PREPA bondholders' $3.7 billion administrative expense claim rejected

U.S. District Judge Laura Taylor Swain denied Puerto Rico Electric Power Authority bondholders' $3.7 billion administrative expense claim.

The bondholders may appeal the decision.

With the administrative expense claim denied, between $8.48 billion and $8.5 billion in outstanding bonds and unpaid interest due as of the July 2017 PREPA bankruptcy filing remains in contention.

The Puerto Rico "Oversight Board welcomes the decision of the U.S. District Court for the District of Puerto Rico denying a motion by certain Puerto Rico Electric Power Authority bondholders seeking administrative expense priority claims of at least $3.7 billion in the PREPA debt restructuring," the board said in a statement.

The ruling, the board said, "removes a significant obstacle to confirmation of" its proposed plan of adjustment.

Puerto Rico-based attorney John Mudd said, "Contrary to what some believe, this decision will not bring about a settlement of the case. Both parties are sure they will win in the end."

"We ultimately need a settlement," said Vicente Feliciano, president of Puerto Rico-based Advantage Business Consulting. "If it can't be negotiated, then it should be imposed by Judge Swain. Both bondholders and Puerto Ricans need to turn a page."

Institute for Energy Economics and Financial Analysis Energy Consultant Cathy Kunkle said, "Legal issues aside, it is quite clear that PREPA does not have the $3.7 billion in cash that the bondholders were demanding. Moreover, forcing PREPA to pay this claim would have undermined the ultimate aim of the bankruptcy process, which is that PREPA emerge as a viable going concern capable of providing adequate electrical service."

Swain said the bondholders' administrative expense claim could be denied on purely legal grounds, without ruling on factual disputes between the board and the bondholders.

The bondholders have argued that PREPA improperly used net revenues they have a lien on since the start of the bankruptcy.

The bondholders made several arguments but all of them are wrong, Swain said.

One argument was based on Section 503 of the Chapter 11 bankruptcy code, which was incorporated into the Puerto Rico Oversight, Management and Economic Stability Act, which guides the bankruptcy.

Case law shows in order to use 503 to make a claim, a creditor must "demonstrate what it has contributed post-petition to benefit the estate or debtor," Swain said. But the bondholders didn't show they took actions or entered into any transactions with PREPA following the bankruptcy filing for which they are seeking an administrative expense as compensation.

Swain said the bondholders used a case, United Trucking Serv. v. Trailer Rental Co., that doesn't support their position. In that case the parties entered a post-petition agreement that was critical to determining an administrative expense claim. There isn't such a stipulation in this case.

The bondholders also relied on a "fundamental fairness" doctrine found in Reading Co. v. Brown for their administrative expense claims, but Swain said it wasn't relevant. The doctrine is meant for "innocent third parties," Swain said, and not parties to the bankruptcy.

The bondholders said the tort of conversion took place due to "malicious and wrongful privation" of ownership rights, quoting an appeals court decision. But Swain said there was no evidence of maliciousness. And PREPA didn't take bondholders' property, it took its own property, albeit one the bondholders had a lien on.

Swain said the bondholders' argument based on the Takings Clause of the Bill of Rights didn't apply because they had "contracted away their ability to claim a taking in this context by agreeing to remedies under the Trust Agreement."

The board is currently offering bondholders a recovery of four cents on the dollar, which bondholders have rejected. Bondholders and PREPA and/or representatives of PREPA have been in mediation and/or negotiations for about 12 years.