Board repeats PREPA bondholders haven't met conditions for claim

The Puerto Rico Oversight Board again argued Puerto Rico Electric Power Authority bondholders haven't satisfied the three conditions that would validate their administrative expense claim for over $3.7 billion.

In a brief filed this weekend in the First Circuit Court of Appeals, the board told the court it should uphold U.S. District Court Judge Laura Taylor Swain's rejection, in March, of the claim.

Under the Puerto Rico Oversight, Management and Economic Stability Act a debtor's spending of collateral can lead to an administrative expense claim only if three conditions are met, wrote Martin Bienenstock, the board's lead attorney. One of these is "the debtor previously provided adequate protection," but the bondholders haven't satisfied the conditions, "primarily because they were never provided adequate protection."

Bondholders in the first six years of the bankruptcy said PREPA wasn't generating net revenue, but they are making the opposite argument now, the board said. They "never followed through to decision [on] any request for adequate protection." 

Bondholders' attempt to use the 1968 Reading Co. v. Brown decision fails for two reasons, the board said. Reading does not apply to claims asserting a post-petition breach of a pre-petition contract, and Reading says only post-petition torts by a bankruptcy trustee yield administrative liability and in this case there wasn't a tort. "PREPA used its own property to pay its own expenses and that is not a tort or inherently wrongful in any sense," the board said.

The bondholders have argued the takings clause in the Fifth Amendment of the Bill of Rights applies to PREPA's actions. The board says this claim fails because "the Fifth Amendment only applies to governmental takings and the bondholders do not even allege PREPA, a utility not empowered to enact laws, took net revenues in a governmental capacity."

PREPA's actions were "commercial acts" and not "sovereign acts" and thus no Fifth Amendment takings could have occurred, the board said.

The bondholders allege PREPA breached the pre-bankruptcy petition trust agreement by using net revenues for post-petition operating transactions, the board told the court. "But it is well established that the breach of a pre-petition agreement cannot give rise to an administrative expense claim under [a section of the bankruptcy code incorporated into PROMESA]." 

Puerto Rico's Fiscal Affairs and Financial Advisory Authority, the Unsecured Creditors Committee and a group representing PREPA retirees also filed briefs on the administrative expense claim on Friday and Saturday. 

A spokesperson for one of the PREPA bond parties didn't immediately respond to a request for a comment. 

The bondholders made their argument for the administrative expense claim with the appeals court in May.

The bondholders have a $8.48 billion claim to unpaid principal and interest regardless of how the appeals court rules on the administrative expense claim.  

Two U.S. Supreme Court decisions from late June could transform the Oversight Board and thus the outcome of the Puerto Rico Electric Power Authority bankruptcy.