Judge partially lifts litigation stay in PREPA bankruptcy to calculate value of bondholders’ claim.

U.S. District Judge Laura Taylor Swain

By THE STAR STAFF

In a significant development in the Puerto Rico Electric Power Authority’s (PREPA) bankruptcy process, U.S. District Judge Laura Taylor Swain has partially lifted the litigation stay in the Title III proceeding, allowing a narrow but critical phase of litigation to move forward.

The ruling this week clears the way for the bondholders’ long‑pending accounting counterclaim to proceed, along with limited discovery focused on how PREPA’s revenues and expenses should be calculated under federal bankruptcy law and the governing bond trust agreement. The order marks a shift away from the prolonged stalemate that has characterized the PREPA case and signals the court’s determination to resolve foundational legal disputes before tackling broader valuation and restructuring issues.

Swain issued the order after reviewing competing proposals filed by the Financial Oversight and Management Board for Puerto Rico, PREPA and its restructuring allies, and the holders of PREPA revenue bonds. While the oversight board pushed for litigation aimed directly at determining the value of the bondholders’ secured claim, bondholders instead sought to revive motions to lift the stay entirely, including a request to dismiss the Title III case.

Rejecting both approaches for now, the court charted a new course. Swain emphasized that determining the value of bondholders’ secured claims is essential to moving the PREPA case forward but warned that attempting to fix a dollar figure now would be premature and potentially misleading.

According to the court, valuation depends on economic data and projections that continue to change, raising the risk that any near‑term calculation could quickly become obsolete. Instead, the judge concluded that the court must first resolve the underlying methodology for calculating PREPA’s “Net Revenues,” including how operating expenses should be treated under section 928 of the Bankruptcy Code.

“The only litigation matter proposed by the parties that does not require reference to changing economic data and projections,” the judge wrote, is the bondholders’ accounting counterclaim.

That conclusion led to the court’s most consequential move: lifting the litigation stay solely to permit that counterclaim and related discovery to proceed.

Under the order, the stay is lifted only to allow litigation and discovery tied to the bondholders’ accounting claims, without prejudging broader motions to lift the stay or dismiss the case. Crucially, the court made clear that this litigation will be phased and tightly focused.

The first phase will center on legal and factual disputes over how PREPA’s revenues and expenses should be categorized, interpreted and calculated under the trust agreement and federal law. Once resolved, the court expects those rulings to produce a workable formula that can later be applied to updated financial data to determine: whether PREPA generated net revenues before or after the bankruptcy filing, and whether those revenues exist today in the form of available funds that could support a secured claim.

Swain noted that resolving these methodological questions will not only inform the accounting dispute, but will also play a key role in evaluating future stay‑relief motions, plan confirmation, and settlement negotiations.

The court authorized limited discovery on disputes previously raised by bondholders, including issues connected to prior motions to compel. While acknowledging that PREPA’s historic financial reporting practices are not necessarily binding, the judge ruled they are not irrelevant and may inform interpretation of the governing documents.

At the same time, the order restricts discovery to non‑duplicative material and requires proportionality, signaling that the court intends to keep this phase efficient and focused.

Swain also imposed an expedited schedule. By late April, bondholders must file a renewed motion to compel discovery, PREPA must respond, and the parties must jointly propose a litigation timeline under Rule 26. A hearing before Magistrate Judge Judith Dein is scheduled for May 12.

PREPA has been in bankruptcy since 2017 under Title III of the Puerto Rico Oversight, Management and Economic Stability Act to restructure $9 billion in debt.