. § 208(a) (emphasis added).

3. Section 401 of the Trust Agreement

Section 401 of the Trust Agreement provides, in relevant part:

A special fund is hereby created and designated ‘Puerto Rico Electric Power Authority Power System Construction Fund’ (herein sometimes called the ‘Construction Fund’), to the credit of which such deposits shall be made as are required by the provisions of Section 208 of this Agreement. There shall also be deposited to the credit of the Construction Fund any moneys received from any other source for paying any portion of the cost of any Improvements. One or more separate accounts may be created in the Construction Fund for use for specified projects.

The moneys in the Construction Fund shall be held by the Authority in trust, separate and apart from all other funds of the Authority, and shall be applied to the payment of the cost of any Improvements and, except for any moneys in separate accounts in the Construction Fund received from the United States Government or any agency thereof or from the Commonwealth of Puerto Rico or any agency thereof, pending such application, shall be subject to a lien and charge in favor of the holders of the bonds issued and outstanding under this Agreement and for the further security of such holders until paid out or transferred as herein provided.

(TA § 401 (emphasis added).)

4. Section 507 of the Trust Agreement

a. Section 507

The first paragraph of section 507 of the Trust Agreement provides, in relevant part:

A special fund is hereby created and designated the ‘Puerto Rico Electric Power Authority Power Revenue Bonds Interest and Sinking Fund’ (herein sometimes called the ‘Sinking Fund’). There are hereby created three separate accounts in the Sinking Fund designated ‘Bond Service Account’, ‘Reserve Account’ and ‘Redemption Account’, respectively. Another special fund is hereby created and designated ‘Puerto Rico Electric Power Authority Reserve Maintenance Fund’ (herein sometimes called the “Reserve Maintenance Fund”). Two other special funds are hereby created and designated ‘Puerto Rico Electric Power Authority Self-insurance Fund’ (herein some times called the ‘Self-insurance Fund’) and ‘Puerto Rico Electric Power Authority Capital Improvement Fund’ (herein sometimes called the ‘Capital Improvement Fund’). ․

(TA § 507.)

b. Section 507(h)

Section 507(h) of the Trust Agreement provides:

(h) ․ The moneys in the Sinking Fund shall be held by the Trustee in trust, and the moneys in the Reserve Maintenance Fund, the Self-insurance Fund and the Capital Improvement Fund shall be held by the Authority in trust, separate and apart from all other funds of the Authority, and shall be applied as hereinafter provided with respect to such Funds and, pending such application, shall be subject to a lien and a charge in favor of the holders of the bonds issued and outstanding under this Agreement and for the further security of such holders until paid out or transferred as herein provided.

(TA § 507(h) (emphasis added).)

5. Section 513 of the Trust Agreement

Section 513 of the Trust Agreement charges the Sinking Fund with payment of the Bonds, providing, in relevant part:

Subject to the terms and conditions set forth in this Agreement, moneys held for the credit of the Bond Service Account, the Reserve Account and the Redemption Account shall be held in trust and disbursed by the Trustee ․

(TA § 513 (emphasis added).)

6. Section 601

Section 601 of the Trust Agreement charges the Sinking Fund with payment of the Bonds, providing, in relevant part:

All moneys received by the Authority under the provisions of this Agreement shall be deposited with a Depositary or Depositaries, shall be held in trust, shall be applied only in accordance with the provisions of this Agreement and shall not be subject to lien or attachment by any creditor of the Authority.

All moneys deposited with the Trustee or any other Depositary hereunder in excess of the amount guaranteed by the Federal Deposit Insurance Corporation or other Federal agency shall be continuously secured, for the benefit of the Authority and the holders of the bonds, either (a) by lodging with a bank or trust company approved by the Authority and by the Trustee as custodian, or, if then permitted by law, by setting aside under control of the trust department of the bank holding such deposit, as collateral security, Government Obligations, or, with the approval of the Trustee, other marketable securities eligible as security for the deposit of trust funds under applicable regulations of the Comptroller of the Currency of the United States or applicable Commonwealth of Puerto Rico or state law or regulations, having a market value (exclusive of accrued interest) not less than the amount of such deposit, or (b), if the furnishing of security as provided in clause (a) of this Section is not permitted by applicable law, in such other manner as may then be required or permitted by applicable Commonwealth of Puerto Rico, state or Federal laws or regulations regarding the security for, or granting a preference in the case of, the deposit of trust funds; provided, however, that it shall not be necessary for the Paying Agents to give security for the deposits of any moneys with them for the payment of the principal of or the redemption premium or the interest on any bonds issued hereunder, or for the Trustee to give security for any moneys which shall be represented by obligations purchased under the provisions of this Article as an investment of such moneys.

All moneys deposited with each Depositary, including the Trustee, shall be credited to the particular fund or account to which such moneys belong.

(TA § 601 (emphasis added).)

D. Counterclaim Count III – Declaratory Judgment for Breach of Statutory Obligations and Contractual Covenants

In Count III of the Counterclaim Complaint, the Bondholders seek a declaratory judgment that PREPA is in breach of statutory obligations and contractual covenants to adjust and revise rates so that its revenues are sufficient to pay Bondholders and to deposit revenues to the credit of the Sinking Fund. The Oversight Board argues, correctly, that the Master PREPA Bond Claim's contractual and statutory claims under the Trust Agreement have been addressed by the Court's previous orders. (See, e.g., FOMB Mem. ¶¶ 42-43.) Further, the Court's estimation of the Unsecured Net Revenue Claim was explicitly based upon the Bondholders’ statutory and contractual receivership remedy and any obligation thereunder to raise rates to pay the Bondholders’ claims. (See generally Estimation Order.) In fact, the entirety of the substance of Counterclaim Count III as pled in the Counterclaim Complaint has been addressed, and resolved, by the Court's prior orders. The only new arguments asserted in the Bondholders’ Response in the instant motion practice are sufficiently remote from what was pled in Counterclaim Count III to constitute an impermissible attempted amendment of their Counterclaim Complaint and need not be addressed further, given the Court's broad discretion in entertaining requests for declaratory judgments. (See, e.g., BH Resp. ¶¶ 15-21. See supra section II.A.1.c (Bondholders “cannot amend their complaint by asserting new facts or theories for the first time in opposition to [a] motion to dismiss.” K.D. ex rel. Duncan v. White Plains Sch. Dist., 921 F. Supp. 2d 197, 209 n.8 (S.D.N.Y. 2013)).)

However, to clarify the rights of the parties, the Court will exercise its discretion to address the Bondholders’ new arguments that alleged breaches of statutory obligations would create a right to payment that is greater or different from that asserted by the Master PREPA Bond Claim and addressed by the Court's prior orders, that PREPA must comply with such obligations during the course of the Title III case, and that alleged breaches give rise to claims for specific performance that cannot be satisfied monetarily or are nondischargeable claims.

1. The Authority Act Does Not Impose Affirmative Duties

The Bondholders argue that PREPA must continue to perform what they assert are obligations arising under the Authority Act because debtors must comply with state law even postpetition. (See, e.g., BH Resp. ¶ 19.) The argument is unavailing. The Authority Act is, as noted by the Bondholders with respect to their own remedies granted by the Authority Act, an “enabling act[.]” (BH Resp. ¶ 27 n.15.) In the Counterclaim Complaint, the Bondholders assert that:

The Authority Act provides that PREPA has and must exercise the power to collect such revenues ‘that are sufficient ․ for the payment of the principal of and interest on its bonds, and for fulfilling the terms and provisions of such agreements entered into with or for the benefit of purchasers or holders of any bonds of the Authority and other creditors.’

(Counterclaim Compl. ¶ 22 (emphasis added).)

The language that the Bondholders characterize and quote is taken from section 5 of the Authority Act, titled “Powers and Authorities.” 22 L.P.R.A. § 196 & (l). Section 5 enumerates, as its title suggests, “powers and authorities” and not obligations. Further, section 5 does not provide that PREPA “has and must exercise” certain powers, it provides in pertinent part as follows:

The Authority is hereby conferred, and shall have and exercise, the rights and powers necessary or convenient to achieve the aforementioned purposes, including the following: ․

22 L.P.R.A. § 196 (emphasis added).

The language, here and in the rest of the statute, imposes no affirmative mandatory obligations giving rise to direct claims, but only confers “rights and powers.” See Stewman v. Mid-South Wood Prods. of Mena, Inc., 784 F. Supp. 611, 616-17 (W.D. Ark. 1992) (authorizing statute imposed no affirmative duty on the agency to perform certain actions). The rights and powers PREPA decided were necessary or convenient to exercise are identified and embodied in the terms of the Trust Agreement.

Furthermore, the current version of the Authority Act's “Powers and Authorities” provision cited by the Bondholders, including the above language, was enacted in 2019 and is therefore irrelevant for the purposes of determining the value of the prepetition Master PREPA Bond Claim, which has been fixed as of the Monday after the PREPA Title III petition date of Sunday, July 2, 2017. (See Estimation Order at 8 n.8 (July 3, 2017, is the appropriate reference date for claim estimation), 32-33 (discussing 22 L.P.R.A. § 196 & (l) as in effect as of the petition date).)

2. Compliance with Laws that Undermine the Debtor's Ability to Reorganize is not Required

Although the Bondholders invoke section 303 of PROMESA and 28 U.S.C. section 959(b), which they assert generally require compliance with state law during bankruptcy proceedings but (as explained below) have no application here, their argument has been successfully countered by the Oversight Board's reply that to comply with statutes requiring the ongoing payment of debt to creditors would substantially undermine a debtor's reorganization and so compliance with such laws is preempted by PROMESA. (BH Resp. ¶¶ 16-17; FOMB Reply ¶ 10 n.10.) As explained previously in this Court's Opinion and Order Denying the DRA Parties’ Motion for Allowance of an Administrative Expense Claim, ongoing alleged breaches of the types of statutory obligations invoked here are not materially different from the nonpayment of prepetition general unsecured claims—here the Unsecured Net Revenue Claim—something “that occurs upon the commencement of every bankruptcy case. The automatic stay protects the debtor from collection of such payments upon commencement of a bankruptcy case, and the [debtor] benefits from the ability to use resources that would otherwise be used for the timely satisfaction of prepetition unsecured claims.” In re Fin. Oversight & Mgmt. Bd. for P.R., 635 B.R. 201, 213-14 (D.P.R. 2021) (footnote omitted) (the “DRA Order”). (Docket Entry No. 18892 at 19.) If it were otherwise, a “debtor's debts arising out of any non-executory contracts, even promissory notes, could not be handled as claims in the bankruptcy proceedings. Instead, the debtor would have a continuing obligation to pay those debts. Such a result would seriously constrain a debtor's ability to resolve his financial affairs through bankruptcy.” Id. at 213 n.11 (quoting Stewart Foods, Inc. v. Broecker (In re Stewart Foods, Inc.), 64 F.3d 141, 145-46 (4th Cir. 1995)). Here, the Bondholders have presented no basis for differentiating obligations arising out of the specific relevant statutes from obligations arising out of a prepetition nonexecutory contract. Accordingly, the Debtor's obligation to comply with any such laws is preempted by the automatic stay pursuant to the express preemption provision in section 4 of PROMESA. Section 4 provides that “[t]he provisions of [PROMESA] shall prevail over any general or specific provisions of territory law, State law, or regulation that is inconsistent with [PROMESA]”. 48 U.S.C.A. § 2103 (Westlaw through P.L. 114-187). Moreover, section 303 of PROMESA is a reservation of the rights of the Commonwealth to continue to perform its governmental functions, not a mandate forcing the Debtors to continue to do everything that Commonwealth law might have required prepetition. 48 U.S.C. § 2163.¹⁹

The United States Court of Appeals for the First Circuit has held that liens on special revenues may not be enforced during the pendency of the Title III case. See Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 919 F.3d 121, 130 (1st Cir. 2019) (“Nothing in the statute's plain language, however, addresses actions to enforce liens on special revenues, which are specifically stayed by Section 362(a)(4) of the Bankruptcy Code, or allows for the compelling of debtors, or third parties holding special revenues, to apply special revenues to outstanding obligations. When Congress wants to command performance, turnover, or payment, it knows how to do so expressly.”); Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 931 F.3d 111, 117 (1st Cir. 2019) (noting that “it is true that a debtor's decision to discontinue making payments and to divert its revenues elsewhere might impair the security created by such liens”). The same principle applies to defeat the Bondholders’ asserted statutory claims insofar as they are premised on breach of an obligation to make payments while the Title III case is pending.

If a PREPA plan of adjustment is confirmed by the Court, the order confirming the plan will likely cancel the PREPA bonds and suspend any further compliance obligations. (Cf. Order and Judgment Confirming Modified Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, and the Puerto Rico Public Buildings Authority, Docket Entry No. 19813 in Case No. 17-3283 ¶ 28; Order and Judgment Confirming Modified Fifth Amended Title III Plan of Adjustment of the Puerto Rico Highways and Transportation Authority, Docket Entry No. 22581 in Case No. 17-3283 and Docket Entry No. 1415 in Case No. 17-3567 ¶ 16.)

3. The Bondholders Fail to State a Claim that their Statutory Claims are Nondischargeable

In addition to arguing that PREPA has a postpetition obligation to comply with statutory debt repayment obligations while in bankruptcy, the Bondholders argue that any claims arising from statutory obligations are nondischargeable. (See, e.g., BH Resp. ¶ 9.) The Court has already determined that the Bondholders’ claims do not arise directly out of any statute. (See supra section II.D.1.) However, even if they did, section 101(5)(b) of the Bankruptcy Code would operate to render what is simply their claim for payment on the Bonds—in whatever guise—a dischargeable claim.

In Counterclaim Count III, the Bondholders essentially are advancing a statutory version of their prior argument that their contractual remedies for specific performance are not reducible to claims under section 101(5)(b) of the Bankruptcy Code that are dischargeable. (See, e.g., Docket Entry No. 67 ¶¶ 6, 44.)

In the Summary Judgment Order, the Court concluded that:

The Bondholders’ arguments do not provide support for their contention that their continuing liens will persist beyond the satisfaction of their claim during the course of the Title III Case, assuming the confirmation of a plan of adjustment. See, e.g., In re Hawker Beechcraft, Inc., 486 B.R. 264, 277 (Bankr. S.D.N.Y. 2013) (if “the contract is not executory and the debtor chooses not to perform, the non-debtor party gets [a] pre-petition claim for breach of contract.”).

(Summary Judgment Order at 44.)

As noted above, the Bondholders have presented no basis for differentiating obligations arising out of preempted statutes from obligations arising out of nonexecutory contracts. Cf. DRA Order, 635 B.R. at 214 (citing Commonwealth of Mass. Div. of Emp. and Training v. Bos. Reg'l Med. Ctr., Inc. (In re Bos. Reg'l Med. Ctr., Inc.), 291 F.3d 111, 126 (1st Cir. 2002) (state law preempted to the extent it purported to alter priority of obligation in bankruptcy)).

Further, as this Court has held in a slightly different context, here the Bondholders’ statutory claims “plainly stem from their bond claims and, although styled as requests for declaratory relief, ultimately are vehicles for asserting rights to payment of amounts outstanding under various bond issues.” See In re Fin. Oversight & Mgmt. Bd. for P.R., 485 F. Supp. 3d 351, 361 (D.P.R. 2020), aff'd, 989 F.3d 170 (1st Cir. 2021). Congress intended a “claim” as defined in the Bankruptcy Code to encompass the broadest definition available. See H.R. Rep. No. 95–595, at 309 (1977) (noting that the definition of “claim” in section 101(5) of the Bankruptcy Code “contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case ․ [and] permits the broadest possible relief in the bankruptcy court.”). The Bondholders seek only payment of their bonds that were issued pursuant to the authority provided in the Authority Act, and that legal right to payment is a claim that can be discharged by a confirmed plan of adjustment; the Court would value any claim based upon statutes in the same manner it has heretofore and the claim would be similarly dischargeable.

4. The Bondholders Fail to State a Claim for Declaratory Relief under 28 U.S.C. § 959(b) Because the Statute is Irrelevant to the Bondholders’ Claims

The Bondholders argue that PREPA must comply with 28 U.S.C. section 959(b), which provides that a “trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.” (BH Resp. ¶ 17 (quoting 28 U.S.C.A. § 959(b) (Westlaw through P.L. 118-21) (emphasis added)).)

The Bondholders interpret the reference to “manag[ing] and operat[ing] property ․ according to the requirements of the valid laws of the State” in section 959(b) to mandate compliance with laws that would require payment to creditors during the pendency of the Title III cases. However, the cases that the Bondholders cite for this proposition do not support their argument. (See BH Resp. ¶¶ 17-18 & n.7 (citing In re N.Y.C. Off-Track Betting Corp., 434 B.R. 131, 144 (Bankr. S.D.N.Y. 2010) (addressing operation of Chapter 9 debtor's off-track betting business); Distefano v. Stern (In re J.F.D. Enters., Inc.), 223 B.R. 610, 624 (Bankr. D. Mass. 1998), aff'd, 215 F.3d 1312 (1st Cir. 2000) (addressing the operation of debtor's liquor business)).) Section 959(b) pertains to ordinary course business operations (i.e., regulating PREPA in the marketplace as an energy producer and vendor), not to the payment of outstanding bond debt, which is suspended by the Bankruptcy Code's automatic stay (as incorporated by PROMESA).

Indeed, in In re J.F.D. Enterprises, Inc., 28 U.S.C. section 959(b) was held not to apply and the court stated, “There is no evidence that [28 U.S.C. section 959] was ever intended to apply to claims by creditors or shareholders against trustees, receivers, and managers based on alleged losses incurred in the course of estate administration.” 223 B.R. at 624. In In re N.Y.C. Off-Track Betting, the court did not explicitly base its holding on 28 U.S.C. section 959(b) but instead immediately undertook a preemption analysis, explaining that, with respect to section 903 of the Bankruptcy Code, for which section 303 of PROMESA is an analog, “[a]s nothing in chapter 9 may be interpreted to interfere with the power of a State to control its municipalities, it necessarily follows that debtors under chapter 9 must follow state laws, at least those that are not preempted by federal law.” 434 B.R. at 144 (emphasis added). In re Old Carco LLC, concerning car dealership contracts with car manufacturers, held that 28 U.S.C. section 959(b) did not apply and that relevant state laws that would burden the debtor's reorganization were preempted. 424 B.R. 633, 649 (Bankr. S.D.N.Y. 2010).

The Bondholders have not proffered or demonstrated that payment on outstanding bonds during a bankruptcy proceeding would constitute ordinary-course management and operation of PREPA within the contemplation of 28 U.S.C. section 959(b), nor have they identified any case law supportive of their assertion that the statute requires the debtor to keep current on bond payments. The Bondholders thus have failed to establish that 28 U.S.C. section 959(b) has any relevance to the present circumstances, and Counterclaim Count III fails to state a claim to the extent it relies on section 959(b).

5. The Court Has Not Held that PREPA is a “Trustee in Bankruptcy”

Although 28 U.S.C. section 959(b) has no bearing on the Bondholders’ claim, the Bondholders’ arguments raise an issue that merits clarification of a portion of the discussion in the Summary Judgment Order. In the Summary Judgment Order, this Court held that the Oversight Board has lien creditor status under section 544 of the Bankruptcy Code, and that under the U.C.C. as enacted in Puerto Rico—U.C.C. § 9-317(a)(2), enacted as 19 L.P.R.A. § 2267(a)(2)—a lien creditor has priority over unperfected security interests. (Summary Judgment Order at 49.)

In their Response, the Bondholders argue that 28 U.S.C. section 959(b) applies and that PREPA is a trustee because the Court held in the Summary Judgment Order that PREPA is a “trustee in bankruptcy.” (BH Resp. ¶ 18.) The Bondholders further argue that the Oversight Board is now judicially estopped from arguing that it is not a “trustee in bankruptcy” (as the Bondholders define that phrase and envision its further application) because the Oversight Board's argument on the matter prevailed. (BH Resp. ¶ 18.)²⁰

The Court has not, however, held that the Oversight Board is a “trustee in bankruptcy.” Rather, the Court held in the Summary Judgment Order that the Oversight Board may act as a lien creditor under section 544 of the Bankruptcy Code and exercise priority over unperfected security interests. The Court then looked to the Uniform Commercial Code (“U.C.C.”) as enacted in Puerto Rico because, although the order did not state so explicitly, “[t]he rights of a lien creditor are determined by state law.” LMS Holding Co. v. Core-Mark Mid-Continent, Inc., 50 F.3d 1520, 1523 (10th Cir. 1995) (citation omitted).²¹

In brief, the Oversight Board argued in connection with Count II of the FAC in its motion for summary judgment that it could act as a lien creditor under the Bankruptcy Code and, in connection with Count III, the Oversight Board argued that it could act as a lien creditor under the U.C.C. as enacted in Puerto Rico. (See, e.g., Summary Judgment Order at 19-20.) The Bondholders appeared to understand the distinction between Count II and Count III of the FAC in their Counterclaim Complaint. (Counterclaim Complaint ¶¶ 70-71.) As explained in footnote 34 of the Summary Judgment Order, because the Oversight Board substantially prevailed with respect to its arguments regarding lien creditor status under section 544 of the Bankruptcy Code, “any decision with respect to Count III of the FAC” was rendered “unnecessary at this juncture.” (Summary Judgment Order at 53 n.34.) The Bondholders’ argument that the Court necessarily adopted the Oversight Board's position regarding the effect of the U.C.C. (in the absence of section 544 of the Bankruptcy Code) and decided the merits of Count III in the Summary Judgment Order is especially puzzling, given that the Bondholders have agreed, in the course of settling the lien perfection disputes that Summary Judgment Order left pending, that Count III is moot and requires no further resolution. (See Lien Perfection Stipulation ¶ 4.)

The Court concluded that there was no need for the Oversight Board to qualify as a “lien creditor” under any of the definitions of “lien creditor” set forth in, e.g., 19 L.P.R.A. section 2212(a)(52)—of which a “trustee in bankruptcy” is only one—because section 544 provided that status, and the Court, in the Summary Judgment Order, looked to 19 L.P.R.A. section 2267(a)(2) for the rights inhering thereto. The intermediary explanation was not spelled out because the Bondholders’ position as to “trustee in bankruptcy” status did not have to be addressed, and the Court explicitly dismissed that argument as unnecessary to the resolution of the cross-motions when the Court forbore to resolve Count III. The Court supplies this clarification for the Bondholders’ benefit, but it is in no way an amendment of the Summary Judgment Order. A fortiori, there is no estoppel effect upon the Oversight Board based upon a holding that the Court did not make.

Finally, the Court notes that, in their Response, the Bondholders represent that this Court held that the Oversight Board qualifies as a “trustee in bankruptcy,” citing to the Summary Judgment Order, and placed the phrase in quotes, despite the fact that the quoted phrase does not appear anywhere in the Summary Judgment Order.

Compare:

Under section 9-317(a)(2) of the U.C.C., a lien creditor has priority over unperfected security interests. 19 L.P.R.A. § 2267(a)(2).

(Summary Judgment Order at 49.)

With:

Based on the Summary Judgment Order, Section 959(b) clearly applies to the Oversight Board, because the Court held there that the Board qualifies as a ‘trustee in bankruptcy.’ See Summary Judgment Order at p. 49 (applying to the Oversight Board 19 L.P.R.A. § 2267(a)(2), which gives a ‘lien creditor ․ priority over unperfected security interests’); see also 19 L.P.R.A. § 2212(a)(52)(C) (defining ‘Lien creditor’ to include ‘a trustee in bankruptcy’).

(BH Resp. ¶ 18 (emphasis added).)²²

The Bondholders are warned not to fabricate “quotations” of language that is not present in the Court's orders and to exercise caution when arguing that any court made any holding by implication.

6. Conclusion

Accordingly, the Motion to Dismiss is granted with respect to Counterclaim Count III and the Bondholders’ request in Count III for a declaratory judgment is denied.

E. Counterclaim Count IV – Declaratory Judgment for Breach of Trust

In Counterclaim Count IV of the Counterclaim Complaint,²³ the Bondholders seek a declaratory judgment that PREPA is in breach of trust with respect to “funds”—the Court assumes that the Bondholders refer to revenues in this instance—“pledged” to payment of the Bonds and “credited to” (the Court assumes that the Bondholders mean “deposited into”) the “Sinking Funds and Other Funds”—the Court takes this reference to mean the accounts in the Sinking Fund and the other Specified Funds. (See Counterclaim Compl. at 60.) For the reasons explained in the Summary Judgment Order, the title of Counterclaim Count IV as pled does not reference any PREPA revenues other than pledged revenues that have already been deposited into the Sinking Fund and other Specified Funds.

In the Summary Judgment Order, the Court held, consistent with its prior decision in In re Fin. Oversight & Mgmt. Bd. of P.R., 618 B.R. 619, 639 n.19 (D.P.R. 2020) (“HTA”), that a “pledge” that lacks “references to a lien or charge or other language indicating” that it is meant to expand the scope of specific lien grants results in a mere “unsecured promise[ ] to deposit Revenues in the manner required by the” Trust Agreement. (Summary Judgment Order at 36.) A bare “pledge,” without more, similarly does not create a trust relationship between contracting parties. Accordingly, the rulings of the Summary Judgment Order with respect to the extent of the Bondholders’ secured claim and the Lien Perfection Stipulation would appear to resolve Counterclaim Count IV with respect to the Sinking Fund and Specified Funds within the Trustee's control: even if PREPA were a trustee for the Bondholders, the ruling that amounts deposited into those Funds are secured obviates the necessity of a declaratory judgment for breach of trust with respect to those Funds.

That leaves as the only question pending whether PREPA is a trustee for the Bondholders with respect to the Specified Funds that the parties have agreed the Bondholders have not perfected their liens on. A ruling of breach of trust could potentially expand the Bondholders’ claim beyond their secured claim and Unsecured Net Revenue Claim to encompass amounts credited to those Funds. The Summary Judgment Order ruled that the Oversight Board has the status of a lien creditor under section 544 of the Bankruptcy Code and that it can avoid unperfected liens on the Specified Funds. (See, e.g., Summary Judgment Order at 48-53.) Under the Bondholders’ trust theory, they are the equitable owners of these revenues regardless. (See, e.g., BH Resp. ¶ 30.) However, the wording of Counterclaim Count IV only extends to amounts already credited to the Sinking Fund and Specified Funds. As a result, a breach of trust—as pled in the heading of Counterclaim Count IV—could arise only from nonpayment of amounts on deposit in the Sinking Fund and Specified Funds that PREPA allegedly holds as trustee for the Bondholders. Despite conclusory allegations of misappropriation due to PREPA not depositing money into the Sinking Fund and Specified Funds, the Bondholders never allege the misappropriation of Revenues that have already been deposited into the funds. Because there is no allegation that such conduct has occurred, Counterclaim Count IV as described by the Bondholders in the wording of the Count itself fails to state a claim.

In the body of the portion of the Counterclaim Complaint relating to Counterclaim Count IV, however, the Bondholders plead a very different claim, asserting a wrong premised on the broadest possible concept of a trust relationship between PREPA and the Bondholders, and alleging that “PREPA acts in the capacity of a trustee to an express trust and holds all moneys received under the provisions of the Trust Agreement in trust for the benefit of bondholders. 22 L.P.R.A. § 208(a)(2); Trust Agreement §§ 401, 507, 601.” (Counterclaim Complaint ¶ 95.) The Committee notes the “sheer breadth” of this argument: “[u]nder their theory, every penny PREPA ever generates is part of a trust res for the benefit of the bondholders.” (UCC Reply ¶ 2.) However, as explained in Summary Judgment Order and below, the Bondholders have failed to advance any viable theory under which a trust is impressed on PREPA's revenues when they are first generated or received. Further, First Circuit case law specifically with respect to Puerto Rico holds that the phrase “held in trust”—which appears in the Trust Agreement only with respect to a few of the Sinking and Specified Funds—is insufficient by itself to create an express trust. The Authority Act creates a cause of action for an accounting (a provision that, as explained below, does not create a trust relationship) but otherwise explicitly limits any remedies of Bondholders and trustees to those contained in the Trust Agreement.

1. The Authority Act

a. PREPA and its Board Must Account “As If They Were” the Trustee of an Express Trust but are not Rendered Trustees by the Authority Act

“Generally, whether a trust has been established is a question to be resolved under state law.” U.S. Fid. & Guar. Co. v. Maxon Eng'g Servs., Inc. (In re Maxon Eng'g Servs., Inc.), 332 B.R. 495, 499 (Bankr. D.P.R. 2005). “The burden, however, is on the claimant to establish the existence of a trust and to identify the property held in trust.” In re Morales Travel Agency, 667 F.2d 1069, 1071 (1st Cir. 1981); see also Rameker v. Peterson (In re Associated Enters., Inc.), 234 B.R. 718 (Bankr. W.D. Wis. 1999) (“The burden of proof to show the existence of a valid trust is on the party asserting the existence of the trust. The party must show that the acts of the settlor were sufficient to create a trust.”).

The Bondholders contend, citing language in section 208(a)(2) providing that PREPA and its board must account “as if they were the trustee of an express trust[,]” that the Authority Act makes PREPA a trustee of an express trust. 22 L.P.R.A. § 208 (emphasis added).

Contrary to the Bondholders’ assertions, the Authority Act, by providing that PREPA must perform a particular disclosure function “as if [it] were” the trustee of an express trust, demonstrates conclusively that PREPA is not a trustee of an express trust by virtue of the Authority Act. (See also FOMB Mem. ¶ 50; FOMB Reply ¶¶ 20-21, 25; UCC Reply ¶ 4 (“If PREPA were a trustee and its revenues subject to a trust, there would be no need for the ‘as if PREPA were a trustee’ remedy.”).) Although the import of the phrase is unmistakably plain, the Court also notes that it is a well-settled tenet of statutory construction that “a statute should not be construed to render any of its phrases superfluous.” U.S. v. Commonwealth Energy Sys. & Subsidiary Cos., 235 F.3d 11, 15 (1st Cir. 2000). As the Oversight Board argues:

Defendants’ interpretation of 22 L.P.R.A. § 208(a)(2) also asks the Court to entirely ignore the plain meaning of the phrase ‘as if.’ ‘The phrase “as if” means “as the case would be if” some different condition had been in existence ․’ As if, Oxford Dictionary of English (3d ed. 2011), https://www.oed.com/view/Entry/11307#eid38318876 [https://perma.cc/7TSA-8ZVF]. In other words, by its plain terms, 22 L.P.R.A. § 208(a)(2) assumes that PREPA is not a trustee and counterfactually imposes a single duty (the duty to account) on PREPA ‘to account’ as if it were a trustee with respect to the bondholders.

(FOMB Reply ¶ 25.)

The Court rejects the Bondholders’ unsupported argument that the phrase “as if” is meant “to create a trust-type relationship without any need to comply with the formal or technical mechanics of trust creation that may exist in some jurisdictions.” (BH Resp. ¶ 27.) It appears that the Bondholders so argue to counter their failure to allege compliance with Puerto Rico's formal recording requirements for express trusts, which render any unrecorded trust unenforceable. (See FOMB Reply ¶ 24 n.7.)

The Authority Act provision creates a single-instance exception that is the opposite of a “trust-type relationship.” If PREPA were a trustee by virtue of the Authority Act, and its revenues subject to a trust, there would be no need to provide for a duplicative accounting remedy. Accordingly, the Bondholders have failed to plead facts sufficient to meet their burden to establish that PREPA is a trustee of an express trust for the Bondholders by virtue of the Authority Act.

b. PREPA and its Board Must “Account”

Section 208(a) of the Authority Act provides, in relevant part:

(a) Subject to any contractual limitations binding upon the holders of any issue of bonds, or trustees therefor ․ any holder of bonds, or trustee therefor, shall have the right and power ․:

․

(2) by action or suit in equity to require the Authority and the Board thereof to account as if they were the trustee of an express trust ․

22 L.P.R.A. § 208(a) (emphasis added).

The Bondholders argue that the requirement under the Authority Act that PREPA and its Board “account” to Bondholders (22 L.P.R.A. § 208(a)(2)) also provides a separate extremely broad remedy that extends beyond their claim as thus far defined by the Court based on the provisions of the Trust Agreement. (BH Resp. ¶¶ 31-36.) This argument fails, for several reasons, including: (1) as explained above, the specific provisions of the Trust Agreement preclude a reading of “as if they were the trustee of an express trust” to subject all revenues (or “Revenues”) at all times to a trust; (2) the Bondholders have provided no legal or textual support for their expansive view of the concept of an “accounting” under Puerto Rico law; and (3) the argument that an accounting functionally expands Bondholder remedies far beyond those in the Trust Agreement is unavailing because, under the Authority Act, all Bondholders’ remedies are made “[s]ubject to any contractual limitations binding upon the holders of any issue of bonds, or trustees therefor.” 22 L.P.R.A. § 208(a) (emphasis added). However, because of the Court's conclusion that the accounting remedy that is provided by Puerto Rico law would be redundant, the Court will address this contention briefly.

The Bondholders do not point to precedent for their concept of an accounting action in Puerto Rico case law or discuss any statutes defining a request for accounting under Puerto Rico law, instead relying primarily upon various, irrelevant, Illinois state court and Seventh Circuit cases from the 1930s and 1940s. (See BH Resp. ¶¶ 33-35.) The remedy sought in the Bondholders’ request for an accounting is payment of the full amount asserted in the Master PREPA Bond Claim, only here under the name of “restitution.” (BH Resp. ¶ 6.) Unfortunately, Puerto Rico law does not provide for an accounting action even vaguely resembling the Bondholders’ conception.

Under 19 L.P.R.A. section 2240(a)(4), titled “Request for accounting; request regarding list of collateral or statement of account” in the official translation, a request for an accounting is only a request “that the recipient provide an accounting of the unpaid obligations secured by collateral and reasonably identifying the transaction or relationship that is the subject of the request.” 19 L.P.R.A. § 2240(a)(4) (emphasis added). There is no remedy in that statute providing the broad relief that the Bondholders argue is necessarily included; the subject party need only authenticate and send the information requested. Id. § 2240(b)(1). Further, in Citibank Glob. Mkts., Inc. v. Rodriguez Santana, the First Circuit “discern[ed] nothing in Puerto Rico agency law requiring anything more” than provision of a detailed list of transactions to render an accounting. See 573 F.3d 17, 30 (1st Cir. 2009). Similarly, this Court can discern nothing in Puerto Rico law requiring anything approaching the Bondholders’ requested relief.

Accordingly, the accounting to which the Bondholders would be entitled is not the accounting that they request in the Counterclaim Complaint nor the form of accounting granted in the many inapposite examples in the Response, and the relief that would be available under the Authority Act appears unnecessary, as the parties have agreed which funds comprise collateral security under the Court's orders. Accordingly, as a matter of law, the Bondholders have failed to state a claim to entitlement to the broad accounting right they seek and the request for an accounting is denied as redundant.

Further, to the extent that the Bondholders are asking the Court to grant a separate request for an “equitable” accounting as they conceive it, any such request is denied in light of the remedies in the Trust Agreement, which are accounted for in the Court's valuation of the Master PREPA Bond Claim. The Oversight Board observes, with respect to the Bondholders’ assertion of the right to an accounting under the Authority Act, that “[i]t is not entirely clear what ‘accounting’ Defendants seek.” (FOMB Mem. ¶ 46 n.22.) The Court agrees. The Bondholders argue that “contractual limitations on recourse or liability do not apply to the equitable accounting remedy” (BH Resp. ¶ 37 (emphasis in the original)) but the very statute requiring PREPA to account to the Bondholders on which they rely begins with the words: “Subject to any contractual limitations binding upon the holders of any issue of bonds, or trustees therefor[.]” 22 L.P.R.A. § 208(a) (emphasis added). It may simply be that the Bondholders mistake the Authority Act's provision that an accounting under Puerto Rico law may be requested “by action or suit in equity” for the creation of an “equitable” action for accounting as they conceive it. Id. If the gravamen of the Bondholders’ accounting request is that the Authority Act requires an “equitable” accounting as they conceive and describe such an action in their Response—and not as provided under Puerto Rico law—and that the accounting contemplated by the Authority Act expands their remedies beyond those in the Trust Agreement, then the request is without basis in law or in fact. It is hereby denied.

2. The Trust Agreement

Despite the Court's conclusions with respect to the Authority Act, and the Bondholders’ failure to allege compliance with Puerto Rico's formal recording requirements for express trusts, because the false premise that PREPA is a trustee for the Bondholders appears central to much of their opposition to the Court's estimation of their claim, the Court's analysis of whether PREPA “acts in the capacity of a trustee of an express trust” must continue to a review of the provisions of the Trust Agreement to evaluate whether an express trustee-beneficiary relationship is created thereby.

The Bondholders argue that use of the phrase “held in trust” at various points in the Trust Agreement creates an express trust for the benefit of Bondholders. (Counterclaim Compl. ¶¶ 30, 95; BH Resp. ¶ 25.) However, the First Circuit has held—specifically under Puerto Rico law—that the “talismanic” phrase “held in trust” is insufficient to establish an express trust or to substitute a trust relationship for a common debtor-creditor relationship. In re Morales Travel Agency, 667 F.2d 1069 (1st Cir. 1981). “If a ritualistic incantation of trust language were deemed conclusive, it would be a simple matter for one creditor, at the expense of others, to circumvent the rules pertaining to the creation of bona fide security interests.” Id. at 1072. See also, e.g., Markel Ins. Co. v. Origin Bancorp, Inc., 1:21-CV-151, 2023 WL 2589231, at *9 n.11 (N.D. Tex. Mar. 21, 2023) (quoting, inter alia, In re Morales Travel Agency); Evans Fur Co. of Houston, Inc. v. Chase Manhattan Bank, N.A. (In re Sakowitz, Inc.), 949 F.2d 178, 181-83 (5th Cir. 1991) (discussing In re Morales Travel Agency at length in holding that the relevant parties had a typical debtor-creditor relationship, rather than a trustee-beneficiary relationship); Ford Motor Credit Co. v. Gallaudet (In re Gallaudet), 46 B.R. 918, 925 (Bankr. D. Vt. 1985) (“The fact that a commercial agreement contains the word ‘trust’ does not make the agreement a trust agreement nor does it create a fiduciary relationship” (citations omitted)).

Here, as explained below, the Trust Agreement creates a clearly defined common debtor-creditor relationship between PREPA and the Bondholders, identifies precisely which Funds are subject to bona fide security interests, and identifies precisely which few Funds contain funds that are to be “held in trust.”

a. Section 601 of the Trust Agreement Does Not Make PREPA the Trustee of an Express Trust for the Benefit of the Bondholders

The Bondholder seek to circumvent the rules pertaining to the creation of bona fide security interests, and to achieve this end the Bondholders have invoked the phrase “held in trust” while intentionally omitting crucial words of section 601 of the Trust Agreement.

In their presentation of section 601 to the Court, the Bondholders argue that the Trust Agreement creates an express trust by providing that “all moneys received by the Authority under the provisions of this Agreement ․ shall be held in trust, [and] shall be applied only in accordance with this Agreement ․ [.]” (BH Resp. ¶ 25 (emphasis and elision in original).)²⁴

Section 601 actually provides: “All moneys received by the Authority under the provisions of this Agreement shall be deposited with a Depositary or Depositaries, shall be held in trust, shall be applied only in accordance with the provisions of this Agreement ․” (TA § 601 (emphasis added).)

The Bondholders omit, in purporting to quote the Trust Agreement, the portion of the sentence providing that moneys received by the Authority “shall be deposited with a Depositary or Depositaries,” to create a misleading impression that the moneys as received by the Authority are already “held in trust” by PREPA. In fact, the Trust Agreement provides that revenues are to be deposited with “a Depositary or Depositaries” who will hold them in trust. (TA § 601.) Section 601, including the lengthy second section, specifies responsibilities of Depositaries to secure and apply the revenues: “All moneys deposited with each Depositary, including the Trustee, shall be credited to the particular fund or account to which such moneys belong.” (TA § 601 (emphasis added).)²⁵ The Trustee is a “Depositary,” but PREPA is not. (TA § 101.)

b. Sections 401 and 507(h) of the Trust Agreement Do Not Make PREPA the Trustee of an Express Trust for the Benefit of the Bondholders

The Trust Agreement imposes obligations upon PREPA itself to hold certain funds in trust only in two discrete sections, neither of which supports the Bondholders’ claim of the imposition of an express trust on all of the revenues of the Authority. Section 401 of the Trust Agreement provides: “The moneys in the Construction Fund shall be held by the Authority in trust, separate and apart from all other funds of the Authority, and shall be applied to the payment of the cost of any Improvements ․” Section 401 also is the source of the Bondholders’ lien and charge upon the funds deposited in the Construction Fund pending application to the payment of Improvements, but the obligations imposed by section 401 do not give exclusive rights, or liens on the entirety of the assets of the Construction Fund, to the Bondholders. (TA § 401.) Rather, section 401 imposes a duty on the Authority to hold Construction Fund assets, which may include separate accounts comprised of moneys received from government sources, in trust for the various purposes to which Construction Fund assets may be applied. (TA § 401.) Accordingly, PREPA is acting similarly to the depositaries in section 601 with respect to government funds. As described in the Summary Judgment Order, provisions of the Trust Agreement attach a lien to unapplied moneys available for transfer to the Sinking Fund in the event of a shortfall in Net Revenues promised to pay the Bonds. (See, e.g., Summary Judgment Order at 36.) However, any government funds in the Construction Fund are not subject to the Bondholders’ lien. (TA § 401.)

Section 507(h) provides, in relevant part: “The moneys in the Sinking Fund shall be held by the Trustee in trust, and the moneys in the Reserve Maintenance Fund, the Self-insurance Fund and the Capital Improvement Fund shall be held by the Authority in trust, separate and apart from all other funds of the Authority, and shall be applied as hereinafter provided with respect to such Funds.” (TA § 507(h).) As explained in the Summary Judgment Order and the Lien Perfection Stipulation, the Self-insurance Fund and Reserve Maintenance Fund were held by the Trustee instead of by PREPA and moneys therein are subject to a perfected security interest, rendering unnecessary any decision with respect to alleged trust responsibilities of the Authority with respect to those moneys. (See, e.g., Summary Judgment Order at 13.)

Because the words “held in trust” apply between PREPA and the Bondholders nowhere else in the Trust Agreement, the remaining question is whether PREPA is a trustee of an express trust for the benefit of the Bondholders solely with respect to the moneys on deposit in the only Fund left, the Capital Improvement Fund. The Court now holds that PREPA is not a trustee of an express trust with respect to the Bondholders by virtue of any provisions of the Trust Agreement, including the Capital Improvement Fund. The Bondholders cannot evade the necessity of perfecting their liens on the Capital Improvement Fund, or any other liened Fund, by saying that the Fund's contents are their property held in trust. Insofar as obligations to the Bondholders are concerned, the Trust Agreement creates one single trustee, the PREPA Bond Trustee. As the First Circuit cautioned in In re Morales Travel Agency, if courts construed the words “held in trust” to establish an express trust (whether or not such trust is enforceable), “it would be a simple matter for” the Bondholders, “at the expense of” other unsecured creditors, to circumvent the rules pertaining to the required perfection of their lien on the Capital Improvement Fund, and “talismanic language” cannot throw a “protective mantle over” any moneys in the Capital Improvement Fund in “the absence of a genuine trust mechanism.” See 667 F.2d at 1071-72.²⁶

Accordingly, PREPA is not a trustee of an express trust for the Bondholders by virtue of the Trust Agreement.

3. Conclusion: PREPA is Not a Trustee of an Express Trust for the Benefit of the Bondholders

Neither the Authority Act, the Trust Agreement, nor any other source of authority makes PREPA a trustee of an express trust with respect to the Bondholders or is indicative of any intent to excuse formal requirements with respect to trust creation. The Court specifically rejects the Bondholders’ contention that any such sources “create a trust-type relationship without any need to comply with the formal or technical mechanics of trust creation that may exist in some jurisdictions.” (BH Resp. ¶ 27.) Further, because it is unmistakably clear that the Authority Act does not make PREPA a trustee, the intent to create an express trust by the Trust Agreement or otherwise would also need to be unmistakably clear. Accordingly, the Bondholders have failed to meet their burden to establish the existence of an express trust that has been properly recorded or that the arrangement between PREPA and the Bondholders has the characteristics of a trust and gives rise to the rights and duties the law recognizes as a trust. Restatement (Third) of Trusts § 5 cmt. a (2003); see In re Morales Travel Agency, 667 F.2d at 1071 (“The burden ․ is on the claimant to establish the existence of a trust ․”).

Because PREPA is not a trustee, it is unnecessary to address at this juncture the Bondholders’ arguments regarding whether breaches of trust would give rise to claims under the Bankruptcy Code or expand their remedies beyond those in the Trust Agreement.

The Court, for the reasons stated above and having considered all of the Bondholders’ trust-related arguments not explicitly addressed herein, concludes that the Counterclaim Complaint fails to state a claim for breach of trust, or for the broad accounting right it pleads. Accordingly, the Motion to Dismiss is granted with respect to Counterclaim Count IV and the Bondholders’ request for a declaratory judgment therein is denied.²⁷

F. Counterclaim Count V – Declaratory Judgment for the Doctrine of Dolo in the Performance of Contracts

In Counterclaim Count V of the Counterclaim Complaint, the Bondholders seek a declaratory judgment that PREPA is liable under Puerto Rico law under the doctrine of dolo (variably called “dolus”) in the performance of contracts. (Counterclaim Compl. ¶ 100.) In the Counterclaim Complaint, the Bondholders cited two provisions of the inapplicable 2020 PR Civil Code in support of this claim, and provided no certified translations. (See Counterclaim Compl. at 60 (citing 31 L.P.R.A. §§ 9316, 9332).) In their Response to the Memorandum, the Bondholders provided a certified translation of only 31 L.P.R.A. section 9316 as an attachment to the Natbony Declaration. (Natbony Translation Ex. 1.)

The Bondholders’ dolo count fails to state a claim for two main reasons. First, despite conceding that dolo literally means “fraud,”²⁸ the Bondholders ignore the necessity of pleading fraud, deception, or bad faith in stating a claim for dolo. Second, the Bondholders’ dolo claim is improperly based upon PREPA's lawful utilization of authority granted by Congress to file a petition for relief under Title III of PROMESA.

1. A Claim for Dolo Requires Allegations of Fraud, Deceit, or Bad Faith

In the Counterclaim Complaint, the Bondholders argue that PREPA is liable for dolo because PREPA “has willfully and knowingly failed to comply with its contractual obligations.” (Counterclaim Compl. ¶ 100.) In its Memorandum, the Oversight Board argues that a claim for dolo must plead, at the minimum, bad faith or deceit. (FOMB Mem. ¶¶ 58-60 (citing, inter alia, P.R. Tel. Co. v. SprintCom, Inc., 662 F.3d 74, 99 (1st Cir. 2011)).) In their Response, the Bondholders seek to lower the pleading standard necessary to state a claim for dolo, arguing that, “[a]lthough the Latin term ‘dolus’ or ‘dolum,’ from which ‘dolo’ is derived, literally means ‘fraud,’ ” essentially any breach of contract or failure to perform an obligation states a claim for dolo. (BH Resp. ¶ 46.) The Oversight Board replies that the Bondholders’ dolo theory cannot be correct because, absent allegations of fraud, deceit, or at a minimum bad faith, any Chapter 11 or Title III case filing—if such could form the basis of a dolo claim—would create “dolo claims galore[.]” (FOMB Reply ¶ 34 (citing, inter alia, Casco, Inc. v. John Deere Constr. & Forestry Co., Civ. No. 13-1325, 2015 WL 4132278, at *2 (D.P.R. July 8, 2015)).)

Relevant authority on the bounds of the dolo cause of action is consistent with the term dolo as explained above, and a mere breach of obligations is insufficient to frame a viable claim. The First Circuit has described dolo thusly, discussing the applicable provision of the 1930 PR Civil Code:

Under Puerto Rico contract law, ‘[t]here is deceit when by words or insidious machinations on the part of one of the contracting parties the other is induced to execute a contract which without them he would not have made.’ 31 L.P.R.A. § 3408. Deceit, or dolo, can exist either ‘in the “formation” of a contract where a party obtains the consent of another through deceptive means,’ or ‘in the “performance” of a contractual obligation where a party knowingly and intentionally, through deceitful means, avoids complying with its contractual obligation.’

Feliciano-Muñoz v. Rebarber-Ocasio, 970 F.3d 53, 62 (1st Cir. 2020) (emphasis added). The certified translation of 31 L.P.R.A. section 9316 of the 2020 PR Civil Code attached to the Natbony Declaration translates dolo as “fraud” and provides: “Fraud consists of deliberate and bad faith nonfulfillment of the obligation.” (Natbony Decl. Ex. 1 (emphasis added).) The Puerto Rico Supreme Court has recognized that contractual dolo “is a broad term that ‘includes deceit, fraud, misrepresentation, undue influence’ and other insidious machinations[,]” and that dolo “in the performance of obligations is equalized to bad faith.” P.R. Tel. Co. v. SprintCom, Inc., 662 F.3d 74, 99 (1st Cir. 2011) (citing Márquez v. Torres Campos, 11 P.R. Offic. Trans. 1085, 111 D.P.R. 854, 863-64 (1982); Canales v. Pan Am., 12 P.R. Offic. Trans. 411, 112 P.R. Dec. 329, 340, 112 D.P.R. 329 (1982)).

Accordingly, a plausible allegation of fraud, deceit, or bad faith is necessary to state a claim for dolo, and, in pleading their claim based upon the lawful use of Title III—as discussed hereafter—the Bondholders have failed to meet the standard.

Additionally, the Bondholders’ conclusory allegations of “misappropriation” and “diversion” found elsewhere in the Counterclaim Complaint do not suffice to remedy the deficiency, nor do assertions that each action taken or forborne by the Bondholders was “induced.” (FOMB Reply ¶ 36.) Plausible nonconclusory factual allegations supporting an inference of bad faith or deceit are necessary, and this count of the Counterclaim Complaint fails to state a claim because the Bondholders have proffered none.

2. PREPA's Actions in Title III Do Not Support a Dolo Claim

In the Counterclaim Complaint, the Bondholders assert that:

Since filing its Title III case, PREPA has relied on the Title III process to prevent the Trustee and bondholders from exercising their rights and remedies under the Trust Agreement to seek the appointment of a receiver, and to seek specific performance of the very covenants and obligations that effectuate the Trustee and bondholders’ lien rights. Moreover, in this action, PREPA contends that, even though it is intentionally and willfully depriving the Sinking Fund of monies sufficient to meet its obligations in violation of the Trust Agreement, the Trustee and bondholders have no recourse beyond the Sinking Fund and no remedy in law or equity to redress PREPA's unlawful, willful, and egregious breaches done with knowledge of the consequences of those breaches for the Trustee and bondholders. Therefore, if the Trustee prevails on any claims seeking to limit the Trustee and bondholders’ liens and bankruptcy claims to funds that are voluntarily deposited by PREPA to the credit of the Sinking Fund, PREPA will have unfairly deprived the Trustee and bondholders of their lien rights under the Trust Agreement.

(Counterclaim Compl. ¶ 101.)

Counterclaim Count V is thus clearly premised on a claim that the Bondholders have been damaged by PREPA's Title III filing (or the decision to file the Title III petition itself) and the effect of the automatic stay. The effects of a legal invocation of a federal statute, standing alone, are facially insufficient to support a dolo claim. Nor has there even been any application for relief on the basis of an alleged bad faith filing, much less a demonstration or determination that such relief would be warranted.

Moreover, the Bondholders’ rights have been the subject of judicial determinations through the Summary Judgment Order, Estimation Order, and the so-ordered Lien Perfection Stipulation. None of these circumstances provides any plausible support for the dolo claim.

Accordingly, the Motion to Dismiss is granted with respect to Counterclaim Count V and the Bondholders’ request for a declaratory judgment therein is denied.

G. Counterclaim Count VI – Declaratory Judgment for Rescission of Contract

In Count VI of the Counterclaim Complaint, the Bondholders seek a “Declaratory Judgment for Rescission of Contact” under 31 L.P.R.A. sections 6303 and 9823 of the inapplicable 2020 PR Civil Code and request:

rescission damages as if the bond transactions were annulled under the doctrine of rescission and thus payment of the amount of the principal lent to PREPA under the bond issuances, accrued interest, and other damages to be determined by the Court. In the alternative, the bondholders ask the Court for a declaratory judgment that the bondholders are entitled to seek the fulfillment of PREPA's obligations under the Trust Agreement and to obtain damages in the full amount they would have received had PREPA fully performed.

(Counterclaim Compl. ¶ 107 (emphasis added).)

The Oversight Board filed the Motion to Dismiss and addressed the Bondholders’ rescission claims in its Memorandum. (See, e.g., FOMB Mem. ¶¶ 62-69.) In the Response, the Bondholders argue that they did not plead a claim for “rescission” but instead pleaded one for “resolución” under Puerto Rico law, which they contend was “translated in the Counterclaim Complaint as ‘rescission.’ ” In support of this attempted sleight of hand they cite—for the first time—Article 1077 of the 1930 PR Civil Code (31 L.P.R.A. § 3052), and argue that the Oversight Board “has now waived by omission any ability to argue that the Counterclaim Complaint did not state a claim for resolución[.]” (BH Resp. ¶ 66.)²⁹

The First Circuit has addressed the distinction between “rescisión,” translated as “rescission,” and “resolución,” translated as “resolution” in 31 L.P.R.A. section 3052, and has described resolution as “a form of rescission.” See, e.g., Dopp v. Pritzker, 38 F.3d 1239, 1242 (1st Cir. 1994). In Dopp v. HTP Corp., the First Circuit specifically addressed the use of the word “rescission” rather than “resolution” in the English translation of 31 L.P.R.A. section 3052. 947 F.2d 506, 510 n.4 (1st Cir. 1991). In that instance, the Court held that the specific term used was not material because the parties had agreed that 31 L.P.R.A. section 3052 was the relevant statute rather than 31 L.P.R.A. section 3492, which deals with rescission as more traditionally understood. Id. Here there was no similar agreement; in the Counterclaim, the Bondholders requested only “rescission,” cited only statutes from the 2020 PR Civil Code, and did not provide translations.

The Bondholders also requested “rescission” independent of any statutory basis in both their Eighth and Ninth Affirmative Defenses to the Oversight Board's Complaint (which went unbriefed during consideration of the cross-motions for summary judgment and therefore were not considered by the Court). (Counterclaim Compl. at 28.) One of the two relevant statutes from the 2020 PR Civil Code actually cited by the Bondholders in the Counterclaim Complaint, 31 L.P.R.A. section 6303, also explicitly distinguishes between rescisión and resolución in the original Spanish-language statute (and, again, no translation was provided).³⁰ Finally, the Bondholders have requested damages “as if the bonds were annulled” but the First Circuit has held that “annulment and resolution are mutually exclusive remedies[.]” Dopp v. Pritzker, 38 F.3d at 1242 . (Counterclaim Compl. ¶ 107.)

The Bondholders have now explicitly abandoned their claim for rescission, and, having passed up the opportunity to amend their Counterclaim Complaint during the time before the Oversight Board filed the Motion to Dismiss, “cannot amend their complaint by asserting new facts or theories for the first time in opposition to [a] motion to dismiss.” K.D. ex rel. Duncan v. White Plains Sch. Dist., 921 F. Supp. 2d 197, 209 n.8 (S.D.N.Y. 2013). Although the Court is skeptical of the Bondholders’ assertions that they intended to plead resolution at all, taken as true, their invocation without explanation of an inexact translation that they had never proffered, of a statute that was not cited, does not meet the basic notice pleading requirements of Federal Rule 8(a)(2). The Bondholders invoked a doctrine by the incorrect name, pled a different statute from a different civil code in their Response, and requested inappropriate relief, and so have failed to state a claim for resolution.

Addressing Counterclaim VI as pled, briefly: in the Counterclaim Complaint, the Bondholders argue that they will be entitled to the relief they seek “If PREPA prevails on its counts seeking a judicial declaration that the Trustee and bondholders’ recourse and/or lien rights are limited to moneys in the Sinking Fund, [because then] PREPA's failure to comply with its covenants to set reasonable rates, bill and collect from customers, and deposit Revenues to the credit of the Sinking Fund will have vitiated the essential terms of the Trust Agreement and will warrant rescission of the bond transactions.” (Counterclaim Compl. ¶ 106.) As argued by the Oversight Board in its Memorandum, the conditions precedent as pled were not fulfilled by the Summary Judgment Order because PREPA (via the Oversight Board) prevailed with respect to its arguments on lien rights, but not fully with respect to its recourse arguments. (FOMB Mem. ¶ 65.) The Summary Judgment Order did not adopt the position previously advanced by the Committee and put forward by the Oversight Board in its motion for summary judgment—that section 927 of the Bankruptcy Code bars all recourse, leaving the Bondholders with only their secured claim—but instead held that the Bondholders have recourse beyond the Sinking Fund in the form of the Unsecured Net Revenue Claim. (FOMB Mem. ¶ 65 (citing Summary Judgment Order at 13-14).)

Accordingly, as pled, the Counterclaim fails to state a viable claim for the requested relief, which is denied. The Bondholders have abandoned their claim for rescission and failed to state a claim for resolution under Puerto Rico law. The Bondholders’ alternatively requested relief is denied as duplicative because, in the Estimation Order, the Court has already valued any claim based upon the net revenues that would have been generated had PREPA performed. The Motion to Dismiss is granted with respect to Counterclaim Count VI and the Bondholders’ request for a declaratory judgment therein is denied.

H. Counterclaim Count VII – Declaratory Judgment Based upon the Takings Clause of the United States Constitution and the Puerto Rico Constitution

In Count VII of the Counterclaim Complaint, the Bondholders seek a declaratory judgment that, “Should PREPA Succeed in Restricting the Trustee's and Bondholders’ Recourse, it has Unconstitutionally Taken Trustee's and Bondholders’ Property Without Just Compensation under the Trust Agreement” under the Takings Clause of the Fifth Amendment of the Constitution of the United States and of the Puerto Rico Constitution. (Counterclaim Compl. at 63.)

The Fifth Amendment of the United States Constitution provides that “private property [shall not] be taken for public use, without just compensation[.]” U.S. Const. amend. V; see also P.R. Const. art. II, sec. 9. For the reasons described below, the Bondholders have not pled cognizable takings claims.

1. Prior Determinations Regarding the Bondholders’ Theories on Property Rights

Traditionally in bankruptcy, property interests are proper subjects of Takings Clause claims only to the extent the obligation at issue is secured by collateral. In re City of Stockton, 909 F.3d 1256, 1266 (9th Cir. 2018) (“The Takings Clause is only implicated in bankruptcy if the creditor has actual property rights ․ If the purported property interest is, in reality, just a contractual or statutory right for monetary relief, then the debt can be adjusted in bankruptcy.”); Americredit Fin. Servs. v. Nichols (In re Nichols), 440 F.3d 850, 854 (6th Cir. 2006) (the Takings Clause protects only a “property right ․ in the collateral that secures the debt,” not an unsecured right to payment).

The extent to which the Bondholders’ interests are secured has already been addressed by the Summary Judgment Order and the Lien Perfection Stipulation, and the Court has already determined that the specific performance remedies of the Trust Agreement are mere mechanisms for obtaining payment and give rise to an unsecured claim under section 101(5)(b) of the Bankruptcy Code. (Summary Judgment Order at 59, 65-66.) The Summary Judgment Order also held that the Bondholders’ liens that have continued post-petition pursuant to 11 U.S.C. § 928 are limited to the amounts deposited into the Sinking Fund, and any other Specified Funds in which security interests were perfected, as of the effective date of PREPA's plan of adjustment, if and when confirmed. (See Summary Judgment Order at 44.) No PREPA plan of adjustment proposed thus far contemplates impairment of the secured portion of the Bondholders’ claim.

Also in the Summary Judgment Order, the Court noted that the Bondholders had abandoned their claim to having liens on the covenants and remedies of the Trust Agreement, and held that the Bondholders do not have liens (presently perfected or otherwise) on “revenues not yet collected for electricity not yet generated” that could give rise to a takings claim because they “have no present property right in the mere expectancy of future revenues.” (See, e.g. Summary Judgment Order at 27, 41-42 & n.25.)

Many of the Bondholders’ contentions regarding property rights rest upon their theory that the revenues of PREPA are held in trust for the Bondholders’ benefit, which putative trust relationship, they argue, expands the Bondholders’ rights to revenues beyond those the Court has identified in the Summary Judgment Order and Estimation Order. (See, e.g., BH Resp. ¶ 23.) The Court has rejected these Bondholder arguments, as explained above. The Court has also, above, rejected the Bondholders’ arguments that their claim arises by virtue of statute. This leaves only the Trust Agreement as a potential source of a property interest upon which takings claims could properly be predicated. As explained below, the Bondholders’ contentions that PREPA's invocation of Title III constitutes an unconstitutional taking of rights conferred by the Trust Agreement are unavailing.

2. The Bondholders Improperly Assert Takings Claims Based Upon PREPA's Utilization of Title III

In the Counterclaim Complaint, the Bondholders argue that, rather than having liens on the covenants and remedies of the Trust Agreement, they have “a property interest in the liens, recourse, and contractual rights in the Trust Agreement[.]” (Counterclaim Compl. ¶ 111.) This argument rests upon the premise that the covenants and remedies arising from the Trust Agreement (particularly the receiver remedy) are property owned by the Bondholders, and is of a piece with the Bondholders’ abandonment of the argument that the covenants and remedies in the Trust Agreement are property of PREPA in which PREPA could grant security interests. (See Summary Judgment Order at 45 n.26.) The Bondholders describe each of their alleged contractual and statutory rights and remedies as a property interest and argue that, “[b]y pursuing its Complaint in this adversary proceeding, PREPA, an entity of Puerto Rico, has acted to destroy those property interests created by the Trust Agreement by utilizing the process created by PROMESA” and thereby giving rise to nondischargeable takings claims. (Counterclaim Compl. ¶ 111 (emphasis added).)

Specifically, the Bondholders argue, with respect to Title III of PROMESA:

Since PREPA filed its Title III case, PREPA has failed to honor its covenants to the Trustee and bondholders. It failed to impose and collect reasonable rates, and has confiscated collateral by failing to deposit Revenues to the credit of the Sinking Fund, thereby depriving the bondholders and Trustee of their lien rights. PREPA has relied on the Title III process to prevent the bondholders and Trustee from exercising their rights and remedies under the Trust Agreement to appoint a receiver, and to seek specific performance of the very covenants and obligations that effectuate the Trustee and bondholders’ lien rights. And the claims PREPA now pursues in this adversary proceeding, if successful, would eviscerate the bondholders’ and Trustee's property rights by limiting such rights and recourse to moneys deposited to the credit of the Sinking Fund.

(Counterclaim Compl. ¶ 113 (emphasis added).)

The Bondholders clarify, in their Response, that their requested declaratory judgment is not—for the time being—meant to contest the impairment of any contractual obligations permitted by PROMESA, but is based on PREPA's actions:

Defendants’ contention in Count VII is not that PROMESA itself works a taking—which would, and in fact may, give rise to a Takings claim against the United States rather than against PREPA—but rather that PREPA's actions have given rise to a Takings claim, which must then be treated as a non-dischargeable claim within the Title III proceeding.

(BH Resp. ¶ 72.)

The Bondholders are specific that it is PREPA's availing itself of Title III that allegedly gives rise to their takings claim: “As an entity of Puerto Rico, PREPA will have thus used the processes established by PROMESA to destroy the Trustee and bondholders’ property rights. The role of the Oversight Board in PREPA's decision-making does not alter the fact that Puerto Rico is the government actor destroying the property interests[.]” (Counterclaim Compl. ¶ 116 (emphasis added).)

The Bondholders base their argument upon a prepetition decision, from the District Court for the District of Puerto Rico, holding that the Bondholders’ contractual receivership remedy is a “form of property for the purposes of the Takings Clause.” See Franklin Cal. Tax-Free Tr. v. P.R., 85 F. Supp. 3d 577, 612 (D.P.R. 2015) (“Franklin”). That holding was rendered outside of Title III, in the context of the court's refusal to grant PREPA's motion to dismiss a request by bondholders for a declaration that passage of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (“Recovery Act”) facially effected a taking, and the decision predated PROMESA. See id. The decision was affirmed by the First Circuit solely on the basis that the Recovery Act was preempted by federal bankruptcy law. See 805 F.3d 322, 332-33 (2015), aff'd, 579 U.S. 115, 136 S. Ct. 1938, 195 L.Ed.2d 298 (2016). The decision in no way implicated the impairment of contracts by PROMESA, a federal law.

Accordingly, it appears that the Bondholders are extrapolating from the 2015 District of Puerto Rico Franklin decision to argue that, despite their acknowledgement here that contractual rights can be impaired and discharged by the Bankruptcy Code (BH Resp. ¶ 72), PREPA's use of Title III to do so gives rise to a nondischargeable claim under the Takings Clause equal to their expected return under the Bonds. The Court rejects this novel theory.

For support, the Bondholders look to the findings of fact and conclusions of law incorporated into the order confirming the plan of adjustment for the Commonwealth, ERS, and PBA, wherein this Court held that there is an exception, imposed by the Takings Clause, to the general ability of a debtor to impair and discharge unsecured claims. (BH Resp. ¶ 69 (citing In re Fin. Oversight & Mgmt. Bd. for P.R., 637 B.R. 223, 292-96 (D.P.R. 2022) (“Commonwealth FFCL”), aff'd, Fin. Oversight & Mgmt. Bd. for P.R. v. Cooperativa de Ahorro y Credito Abraham Rosa, 41 F.4th 29, 37 (1st Cir. 2022) (“Cooperativa”), cert. denied, ––– U.S. ––––, 143 S. Ct. 774, 215 L.Ed.2d 46 (2023) (Docket Entry No. 19812 ¶¶ 162-69).) However, the Bondholders’ invocation of the Commonwealth FFCL and the First Circuit's decision in Cooperativa is entirely inapposite. The takings in Cooperativa were of real property, and had been effected by the Commonwealth prepetition pursuant to a Commonwealth law. Id. at 41. The taking alleged in Franklin was also a prepetition action by the Commonwealth pursuant to Commonwealth law. See 85 F. Supp. 3d at 612.

The difference in the present situation is not so much in the existence of a property interest (assuming, arguendo, that the Bondholders’ contractual receivership right is a property interest for the purposes of the Takings Clause) as in the manner in which it may be impaired and who is doing the impairing. Here, as opposed to in Franklin, the Bondholders’ allegation that any impairment of the Master PREPA Bond Claim would effect a taking by PREPA is not based upon the effect of any law enacted by the Commonwealth prepetition, but instead is based upon PREPA's alleged breach of the Trust Agreement by filing (or deciding to file) the Title III petition and thereafter in pursuing reorganization and discharge utilizing powers and authority conferred upon it by PROMESA.

Any takings claim as alleged by the Bondholders could be based on one of two grounds, neither of which is sufficient to support the Takings Clause claim asserted in Counterclaim Count VII. First, the Bondholders might premise their takings claim upon PREPA's nonperformance of its contractual obligations under the Trust Agreement, but that approach is not viable: the First Circuit has “held with a regularity bordering on the echolalic that a simple breach of contract does not amount to an unconstitutional deprivation of property.” Redondo-Borges v. U.S. Dept. of Hous. and Urb. Dev., 421 F.3d 1, 10 (1st Cir. 2005); see also Horwitz-Matthews, Inc. v. City of Chicago, 78 F.3d 1248, 1250 (7th Cir. 1996) (“It would be absurd to turn every breach of contract by a state or municipality into a violation of the federal Constitution.”).

The second potential legal and factual view of the Bondholders’ allegations is that they are asserting a takings claim based upon PREPA's undertaking of the legal readjustment of its debts pursuant to PROMESA as enacted by the United States Congress. As discussed below, the Bondholders fail to state a claim for a facial or a regulatory taking under any cognizable theory.

3. The Debtors Do Not Sufficiently Plead a Facial or Regulatory Taking

The Bondholders’ bare assertion that PREPA's alleged actions “resemble[ ] a physical invasion of property” (Counterclaim Compl. ¶ 117) is insufficient to state a viable facial takings claim.

Instead, the proper analytical framework for addressing the Bondholders’ Takings Clause challenge as a regulatory taking is set forth in Penn Central Transp. v. City of New York, 438 U.S. 104, 124, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978). See Cedar Point Nursery v. Hassid, ––– U.S. ––––, 141 S. Ct. 2063, 2071-72, 210 L.Ed.2d 369 (2021). Pursuant to that test, courts consider three factors: “(1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation interferes with the claimant's reasonable investment-backed expectations; and (3) the character of the governmental action.” Patriot Portfolio v. Weinstein (In re Weinstein), 164 F.3d 677, 685 (1st Cir. 1999) (applying Penn Central analysis to constitutional challenge to lien avoidance pursuant to section 522(f) of the Bankruptcy Code).

a. The Economic Impact of the “Regulation”

The Bondholders cite no law or regulation pursuant to which PREPA has purportedly effected a taking other than PROMESA (“utilizing the process created by PROMESA” (Counterclaim Compl. ¶ 111)), and provide no basis for distinguishing a purported takings claim based upon PREPA filing a Title III case and actions taken postpetition in pursuing readjustment of its debts under Title III from the decisions to file the petition (see Counterclaim Compl. ¶ 120 (“the governmental decision to do so constitutes a taking”)) or seek a discharge (i.e., “should PREPA succeed” in “this adversary proceeding” (Counterclaim Compl. at 60 & ¶ 113).)

The Bondholders provide no legal support for a theory that filing a Title III case (or a Chapter 9 or Chapter 11 case) by itself gives rise to takings claims against a debtor. The Bondholders further provide no support at all for the distinction between a takings claim that would purportedly arise against the United States due to treatment of a claim in a plan of adjustment and their allegations that PREPA's actions in filing a Title III case or receiving a discharge of certain debts by confirming a plan give rise to a nondischargeable takings claim against PREPA. (BH Resp. ¶ 72.) The only law pursuant to which the Bondholders allege PREPA has acted in a way that could constitute a taking is PROMESA, but the Bondholders do not allege that PREPA has effected a taking pursuant to PROMESA or explain how it could.

b. Interference with the Claimants’ Reasonable Investment-Backed Expectations

The Bondholders’ Counterclaim Complaint likewise fails to plead facts sufficient to support an analysis of the second regulatory taking consideration. Although the proposed treatment of the Bondholders’ claim may interfere with certain Bondholders’ professed subjective investment expectations, the Bondholders’ reasonable expectations must take account of the Court's decisions concerning the nature and extent of their claim, as well as the claims and potential claims that have been the subject of the substantial litigation that the PREPA Plan proposes to globally resolve under the provisions of PROMESA, including disputes with other PREPA bondholders, the Fuel Line Lenders, the Committee, and PREPA's obligations to the citizenry of the Commonwealth. See Commonwealth FFCL, 637 B.R. at 299 (citing New Haven Inclusion Cases, 399 U.S. 392, 492, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970) (noting that security holders “invested their capital in a public utility that does owe an obligation to the public [and thereby] assumed the risk that in any depression or any reorganization the interests of the public would be considered as well as theirs”).) (Docket Entry No. 19812 ¶ 173.) Further, in light of the Court's determinations, the Bondholders’ arguments as to their expectations of full nondischargeable recovery are unreasonable because the Court has rejected the property rights arguments on which the takings claim turns.

c. The Character of the Governmental Action

With respect to “the character of the governmental action,” Counterclaim Count VII requests a declaratory judgment that “Should PREPA Succeed in Restricting the Trustee's and Bondholders’ Recourse, it has Unconstitutionally Taken Trustee's and Bondholders’ Property Without Just Compensation under the Trust Agreement” and the Bondholders assert, in its concluding paragraph, that “if PREPA violates its contractual obligations to the bondholders and the Trustee, destroying the value of the Bonds, the governmental decision to do so constitutes a taking[.]” (Counterclaim Compl. at 63 and ¶ 120.)

There is no “governmental decision” reasonably in question apart from the decision to file the Title III petition or pursue readjustment of debts under PROMESA. In the Bondholders’ own words, “[b]y pursuing its Complaint in this adversary proceeding, PREPA ․ has acted to destroy those property interests created by the Trust Agreement by utilizing the process created by PROMESA.” (Counterclaim Compl. 111.) However, any impairment of the Bondholders’ expectations as to their contractual rights is effected not by PREPA, but by judicial interpretation of their rights under the contract and the operation of PROMESA with respect to those rights. The Bondholders’ contention that impairment of a contractual property right by a court constitutes destruction of a property right by a debtor, particularly when the impairment is effected pursuant to duly enacted federal law authorizing the restructuring and discharge of debts, is without foundation in law or fact. The Bondholders’ non-bankruptcy case law examples provide no relevant authority.

4. Conclusion

Utilization of Title III by a debtor does not by itself give rise to takings claims against PREPA any more than utilization of Chapter 9 gives rise to takings claims against a municipality. Accordingly, the Bondholders have failed to state a claim for a facial taking or to plead plausibly any of the requisite factors of a regulatory taking under the Takings Clause of the Fifth Amendment of the Constitution of the United States and of the Puerto Rico Constitution.

For the foregoing reasons, the Motion to Dismiss is granted with respect to Counterclaim Count VII and the Bondholders’ request for a declaratory judgment is denied.³¹

III.

Conclusion

In conclusion, and for the foregoing reasons, the Oversight Board's motion to dismiss Counts III through VII of the Counterclaim Complaint is granted.³²

This Opinion and Order resolves Docket Entry No. 211 in Adversary Proceeding No. 19-00391. Accordingly, for the reasons stated above, in the Summary Judgment Order, and in the Estimation Order, all counts of the Counterclaim Complaint are dismissed; judgment is granted as set forth in the Summary Judgment Order and Estimation Order; and Counterclaim Counts I and II of the Counterclaim Complaint and Count III of the FAC are resolved as set forth in the Lien Stipulation.

SO ORDERED.

FOOTNOTES

3.   Unless otherwise noted, all references herein to Docket Entry Nos. are references to Adversary Proceeding No. 19-00391.

4.   All capitalized words used but not defined herein shall have the meanings ascribed to them in the Summary Judgment Order or in any specific document the Court is citing.

5.   The Summary Judgment Order granted in part and denied in part cross-motions for summary judgment on Counts I-VII Oversight Board's First Amended Complaint Objecting to Defendant's Claims and Seeking Related Relief (Docket Entry No. 26) (the “FAC”), and Counts I & II of the Counterclaim Complaint.

6.   PREPA was created under the Puerto Rico Electric Power Authority Act, Act No. 83-1941, codified at 22 L.P.R.A. §§ 191-240 (as amended, the “Authority Act”).

7.   The Counterclaim Complaint was filed by Kramer Levin Naftalis & Frankel LLP and Toro Colón Mullet P.S.C. on behalf of the Ad Hoc Group of PREPA Bondholders, but those firms no longer represent the AHG. The AHG has dissolved, and the individual members have organized into groupings that are now parties in the case and are represented by other counsel. (See Stipulation and Agreed Order Regarding Substitution of Counsel for the Former Members of Ad Hoc Group of PREPA Bondholders, Docket Entry No. 360 (Court approving the intervention of GoldenTree Asset Management LP and Majority Member Ad Hoc Group); Stipulation and Agreed Order by and Among the Financial Oversight and Management Board for Puerto Rico, U.S. Bank National Association and The PREPA Ad Hoc Group of Bondholders, Docket Entry No. 356 (Court approving the intervention of the PREPA Ad Hoc Group as defendants).) The AHG has been dismissed from the case, but the Counterclaim Complaint, which was filed by Kramer Levin/Toro Colón Mullet for the AHG, was signed by counsel to the other defendants and has not been withdrawn. The Court therefore addresses the Motion to Dismiss on the papers of record.

8.   Defendants are also referred to herein as the “Counterclaim-Plaintiffs.” Assured and Syncora are monoline insurers of insured Bonds. National Public Finance Guarantee Corporation (“National”) is also monoline insurer of insured Bonds and a defendant in this adversary proceeding. After National entered into a plan support agreement with the Oversight Board as sole Title III representative of PREPA, the Court granted National's request to stay this adversary proceeding and certain other matters with respect to National pending further order of the Court. (See Docket Entry No. 148.)

9.   Rule 12 of the Federal Rules of Civil Procedure (the “Federal Rules”) is made applicable in these Title III cases by Rule 7012 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), which are made applicable in these Title III cases by section 310 of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). 48 U.S.C. § 2170. PROMESA is codified at 48 U.S.C. section 2101 et seq. References herein to PROMESA section numbers are to the uncodified version of the legislation. References herein to the provisions of Title 11 of the United States Code (the “Bankruptcy Code”) are to sections made applicable in these cases by section 301 of PROMESA. 48 U.S.C. § 2161.

10.   The Court has also received and reviewed, inter alia, the following pleadings: Declaration of William J. Natbony in Support of Defendants’ and Counterclaim Plaintiffs’ Memorandum in Opposition to the Motion of the Financial Oversight and Management Board for Puerto Rico to Dismiss Counts III Through VII of the Counterclaim Complaint (ECF No. 211) (Docket Entry No. 310) (the “Natbony Declaration”); Reply Memorandum of Law in Support of the Financial Oversight and Management Board for Puerto Rico's Motion to Dismiss Counts III Through VII of the Counterclaim Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6) (Docket Entry No. 318) (the “FOMB Reply”); as well as the Supplemental Reply Brief and Joinder of Intervenor-Plaintiff Official Committee of Unsecured Creditors in Support of Motion to Dismiss Counterclaims III Through VII (Docket Entry No. 319) (the “UCC Reply”), filed by the Official Committee of Unsecured Creditors (the “Committee”) to supplement the Oversight Board's briefing.

11.   The Master PREPA Bond Claim does not reference the Takings Clause of the Federal Constitution or any trust theories as bases for the claim. The Master PREPA Bond Claim asserts that the Bondholders’ claim is secured by: “(i) a lien and charge on, pledge of and security interest in present and future revenues including, without limitation, all Revenues of the System; (ii) certain intangibles provided for in the Trust Agreement and Resolutions or provided for in the Authority Act, including, without limitation, certain covenants, obligations and undertakings; and (iii) moneys and investments to the extent provided in the Trust Agreement, the Resolutions and the Authority Act, including all monies and investments held in trust or required to be held in trust by the Authority at Depositories or otherwise in special accounts or funds under the Trust Agreement including, without limitation, in the General Fund, the Construction Fund, the Reserve Maintenance Fund, and the Capital Improvement Fund, all of which are subject to the rights of the Trustee and the Bondholders to the extent provided in the Trust Agreement, Resolutions, and the Authority Act.” (Master PREPA Bond Claim Ex. A ¶ 6.)

12.   In response to the Court's Order Concerning PREPA Trust Agreement (Docket Entry No. 115), the Oversight Board and the Defendants filed an agreed-upon conformed trust agreement as Exhibit A to their Joint Informative Motion Submitting Conformed Trust Agreement in Response to January 5, 2023 Order Concerning PREPA Trust Agreement [ECF No. 115] (Docket Entry No. 118 Ex. A) (the “TA”). All citations to the TA are to that conformed version.

13.   The Reserve Maintenance Fund, Self-insurance Fund, Capital Improvement Fund, and Construction Fund are referred to as the “Specified Funds” in the Summary Judgment Order and the “Subordinate Funds” in the FAC.

14.   The Court declined to address the Bondholders’ possible perfection of their liens on the Capital Improvement Fund and Construction Fund, because the record before the Court provided no evidence from either party as to the form of the assets comprising those Funds and their custodial status, and means of perfection may vary with the form of the asset in question. On August 28, 2023, the Court entered the Joint Stipulation and Agreed Order of the Financial Oversight and Management Board for Puerto Rico, U.S. Bank National Association as PREPA Bond Trustee, the Ad Hoc Group Of PREPA Bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corporation, and Syncora Guarantee, Inc. Resolving Perfection-Related Issues, approving a consensual resolution of the remaining lien-perfection issues while reserving certain rights for appeals. (Docket Entry No. 337 (the “Lien Perfection Stipulation”).)

15.   The Court has issued numerous orders respecting the Master PREPA Bond Claim in addition to the Summary Judgment Order and Estimation Order. (See generally, e.g., Order (I) Denying the Trustee's and PREPA Bondholders’ Urgent Motion for Limited Clarification and the Urgent Motion for Expedited Consideration Thereof, and (II) Setting Deadlines and Providing Relief Concerning the Amended Joint Informative Motion in Response to Summary Judgment Order, Docket Entry No. 154 (the “Reconsideration Denial Order”); Order Regarding Claim Estimation and Briefing, Docket Entry No. 168; Order Denying Certification of the Court's March 22, 2023 Summary Judgment Order for Interlocutory Appeal, Docket Entry No. 182 (the “Certification Denial Order”).) Several excerpts significant to defining the Bondholders’ Unsecured Net Revenue Claim are included in the Estimation Order, but the other orders also touch upon subjects that were not properly presented during briefing on the cross-motions for summary judgment, including distinguishing the specific Trust Agreement at hand from examples of other trust agreements—supplied by the Bondholders only as exhibits to an excluded declaration—that granted security interests in various utilities’ net revenues. (See Certification Denial Order at 11-12 & n.11.) The examples were inapposite in that the TA contains no similar language granting a lien on net revenues. None of the supplied examples involved liens on either all revenues of a utility or all “Revenues” with a similar definition to that in the TA.

16.   United States law and the Court's rules require that all documents submitted to the Court must be in English (or be translated into English). See 48 U.S.C. § 864; see also District of Puerto Rico Local Civil Rule 5(c).

17.   All citations herein to provisions of the Laws of Puerto Rico Annotated are to the English-language translations, available on Westlaw, by the Translation Office of the Puerto Rico Government, with one exception: Westlaw does not provide an English-language translation of the current section 196 of the Authority Act. Accordingly, citations to section 196 of the Authority Act are to the version as most recently amended by Act 33-2019. For the English-language translation of the relevant sections of the Authority Act as currently amended—which have been amended since the version that was in effect on the date relevant to the Estimation Order (July 3, 2017)—the Court has relied upon a translated compilation of the Authority Act provided by the Puerto Rico Office of Management and Budget. Puerto Rico Electric Power Authority Act, Act No. 83-1941 (codified as amended by Act 33-2019), 22 L.P.R.A. §§ 191-240 (2019), https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/PDF/2-ingles/83-1941.pdf [https://perma.cc/FS2F-42VW].

18.   As discussed supra note 17, 22 L.P.R.A. § 196 has been amended since the date relevant to the Estimation Order and examined therein (July 3, 2017), most recently by section 24 of Act 33-2019.

19.   To the extent that the Bondholders are requesting specific performance in compliance with Commonwealth statutes pursuant to section 303, Collier on Bankruptcy notes that—with respect to section 903 of the Bankruptcy Code, the chapter 9 analogue to section 303 of PROMESA—except for a state (here territory), “no other party has standing to assert that section 903 operates to limit the actions of a” municipal debtor (here PREPA). 6 Collier ¶ 903.02[3]. To the extent that the Bondholders argue that section 303 of PROMESA renders any statutory obligations nondischargable, Collier states—again with respect to section 903 of the Bankruptcy Code—“section 903 does not act as an independent substantive limitation on actions of the bankruptcy court in applying the provisions of chapter 9 to the adjustment of a municipality's debts, except as such actions may impact upon the exercise of state governmental power of a municipality. Thus, section 903 does not preclude creditor obligations from being impaired by a municipality.” 6 Collier ¶ 903.02[2]. Similarly here, if there were affirmative obligations imposed by Commonwealth law, section 303 of PROMESA would not render such obligations to creditors nondischargable or provide the Bondholders with an avenue to seek specific performance thereof.

20.   The Oversight Board asserts that section 301(c)(7) of PROMESA “only renders PREPA a trustee for purposes of Bankruptcy Code sections imported into PROMESA by section 301(a).” (See FOMB Reply ¶ 10 n.3.) 48 U.S.C. § 2161(a), (c)(7). In fact, section 301(c)(7) only refers to the Oversight Board and does not by itself make PREPA a trustee for any purpose.

21.   “Under section 544 of the Bankruptcy Code, the Oversight Board may avoid unperfected security interests by standing in the shoes of a hypothetical lien creditor and a creditor with an unsatisfied execution, whether or not such a creditor exists. 11 U.S.C. § 544. Under section 9-317(a)(2) of the U.C.C., a lien creditor has priority over unperfected security interests. 19 L.P.R.A. § 2267(a)(2).” (Summary Judgment Order at 49.)

22.   (See also Assured Guaranty Corp. and Assured Guaranty Municipal Corp.’s (I) Objection to Modified Second Amended Title III Plan of Adjustment of the Puerto Rico Electric Power Authority and Related Proposed Order and (II) Partial Joinder to Objections of the Ad Hoc Group of PREPA Bondholders to the Modified Second Amended Title III Plan of Adjustment of the Puerto Rico Electric Power Authority, Docket Entry No. 3713 in Case No. 17-4780 ¶ 109; Assured Guaranty Corp. and Assured Guaranty Municipal Corp.’s (I) Objection To PREPA Disclosure Statement and Disclosure Statement Motion and (II) Joinder to (A) PREPA Ad Hoc Group Objection and (B) GoldenTree Objection, Docket Entry No. 4033 in Case No. 17-4780 ¶ 46.)

23.   The complete title of Counterclaim Count IV is “Declaratory Judgment that PREPA is in Breach of Trust with Respect to Funds Pledged to Payment of the Bonds and Credited to the Sinking Funds and Other Funds[.]” (Counterclaim Compl. at 60.)

24.   (See also Assured Guaranty Corp. and Assured Guaranty Municipal Corp.’s (I) Objection to Modified Second Amended Title III Plan of Adjustment of the Puerto Rico Electric Power Authority and Related Proposed Order and (II) Partial Joinder to Objections of the Ad Hoc Group of PREPA Bondholders to the Modified Second Amended Title III Plan of Adjustment of the Puerto Rico Electric Power Authority, Docket Entry No. 3713 in Case No. 17-4780 ¶ 19.)

25.   The Bondholders argue that, because the Oversight Board did not specifically address section 601 of the Trust Agreement in its Memorandum, “the allegations are deemed true that Section 601 creates a trust relationship with PREPA as trustee, and any arguments to the contrary have been waived for purposes of the Motion to Dismiss.” (BH Resp. ¶ 25.) The extent of the Bondholders’ discussion of section 601 in the Counterclaim Complaint is the bare statement: “All moneys received by PREPA under the provisions of the Trust Agreement are to be ‘held in trust’ and applied only as directed by the Agreement. Trust Agreement § 601.” (Counterclaim Compl. ¶ 30.) The Oversight Board's bare statement in the Memorandum, “Nothing in the Trust Agreement makes PREPA a trustee,” suffices to preserve its argument. (FOMB Mem. ¶ 50.) In any event, the Court is “not bound to accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).

26.   Moreover, similarly to Puerto Rico's requirement that all contracts with the government be officially registered to be enforceable, see 2 L.P.R.A. § 97, express trusts must be recorded in order to be enforceable under Puerto Rico law, see, e.g., 32 L.P.R.A. § 3351d (“Every trust constituted in Puerto Rico shall be recorded in the Special Trust Registry under penalty of nullity.”). That the Bondholders have not alleged the existence of a recorded trust with respect to the Trust Agreement is more weight upon the scale indicating that PREPA is not trustee of an express trust for the Bondholders.

27.   The Bondholders’ arguments regarding general “principles of municipal finance law” with respect to allegedly common characteristics of revenue bonds are also insufficient to establish that PREPA is the trustee of an express trust for the benefit of the Bondholders. (See BH Resp. ¶ 28 & n.16.) The Bondholders’ case exemplars, drawn primarily from the mid-20th century, involve special assessments or interests granted in revenues upon receipt by the utility rather than interests triggered by later deposit into a liened fund or use of funds after their deposit into a liened fund; none is apposite here.

28.   See dolo, Black's Law Dictionary (11th ed. 2019) (“Fraud or deceit[.]”).

29.   It was entirely reasonable for the Oversight Board to treat Counterclaim Count VI as requesting rescission, and the bondholders have proffered no legal or factual support for the repercussions and preclusive effects they wish to see visited upon the Oversight Board.

30.   “Resolución es el negocio jurídico unilateral previsto en la ley o en el acto jurídico, en virtud del cual este se extingue y queda privado de efecto con carácter retroactivo. ․ Rescisión es el negocio jurídico bilateral, o el unilateral previsto en la ley o en el propio negocio jurídico, en virtud del cual este queda privado de efecto.” 31 L.P.R.A. § 6303 (emphasis added).

31.   The Bondholders’ additional takings arguments in their Response are sufficiently remote from what was pled in Counterclaim Count VII to constitute an impermissible amendment of their Counterclaim Complaint and need not be addressed further. (See, e.g., BH Resp. ¶¶ 74, 76. See supra section II.A.1.c (Bondholders “cannot amend their complaint by asserting new facts or theories for the first time in opposition to [a] motion to dismiss.” K.D. ex rel. Duncan v. White Plains Sch. Dist., 921 F. Supp. 2d 197, 209 n.8 (S.D.N.Y. 2013)).) Suffice it to say that Asociación de Subscripción Conjunta del Seguro de Responsabilidad Obligatorio v. Flores Galarza, 484 F.3d 1 (1st Cir. 2007), is not relevant here, because PREPA is in no way a custodian for Bondholders’ money. Similarly, In re The Ground Round Inc., 482 F.3d 15, 20 n.6 (1st Cir. 2007) (liquor license) and In re Skorich, 482 F.3d 21, 25 (1st Cir. 2007) (marital interest in a house sold in defiance of court order) involve the failure to return specific property. The cases do not support the Bondholders’ characterization of the cases as holding that “equitable interests, in money are not claims’ ” or refer to the return of “specific dollars[.]” (BH Resp. ¶ 39.) Section 101(5)(a) of the Bankruptcy Code states explicitly that the “equitable” “right to payment” is a claim. 11 U.S.C. § 101(5)(a). Finally, the Court has rejected the Bondholders’ arguments regarding the extent or not of PREPA's obligation to generate net revenues to pay the Bondholders debts to the exclusion of consideration of the citizenry in the Estimation Order. (See generally Estimation Order.)

32.   To the extent not discussed explicitly above, the Court has considered all of the Bondholders’ arguments, whether or not specifically addressed herein, in determining that the counts of the Counterclaim Complaint should be dismissed in their entirety. All alternative arguments for relief are rejected and—to the extent it is necessary to address them at all—all affirmative defenses asserted in conjunction with the Defendants’ Answer in the Counterclaim Complaint and not previously addressed are likewise rejected.

LAURA TAYLOR SWAIN, United States District Judge