Before dollar figures are debated, Judge Laura Taylor Swain must first resolve key accounting questions that will determine bondholders’ claims.
The July omnibus hearing in the “Puerto Rico Electric Power Authority’s case pivoted toward the core legal and financial questions that will shape the value of bondholders’ claims: how to calculate PREPA’s “net revenues.”
Judge Laura Taylor Swain used the session to outline the issues she expects to be addressed in the upcoming round of partial summary judgment motions, signaling that the court intends to resolve key methodological disputes before turning to any evidentiary fight over numbers.
At the heart of the dispute is the accounting counterclaim, a litigation track the court authorized in April. Bondholders argue that PREPA historically generated net revenues-defined under the Trust Agreement as revenues remaining after current expenses-and that these net revenues constitute their collateral.
The Financial Oversight and Management Board (FOMB) counters that PRE-PA’s revenues were consumed by operating costs and that little, if any, collateral remains. The counterclaim will determine not only the methodology for calculating net revenues but also the ultimate size of the bondholders’ secured claim.
The legal backdrop includes Section 928 of the Bankruptcy Code, which preserves a lien on “special revenues” even after a municipal bankruptcy filing. Section 928 specifies that bondholders’ lien attaches only to net revenues, not gross revenues, making the definition and calculation of net revenues central to the dispute, which came about after the U.S. First Circuit Court of Appeals in 2024 ruled that bond-holders possess a valid, perfected lien on PREPA’s net revenues but did not specify a dollar amount.
Judge Swain opened the motion-prac-tice discussion by listing the principal areas of disagreement: how the Trust Agreement interacts with Section 928; whether PREPA’s monthly operating reports constitute binding net-revenue calculations; whether revenues and expenses should be measured on a cash or accrual basis; how contributions in lieu of taxes should be treated; whether only budgeted expenses qualify as current expenses; how federal disaster-related funds should be classified; the relevance of the Commonwealth of Puerto Rico’s Energy Sector Reserve; and whether certain categories of spending are automatically excluded from current or necessary operating expenses.
She emphasized that these issues can be resolved as legal questions through a partial summary judgment, a procedural mechanism allowing the court to decide discrete legal issues without a full trial when no material facts are in dispute.
“These are issues that can potentially be dealt with as legal questions without getting out our calculators,” Swain said, underscoring that the first phase will focus on methodology rather than dollar values.
Discovery Issues & KPMG’s 2018 PREPA Audit
Counsel for all major parties agreed with the court’s framing. Margaret Dale, counsel for the FOMB, said the Oversight Board’s expert reports would include numerical illustrations, but acknowledged that the court is not seeking a ruling on amounts at this stage. Glenn Kurtz of White & Case, representing bondholders GoldenTree and Syncora, called Swain’s list “excellent” and said bondholders are prepared to move forward on cross-mo-tions. Eric Brunstad of Dechert, counsel for the PREPA Ad Hoc Group, said the court’s approach “will resolve important issues” and urged adherence to the existing schedule.
Judge Swain confirmed that cross-motions for partial summary judgment will be filed in September, with responses in October and oral arguments tentatively set for the November omnibus hearing.
Earlier in the hearing, the court turned to discovery issues. Kurtz reported complications with LUMA Energy’s witnesses, including one witness who lacked knowledge of the monthly operating reports. Dale pressed for clarity on whether bondholders intended to proceed with the depositions scheduled before the July 17 discovery cutoff, noting that the Oversight Board’s deposition of the bond trustee was set for last Friday.
The court also heard updates on the production of KM’s 2018 audit file for PREPA. Assured’s counsel, William Natbony, raised concerns about PREPA’s assertion of privilege over several hundred documents. Local counsel Diana Pérez explained that KPMG produced its entire 2018 audit file-nearly 4,000 documents and that PREPA had withheld 139 documents after a rapid privilege review.
PREPA’s counsel, Maria DeConza, said the privilege log would be delivered that morning and noted that the 2018 audit was unique because it contained a supplemental schedule tied to the Trust Agreement, absent from later years.
Judge Swain encouraged the parties to resolve any remaining disputes without court intervention, allowing for a short extension of the KPMG deposition if necessary.
The hearing closed with Swain reiterating that the litigation will proceed in phases: first, resolving the legal framework for calculating net revenues; then, if needed, holding an evidentiary proceeding to determine dollar amounts. The next omnibus hearing is scheduled for September 16.
PREPA has been in bankruptcy since 2017 to restructure over $9 billion in debt.
