United States Court of Appeals
For the First Circuit
Nos. 25-1745, 25-1748, 25-1749, 25-1750, 25-1751
IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, as representative for the Commonwealth of Puerto Rico; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
representative for the Employees Retirement System of the
Government of the Commonwealth of Puerto Rico; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
representative for the Puerto Rico Highways and Transportation
Authority; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR
PUERTO RICO, as representative for the Puerto Rico Electric
Power Authority (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT
BOARD FOR PUERTO RICO, as representative of the Puerto Rico
Public Buildings Authority,
Debtors,
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
representative for the Commonwealth of Puerto Rico,
Debtor, Appellee,
CAROL FLATON, in the capacity of Claims Reconciliation Monitor;
RAMON ORTIZ, in the capacity of Claims Reconciliation Monitor,
Interested Parties, Appellees,
v.
SIG STRUCTURED PRODUCTS, LLC; ALLIANCE BERNSTEIN LP; ARISTEIA
CAPITAL, LLC; BNY MELLON INVESTMENT ADVISER, INC.; CAPITAL
RESEARCH AND MANAGEMENT COMPANY; COLUMBIA MANAGEMENT INVESTMENT
ADVISERS, LLC; DELAWARE MANAGEMENT COMPANY, a series of
Macquarie Investment Management Business Trust; ELLINGTON
MANAGEMENT GROUP, LLC.; GOLDMAN SACHS ASSET MANAGEMENT LP;
INVESCO ADVISERS, INC.; MACKAY SHIELDS LLC; MFS INVESTMENT
MANAGEMENT; OLD ORCHARD CAPITAL MANAGEMENT LP; ONE WILLIAM
STREET CAPITAL MANAGEMENT LP; RUSSELL INVESTMENT COMPANY; T.
ROWE PRICE; TOWER BAY ASSET MANAGEMENT; ASSURED GUARANTY INC.;
U.S. BANK NATIONAL ASSOCIATION, in the capacity as PREPA Bond
Trustee; NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION;
GOLDENTREE ASSET MANAGEMENT LP; SYNCORA GUARANTEE, INC.,
Respondents, Appellants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain,* U.S. District Judge]
Before
Rikelman, Howard, and Dunlap,
Circuit Judges.
G. Eric Brunstad, Jr., with whom Stephen D. Zide, David A.
Herman, and Dechert LLP were on brief, for appellants SIG
Structured Products, LLC; Alliance Bernstein LP; Aristeia Capital, LLC; BNY Mellon Investment Adviser, Inc.; Capital Research and
Management Company; Columbia Management Investment Advisers, LLC; Delaware Management Company, a series of Macquarie Investment
Management Business Trust; Ellington Management Group, LLC.;
Goldman Sachs Asset Management LP; Invesco Advisers, Inc.; Mackay Shields LLC; MFS Investment Management; Old Orchard Capital
Management LP; One William Street Capital Management LP; Russell
Investment Company; T. Rowe Price; and Tower Bay Asset Management.
Michael C. McCarthy, Clark T. Whitmore, John T. Duffey, and
Maslon LLP on brief for appellant U.S. Bank National Association.
John K. Cunningham, with whom Glenn M. Kurtz, Claudine
Columbres, Isaac Glassman, Thomas E. MacWright, Thomas E. Lauria, Michael C. Shepherd, Jesse L. Green, White & Case LLP, Lydia M.
Ramos Cruz, Ramos Cruz Legal, Susheel Kirpalani, Eric Kay, Quinn
Emanuel Urquhart & Sullivan, LLP, Rafael Escalera, Carlos R.
Rivera-Ortiz, and Reichard & Escalera were on brief, for appellants GoldenTree Asset Management LP and Syncora Guarantee, Inc.
Miguel A. Estrada, with whom Lochlan F. Shelfer, Gibson, Dunn
& Crutcher LLP, Howard R. Hawkins, Jr., Casey J. Servais, William J. Natbony, Thomas J. Curtin, and Cadwalader, Wickersham & Taft
LLP were on brief, for appellant Assured Guaranty Inc.
* Of the Southern District of New York, sitting by designation.
- 2 -Mark D. Harris, with whom Martin J. Bienenstock, Brian S.
Rosen, Elliot R. Stevens, Timothy W. Mungovan, John E. Roberts,
Adam L. Deming, and Proskauer Rose LLP were on brief, for appellee Financial Oversight and Management Board for Puerto Rico.
Georg Alexander Bongartz, with whom Eric D. Stolze, Luc A.
Despins, Pedro A. Jimenez, and Paul Hastings LLP were on brief,
for appellees Carol Flaton and Ramon Ortiz.
September 23, 2026
- 3 -RIKELMAN, Circuit Judge. This appeal requires us to
interpret § 510(b) of the Bankruptcy Code, which mandates the
subordination of any claim "for damages arising from the purchase
or sale" of a security of a debtor or its affiliate. 11 U.S.C.
§ 510(b). A trustee filed a proof of claim for $8.5 billion in
Puerto Rico's bankruptcy-type restructuring proceedings asserting
that the Commonwealth violated bondholders' statutory and
constitutional rights. The district court concluded that § 510(b)
applied to the trustee's claim and thus classified it as a
subordinated claim. We affirm.
I. BACKGROUND
A. Statutory Background
In 1941, Puerto Rico enacted the Puerto Rico Electric
Power Authority Act (the "Authority Act"). See P.R. Laws Ann.
tit. 22, § 191 (2026). The Authority Act established the Puerto
Rico Electric Power Authority (PREPA), a public utility
corporation charged with managing the Commonwealth's energy
resources. See id. § 193(a). It also authorized PREPA to finance
its operations by issuing revenue bonds and pledging its "entire
gross or net revenues and present or future income" to secure
repayment of those obligations. Id. § 206(e)(1); see also id.
§ 196(o). At the same time, the statute expressly provided that
the Commonwealth was not liable for payment of the principal or
interest on PREPA's revenue bonds. See id. § 210 (stating that
- 4 -the "bonds and other obligations issued by [PREPA] shall not be a
debt of the Commonwealth" nor "shall [the Commonwealth] be liable
thereon").
The Authority Act did grant bondholders several
statutory protections, however, to facilitate PREPA's access to
the capital markets. Most importantly for our purposes, it
memorialized a promise by the Commonwealth not to impair PREPA's
ability to repay the bonds. Specifically, the Authority Act
included a covenant by the Commonwealth not to "limit or alter the
rights or powers" vested in PREPA until it repaid its outstanding
bonds, including any accrued interest (the "Statutory Covenant").
Id. § 215. The Authority Act also permitted the appointment of a
trustee to enforce "any covenants made to secure, to pay, or in
relation to the bonds" for the benefit of PREPA's bondholders.
Id. § 206(e)(12).
In 1974, PREPA executed a trust agreement with the
trustee at the time (the "Trust Agreement").1 See In re Fin.
Oversight & Mgmt. Bd. for P.R., 121 F.4th 280, 290 (1st Cir. 2024).
Under that agreement, and as permitted by § 196 of the Authority
Act, PREPA issued several series of bonds and pledged its present
and future net revenues as security to the bondholders. It also
1 Appellant U.S. Bank National Association is the current
trustee, and we refer to it, acting in its capacity under the Trust Agreement, as the "Trustee" throughout this opinion.
- 5 -agreed to maintain rates sufficient to satisfy operating expenses
and debt-service obligations.2 Notably, the Trust Agreement
specified that the revenue bonds were payable solely from PREPA's
net revenues and that the Commonwealth was not liable on the bonds.
B. The Commonwealth's Title III Proceedings
In 2016, to address the Commonwealth's fiscal crisis,
Congress enacted the Puerto Rico Oversight, Management, and
Economic Stability Act (PROMESA), which created a restructuring
framework modeled on relevant aspects of federal bankruptcy law.
See 48 U.S.C. §§ 2101-2241; id. § 2161(a) (incorporating
substantial portions of the Bankruptcy Code into PROMESA). Among
other things, PROMESA established the Financial Oversight and
Management Board (the "Board") and "empowered [it] to place
Commonwealth entities into bankruptcy-type restructuring
proceedings," known as "Title III proceedings." In re Fin.
Oversight & Mgmt. Bd. for P.R., 121 F.4th at 292.
The next year, the Board filed a restructuring petition
on behalf of the Commonwealth, initiating the Commonwealth's
Title III case. Two months later, PREPA defaulted on its
obligation to pay the bondholders under the Trust Agreement, and
Our court recently held that the Trust Agreement grants
2
bondholders a lien on PREPA's present and future net revenues.
See In re Fin. Oversight & Mgmt. Bd. for P.R., 121 F.4th at 301.
This appeal does not directly concern PREPA's liability to repay
those bonds.
- 6 -the Board filed a separate Title III restructuring petition on
PREPA's behalf. See In re Fin. Oversight & Mgmt. Bd. for P.R.,
899 F.3d 13, 18 (1st Cir. 2018). Although PREPA is a public
corporation of the Commonwealth, the two entities have proceeded
in separate Title III cases.
On behalf of PREPA's bondholders, the Trustee filed a
general unsecured proof of claim for $8.5 billion in the
Commonwealth's Title III case. Separately, the Trustee filed a
proof of claim for the same amount in PREPA's Title III case,
reflecting the face value (that is, the principal and interest) of
the then-outstanding revenue bonds.
In its proof of claim in the Commonwealth case, the
Trustee alleged that the Commonwealth interfered in multiple ways
with PREPA's ability to repay the revenue bonds. For example, the
Trustee pointed out that the Commonwealth enacted a statute
limiting PREPA's independent ability to set rates for its services
to satisfy its bond obligations and requiring it to receive
approval for any rate changes from a separate Energy Commission.
See P.R. Laws Ann. tit. 22, § 196(l) (2026) (as amended by Act
57-2014 and Act 4-2016).
Based on those allegations, the Trustee asserted
multiple discrete causes of action within its proof of claim,
including claims that the Commonwealth breached the Statutory
Covenant and violated the Takings and Contracts Clauses of the
- 7 -U.S. and Puerto Rico Constitutions. See id. § 215; U.S. Const.
amend. V; id. art. 1, § 10, cl. 1; P.R. Const., art. II, §§ 7, 9.
Critically, the Trustee also asserted that the Commonwealth
granted the Statutory Covenant and related protections as a
"material inducement for investors to purchase" PREPA's revenue
bonds. Thus, the Trustee sought $8.5 billion for the
Commonwealth's alleged impairment of those statutory and
constitutional rights.
In 2022, the district court3 confirmed the Commonwealth's
Plan of Adjustment ("the Commonwealth Plan"), which restructured
the Commonwealth's debt and specified the recoveries for its
various creditors. The Trustee did not file an objection.
The Commonwealth Plan divides claims against the
Commonwealth into multiple classes entitled to different
distributions. Classes 64 and 58 are central to this appeal.
Class 64 is composed of "Section 510(b) Subordinated Claims,"
defined as:
Any Claim . . . against the Debtors' [sic] or
their Assets arising from or relating to
(a) rescission of a purchase or sale of an
existing security of a Debtor or an Affiliate
of a Debtor, (b) purchase, sale or retention
of such a security, or (c) reimbursement,
indemnification or contribution allowed under
3 In Title III proceedings, the lower court is commonly
referred to as the "Title III court." See In re Fin. Oversight &
Mgmt. Bd. for P.R., 121 F.4th at 292. For simplicity, we refer to it as the "district court" in this opinion.
- 8 -section 502 of the Bankruptcy Code on account
of such Claim.
The parties agree that this definition substantially incorporates
§ 510(b) of the Bankruptcy Code, such that any claim that falls
within the scope of § 510(b) of the Code is properly categorized
as a Class 64 claim. The Commonwealth Plan does not provide for
any distribution to holders of Class 64 claims, so the bondholders
would recover nothing under that Plan if the district court
correctly concluded that the Trustee's proof of claim falls under
§ 510(b) (although the bondholders would still have potential
claims against PREPA under PREPA's plan set out in its Title III
case).
Separately, Class 58 of the Commonwealth Plan covers
"General Unsecured Claims," which are defined as those claims not
falling into other classes; by definition, claims categorized as
Class 64 Section 510(b) Subordinated Claims are excluded from
Class 58. General Unsecured Claimants stand to recover roughly
twenty percent of their asserted damages under the Commonwealth
Plan if the Trustee's claim on behalf of the bondholders is
excluded; if the Trustee's claim is included, however, they would
recover about five percent.
The Board filed a timely objection to the Trustee's
$8.5 billion general unsecured claim in the Commonwealth's
Title III case. In response, the Trustee maintained that the
- 9 -Commonwealth violated its statutory promise not to impair PREPA's
ability to repay the bonds -- a promise that it again described as
"induc[ing] the purchase of PREPA's bonds." And the Trustee
repeated its assertions that the Commonwealth "negatively impacted
the Trustee's and [PREPA] Bondholders' rights under the Trust
Agreement and Authority Act." The district court then stayed any
litigation related to the Trustee's proof of claim.
In 2025, the Board moved to enforce the Commonwealth
Plan by seeking a determination that the Trustee's proof of claim
constituted a Class 64 Section 510(b) Subordinated Claim under the
Plan.4 To support its motion, the Board asserted that the Trustee's
claim sought damages that arose from the bondholders' purchase of
the PREPA revenue bonds. Thus, the Board maintained that the
Trustee should not be classified as a Class 58 General Unsecured
Claimant, and, as a result, was not entitled to any recovery on
its $8.5 billion claim from the Commonwealth's bankruptcy
distribution.
The district court granted the Board's motion to
enforce. After concluding that the motion was not time-barred,
the court turned to the merits and held that the Trustee's proof
of claim was properly classified under the Commonwealth Plan as a
Class 64 Section 510(b) Subordinated Claim, not a Class 58 General
4The district court lifted the litigation stay to permit the
Board to file the motion to enforce.
- 10 -Unsecured Claim.5 Rejecting the Trustee's argument that the phrase
"arising from" in § 510(b) should be read narrowly, the court noted
that other federal circuit courts had interpreted § 510(b) to cover
claims that share a "causal link" with the purchase or sale of the
relevant security. The court then emphasized the allegation in
the Trustee's proof of claim that the Commonwealth breached
promises made to "induc[e]" the bondholders to purchase those
bonds. As a result, the court concluded that § 510(b) applied to
the Trustee's claim because it sought damages that "ultimately
relate[d]" to those initial purchases.
In reaching its ruling, the district court specifically
addressed the bondholders' constitutional causes of action. It
concluded that there was no basis for treating those alleged claims
differently because § 510(b) "unambiguous[ly]" applied to the
proof of claim as a whole and the Trustee waived any argument that
the bondholders' constitutional claims could not be impaired.
Thus, the court classified the proof of claim as a Class 64 Section
510(b) Subordinated Claim that would receive no distribution under
the Commonwealth Plan.
5The Trustee and the bondholders involved in this case
pursued a narrow argument before the district court: that the
Trustee's claim should be classified in Class 58, not Class 64, of the Commonwealth Plan. Thus, the district court's review was
limited to the question of which of those two classes was the
better fit for the Trustee's claim.
- 11 -The Trustee and multiple bondholder groups timely
appealed.6
II. DISCUSSION
On appeal, the Bondholders challenge the district
court's ruling on procedural grounds, arguing that the Board's
motion to enforce was filed too late, and on substantive grounds,
contending that the court misinterpreted § 510(b). We ultimately
reject both arguments.
A. Timeliness of the Motion to Enforce
To begin, the Bondholders maintain that the district
court should not have considered the Board's argument that the
Trustee's proof of claim met the definition of a Section 510(b)
Subordinated Claim. In their view, the Board's request that the
court treat the proof of claim as a Class 64 claim was untimely
because the deadline for objecting had passed.
The district court rejected the Bondholders' position
and concluded that the Board properly raised the classification
issue via a motion to enforce the Commonwealth Plan, which could
be filed at any time. But the court also held that, even if it
were to view the Board's motion to enforce as a formal objection,
6 The appellants filed five separate notices of appeal, which
we consolidated at their request. We refer to the appellants
collectively as the "Bondholders" throughout the remainder of this opinion. Meanwhile, we refer to the appellees, which include the
Board and two claims reconciliation monitors, simply as the
"Board."
- 12 -it would construe the motion to include a request for leave to
amend the Board's earlier, timely objection under Federal Rule of
Civil Procedure 15(a) and grant leave to amend on that basis.
We affirm the district court's ruling based on its
alternative holding granting the Board leave to amend its previous
objection.7 The Bondholders do not dispute that the court was
authorized to treat the Board's filing as a motion to amend that
earlier objection. They also do not contest that Federal Rule of
Civil Procedure 15(a) governs the court's decision to permit
amendment of the Board's objection or that we review that decision
for abuse of discretion. Instead, the Bondholders insist that the
court should have rejected the Board's filing because it was unduly
delayed and prejudicial.
Rule 15(a)(2) provides that "court[s] should freely give
leave [to amend] when justice so requires." Fed. R. Civ.
P. (15)(a)(2); see also Fed. R. Bankr. P. 7015 (applying Rule 15
to adversary bankruptcy proceedings). Nevertheless, "[i]n
appropriate circumstances," courts may deny leave to amend -- for
example, if there is "undue delay, bad faith, futility, [or] the
absence of due diligence on the movant's part." Palmer v. Champion
Mortg., 465 F.3d 24, 30 (1st Cir. 2006).
7As a result, we need not decide whether the Board correctly
raised its request through a motion to enforce the Commonwealth
Plan.
- 13 -We are unpersuaded by the Bondholders' undue delay and
prejudice arguments. The district court found that the Board
sought to resolve the classification issue as soon as it could,
and the Bondholders' only challenge to that finding is to assert
(without any support) that filing an objection a year after a
deadline constitutes "quintessential[] undue delay." But we have
rejected such an approach to evaluating undue delay, emphasizing
that the inquiry "is not simply a matter of counting days."
Amyndas Pharms., S.A. v. Zealand Pharma A/S, 48 F.4th 18, 37 (1st
Cir. 2022). And given that the district court stayed all
litigation related to the Bondholders' classification argument
almost immediately after they raised it (in their response to the
Board's timely initial objection), we see no basis to overturn the
court's conclusion that the Board did not unduly delay.
As to prejudice, the Bondholders contend that the
district court's ruling permitting the Board to amend its previous
objection led to increased litigation costs, but that contention
does not establish prejudice sufficient to warrant reversal.
Virtually any amendment would lead to more litigation, and the
Bondholders have not cited any case law to suggest that a court
abuses its discretion when it permits amendment simply because
additional litigation would ensue.
Thus, on this record and given the arguments before us,
we cannot conclude that the district court abused its discretion
- 14 -in considering the Board's request to treat the Trustee's proof of
claim as a Section 510(b) Subordinated Claim.
B. Section 510(b)
Turning to the merits, the Bondholders press three main
arguments concerning § 510(b)'s application to the Trustee's proof
of claim. First, they argue that the proof of claim does not seek
damages "arising from the purchase or sale" of a security within
the meaning of § 510(b) because, in their view, the claim targets
"post-sale malfeasance." Second, the Bondholders maintain that
even if § 510(b) could be read to encompass the Trustee's claim,
the canon of constitutional avoidance requires adoption of their
narrower construction of the provision. And third, they argue
that even if the Trustee's claim is subject to subordination under
§ 510(b), the district court erred in classifying the claim as
falling below Class 58 General Unsecured Claims.
Because this dispute centers on a purely legal question
concerning the proper interpretation and application of 11 U.S.C.
§ 510(b) to the Trustee's proof of claim, our review is de novo.
See In re Savage, 169 F.4th 45, 53 (1st Cir. 2026) ("The
interpretation of the Bankruptcy Code is a legal question that we
review de novo."); In re Fin. Oversight & Mgmt. Bd. for P.R., 178
F.4th 747, 753 (1st Cir. 2026) ("We . . . review[] the Title III
court's factual findings for clear error and its legal conclusions
de novo.").
- 15 -1. Section 510(b)'s Reach
Section 510(b) provides, in relevant part:
[A] claim arising from rescission of a
purchase or sale of a security of the debtor
or of an affiliate of the debtor, for damages
arising from the purchase or sale of such a
security, or for reimbursement or contribution
allowed under section 502 on account of such
a claim, shall be subordinated to all claims
or interests that are senior to or equal the
claim or interest represented by such
security . . . .
11 U.S.C. § 510(b) (emphasis added). The parties agree that the
PREPA revenue bonds constitute "securities" within the meaning of
the Bankruptcy Code and that PREPA is an "affiliate" of the
Commonwealth for purposes of § 510(b).8 See id. § 101(2),
(49)(A)(iv); 48 U.S.C. § 2161(c)(1). Thus, the key inquiry on
appeal turns on a single statutory question: whether the Trustee's
proof of claim seeks "damages arising from the purchase or sale"
of the PREPA revenue bonds. 11 U.S.C. § 510(b).
"As usual," when tasked with construing a statute, "we
must start with the text of the statute itself." Washington v.
HUD, 171 F.4th 473, 490 (1st Cir. 2026) (quoting Teles de Menezes
v. Rubio, 156 F.4th 1, 12 (1st Cir. 2025)). Generally, we construe
the words in a federal statute based on their plain and ordinary
8 The Bondholders initially argued to the district court that
the PREPA revenue bonds were not securities subject to § 510(b),
but they abandoned that position below and did not press that
argument on appeal. It is thus waived. See Shash v. Biogen, Inc., 84 F.4th 1, 10 n.9 (1st Cir. 2023).
- 16 -meaning at the time that Congress enacted the statute. See Watson
v. Republican Nat'l Comm., 146 S. Ct. 2165, 2172 (2026). But in
doing so, we must read those words in the context of the particular
provision, surrounding provisions, and the statutory scheme as a
whole. See City of Providence v. Barr, 954 F.3d 23, 31 (1st Cir.
2020); see also Gundy v. United States, 588 U.S. 128, 141 (2019)
("It is a fundamental canon of statutory construction that the
words of a statute must be read in their context and with a view
to their place in the overall statutory scheme." (quoting Nat'l
Ass'n of Home Builders v. Defs. of Wildlife, 551 U.S. 644, 666
(2007))).
When "interpreting a statute," courts aim "to determine
whether the language at issue has a plain and unambiguous meaning
with regard to the particular dispute in the case." Robinson v.
Shell Oil Co., 519 U.S. 337, 340 (1997) (emphasis added). Thus,
as long as it is "plain to anyone reading [the statute] that it
encompasses the conduct at issue," we need not resolve if the
statutory provision would be unambiguous in all potential
situations. United States v. Sargent, 103 F.4th 820, 826 (D.C.
Cir. 2024) (citation modified) (quoting Salinas v. United States,
522 U.S. 52, 60 (1997)).
The Bondholders insist that our previous decisions
construing the phrase "arising from" in other statutes weigh in
their favor. See, e.g., Aguilar v. U.S. Immigr. & Customs Enf't,
- 17 -510 F.3d 1, 10 (1st Cir. 2007) (analyzing "arising from" in the
immigration law context). Those cases "recognized that the term
'arising from' requires more than a weak or tenuous connection to
a triggering event." Id. We consider their analysis as we
interpret the meaning of § 510(b) in light of its unique statutory
context.
With these principles in mind, we reject the
Bondholders' front-line position that the "plain text" of § 510(b)
encompasses only those claims alleging misconduct at the time of
the security transaction itself and does not extend to claims
concerning "subsequent intervening wrongdoing." To start, nothing
in § 510(b)'s text limits its application to claims alleging
misconduct at the moment a security is issued. Nor do legal
dictionaries published at the time that Congress enacted § 510(b)
suggest that the phrase "arising from" carries any such temporal
limit; rather, they define "arise" to mean "to originate," "to
spring up," or "to come into being." Arise, Black's Law Dictionary
(4th ed. 1968). Thus, those definitions support reading the phrase
to require a causal relationship between the securities
transaction and the asserted damages but do not indicate that the
misconduct leading to the alleged damages must have occurred at
- 18 -the time of the transaction.9 And our case law, although not
exactly on point, does not suggest otherwise. Cf. Aguilar, 510
F.3d at 10 (declining to read "arising from" to "sweep within its
scope claims with only a remote or attenuated connection to the
removal of an alien").
Other circuit courts to consider the issue have rejected
the temporal limit that the Bondholders urge us to read into the
statute. For example, in In re Geneva Steel Co., the U.S. Court
of Appeals for the Tenth Circuit applied § 510(b) to bondholders'
fraud-in-the-retention claims, even though the claims arose from
the debtor's post-transaction conduct rather than from fraud
inducing the purchase itself. See 281 F.3d 1173, 1178-80 (10th
Cir. 2002). Similarly, in In re Telegroup, the U.S. Court of
Appeals for the Third Circuit rejected the argument that a debtor's
post-transaction breach of contract occurred too late to fall
within § 510(b). See 281 F.3d 133, 141-43 (3d Cir. 2002); id. at
141 (finding no "meaningful basis as a matter of Congressional
policy" to distinguish "between actionable conduct that occurred
at the time of the purchase of the security and actionable conduct
9The Bondholders invoke the Supreme Court's decision in
Howard Delivery Service, Inc. v. Zurich American Insurance Co.,
547 U.S. 651, 655, 667 (2006), for the proposition that statutory departures from the Bankruptcy Code's baseline goal of equal
distribution should be construed narrowly. That principle,
however, does not provide support for inserting a temporal limit
into § 510(b) that does not appear in its text.
- 19 -that occurred after the purchase"). The U.S. Courts of Appeals
for the Second, Ninth, and Fifth Circuits have adopted similar
understandings of § 510(b).10 See In re Med Diversified, Inc., 461
F.3d 251, 255-56 (2d Cir. 2006); cf. In re Betacom of Phx., 240
F.3d 823, 829-31 (9th Cir. 2001) (subordinating a claim alleging
misconduct that "surround[ed]" a securities sale but did not occur
at the time of such a sale); In re SeaQuest Diving, LP, 579 F.3d
411, 420-22 (5th Cir. 2009) ("[T]he rescission category [of
§ 510(b)] also extends to claims arising from post-issuance
conduct.").
Like our sister circuits, we hold that § 510(b) does not
categorically exclude claims based on post-purchase misconduct.
See 4 Collier on Bankruptcy ¶ 510.04[3] (16th ed. 2026) (observing
that courts "generally interpret[] the provision broadly" such
that a claim subject to mandatory subordination "need not flow
directly from the securities transaction or arise
contemporaneously with the purchase or sale of a security").11
We acknowledge that many of our sister circuits have found
10
Section 510(b) to be ambiguous. For the reasons we explain,
however, we conclude that the Trustee's proof of claim fits
comfortably within Section 510(b)'s scope even if there may be
some ambiguity as to the outer limits of the provision's reach.
See Robinson, 519 U.S. at 340.
The Bondholders suggest that courts are more divided on
11
this issue than they actually are. For example, they cite In re
Amarex, Inc., 78 B.R. 605, 610 (W.D. Okla. 1987), and In re
Angeles, 177 B.R. 920, 927 (Bankr. C.D. Cal. 1995), for the
proposition that "claims . . . based on malfeasance occurring
- 20 -Thus, we reject the Bondholders' front-line position that § 510(b)
applies only to claims alleging misconduct at the time of the
securities transaction.
We now move to the Bondholders' back-up arguments for
why we should adopt a narrow interpretation of § 510(b), which we
also find unpersuasive. First, the Bondholders suggest that the
statute targets specific causes of action not at issue here, such
as "violat[ions of] securities laws in connection with the
[security] issuance," "market[ing]" fraud, and "fraudulent
inducement in the purchase or sale" of a security. Because, in
their view, the Trustee's proof of claim alleges statutory and
constitutional violations distinct from the typical causes of
action subject to subordination, the Bondholders contend that
§ 510(b) does not apply here.
We see nothing in the text of § 510(b) to support the
Bondholders' position that it is restricted to certain causes of
action. See 4 Collier on Bankruptcy ¶ 510.04[3] (noting that
§ 510(b) encompasses "a wide variety of causes of actions arising
out of securities transactions"). And other federal circuit court
after the actual securities transaction has taken place are not
subordinated under Section 510(b)." But the Tenth Circuit squarely rejected the holding of both cases, instead concluding that
§ 510(b) applied to claims alleging fraud after the security
issuance, and other circuit courts have followed suit. See In re
Geneva Steel, 281 F.3d at 1179, 1181-82 & n.5; 4 Collier on
Bankruptcy ¶ 510.04[3].
- 21 -decisions confirm that a claimant cannot avoid subordination under
§ 510(b) simply by pleading a different legal theory or redefining
the claim's character. See In re Lehman Bros. Holdings Inc., 855
F.3d 459, 478-80 & n.29 (2d Cir. 2017) (subordinating breach of
contract and restitution claims asserted by debtor's former
employees where the employee stock plan formed "part of the causal
link leading to the alleged injury," and the employees' various
legal theories were "functionally equivalent" to damages claims
covered by § 510(b)). Thus, we see no reason to categorically
exclude the Trustee's proof of claim from § 510(b)'s reach simply
because the Trustee alleges statutory and constitutional
violations.
Second, the Bondholders contend that § 510(b) is
intended primarily to address the risk of double recovery or
priority skipping by preventing investors from lodging
"duplicative" claims -- one claim for repayment of the security
itself and another claim for acquisition-related
damages -- against the "same debtor," which is not the case here.
That may be a common application of § 510(b), but the provision
expressly extends to securities issued by "an affiliate of the
debtor" as well.12 11 U.S.C. § 510(b). And the Bondholders concede
12 The Bondholders suggest that the "affiliate" language in
§ 510(b) applies only to situations in which a creditor brings
"the very same . . . claim" against a debtor and its affiliate.
But again, nothing in the statute's text establishes such a limit.
- 22 -that PREPA is an affiliate of the Commonwealth. Thus, we see no
textual basis to support that restrictive interpretation either,
which would treat the existence of two claims against the same
debtor as a prerequisite to subordination.
And third, the Bondholders argue that the Trustee does
not seek "damages" within the meaning of § 510(b) because the
amount claimed corresponds to the unpaid principal and interest on
the PREPA bonds. As the district court noted, § 510(b) does not
subordinate ordinary bond-repayment claims -- that is, claims for
payment of the bond's principal and interest -- because such
claims seek payment for the securities themselves, not "damages
arising from" their purchase. See 4 Collier on Bankruptcy
¶ 510.04[6] ("[C]laims of noteholders for payments required by the
note, based upon the instrument itself, are not
claims . . . subject to subordination under section 510(b).").
But the Trustee's claim against the Commonwealth is not
an ordinary bond repayment claim; only PREPA is obligated to repay
the bonds (and indeed, the Trustee lodged a proof of claim for
repayment of the bonds in PREPA's separate Title III proceeding).
And the Authority Act and Trust Agreement expressly disclaim any
liability on the Commonwealth's part to repay those bonds.13 See
13For that reason, we also reject the Bondholders' contention
that our holding would require subordination of every claim against a guarantor of an affiliate's bonds. Although we need not decide
- 23 -P.R. Laws Ann. tit. 22, § 210 (2026). Instead, in its proof of
claim, the Trustee seeks compensation for the Commonwealth's
alleged impairment of separate statutory protections that the
Bondholders allege induced them to purchase the bonds. That the
Trustee measures the alleged loss to the Bondholders by reference
to unpaid principal and interest does not render § 510(b)
inapplicable to the claim.14
To be sure, although we reject the Bondholders' cramped
reading of § 510(b), we recognize that the statute's scope is not
limitless. Section 510(b) does not subordinate all claims raised
by purchasers or owners of securities, nor do we understand
"arising from" to encompass every possible claim that bears any
incidental connection to an earlier securities transaction.15 See
whether § 510(b) could ever apply to a guaranty claim, we can
easily distinguish this case because the Commonwealth expressly
did not accept any obligation to repay the PREPA revenue bonds.
See P.R. Laws Ann. tit. 22, § 210. Nor does the Trustee's proof
of claim even seek payment on a Commonwealth guarantee; it alleges impairment of separate protections that accompanied the bond
purchase.
14To the extent that the Bondholders suggest that § 510(b)
does not apply to any claims that are based on a "fixed debt," we reject that assertion. As the Bondholders conceded in the district court, the text of § 510(b) plainly applies to damages arising
from the sale of any "security," including fixed-debt instruments like the PREPA bonds. 11 U.S.C. §§ 510(b), 101(49)(A)(iv).
15 For this reason, to the extent the district court understood
§ 510(b) to encompass any claim whenever it "ultimately relate[s]" to a securities transaction, regardless of the nature of the claim or degree of causal relation, we do not agree.
- 24 -In re Telegroup, 281 F.3d at 144 n.2 ("Congress did not intend to
subordinate every claim brought by a shareholder, regardless of
the nature of the claim."); In re Khan, 846 F.3d 1058, 1064 (9th
Cir. 2017) (reasoning that § 510(b) cannot extend to "every
transaction that touches on or involves stock in a corporation").
Section 510(b)'s text does not specify the minimum
connective tissue necessary for subordination. See, e.g., In re
Telegroup, 281 F.3d at 138 ("[Section] 510(b)'s language alone
provides little guidance in delineating the precise scope of the
required nexus."). And as the Board acknowledges, ambiguity exists
at the "outer reaches" of § 510(b). But we need not define those
"outer reaches" in this case.
Even if § 510(b) is "ambiguous as applied to some
situations," we conclude that the Trustee's proof of
claim -- based on its own allegations -- fits comfortably within
the provision's scope. Sargent, 103 F.4th at 826 (quoting Ass'n
of Battery Recyclers, Inc. v. EPA, 208 F.3d 1047, 1056 (D.C. Cir.
2000)). The claim alleges that (1) the Commonwealth granted the
Statutory Covenant and related protections specifically "to induce
investment in" the PREPA revenue bonds, (2) the Bondholders were
in fact "material[ly] induce[d] . . . to purchase" the bonds based
on those protections, and (3) the Commonwealth subsequently
impaired those same protections. According to the proof of claim,
then, the Statutory Covenant and the other provisions in the
- 25 -Authority Act induced the Bondholders to purchase the bonds. Thus,
we cannot accept the Bondholders' assertion that the Trustee's
claimed damages bear only a tenuous relationship to the securities
transaction. Instead, the Trustee's own allegations support a
finding of a sufficient causal nexus to bring the claim within
§ 510(b)'s ambit. See In re Am. Hous. Found., 785 F.3d 143, 155,
157 (5th Cir. 2015) (concluding that there was a "nexus or causal
relationship" between the investor's claim and the transaction
because it was "clear from the record that the guaranties, at least
in part, induced [the investor] to make th[o]se investments," and
the claims were therefore properly subordinated under
Section 510(b)).
The Bondholders resist this conclusion by asserting that
even under a "broad" reading of § 510(b), independent acts of
"malfeasance" fall outside of its reach. As support, the
Bondholders lean heavily on the Ninth Circuit's decision in In re
Khan. In that case, the claimant had acquired stock, but then
"many years later," the debtor converted and fraudulently
transferred those shares (in essence, it stole the stock). In re
Khan, 846 F.3d at 1065. The court concluded that the claimant's
injury arose from the debtor's subsequent conversion -- not from
the earlier purchase of the securities -- and thus held that
§ 510(b) did not apply. See id.
- 26 -Critically, however, In re Khan did not establish that
any intervening misconduct by a debtor severs the connection
required by § 510(b). Rather, In re Khan recognized that § 510(b)
ceases to apply when a later and independent wrong displaces the
securities transaction as the source of the claimed damages. In
that case, the claimant's purchase and ownership of the stock
explained merely how he came into possession of the property that
the debtor later stole. But nothing about the later conversion
claim depended on a right or protection that allegedly induced the
claimant to buy the securities. See id. Conversely, here, the
Trustee's own proof of claim alleges that the Commonwealth impaired
rights that it had granted to "induce[]" the Bondholders to
purchase the PREPA bonds. Thus, the purchase of the securities is
not merely part of the historical background, as it was in In re
Khan. It is instead central to the Trustee's asserted claim for
damages because the very protections the Commonwealth allegedly
impaired induced that purchase.
In sum, because the proof of claim here alleges that the
Commonwealth impaired rights that induced the Bondholders to
purchase the PREPA revenue bonds, we conclude that the Trustee's
- 27 -claim seeks "damages arising from the purchase or sale" of
securities within the meaning of § 510(b).16
2. Canon of Constitutional Avoidance
The Bondholders alternatively contend that, even if
§ 510(b) could be read to permit subordination of their proof of
claim, we should reject that reading of the provision based on the
canon of constitutional avoidance. According to the Bondholders,
interpreting § 510(b) to permit subordination of a claim that
alleges violations of the Takings Clause and Contracts Clause would
permit the Commonwealth to use PROMESA and the Bankruptcy Code to
avoid paying constitutionally required compensation or some other
constitutionally required remedy. Because Class 64 Section 510(b)
Subordinated Claims receive no distribution under the confirmed
Commonwealth Plan, the Bondholders argue that construing § 510(b)
to apply here would effectively extinguish otherwise valid
constitutional causes of action.
The canon of constitutional avoidance is "a tool for
choosing between competing plausible interpretations of a
statutory text" to avoid constructions that raise serious doubts
about the statute's constitutionality. Clark v. Martinez, 543
16Because we affirm on the basis of § 510(b) itself, we do
not reach the Board's alternative contention that the Commonwealth Plan's definition of Section 510(b) Subordinated Claims -- which
includes not only claims that "arise from" but also those that
"relate to" the securities transaction -- independently requires
Class 64 treatment of the Trustee's proof of claim.
- 28 -U.S. 371, 381 (2005). "It 'has no application in the absence of
[statutory] ambiguity.'" Warger v. Shauers, 574 U.S. 40, 50 (2014)
(quoting United States v. Oakland Cannabis Buyers' Coop., 532 U.S.
483, 494 (2001)).
Importantly, "[s]potting a constitutional issue does not
give a court the authority" to leverage the constitutional
avoidance canon to "rewrite a statute as it pleases." Jennings v.
Rodriguez, 583 U.S. 281, 298 (2018). Instead, courts must first
employ the ordinary tools of statutory interpretation. See id. at
296. Only if those tools leave the statute genuinely susceptible
to multiple reasonable constructions does the canon of
constitutional avoidance become relevant. See id.
The canon of constitutional avoidance does not alter our
analysis here.17 Although we recognize that the outer limits of
§ 510(b) may be susceptible to ambiguity, as we explained, the
Trustee's proof of claim fits comfortably within the provision's
scope. The text of § 510(b), coupled with the consensus view of
our sister circuits construing that provision, forecloses the
Bondholders' proposed construction as applied to the facts of this
case.
We assume, without deciding, that the Trustee's proof of
17
claim raises constitutional questions that could justify invoking the constitutional avoidance canon, if the statute were
sufficiently ambiguous as applied to the proof of claim.
- 29 -Section 510(b) does not establish any carve-out for
claims asserting constitutional causes of action, nor can we
"rewrite [the] statute" to create such a carve-out. Jennings, 583
U.S. at 298. Rather, § 510(b)'s application turns on whether the
claimed damages bear the requisite causal relationship to the
purchase or sale of the security; it does not depend on the
particular legal theory pleaded or the timing of the alleged
misconduct. See 11 U.S.C. § 510(b). Because the Trustee's proof
of claim seeks to recover damages for injuries to the very rights
that induced the Bondholders' purchase of PREPA revenue bonds, it
sits squarely within § 510(b)'s scope, despite the constitutional
nature of the asserted causes of action.
The parties dispute whether the Bondholders waived their
constitutional objection altogether by conceding in the district
court that the Trustee's proof of claim should be treated as a
Class 58 General Unsecured Claim only.18 The district court
concluded that because the Bondholders consented to treatment as
18 Despite the district court's repeated inquiries, the
Bondholders did not seek any alternative classification for their constitutional causes of action outside of Class 58 (General
Unsecured Claims), even though the Commonwealth Plan provided a
separate class for other claims with a "constitutional character" to receive "full payment." Thus, the sole merits question before
the district court was whether to treat the Trustee's proof of
claim as falling under Class 64 or Class 58. And our review is
even narrower, asking only whether the Trustee's proof of claim
seeks "damages arising from" the PREPA bond purchase within the
meaning of § 510(b).
- 30 -General Unsecured Claimants under the Commonwealth Plan, they
accepted impairment of their constitutional causes of action. But
agreeing to substantial impairment does not necessarily amount to
waiving an objection to complete nonpayment. And the Bondholders
vigorously opposed Class 64 classification in the district court
precisely because it would yield zero distribution under the
Commonwealth Plan.
In any event, the constitutional avoidance canon does
not alter our holding because § 510(b)'s text does not permit the
statutory construction that the Bondholders seek. See Warger, 574
U.S. at 50. And because our review is limited to the narrow
question of interpreting § 510(b)'s text, we do not reach the
merits of the Bondholders' constitutional claims, including
whether the Commonwealth effected a taking and, if so, what
compensation the Constitution would require. Those questions are
not before us. Instead, we conclude only that the constitutional
nature of the Trustee's asserted causes of action does not place
its proof of claim outside of § 510(b)'s scope.
3. Level of Subordination
Finally, the Bondholders maintain that even if § 510(b)
were to apply to the Trustee's proof of claim, the claim must not
be "demoted" to less than General Unsecured Claimant priority. As
support, they point to § 510(b)'s text, which subordinates those
claims defined in the subsection "to all [other] claims or
- 31 -interests that are senior to or equal the claim or interest
represented by [the] security" at issue. 11 U.S.C. § 510(b). In
the Bondholders' view, even though the Trustee filed a general
unsecured creditor claim in the Commonwealth's bankruptcy,
§ 510(b) mandates subordination only to claims "senior" or "equal"
to their secured interest in the PREPA bonds -- resulting in its
classification as a General Unsecured Claim.
The Board contends that the Bondholders have forfeited
and waived this argument. According to the Board, the Bondholders
forfeited this argument because they failed to raise it to the
district court. See In re Watson, 403 F.3d 1, 7 (1st Cir. 2005)
("A party's failure to raise an issue in the bankruptcy court
forfeits its right to raise that issue for the first time on appeal
in this Court."). Normally, a forfeited argument is subject to
plain error review, but because the Bondholders did "not attempt
to satisfy" the plain error standard in their opening briefs, the
Board contends this argument is waived altogether. Mullane v.
DOJ, 113 F.4th 123, 137 (1st Cir. 2024); see also In re Fin.
Oversight & Mgmt. Bd. for P.R., 7 F.4th 31, 40 (1st Cir. 2021)
(declining to consider appellants' nondelegation doctrine argument
"because they never raised the issue before the Title III court"
and "no exceptional circumstances warrant[ed] consideration of
th[e] argument for the first time on appeal").
- 32 -In response, the Bondholders make two points -- neither
of which persuade us that they did in fact raise this "level of
subordination" argument to the district court. For starters, they
maintain that this argument "is merely subsidiary to" -- and not
separate from -- their assertion that § 510(b) would not mandate
subordination of the Trustee's proof of claim at all. We disagree.
As the Bondholders implicitly acknowledge, the question of whether
§ 510(b) mandates subordination is analytically distinct from any
question about the level of subordination that § 510(b) requires.
The first inquiry focuses on whether damages "aris[e] from" a
securities transaction, whereas the second inquiry focuses on what
"the claim or interest represented by such security" means. 11
U.S.C. § 510(b). That second inquiry implicates different
considerations and arguments that the Bondholders never presented
to the district court.
Next, the Bondholders assert that because the Board
offered an alternative argument in its brief on appeal for treating
the Trustee's proof of claim as falling under Class 64, they "are
entitled to respond." See Wills v. Brown Univ., 184 F.3d 20, 27
(1st Cir. 1999) ("Reply briefs are to counter the appellee's
arguments . . . ."). But here, the Bondholders debuted their
"level of subordination" argument in their opening briefs, not in
response to the Board's brief, despite failing to present it to
the district court. See In re Fin. Oversight & Mgmt. Bd. for P.R.,
- 33 -7 F.4th at 40. And in any event, as we have explained, our holding
does not rest on (or even address) the Board's alternative argument
to which the Bondholders purport to respond. See supra note 17.
Thus, we conclude that the Bondholders have waived any
challenge to the district court's ruling as to the level of
subordination that applies to the Trustee's proof of claim.
III. CONCLUSION
For all these reasons, we affirm the district court's
order.
- 34 -