Judge rejects PREPA bondholders’ bid for $3.7 billion priority claim.

U.S. District Judge Laura Taylor Swain

By THE STAR STAFF

U.S. District Judge Laura Taylor Swain has rejected an effort by major Puerto Rico Electric Power Authority (PREPA) bondholders to obtain an administrative expense priority claim valued at no less than $3.7 billion. The ruling, issued in Puerto Rico’s long‑running electric utility bankruptcy, blocks the bondholders from receiving top‑of‑the‑line payment status ahead of other creditors.

The bondholder group -- which includes Assured Guaranty, GoldenTree Asset Management, Syncora, National Public Finance Guarantee, and U.S. Bank as trustee -- argued that PREPA had consumed billions of dollars in “Net Revenues” during the bankruptcy. These revenues, they said, were collateral pledged to them under the 1974 Trust Agreement, and PREPA’s use of the funds should be treated as an administrative expense, ensuring immediate repayment.

Swain flatly disagreed. In a detailed 42‑page decision issued on Monday, she concluded that the bondholders had not shown any legal basis that would allow their claim to receive administrative priority status. Administrative expenses are paid ahead of almost all other claims in bankruptcy, and granting such treatment would have dramatically altered PREPA’s restructuring landscape.

The judge first determined that the bondholders failed to meet the basic requirements of section 503 of the Bankruptcy Code, which allows administrative priority for “actual, necessary” expenses that arise from a post-petition transaction with the debtor and that benefit the estate. She emphasized that the bondholders had no post‑petition dealings with PREPA. Their claim arose entirely from a pre‑bankruptcy contract, and PREPA’s spending of its own revenues did not constitute a transaction with the bondholders. Because administrative expense treatment is reserved for those who provide new value or services after the bankruptcy filing, she held that the bondholders simply did not qualify.

Swain also rejected the bondholders’ alternative arguments based on the Supreme Court’s Reading v. Brown decision, which allows certain post‑petition tort claims to be treated as administrative expenses on “fundamental fairness” grounds. The bondholders had accused PREPA of conversion -- essentially, wrongfully taking their property -- and had also asserted a Takings Clause violation.

The court found neither theory convincing. Swain noted that conversion requires the wrongful taking of someone else’s property, but the revenues PREPA used were PREPA’s own funds. The bondholders merely held a security interest; they did not “own” the revenues. Their filings also failed to show malicious or wrongful intent on PREPA’s part. For similar reasons, the judge dismissed the Fifth Amendment takings claim, concluding that any rights the bondholders had were governed strictly by contract. The Trust Agreement itself limits the remedies available to bondholders, and courts have consistently held that breaches of government contracts do not constitute takings.

Finally, Swain addressed the bondholders’ reliance on section 922, a provision that allows administrative priority when a creditor receives court‑ordered adequate protection that later proves insufficient. She found that PREPA never provided any court‑ordered adequate protection to the bondholders. The 2019 Restructuring Support Agreement, which would have included such protections, was never approved and was ultimately terminated. Without adequate protection in place, there can be no claim that it was inadequate, and therefore no administrative expense claim is viable under this provision.

In the end, the judge concluded that the bondholders’ theories were incompatible with bankruptcy law, inconsistent with the terms of the Trust Agreement, and unsupported by facts. Her ruling ensures that the bondholders cannot leap ahead of other creditors in what remains one of the most complex municipal bankruptcies in U.S. history.