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It would appear that this is due to the patch being base64 encoded when saved to the config (no error) but being plain text when the page reloads after an error.

This is a simple way to fix it:

system_patches_edit.php line 184:

$patchtext = new Form_Textarea(
    'patch',
    'Patch Contents',
    $input_errors ? $pconfig['patch'] : base64_decode($pconfig['patch'])
);

Fix committed