UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF PUERTO RICO 

PROMESA Title III 

No. 17 BK 3283-LTS 

(Jointly Administered) 

In re: 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO, 

as representative of 

THE COMMONWEALTH OF PUERTO RICO et al., 

Debtors.1

In re: 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO, 

as representative of 

PUERTO RICO ELECTRIC POWER 

AUTHORITY, 

Debtor. 

PROMESA Title III 

No. 17 BK 4780-LTS 

 

1

 The Debtors in these Title III cases, along with each Debtor’s respective Title III case 

number and the last four (4) digits of each Debtor’s Federal tax identification number, as 

applicable, are the (i) Commonwealth of Puerto Rico (Bankruptcy Case No. 17 BK 3283-LTS) 

(Last Four Digits of Federal Tax ID: 3481); (ii) Puerto Rico Sales Tax Financing Corporation 

(“COFINA”) (Bankruptcy Case No. 17 BK 3284-LTS) (Last Four Digits of Federal Tax ID: 

8474); (iii) Puerto Rico Highways and Transportation Authority (“HTA”) (Bankruptcy Case No. 

17 BK 3567-LTS) (Last Four Digits of Federal Tax ID: 3808); (iv) Employees Retirement 

System of the Government of the Commonwealth of Puerto Rico (“ERS”) (Bankruptcy Case No. 

17 BK 3566-LTS) (Last Four Digits of Federal Tax ID: 9686); and (v) Puerto Rico Electric 

Power Authority (“PREPA”) (Bankruptcy Case No. 17 BK 04780-LTS) (Last Four Digits of 

Federal Tax ID: 3747). 

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 OBJECTION AND RESERVATION OF RIGHTS OF PREPA BOND TRUSTEE TO 

URGENT MOTION OF THE FINANCIAL OVERSIGHT AND MANAGEMENT 

BOARD FOR PUERTO RICO AND THE PUERTO RICO FISCAL AGENCY AND 

FINANCIAL ADVISORY AUTHORITY FOR ENTRY OF INTERIM AND FINAL 

ORDERS (A) AUTHORIZING POSTPETITION SECURED FINANCING, (B) 

GRANTING PRIMING LIENS AND PROVIDING SUPERPRIORITY 

ADMINISTRATIVE EXPENSE CLAIMS, (C) MODIFYING THE AUTOMATIC STAY, 

(D) SCHEDULING A FINAL HEARING, AND (E) GRANTING RELATED RELIEF 

To The Honorable United States District Court Judge Laura Taylor Swain: 

U.S. Bank National Association, solely in its capacity as trustee (the “PREPA Bond

Trustee”) under the Trust Agreement dated as of January 1, 1974 (as amended and 

supplemented from time to time, the “Trust Agreement”), between it and the Puerto Rico 

Electric Power Authority (“PREPA” or the “Authority”) for over $8.3 billion in principal 

amount of power revenue and power revenue refunding bonds (“Bonds,” and the holders thereof, 

“Bondholders”) currently outstanding, respectfully submits this Objection and Reservation of 

Rights of PREPA Bond Trustee (the “Objection”) to the To Urgent Motion Of The Financial 

Oversight And Management Board For Puerto Rico And The Puerto Rico Fiscal Agency And 

Financial Advisory Authority For Entry Of Interim And Final Orders (A) Authorizing 

Postpetition Secured Financing, (B) Granting Priming Liens And Providing Superpriority 

Administrative Expense Claims, (C) Modifying The Automatic Stay, (D) Scheduling A Final 

Hearing, And (E) Granting Related Relief (the “DIP Motion”). Capitalized terms used herein 

but not defined shall have the meanings assigned to them in the DIP Motion. 

The PREPA Bond Trustee intends to file a motion to join in one or more separate 

objections to the DIP Motion being filed today by the Ad Hoc Group of PREPA Bondholders; 

Assured Guaranty Corp. and Assured Guaranty Municipal Corp.; National Public Finance 

Guarantee Corporation; and Syncora Guarantee Inc. This separate Objection is being filed to 

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underscore certain points believed by the PREPA Bond Trustee to be of particular importance to 

the Court’s consideration of the DIP Motion. 

I. Introduction.

1. The PREPA Bond Trustee shares the concern of all parties that PREPA’s short 

term liquidity issues should be promptly addressed in a manner that prevents a shutdown of 

PREPA’s operations or further delays the restoration of power. The DIP Motion proposes a 

solution that is premature, improper, and the proposed priming lien violates 11 U.S.C. § 364(d). 

In addition, the PREPA Bond Trustee submits that the proposed interim financing order includes 

findings that are and will be unsupported by the record and grant rights and protections that are 

objectionable as set forth herein. 

2. The DIP Motion lumps together two distinct proposed lending relationships 

between PREPA and the Commonwealth bankruptcy estates that should be reviewed by the 

Court separately. The first consists of low interest rate direct advances by the Commonwealth to 

PREPA of up to $550 million (the “Direct Advances”) pursuant to Joint Resolution 196 of the 

Puerto Rico legislature, dated January 25, 2018 (the “Joint Resolution”).2 The second proposed 

relationship consists of the Commonwealth serving as a pass-through lender of proceeds that the 

Commonwealth hopes to receive from the federal government for community disaster loans 

(“CDLs”) that PREPA could qualify for under applicable disaster relief statutes (the “PassThrough Advances”). Together the Direct Advances and the Pass-Through Advances could 

total $1.3 billion. In both cases, however, the proposed lender/borrower relationship is 

premature and imposes an inequitable burden on the PREPA bankruptcy estate and its creditors. 

And, any priming lien would violate § 11 U.S.C. 364(d)(1)(A) and (B). 

 

2

 An unsworn declaration and copy of the Joint Resolution is attached as Exhibit A. 

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II. The DIP Motion Is Premature. 

3. The DIP Motion is premature in differing respects for both the Direct Advances 

and the Pass-Through Advances. With respect to the Direct Advances, the Commonwealth and 

its instrumentalities owe PREPA substantial sums of money, and the liquidity crisis may be 

either entirely resolved or at least materially delayed if the Commonwealth were to simply pay 

the sums owed to PREPA. One senator, during the debate on the Joint Resolution identified 

liabilities owed by Commonwealth Agencies to PREPA in excess of $212 million.3

 There is no 

justification for an entity to make a post-petition loan, and gain priority over other creditors, 

when that same entity owes substantial sums of money that could be paid to the debtor. If the 

Commonwealth can afford to make zero interest loans for up to $550 million it can afford to pay 

its electricity bills to avert a utility shutdown. 

4. With respect to the Pass-Through Advances, the DIP Motion is profoundly 

premature. The Movants acknowledge that they have not yet negotiated the terms of any 

potential agreement with the federal government. Accordingly, the role of the Commonwealth 

as an intermediate lender for the proceeds of CDLs is unknown. DIP Motion ¶¶24-26. Any 

potential agreement would be novel. Unless there is full disclosure of the obligations that the 

Commonwealth would be undertaking to the federal government, creditors and the Court are not 

in a position to evaluate whether the imposition of a priming lien in favor of the Commonwealth, 

as well as other benefits sought in consideration of playing the role of intermediate lender, are 

fair, appropriate, or even legal. Moreover, there is no clear urgency to approve this portion of 

the DIP Motion before any underlying deal is reached. All portions of the DIP Motion 

 

3

 A declaration and transcript of the Senator’s floor statements are attached as Exhibit B, 

and a certified translation of it is attached as Exhibit C.

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pertaining to the approval of potential future Pass-Through Advances should be denied without 

prejudice for the Movants to refile it when they have an arrangement for the Court to consider. 

III. The DIP Motion Is an Inappropriate One-Sided Solution to an Inter-Estate 

 Claim. 

5. The Commonwealth and PREPA are separate Title III debtors and their property 

and claims have not been substantively consolidated. See Order Directing Joint Administration, 

Dkt. No. 340; Case 17-4780. Courts do not generally permit the assets of one estate to be used to 

pay the liabilities of another. In re Las Torres Development, L.L.C., 413 B.R. 687, 693-95 

(Bankr. S.D.Tex 2009). This is so because each estate is required to be treated equitably vis-àvis other estates in jointly administered cases. In complex cases involving multiple bankruptcy 

estates that intermingle their cash, courts routinely protect the dignity of each estate with cash 

management orders that provide for the offsetting of claims of equal priority for each estate 

based upon each estate’s legal rights. See Debtors’ Motion for Interim and Final Orders 

Authorizing: (A) Continued Use of Cash Management System and Procedures . . . ; and (E) 

Continuation of Intercompany Transactions and Accordance of Administrative Expense Status of 

Intercompany Claims at 25 In re SquareTwo Financial Services Corporation, et al., Case No. 

17-10659 (Bankr. S.D.N.Y. Mar. 19, 2017), Dkt. No. 9. 

6. PREPA “is a corporation having legal existence and personality separate and 

apart from that of the [Commonwealth].” 22 L.P.R.A. § 193. Accordingly, the debts of both 

PREPA and the Commonwealth are separate and apart from one another. Federal Courts in 

Puerto Rico have held that PREPA is an entity politically and legally separate from the 

Commonwealth and that PREPA has its own fiscal autonomy distinct from that of Puerto Rico. 

See Riefkohl v. Alvarado, 749 F. Supp. 374, 375-76 (D. P.R. 1990). Accordingly, the 

independence of PREPA’s Title III bankruptcy estate should likewise be respected. 

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7. Given PREPA’s role as the electric utility of the Commonwealth, value naturally 

flows between its Title III estate and the Commonwealth’s Title III estate regularly. PREPA 

provides the Commonwealth and its instrumentalities electricity. The Commonwealth and its 

instrumentalities are required to pay for that electricity. Here, in the DIP Motion, the Movants 

are asking the Court to elevate unfairly the Direct Advance and Pass-Through Advance claims of 

the Commonwealth to those of a secured lender without treating PREPA’s rights and claims in 

the same manner. This violates the principle of independence and fairness among nonconsolidated bankruptcy estates and should not be permitted by the Court. The Commonwealth 

estate would obtain a priming lien for each dollar advanced, whereas the PREPA estate, currently 

the net creditor, would receive no commensurate rights for the value of the electricity provided to 

the Commonwealth and its other instrumentalities. Any order requested by the Movants that 

provides protection to the Commonwealth with respect to the Direct Advances should also 

provide equal and coextensive protection to PREPA related to its electricity advances every day 

to the Commonwealth and its instrumentalities. 

8. With respect to the Pass-Through Advances, to the extent an agreement is ever 

reached between the Commonwealth and the federal government, the governing principle of 

comity and fairness among bankruptcy estates should apply so that the PREPA estate would only 

be responsible to protect the Commonwealth estate against losses caused by PREPA’s 

nonpayment. The Movants in the DIP Motion prematurely, and unfairly, seek special rights for 

the Pass-Through Advances that prefer the Commonwealth estate over the PREPA estate, before 

even a tentative deal is reached to establish the authority to make such advances. 

9. The similar problem of protecting the Commonwealth for its role of passing 

through FEMA emergency relief grant money was adequately addressed in a consensual order by 

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giving the Commonwealth a claim against the PREPA bankruptcy estate in the event that the 

Commonwealth were held liable for disobligated federal grants passed along to PREPA. Order 

Granting Urgent Joint Motion of Puerto Rico, Puerto Rico Highways and Transportation 

Authority, Puerto Rico Electric Power Authority, and The Puerto Rico Electric Power Authority, 

and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Order Concerning 

Receipt and Use of Anticipated Federal Disaster Relief Funds and Preserving Rights of Parties, 

Case No. 17-4780, Dkt. No. 359. 

IV. The Proposed Priming Lien is Improper Under the Bankruptcy Code. 

10. A debtor may not grant a priming lien under 11. U.S.C. §364(d)(1) unless it 

proves that it is “unable to obtain such credit otherwise.” Discovery is ongoing regarding the 

process PREPA used to seek any unsecured loan from the Commonwealth or other lenders. In 

the DIP Motion, the Movants allege that PREPA began actively looking for an alternative 

facility on January 21, 2018, which is not adequate. Movants make the bare allegation that they 

have not been able to find another lender who would be willing to make a loan to PREPA for the 

Direct Advances on an unsecured basis. DIP Motion ¶¶20-22. However, the DIP Motion does 

not seem to allege that PREPA attempted to negotiate the Direct Advances from the 

Commonwealth without the priming lien. Nor does the DIP Motion claim that the 

Commonwealth would refuse to make the Direct Advances unless it received a priming lien. In 

light of the common control of PREPA and the Commonwealth, the Court should closely 

scrutinize the alleged good faith process to seek alternative unsecured financing. Weinberger v. 

UOP, 457 A.2d 701, 710 (Del. 1983). It strains all credulity to believe that even though the 

Commonwealth would sustain irreparable harm unless the DIP Motion is approved, that the 

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Commonwealth would nonetheless refuse to provide Direct Advances, unless it is granted a 

priming lien. 

11. Indeed, there is no legitimate economic reason why the Commonwealth needs to 

be secured by a priming lien on PREPA’s Revenues (as defined in the Trust Agreement). The 

Commonwealth is more than protected, to the extent the Court approves the Direct Advances, 

and gives them administrative expense status. Holders of such claims are entitled to be paid in 

full upon confirmation of a plan of adjustment, there is no need for other protections. See 11 

U.S.C. § 1129(a)(9). Moreover, they control PREPA and who it pays. Since the evidence will 

likely show that the Commonwealth itself would be willing, if requested, to make the Direct 

Advances without a priming lien, the requirements of 11 U.S.C. §364(d)(1)(A) cannot be 

satisfied and the priming lien cannot be approved. 

V. The DIP Motion Deprives PREPA Bondholders of Adequate Protection in 

Violation of 11 U.S.C. § 364(d)(1)(B). 

12. Adequate protection requires that the Bondholders be compensated for the loss in 

in the value of their liens in Revenues caused by the priming lien. 11 U.S.C. §§ 361; 

364(b)(1)(B). It is the Movants’ burden to demonstrate that the Bonds are adequately protected 

in spite of the priming lien. Movants categorically claim that adequate protection is being 

afforded to the PREPA Bond Trustee and Bondholders because (1) the loans are needed to keep 

PREPA operating, and (2) the loan proceeds will be used for purposes permitted by the Trust 

Agreement. As is amply addressed in other objections, taking on additional debt, in order to 

meet operating expenses—which should be payable from Revenues—does not work to 

adequately protect Bondholders. 

13. The DIP Motion is replete with mischaracterizations of the pledge of Revenues 

made by PREPA under the Trust Agreement. As they have throughout this case, the Movants 

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mistakenly claim that the pledge under the Trust Agreement is merely a pledge of the net 

revenues of the System. It is not. Under the Trust Agreement, PREPA granted numerous 

property rights, including pledges of, and liens in its Revenues and various trust accounts to the 

PREPA Bond Trustee on behalf of the Bondholders.4

 See Trust Agreement, Granting Clause, 

p.11-12. “the Authority has executed and delivered this Agreement and has pledged and does 

hereby pledge to the Trustee the revenues of the System . . and other moneys to the extent 

provided in this Agreement as security for the payment of the bonds and the interest and the 

redemption premium, if any, thereon and as security for the satisfaction of any other obligation 

assumed by it in connection with such bonds” (emphasis added). Section 701 of the Trust 

Agreement further establishes that the lien extends to all Revenues by stating that “. . . such 

principal, interest and premium will be payable solely from the Revenues and said Revenues are 

hereby pledged to the payment thereof in the manner and to the extent hereinafter particularly 

identified.” 

14. Revenues, in turn, are defined as including all moneys received by PREPA in 

connection with or as a result of its ownership or operation of the System, including the income 

derived by the Authority from the sale of electricity generated or distributed by the System. 

Indeed, this definition and the pledge under the Trust Agreement could hardly be larger. 

15. The collateral pledged under the Trust Agreement secures more than just the 

obligation of PREPA to pay debt service after paying its reasonable Current Expenses. The 

collateral secures each and every obligation of PREPA under the Trust Agreement including the 

following: 

 

4

 A copy of the Trust Agreement has previously been submitted to the Court as an exhibit 

to the Declaration of Stephen Spencer [Dkt. No. 74-8], dated July 18, 2017. 

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• PREPA must provide an annual budget, including projected amounts of Current 

Expenses, which is an amount not to exceed that which is reasonable and 

necessary for maintaining, repairing and operating the System in an economical 

manner. Trust Agreement § 504. 

• PREPA must render regular bills to customers and enforce reasonable collection 

of such bills. Trust Agreement § 501 

• The establishment of special funds including the General Fund, Construction 

Fund, the Reserve Maintenance Fund, the Revenue Fund and the Sinking Fund 

and the holding of such funds with the Trustee or with designated Depositories in 

trust. See Trust Agreement Article 5. 

• The resetting of electricity rates at levels necessary to generate sufficient 

Revenues for the payment of Bonds. Trust Agreement § 502. 

• PREPA must keep the System in good repair. Trust Agreement § 702. 

• Maintaining insurance against property loss and business interruption at levels 

customary in the industry and applying such proceeds as specified in the Trust 

Agreement. Trust Agreement § 707. 

• The delivery of specified information and reports to the Trustee as a repository for 

Bondholders. Trust Agreement § 710. 

• Protecting the System and Revenues from any encumbrance ranking equally with 

or prior to the charge or lien on the Revenues of the Bonds issued under the Trust 

Agreement. Trust Agreement § 712. 

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16. The foregoing covenants made by PREPA under the Trust Agreement all are part 

of the collateral value package that secures the Bonds. The Movants cannot meet their burden of 

demonstrating adequate protection and, accordingly, no priming lien can be granted. 

Conclusion

For the reasons stated herein, the PREPA Bond Trustee respectfully requests that the DIP 

Motion be denied at the interim hearing in favor of requiring the Commonwealth to pay all 

outstanding amounts owed to PREPA; and that the DIP Motion be taken up, if ever, when Direct 

Advances are truly necessary to sustain PREPA’s liquidity position. With respect to PassThrough Advances, the PREPA Bond Trustee respectfully requests that the Court defer 

consideration until there is an underlying agreement with the federal government to consider. 

 The PREPA Bond Trustee reserves all rights, claims, defenses, and remedies, including, 

without limitation, the right to supplement this Objection, to raise further and other objections to 

the DIP Motion and the form of any interim or final orders with respect thereto, and to introduce 

evidence prior to or at any hearing regarding the DIP Motion in the event this Objection is not 

resolved prior to such hearing. 

RIVERA, TULLA AND FERRER, LLC 

/s Eric A. Tulla 

Eric A. Tulla 

USDC-DPR No. 118313 

Email: etulla@ riveratulla.com

/s Iris J. Cabrera-Gómez 

Iris J. Cabrera-Gómez 

USDC-DPR No. 221101

Email: icabrera@riveratulla.com

Rivera Tulla & Ferrer Building 

San Juan, PR 00917-1212 

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Tel: (787)753-0438 

Fax: (787)767-5784 

AND 

Dated: February 1, 2018 MASLON LLP 

By: /s Clark T. Whitmore

Clark T. Whitmore (admitted pro hac vice) 

Jason M. Reed (admitted pro hac vice) 

90 South Seventh Street, Suite 3300 

Minneapolis, MN 55402 

Telephone: 612-672-8200 

Facsimile: 612-672-8397 

E-Mail: clark.whitmore@maslon.com

jason.reed@maslon.com

ATTORNEYS FOR U.S. BANK NATIONAL 

ASSOCIATION, IN ITS CAPACITY AS PREPA 

BOND TRUSTEE 

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Exhibit A

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Exhibit B

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