First Circuit hears high‑stakes clash over PREPA bondholder claims
By THE STAR STAFF
The U.S. Court of Appeals for the First Circuit heard sharply divided arguments on Tuesday over whether bondholders of the Puerto Rico Electric Power Authority (PREPA) are entitled to administrative expense claims for the utility’s years‑long use of revenues pledged as collateral.
The outcome could reshape the final phase of PREPA’s Title III restructuring, now in its ninth year.
Attorneys for GoldenTree Asset Management, Assured Guaranty and the PREPA Ad Hoc Group urged the panel to reverse a district court ruling that denied administrative priority for PREPA’s post‑petition use of net revenues. They argued that the First Circuit has already held that bondholders possess a “valid, perfected and unavoidable lien on past, present and future revenues,” and that PREPA’s continued consumption of those revenues amounts to a compensable post‑petition expense.
GoldenTree’s counsel Glenn Kurtz said PREPA’s use of the collateral “constitute[s] actual, necessary and highly beneficial expenses of the estate,” adding that no court has ever permitted a debtor to consume cash collateral without granting an administrative expense claim. He warned that the district court’s ruling “incentivizes theft” by allowing PREPA to spend liened revenues without negotiating adequate protection.
Assured Guaranty’s attorney Miguel Estrada echoed that view, arguing that bondholders have been forced to extend “involuntary credit” because the automatic stay prevents them from enforcing their lien rights. He cited precedent suggesting that compelled extensions of credit qualify as post‑petition transactions under Section 503(b).
The PREPA Ad Hoc Group advanced a more sweeping theory, asserting that PREPA’s conduct constitutes both a Fifth Amendment taking and a post‑petition conversion tort. Counsel Eric Brunstad told the panel that the destruction of lien rights “satisfies every possible element of a Fifth Amendment taking,” and that under Supreme Court precedent, post‑petition torts must be treated as administrative expenses.
Attorneys for the Financial Oversight and Management Board, the Puerto Rico government, and PREPA’s unsecured creditors urged the court to reject those arguments, warning that the bondholders’ position would upend the statutory framework of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA).
Martin Bienenstock, representing the oversight board, argued that Section 922(c) governs the treatment of collateral in municipal bankruptcies and requires creditors to seek adequate protection through stay‑relief proceedings before pursuing administrative expense claims. He said PREPA’s continuous generation of new net revenues means the collateral has not diminished in value, and that the bondholders are attempting to “blow open the Reading exception” far beyond its intended scope.
The Puerto Rico government’s attorney, Peter Friedman, said the bondholders’ theory would create a “chokehold claim” capable of derailing PREPA’s restructuring, noting that PROMESA does not incorporate Section 363’s cash‑collateral restrictions. The unsecured creditors’ committee added that bondholders failed to diligently pursue adequate protection and that allowing an administrative claim now would unfairly leapfrog them ahead of other creditors.
Bondholder counsel rejected those assertions in rebuttal, insisting they repeatedly sought stay relief only to be blocked by the district court, and that PROMESA does not bar administrative expense claims.
The panel took the matter under advisement. A ruling will determine whether PREPA must account for potentially massive administrative claims tied to its use of pledged revenues, a decision that could significantly influence the utility’s long‑delayed restructuring plan.
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