Employees Retirement System v. PR AAA Portfolio Target

United States Court of Appeals
For the First Circuit

No. 19-1699

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 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 FOR THE PUERTO RICO
SALES TAX FINANCING CORPORATION, a/k/a Cofina; 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,

Debtors.

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,

Plaintiff, Appellee,

OFFICIAL COMMITTEE OF RETIRED EMPLOYEES OF THE COMMONWEALTH OF
PUERTO RICO,

Interested Party, Appellee,

v.

ANDALUSIAN GLOBAL DESIGNATED ACTIVITY COMPANY; GLENDON
OPPORTUNITIES FUND, LP; MASON CAPITAL MASTER FUND LP; OAKTREE
OPPORTUNITIES FUND IX (PARALLEL 2), L.P.; OAKTREE OPPORTUNITIES
FUND IX, L.P.; OAKTREE VALUE OPPORTUNITIES FUND, L.P.; OAKTREE-
FORREST MULTI-STRATEGY, L.L.C. (SERIES B); OCHER ROSE, L.L.C.;
SV CREDIT, L.P.,

Defendants, Appellants,
 PUERTO RICO AAA PORTFOLIO BOND FUND II, INC.; PUERTO RICO AAA
PORTFOLIO BOND FUND, INC.; PUERTO RICO AAA PORTFOLIO TARGET
MATURITY FUND, INC.; PUERTO RICO FIXED INCOME FUND II, INC.;
PUERTO RICO FIXED INCOME FUND III, INC.; PUERTO RICO FIXED
INCOME FUND IV, INC.; PUERTO RICO FIXED INCOME FUND V, INC.;
PUERTO RICO FIXED INCOME FUND, INC.; PUERTO RICO GNMA AND U.S.
GOVERNMENT TARGET MATURITY FUND, INC.; PUERTO RICO INVESTORS
BOND FUND I, INC.; PUERTO RICO INVESTORS TAX-FREE FUND II, INC.;
PUERTO RICO INVESTORS TAX-FREE FUND III, INC.; PUERTO RICO
INVESTORS TAX-FREE FUND IV, INC.; PUERTO RICO INVESTORS TAX-FREE
FUND V, INC.; PUERTO RICO INVESTORS TAX-FREE FUND VI, INC.;
PUERTO RICO INVESTORS TAX-FREE FUND, INC.; PUERTO RICO MORTGAGE-
BACKED & U.S. GOVERNMENT SECURITIES FUND, INC.; TAX-FREE PUERTO
RICO FUND II, INC.; TAX-FREE PUERTO RICO FUND, INC.; TAX-FREE
PUERTO RICO TARGET MATURITY FUND, INC.; UBS IRA SELECT GROWTH &
INCOME PUERTO RICO FUND; ALTAIR GLOBAL CREDIT OPPORTUNITIES FUND
(A), LLC; NOKOTA CAPITAL MASTER FUND, L.P.,

Defendants.

No. 19-1700

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 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 FOR THE PUERTO RICO
SALES TAX FINANCING CORPORATION, a/k/a Cofina; 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,

Debtors.

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,

Plaintiff, Appellee,

OFFICIAL COMMITTEE OF RETIRED EMPLOYEES OF THE COMMONWEALTH OF
 PUERTO RICO,

Interested Party, Appellee,

v.

PUERTO RICO AAA PORTFOLIO TARGET MATURITY FUND, INC.; PUERTO
RICO AAA PORTFOLIO BOND FUND, INC.;
PUERTO RICO AAA PORTFOLIO BOND FUND II, INC.; PUERTO RICO FIXED
INCOME FUND II, INC.; PUERTO RICO FIXED INCOME FUND III, INC.;
PUERTO RICO FIXED INCOME FUND IV, INC.; PUERTO RICO FIXED INCOME
FUND V, INC.; PUERTO RICO FIXED INCOME FUND, INC.; PUERTO RICO
GNMA AND U.S. GOVERNMENT TARGET MATURITY FUND, INC.; PUERTO RICO
INVESTORS BOND FUND I, INC.; PUERTO RICO INVESTORS TAX-FREE FUND
II, INC.; PUERTO RICO INVESTORS TAX-FREE FUND III, INC.; PUERTO
RICO INVESTORS TAX-FREE FUND IV, INC.; PUERTO RICO INVESTORS
TAX-FREE FUND V, INC.; PUERTO RICO INVESTORS TAX-FREE FUND VI,
INC.; PUERTO RICO INVESTORS TAX-FREE FUND, INC.; PUERTO RICO
MORTGAGE-BACKED & U.S. GOVERNMENT SECURITIES FUND, INC.; TAX-
FREE PUERTO RICO FUND II, INC.; TAX-FREE PUERTO RICO FUND, INC.;
TAX-FREE PUERTO RICO TARGET MATURITY FUND, INC.,

Defendants, Appellants,

ALTAIR GLOBAL CREDIT OPPORTUNITIES FUND (A), LLC; ANDALUSIAN
GLOBAL DESIGNATED ACTIVITY COMPANY; GLENDON OPPORTUNITIES FUND,
LP; MASON CAPITAL MASTER FUND LP; NOKOTA CAPITAL MASTER FUND,
L.P.; OAKTREE OPPORTUNITIES FUND IX (PARALLEL 2), L.P.; OAKTREE
OPPORTUNITIES FUND IX, L.P.; OAKTREE VALUE OPPORTUNITIES FUND,
L.P.; OAKTREE-FORREST MULTI-STRATEGY, L.L.C. (SERIES B); OCHER
ROSE, L.L.C.; SV CREDIT, L.P.; UBS IRA SELECT GROWTH & INCOME
PUERTO RICO FUND,

Defendants.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO

[Hon. Laura Taylor Swain,* U.S. District Judge]

* Of the Southern District of New York, sitting by
designation.
 Before

Howard, Chief Judge,
Lynch and Lipez, Circuit Judges.

Bruce Bennett, with whom Benjamin Rosenblum, David R. Fox,
Geoffrey S. Stewart, Beth Heifetz, Sparkle L. Sooknanan, Isel M.
Perez, Jones Day, Alfredo Fernández-Martínez, and Delgado &
Fernández, LLC were on brief, for Andalusian Global Designated
Activity Company; Glendon Opportunities Fund, LP; Mason Capital
Master Fund LP; Nokota Capital Master Fund, L.P.; Oaktree
Opportunities Fund IX (Parallel 2), L.P.; Oaktree Value
Opportunities Fund, L.P.; Oaktree-Forrest Multi-Strategy, L.L.C.
(Series B); Ocher Rose, L.L.C; and SV Credit, L.P.
Jason N. Zakia, Glenn M. Kurtz, John K. Cunningham, White &
Case LLP, Alicia I. Lavergne-Ramírez, José C. Sánchez-Castro,
Maraliz Vázquez-Marrero, and Sánchez Pirillo LLC on brief for
Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; Puerto Rico
AAA Portfolio Bond Fund II, Inc.; Puerto Rico AAA Portfolio Bond
Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico
Fixed Income Fund III, Inc.; Puerto Rico Fixed Income Fund IV,
Inc.; Puerto Rico Fixed Income Fund V, Inc.; Puerto Rico Fixed
Income Fund, Inc.; Puerto Rico GNMA and U.S. Government Target
Maturity Fund, Inc.; Puerto Rico Investors Bond Fund I, Inc.;
Puerto Rico Investors Tax-Free Fund II, Inc.; Puerto Rico Investors
Tax-Free Fund III, Inc.; Puerto Rico Investors Tax-Free Fund IV,
Inc.; Puerto Rico Investors Tax-Free Fund V, Inc.; Puerto Rico
Investors Tax-Free Fund VI, Inc.; Puerto Rico Investors Tax-Free
Fund, Inc.; Puerto Rico Mortgage-Backed & U.S. Government
Securities Fund, Inc.; Tax-Free Puerto Rico Fund II, Inc.; Tax-
Free Puerto Rico Fund, Inc.; Tax-Free Puerto Rico Target Maturity
Fund, Inc.; and UBS IRA Select Growth & Income Puerto Rico Fund.
Martin J. Bienenstock, with whom Timothy W. Mungovan, John E.
Roberts, William D. Dalsen, Stephen L. Ratner, Mark D. Harris,
Jeffrey W. Levitan, Margaret A. Dale, and Proskauer Rose LLP were
on brief, for 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.
Catherine L. Steege, with whom Melissa M. Root, Ian Heath
Gershengorn, Lindsay C. Harrison, Robert D. Gordon, Richard Levin,
Jenner & Block LLP, A.J. Bennazar-Zequeira, Héctor M. Mayol
Kauffmann, and Bennazar, García & Milián, C.S.P. were on brief,
for the Official Committee of Retired Employees of the Commonwealth
of Puerto Rico.
January 30, 2020
 LYNCH, Circuit Judge. The appellant Bondholders own

bonds issued in 2008 by the Employees Retirement System of the

Government of the Commonwealth of Puerto Rico (the "System"). More

than eight years after the bond issuance, Congress enacted the

Puerto Rico Oversight, Management, and Economic Stability Act

("PROMESA"), 48 U.S.C. §§ 2101–2241, to address Puerto Rico's

financial crisis and, under PROMESA's Title III, id. §§ 2161-2177,

provided many bankruptcy protections to Puerto Rico's government

agencies. The Commonwealth and the System filed Title III

petitions for such protections.

Pursuant to a stipulation in earlier litigation between

the System and the Bondholders in 2017, the System filed two

lawsuits against the Bondholders in the Title III court seeking

declaratory relief on the "validity, priority, extent and

enforceability" of the Bondholders' asserted security interest in

the System's "postpetition assets," including "[employer]

contributions [to the System] received postpetition." On summary

judgment, the Title III court addressed three arguments made by

the Bondholders. Fin. Oversight & Mgmt. Bd. for P.R. v. Andalusian

Glob. Activity Co. (In re Fin. Oversight & Mgmt. Bd. for P.R.),

385 F. Supp. 3d 138, 147–55 (D.P.R. 2019). First, the Bondholders

claimed that their security interests fit within exceptions under

§ 552 of the Bankruptcy Code. Id. at 152. The Title III court

rejected that claim. Second, the Bondholders argued that they are

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entitled to the protection of the "special revenue" provisions of

PROMESA. Id.; see also 48 U.S.C. § 2161(a) (incorporating relevant

parts of 11 U.S.C. §§ 902, 928). The Title III court held that

the Bondholders were not so protected, as Employers' Contributions

were not special revenues. Andalusian, 385 F. Supp. 3d at 154.

Finally, the Bondholders argued that the statutes should be

construed in their favor on their first two arguments to avoid an

impermissible taking under the Takings Clause of the Fifth

Amendment. Id. at 154–55. The Title III court rejected this

argument as well. Id. at 155. We affirm.

I.
Background

We describe the relevant statutes, facts, and procedural

history of the appeals. For additional facts and procedural

history, we refer the reader to the earlier litigation between

these parties about these bonds. See Altair Glob. Opportunities

Credit Fund, LLC v. Fin. Oversight & Mgmt. Bd. for P.R. (In re

Fin. Oversight & Mgmt. Bd. for P.R.), 914 F.3d 694, 702–09 (1st

Cir.), cert. denied, 140 S. Ct. 47 (2019).

A. PROMESA and the Bankruptcy Code

PROMESA created the Financial Oversight and Management

Board for Puerto Rico (the "Board") and authorizes that Board "to

restructure the debt of the Commonwealth of Puerto Rico through

'quasi-bankruptcy proceedings.'" Autonomous Municipality of Ponce

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(AMP) v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight

& Mgmt. Bd. for P.R.), 939 F.3d 356, 359 (1st Cir. 2019) (quoting

Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd. for P.R. (In

re Fin. Oversight & Mgmt. Bd. for P.R.), 872 F.3d 57, 59 (1st Cir.

2017)). Under 48 U.S.C. § 2161(a), which incorporates § 552 of

the Bankruptcy Code into PROMESA, any property acquired

postpetition by the Title III debtor is not subject to any

prepetition lien, unless an exception applies.1 11 U.S.C.

§ 552(a). The Bondholders' claim is that their liens survive

because of the exception in § 552(b)(1) for the proceeds of

property subject to a prepetition lien. When the exception

applies, the lien survives the filing of the Title III petition.

See id. § 552(b)(1). For this exception to apply to a security

interest, (1) the Title III debtor must have property before filing

the Title III petition; (2) a security interest must attach to

that property prepetition; (3) that property must generate some

proceeds postpetition; and (4) a prepetition security agreement

must grant a security interest in both the original prepetition

property and proceeds arising from it postpetition. Id.

1 We employ "lien" and "security interest"
interchangeably, as the liens at issue were created by agreement.
See 11 U.S.C. § 101(51) (defining "security interest" as a "lien
created by an agreement"); see also 48 U.S.C.
§ 2161(a)(incorporating 11 U.S.C. § 101(51)).

- 8 -
 In addition, § 552(a)'s bar on liens against property

received postpetition does not apply to "special revenues acquired

by the [Title III] debtor after the commencement of the [Title

III] case." Id. § 928(a); see also 48 U.S.C. § 2161(a)

(incorporating 11 U.S.C. § 928(a) into PROMESA). These "special

revenues . . . remain subject to any [prepetition] lien." 11

U.S.C. § 928(a). Only these special revenues as defined under

§ 902(2)(A) and § 902(2)(D) are argued by the Bondholders to apply

here. Section 902(2)(A) special revenues are "receipts derived

from the ownership, operation, or disposition of projects or

systems of the [Title III] debtor that are primarily used or

intended to be used primarily to provide transportation, utility,

or other services, including the proceeds of borrowings to finance

the projects or systems." Id. § 902(2)(A). Section 902(2)(D)

special revenues are "other revenues or receipts derived from

particular functions of the [Title III] debtor, whether or not the

debtor has other functions." Id. § 902(2)(D).

B. The Puerto Rico Enabling Act for the System and the Bond
Resolution

In 1951, the Commonwealth created by statute the System

as both a trust and government agency. Law No. 447 of May 15,

1951, 1951 P.R. Laws 1298 (the "Enabling Act") (codified as amended

at P.R. Laws Ann. tit. 3, §§ 761–788). The System provides

pensions and retirement benefits to employees and officers of the

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Commonwealth government, municipalities, and public corporations,

as well as employees and members of the Commonwealth's Legislative

Assembly. P.R. Laws Ann. tit. 3, § 764. The Enabling Act

designated the System as "independent and separate" from other

Commonwealth agencies and funded the System through mandatory

contributions from both employers and employees, and the System's

investment income. Altair, 914 F.3d at 704 (quoting P.R. Laws

Ann. tit. 3, § 775). The employer contributions, in turn, were

allocated to the System through annual appropriations in the

Commonwealth budgets. P.R. Laws Ann. tit. 3, § 781(g) (repealed

2013).

As of 2008, the Enabling Act authorized the System to

issue bonds, subject to conditions. Altair, 914 F.3d at 704

(citing P.R. Laws Ann. tit. 3, § 779(d)). Before the System's

assets can be used for security as to bonds, the statute requires

both the consent of two-thirds of the System's Board of Trustees

and "the enactment of legislation by the Legislative Assembly."

P.R. Laws Ann. tit. 3, § 779(d). On January 24, 2008, the System's

Board of Trustees adopted a resolution authorizing the issuance of

$2.9 billion in bonds. Altair, 914 F.3d at 704. The Enabling

Act, as amended, references this bond issue, stating: "It is

hereby clarified for future generations that the Retirement System

made a bond issue amounting to three billion dollars, which bears

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between 6.25% to 6.35% interest[2] to bondholders, thus encumbering

employer contributions of the System for up to fifty years." P.R.

Laws Ann. tit. 3, § 779(d). The Bondholders own some of these

bonds.

When the System issued these bonds, it granted the

Bondholders security interests in "Pledged Property." That

definition is very important to the resolution of the issues in

this case. The 2008 Pension Bond Funding Resolution ("Bond

Resolution") defines "Pledged Property" as:

[1] All Revenues. [2] All right, title and interest of
the System in and to Revenues, and all rights to receive
the same. [3] The Funds, Accounts, and Subaccounts held
by the Fiscal Agent . . . . [4] Any and all other rights
and personal property . . . assigned by the System to
the Fiscal Agent . . . . [5] Any and all cash and non-
cash proceeds, products, offspring, rents and profits
from any of the Pledged Property . . . .

"Revenues" is further defined to include "Employers' Contributions

received by the System." The Resolution defines "Employers'

Contributions" as "the contributions paid from and after the date

hereof that are made by the Employers and any assets in lieu

thereof or derived thereunder which are payable to the System

2 This interest rate exceeded the then-market municipal
borrowing rate of closer to four-and-a-half percent, and the 2008
System bonds are, under certain circumstances, tax-exempt. See
Board of Governors of the Federal Reserve System, State and Local
Bonds - Bond Buyer Go 20-Bond Municipal Bond Index (DISCONTINUED),
Economic Research: Federal Reserve Bank of St. Louis (Oct. 7,
2016), https://fred.stlouisfed.org/series/WSLB20/ (indexing
representative bonds' interest rates for bonds higher rated than
those at issue here).

- 11 -
pursuant to Sections 2-116, 3-105 and 4-113 of the [Enabling]

Act."3

The System also executed a security agreement, in which

it granted the Bondholders a security interest in the Pledged

Property and "all proceeds thereof and all after-acquired

property, subject to application as permitted by the Resolution."

In 2013, the Commonwealth legislature amended the

Enabling Act in response to the ongoing financial crisis. 2013

P.R. Laws 3. Among other changes, the 2013 Amendment repealed

P.R. Laws Ann. tit. 3, §§ 781, 786-5 (commonly referred to by their

section numbers in the original Enabling Act, 2-116 and 3-105)

with respect to active employees. Id. §§ 9, 12. In effect, this

froze the accrual of pension benefits for active government

employees. But, through a savings clause, the 2013 Amendment

required that employers continue to make contributions to pay

benefits accrued by active employees up to the effective date of

the Act. P.R. Laws Ann tit. 3, § 761a. So, while the 2013

Amendment stopped the accumulation of new benefits, it also

preserved for accrued benefits the concept of Employers'

Contributions, and also how those Contributions were calculated,

including the dependence of the calculation on the ongoing payrolls

of each employer.

3 Codified at P.R. Laws Ann. tit. 3, §§ 781, 786-5, 787,
respectively.

- 12 -
 In 2017, the Commonwealth again amended the Enabling

Act. See Con. H.R. Res. 188, 18th Legislative Assemb. (2017)

("Concurrent Resolution 188"); 2017 P.R. Laws 106. Until the 2017

Amendment, the Enabling Act required that the contribution of

government employers be at least 9.275% of their participating

employees' compensation (with respect to accrued benefits). P.R.

Laws Ann. tit. 3, § 781(d) (repealed 2013). The 2017 Amendment

eliminated the employers' obligation to contribute to the System

and required the Commonwealth General Fund to pay individual

pensions.4 See Concurrent Resolution 188. The Act does not

authorize the System to charge any fees for managing participant

investments or providing retirement services. P.R. Laws Ann. tit.

3, § 781.

4 The legal status of these payments and the validity of
the 2017 Amendment are subject to other litigation. See, e.g.,
Altair Glob. Credit Opportunities Fund (A), LLC v. United States,
138 Fed. Cl. 742 (Fed. Cl. 2018); Complaint, Altair Glob. Credit
Opportunities Fund (A), LLC v. Commonwealth of Puerto Rico (In re
Fin. Oversight & Mgmt. Bd. for P.R.), No. 17-00219-LTS (D.P.R.
filed July 27, 2017), ECF No. 1. This other litigation raises the
issues of whether the 2017 Amendment actually eliminated the
Bondholders' liens and, if so, whether that action was
constitutional. The Title III court has stayed the proceedings
pending the outcome of the instant appeal. Order, Altair, No. 17-
00219-LTS (D.P.R. filed Sept. 6, 2018), ECF No. 69. Although the
2017 Amendment repealed the Employers' Contributions provision of
the Enabling Act, subsequent events could reinstate these
provisions. In consequence, and for clarity, we refer to these
provisions in the present tense with respect to the Contributions
still required after the 2013 Amendment.

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 The Enabling Act before 2017 specifies the consequences

if employers fail to make their required Contributions to the

System. The "director [or 'head'] of an agency, public corporation

or municipality" who "knowingly, willfully, and without just cause

fails to remit" his/her agency's Contributions to the System "shall

be guilty of a felony." P.R. Laws Ann. tit. 3, § 781a(a), (f).

More significant for present purposes, the Enabling Act also

directs that, upon receiving a certificate of debt from the

Administrator of the System, it is Centro de Recaudación de

Ingresos Municipales ("CRIM"), Puerto Rico's municipal property

tax collection agency, which is obligated to pay the delinquent

Employers' Contributions of municipalities "on or before the

fifteenth (15) day of each month" and it is the Commonwealth

Secretary of the Treasury who is obligated to pay the delinquent

Employers' Contributions of "an agency, public corporation, or any

[Commonwealth-level government] entity . . . immediately." Id.

§ 781a(g), (h). The statute also states that delinquent Employers'

Contributions (and several additional types of debt) "shall have

priority over any other outstanding debt of" a municipality or a

Commonwealth-level entity that fails to make its Contribution.

Id. CRIM and the Secretary of the Treasury are obligated to give

priority to those debts before addressing other debts of the

municipality or Commonwealth entity. The Enabling Act's

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provisions do not accord the System any remedy or mechanism to

collect delinquent Contributions. See id. § 781a.

C. Procedural History

The first time this court addressed these bonds, it held

that the Bondholders had perfected a security interest in whatever

property was pledged to them under the bond issuance's security

agreement. Altair, 914 F.3d at 719. We then remanded to the Title

III court to determine whether the Bondholders held "valid,

enforceable, attached, perfected, first priority liens on and

security interest in [prepetition and postpetition Employers'

Contributions]" and whether the Employers' Contributions were

special revenues under 11 U.S.C. § 928(a). Id. at 720.

As said, the Title III court concluded that, under 11

U.S.C. § 552(b)(1), postpetition Employers' Contributions were not

proceeds of a secured, prepetition property right of the System to

receive them. Andalusian, 385 F. Supp. 3d at 152. It also

concluded that the Employers' Contributions were not special

revenues under § 902(2)(A) or (D). Id. at 154. Finally, the court

rejected the Bondholders' argument that the canon of

constitutional avoidance required it to construe PROMESA's

incorporation of § 552 to be prospective only. Id. at 155. In

consequence, the Title III court held that, under § 552(a),

postpetition Employers' Contributions were not subject to any

security interest of the Bondholders, denied summary judgment to

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the Bondholders, and granted summary judgment to the Board. Id.

These appeals followed.

II.
Standard of Review

"We review de novo the grant or denial of summary

judgment, as well as pure issues of law." Rodriguez v. Am. Int'l

Ins. Co. of P.R., 402 F.3d 45, 46–47 (1st Cir. 2005) (citation and

emphasis omitted). We must "'view [the parties' cross motions for

summary judgment] separately,' in the light most favorable to the

non-moving party, and draw all reasonable inferences in that

party's favor." OneBeacon Am. Ins. Co. v. Commercial Union

Assurance Co. of Can., 684 F.3d 237, 241 (1st Cir. 2012) (quoting

Estate of Hevia v. Portrio Corp., 602 F.3d 34, 40 (1st Cir. 2010)).

III.
Section 552 Prevents the Bondholders' Security Interest from
Attaching to Postpetition Employers' Contributions

The Bondholders argue that § 552(a) does not bar a lien

on Employers' Contributions received postpetition because those

Contributions are "proceeds" within the meaning of § 552(b)(1).

That is, the Bondholders argue that (1) the System's statutory

authority to receive Employers' Contributions constituted a

property right; (2) the Security Agreement gave the Bondholders a

security interest in the System's property right to receive those

Contributions; (3) the Employers' Contributions actually received

postpetition are the "proceeds" of the System's prepetition

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property right; and (4) the Security Agreement gave the Bondholders

a security interest in these "proceeds" of the System's prepetition

right. They argue they have an interest in both the System's

prepetition right to receive postpetition Employers' Contributions

and in the employers' prepetition obligations to make postpetition

contributions to the System on account of any actuarial deficit.

They argue that these obligations continue postpetition and so are

proceeds of the prepetition property.5 After addressing the

contract and statutory language common to these theories, we

address each theory in turn.

We look at a combination of the points of the above

analysis by examining the extent of the Bondholders' security

interest as defined in the Bond Resolution to determine whether,

as of the petition date, that interest constituted a property right

to receive postpetition Employers' Contributions. The

Bondholders' security interests are restricted to those defined as

Pledged Property.

"Pledged Property" is defined in the Bond Resolution to

include "Revenues," and Revenues are restricted to Employers'

Contributions received by the System, "rights to receive [the

Revenues]," and the proceeds of any property or rights defined as

5 At different stages of the proceedings, the Bondholders
have framed the same argument in these two different ways.

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Revenues.6 The Official Statement accompanying the bonds denotes

that the "[b]onds are not payable from or secured by any other

assets of the System." The key to resolving the § 552 argument in

this case is the limited definition of "Employers' Contributions."

We start by rejecting the Bondholders' argument, as did

the Title III court, that, in the Bond Resolution's definition of

Employers' Contributions, the limiting clause "which are payable

to the System pursuant to Sections 2-116, 3-105 and 4-113" modifies

only the antecedent phrase "any assets in lieu thereof or derived

thereunder" and not the other antecedent phrase "the contributions

paid from and after the date hereof that are made by the

Employers." The Supreme Court has held that "[w]hen several words

are followed by a clause which is applicable as much to the first

and other words as to the last, the natural construction of the

language demands that the clause be read as applicable to all."

Paroline v. United States, 572 U.S. 434, 447 (2014) (quoting Porto

Rico Ry., Light & Power Co. v. Mor, 253 U.S. 345, 348 (1920)).

That principle applies here, and the limiting clause here is

6 Not at issue are other categories of Pledged Property
than those addressed in this opinion. Pledged Property also
comprises various funds, accounts, and additional rights of the
System. "Revenues" is also defined to include various other
payments and income received by the System (and unrelated to
Employers' Contributions). No party has argued any of these
additional definitions are relevant here, so we need not discuss
them further.

- 18 -
applicable to both antecedent phrases. Such Employers'

Contributions, and so the extent of the security interest granted

by the Security Agreement, are limited to those contributions

payable to the System pursuant to Sections 2-116, 3-105, and 4-

113 of the Enabling Act. We turn to each of these sections.

As to pension benefits preserved under the 2013

Amendment's savings provision, see P.R. Laws Ann. tit. 3, § 761a

(2013), Section 2-116(a) states that Employers' Contributions

"should" cover the difference between the total cost of the System

and employee contributions. Id. § 781 (repealed 2013). The

Section also provides the formula for computation of each

employer's monthly contribution. Id. Importantly, the Section

provides that an employer is not obligated to contribute anything

until the Employers' Contributions are determinable. See id.

§ 781(c), (d), (f). The Section also provides that future

appropriations by the legislature would allocate the funds in the

amount of the Employers' Contributions. Id. § 781(g).

As to benefits similarly preserved under the savings

provision of the 2013 Amendment, Section 3-105 requires Employers'

Contributions to be paid for salaried employees. Id. § 786-5.

These are computed in the same manner as the Contributions are for

other employees.

Finally, Section 4-113 states only that the intent of

the Enabling Act is that contributions, annuities, benefits,

- 19 -
reimbursements, and administration expenses be obligations of the

employers. Id. § 787.

A. As of the Petition Date, the System Did Not Have a Property
Right, and the Bondholders Did Not Have a Security Interest,
in Any Right To Receive Postpetition Employers' Contributions

We turn to the Bondholders' argument that their security

interest in prepetition "rights" to receive Employers'

Contributions gave them a security interest in Contributions

received postpetition. The Security Agreement covers only

Contributions paid or payable to the System and rights to receive

the same under the three provisions outlined above.

We conclude that the System's statutory authority to

receive postpetition Employers' Contributions constituted merely

an expectancy and not a property "right" as it is clear that the

payment and the amounts of the Contributions depended on work

occurring on and after the petition date. It is also clear and

our result is reinforced by the fact that language in the Bond

Resolution and the Official Statement for the bonds explicitly

contemplated that the payment of future Contributions was

contingent on Puerto Rico's future fiscal status and the decisions

of future Puerto Rico legislatures. Because Employers'

Contributions to the System based on payroll amounts for work

occurring on and after the petition date could not be determined

as of the petition date, the Contributions were not payable

prepetition and the Bondholders did not have any security interest

- 20 -
in such contributions. The Bondholders thus lacked any secured

interest in property that could produce postpetition "proceeds" to

which they could be entitled. See 11 U.S.C. § 552(b)(1); N.H.

Bus. Dev. Corp. v. Cross Baking Co. (In re Cross Baking Co.), 818

F.2d 1027, 1032 n.6 (1st Cir. 1987) (stating that "[§] 552(b)

'creates an exception for proceeds generated by prepetition

collateral, and not for property acquired by the debtor or the

estate postpetition or proceeds of the same.'" (quoting 4 Collier

on Bankruptcy ¶ 552.02, at 552–7 (Lawrence King ed., 15th ed.

1987))). So, the Bondholders did not have a prepetition property

right in any postpetition contributions that might be made. At

most, the Bondholders had an expectation.7

7 Typically, local law creates and defines property
interests in bankruptcy proceedings. Soto-Rios v. Banco Popular
de P.R., 662 F.3d 112, 117 (1st Cir. 2011) (citing Butner v. United
States, 440 U.S. 48, 54–55 (1979)). Puerto Rico law recognizes
that the mere expectancy of property is not itself a property
interest. See, e.g., Redondo-Borges v. HUD, 421 F.3d 1, 9 (1st
Cir. 2005) (holding that, under Puerto Rico law, a government
contract bidder had only a "unilateral expectation," not a vested
property interest in a Puerto Rico agency's determination of the
party's responsible bidder determination, even if it prevented the
party from receiving future bids and payment from the government);
Carrasquillo v. Aponte Roque, 682 F. Supp. 137, 141 (D.P.R. 1988)
(distinguishing between "vested property interests" and
"subjective expectancies" under Puerto Rico law). This treatment
of expectancies as not property interests is generally accepted.
See Restatement (Third) of Trusts § 41 cmt. a (Am. Law Inst. 2003)
("By all traditional and current concepts of property,
expectancies are not property interests.").

- 21 -
 Importantly, the Bond Resolution explicitly states that

the legislature of the Commonwealth might reduce (or, by

implication, eliminate) Employers' Contributions, and so

"adversely affect[]" the Bondholders. And legislative

appropriations are the method by which the Commonwealth allocates

the Employers' Contributions to the System. Although required by

Section 2-116(g),8 this directive could be disregarded by a

subsequent legislature (to the Bondholders' detriment). See P.R.

Laws Ann. tit. 3, § 781(g) (repealed 2013); United States v.

Winstar Corp., 518 U.S. 839, 873 (1996) ("[O]ne legislature is

competent to repeal any act which a former legislature was

competent to pass; and one . . . legislature cannot abridge the

powers of a succeeding legislature." (quoting Fletcher v. Peck,

10 U.S. (6 Cranch) 87, 135 (1810))).

Moreover, the Official Statement for the bonds

explicitly contemplates that, if faced with insufficient funds to

pay approved appropriations, the Commonwealth would prioritize

paying public debt over funding Employers' Contributions. As the

Official Statement provides, "[t]his Constitutional restriction

does not apply to Employers' Contributions made by public

corporations and municipalities, because the funds of public

8 At least, this was true until the Contributions
provisions were repealed with respect to future benefits in 2013
and fully repealed in 2017.

- 22 -
corporations and municipalities are not 'available resources' of

the Commonwealth." This language in the Official Statement put

the Bondholders on notice that the Employers' Contributions stem

from appropriations that the Commonwealth legislature could, and

likely would, reduce if it could not fully fund its planned

appropriations.

The Bondholders knew that if the Commonwealth

experienced additional financial problems, such problems could

adversely affect the Bondholders. These known risks of alterations

to the Employers' Contributions distinguish the instant case from

the cases the Bondholders cite regarding liens on prepetition

contracts. See, e.g., United Va. Bank v. Slab Fork Coal Co., 784

F.2d 1188, 1191 (4th Cir. 1986) (deciding whether postpetition

payments under a coal contract made subject to a prepetition lien

were proceeds subject to the same lien).

The Bondholders argue that Cadle Co. v. Schlichtmann,

267 F.3d 14 (1st Cir. 2001), requires that we rule in their favor.

Not so. In fact, Cadle, although partially distinguishable on the

facts, supports the Board. In Cadle, a law firm granted to a bank

a security interest in its accounts receivable, including a

$300,000 contingency fee interest in escrowed settlement funds.

Id. at 16. Schlichtmann, a partner in the firm, later declared

bankruptcy and the firm dissolved. Id. Schlichtmann completed

the remaining work on the settlement, distributed the $300,000

- 23 -
among himself and his partners, and did not transfer anything to

the security interest owner. Id. Although the finalization of

the settlement depended on judicial approval, the security

interest had attached to the escrowed funds. Id. at 19. Those

funds were not "future fees", id. at 18 n.2, as "the amount of the

fee . . . was established outside of Schlichtmann's bankruptcy,"

id. at 19, and nothing in the security agreement suggested that

"the fees or the security interest were contingent on the

performance of substantial further legal services," id. at 21. On

these facts, the Cadle court held that the contingent fee was

proceeds of a prepetition account receivable, not after-acquired

property, and so the security interest survived under § 552(b)(1).

Id.

The facts here differ considerably. The Bondholders

claim a security interest in future, yet-to-be calculated or

contributed Employers' Contributions, and not in deposited funds.

Unlike the fee in Cadle, the Contributions at issue are only

determinable postpetition and so are not "established outside of

. . . bankruptcy." Id. at 19. Further, unlike in Cadle, the

future Employers' Contributions necessarily depend on future

payrolls, which depend in turn on the performance of labor by

government employees. Although the finality of the settlement was

contingent on judicial and regulatory approval, the secured

property in Cadle was otherwise fixed prepetition and payable at

- 24 -
any time. The postpetition Employers' Contributions here, by

contrast, are not payable until they are determined postpetition.

As of the petition date, postpetition Employers' Contributions

were too indeterminate for any "right" to receive postpetition

Employers' Contributions to be prepetition property of which those

postpetition Contributions could be proceeds.9

B. The Bondholders Do Not Have Liens on "Obligations" of
Employers To Solve Any Deficiency in the Pension System

The Bondholders raise another theory of recovery under

§ 552(b): they claim to have a prepetition security interest in

payments on the employers' "obligation" to pay down the actuarial

deficit, that Employers' Contributions are proceeds of this

actuarial deficit obligation, and so they conclude the Bondholders

have a security interest in these actuarial deficit "proceeds"

under § 552(b)(1).10 This theory fails both because the plain

9 Valley Bank & Trust Co. v. Spectrum Scan, LLC (In re
Tracy Broadcasting), 696 F.3d 1051 (10th Cir. 2012), cited by the
Bondholders, is, of course, not binding on us and further is
similarly distinguishable. Tracy held that the right to the
proceeds of selling a Federal Communications Commission license
was prepetition property, the postpetition revenues from selling
the license were proceeds of that property, and so the creditor's
security interest in the sale proceeds survived the debtor's
bankruptcy under § 552(b)(1). Id. at 1058–59.
In Tracy, the FCC license already existed, so the right
to its sale proceeds was more analogous to uncalculated accounts
receivable than the "right to receive" Employers' Contributions,
which arise postpetition from employee labor and salary every
month.

10 Even if the Bondholders' actuarial deficit argument is
meant to show that they had liens on postpetition Employers'

- 25 -
language of the Security Agreement and Bond Resolution does not

include the Bondholders' purported collateral and because the

Employers' Contributions are not "proceeds" as a matter of fact or

of law.

1. The Security Agreement's Language Does Not Cover the
Actuarial Deficit

As said, the Bondholders only had a security interest in

Contributions made under the three Puerto Rico statutory

provisions discussed earlier. As to these three provisions, the

Enabling Act does not create an obligation of employers to pay the

actuarial deficit. In consequence, there is no security interest

granted by the Security Agreement in payments on any purported

employer obligation to pay down the actuarial deficit.

As the Title III court correctly recognized, even were

employers required to make actuarial deficit contributions,

employers could not be obligated to pay actuarial deficit

contributions until such deficiencies were determinable. Section

2-116(e) provides that "the [actuarial deficit] shall constitute

a deficiency in the employer contribution" and that "[t]he

Contributions of a determinable amount (that is, the actuarial
deficit as of 2013), this argument fails for the reasons stated in
Section III.A. In the interest of completeness, we address in the
text the Bondholders' actuarial deficit argument as one separate
from the Bondholders' primary § 552 argument, and not merely as a
response to the Title III court's conclusion that the Bondholders'
purported prepetition collateral was insufficiently "fixed in form
or quantity."

- 26 -
obligation accrued as a result of this deficiency shall constitute

an actuarial deficit for the System and an obligation of the

employer." P.R. Laws Ann. tit. 3, § 781(e). The Bondholders did

not acquire a security interest explicitly in payments toward the

deficit. The statutory provisions that do give the Bondholders a

security interest merely require employers to pay whatever rate

the System's Administrator sets (not the entire deficit). See id.

§§ 781(c), (d), 786-5.

Because this deficit is calculated after the payment of

the employers' monthly contribution, as a factual matter, it cannot

be a part of that contribution. See id. § 781 (c)–(e). Under

Section 3-105, Employers' Contributions are based on the salary of

each participant covered by the System retirement program. Id.

§ 786-5. And the Employers' Contributions are required "to be

made concurrently with employee contributions," id. § 781(d), and

these are made monthly, id. § 780. The Title III court correctly

observed that, before employees actually worked, those

Contributions were not, and could not be, "fixed in form or

quantity." The Employers' Contributions could not form a

prepetition pool of obligations in which the Bondholders have a

security interest.

In addition, Section 1-110(d) of the Enabling Act

provides that the System's Administrator shall annually "certify

the . . . amounts which shall be contributed by [employers]" and

- 27 -
can "require [employers] to make additional payments to eliminate

[accumulated actuarial] shortages." P.R. Laws Ann. tit. 3,

§ 782(d). That section makes it plain that employers could not be

required to make additional payments until there were

certifications.11

Our conclusion is buttressed by Section 4-113, which

provides: "It is the intent of §§ 761 et seq. of this title [i.e.,

the Enabling Act] that the contributions required from the

employer, as well as all annuities, benefits, reimbursements, and

administration expenses, shall constitute obligations of the

employer." P.R. Laws Ann. tit. 3, § 787 (2013). The provision

expresses an aspiration that Employers' Contributions will cover

the System's cost, but it does not create an additional obligation

that alters Employers' Contributions. Nor does it create an

interest in property to which the Bondholders' Security Agreement

applies. Further, this provision clearly distinguishes between

contributions and the other expenses of the System which constitute

employers' obligations.

The Bondholders argue that the 2013 Amendment, by

freezing the accrual of future benefits, fixed prepetition the

total pension liability of the System. They then contend that

11 We do not reach the additional argument by the System
that even if the employer had a payment obligation to the System,
that obligation would not constitute property of the System.

- 28 -
Sections 2-116(e) and 4-113, which each state that deficiencies

"shall constitute" employer obligations, accord the System an

enforceable right to collect Employers' Contributions. See P.R.

Laws Ann. tit. 3, §§ 781(e), 787. The Bondholders characterize

the System's pension liability as a pool of benefits (fixed by the

2013 Amendment) for which all employers are jointly liable. In

consequence, they argue, Employers' Contributions are merely a

mechanism of standardizing this liability month-to-month. Not so.

The Bondholders' view of the System contradicts the Enabling Act's

plain language, and their asserted security interest exceeds the

language of the Security Agreement. The 2013 Amendment does not

change whether the Bondholders had a prepetition security interest

in postpetition Employers' Contributions. It does not alter the

extent of the Security Agreement and, for the Contributions it did

not discontinue, it did not alter their calculation or payment.

The 2013 Amendment is irrelevant to the determination of whether

the § 552(b)(1) exception applies.

2. The Employers' Contributions Cannot Be "Proceeds" of Any
Deficit

Employers' Contributions cannot be proceeds of any

secured, prepetition property for another reason. The Enabling

Act does not include a provision that creates an obligation of the

employers to plug a deficiency in the System, so no such obligation

exists. It is impossible to have a lien on something that does

- 29 -
not exist. See Sims v. Jamison, 67 F.2d 409, 411 (9th Cir. 1933)

("[T]here can be no lien upon something which does not exist at

the time of the [bankruptcy] adjudication."). The Employers'

Contributions cannot be the proceeds of some property interest on

which the Bondholders do not have a lien.

C. The Amendment of Article 9 of the Puerto Rico Uniform
Commercial Code Does Not Affect the Resolution of the § 552
Issue

The Bondholders argue that the expanded definition of

collateral and proceeds in the amended Article 9 of Puerto Rico's

Uniform Commercial Code ("UCC") renders as secured proceeds the

Employers' Contributions. This lacks merit.

First, Congress codified the term "proceeds" in

§ 552(b)(1) well before Puerto Rico or any state revised Article

9. Compare Bankruptcy Abuse Prevention Act of 2005, 119 Stat. 23

(2005) (amending § 552 in 2005, its most recent amendment), with

Law No. 21 of January 17, 2012, 2012 P.R. Laws 162 (codified at

P.R. Laws Ann. tit. 19, §§ 2211-2409) (implementing the American

Law Institute's revisions to the UCC on January 13, 2013); Paul

Hodnefield, Proposed 2010 Amendments to UCC Article 9: State-by-

State Adoption (June 6, 2015), Westlaw Practical Law. When

enacting, or last amending, § 552, Congress employed the

definition of "proceeds" as it was at that time (not as it would

be if there were a material alteration made in a future alteration

of Article 9). See Saint Francis Coll. v. Al-Khazraji, 481 U.S.

- 30 -
604, 610 (1987) (stating that courts should look to a statutory

term's definition when Congress enacted the statute). So, the

revised definition in Puerto Rico law of Article 9 is irrelevant.

Second, even if the revised UCC Article 9 expanded the

concept of collateral and altered Puerto Rico law distinguishing

between expectancies and property (which we need not decide), the

Bondholders' claims still require a collection on a receivable.

Here, there were no postpetition collections on, i.e., proceeds

of, any prepetition receivables, i.e., collateral, onto which the

Bondholders' lien might attach. See P.R. Laws Ann. tit. 19,

§ 2212(a)(64). The only receivables at issue are the Employers'

Contributions and, as said, such Contributions only become

receivables after the employers' employees actually performed the

work necessary for payroll to be calculated.12 The Bondholders do

not have the security interest they claim to have in postpetition

Employers' Contributions.

IV.
The Bondholders Did Not Have Special Revenue Bonds Under
§ 902(2)(A) or (D)

The Bondholders argue that the Employers' Contributions

are special revenues within the meaning of 11 U.S.C. § 902(2)(A)

and (D). Section 902(2)(A) defines as "special revenues" any

12 This analysis does not address Employers' Contributions
calculated and owed, but not paid to the System, before the filing
of the Title III petition. The Board concedes that the Bondholders
have a security interest in these receivables.

- 31 -
"receipts derived from the ownership, operation, or disposition of

. . . systems . . . primarily used or intended to be used primarily

to provide transportation, utility, or other services." Id.

§ 902(2)(A). Section 902(2)(D) defines as "special revenues"

"other revenues or receipts derived from particular functions of

the debtor." Id. § 902(2)(D). This statutory analysis turns on

whether the Employers' Contributions are "derived from" the

ownership or operation of a system of "other services" provided by

the System or the "particular functions" of the System. The

"particular function" of the System is limited to collecting

Employers' Contributions, making investments, and paying out

pension benefits.

The Title III court concluded that the Employers'

Contributions were not special revenues. Applying the canon of

ejusdem generis, the Title III court concluded that, in

§ 902(2)(A), "other services" comprised only "physical system[s]

of providing services to third parties." Andalusian, 385 F. Supp.

3d at 154. The court then held that, because the System did not

provide transportation, utility, or other services involving a

"physical system," the Bondholders did not have special revenue

bonds under § 902(2)(A). Id.

Turning to § 902(2)(D), the Title III court stated that

the System served as a conduit for the deferred compensation of

government employees through the Contributions, it did not charge

- 32 -
any fees for its services, the Employers' Contributions were not

derived from a "particular function" of the System, and so

Bondholders did not have special revenue bonds under § 902(2)(D).

Id.

On appeal, the Bondholders argue that the System derives

the Employers' Contributions from its ownership and operation of

the pension system because, as defined in the Bond Resolution, the

System performs its pension functions "due to its statutory right

to receive Employers' Contributions." They define "derive" as "to

take or receive especially from a specific source," citing Derive,

Webster's Ninth Collegiate Dictionary (1986). The Bondholders

also argue that, because the System receives Employers'

Contributions, for that same reason it performs its "particular

functions," and Employers' Contributions are "fees" for providing

pension benefits, the Employers' Contributions are special

revenues under § 902(2)(D).

Neither the Bankruptcy Code nor PROMESA give "derived

from" a special definition. In consequence, we "construe [it] in

accordance with its ordinary or natural meaning." FDIC v. Meyer,

510 U.S. 471, 476 (1994) (citing Smith v. United States, 508 U.S.

223, 228 (1993)). In this context, we interpret "derived from" as

requiring that Employers' Contributions originate in the System's

"particular functions" or its "ownership, operation, or

disposition of" a system of "other services." See Derive,

- 33 -
Webster's Third New International Dictionary (1993) (defining

"derive" as "to have or take origin: ORIGINATE: STEM, EMANATE");

Derive, Merriam-Webster Unabridged Dictionary,

http://unabridged.merriam-webster.com/unabridged/derive (last

visited Jan. 29, 2020) (same); Derive, Oxford English Dictionary

Online, https://oed.com/view/Entry/50613 (last visited Jan. 29,

2020) (defining "derive" as "[t]o flow, spring, issue, emanate,

come, arise, [or] originate").13 The Bondholders' argument fails

to meet this test.

We need look only to the plain language of the statute

to reject the Bondholders' special revenues arguments.14 See Conn.

Nat'l Bank v. Germain, 503 U.S. 249, 254 (1992) ("When the words

of a statute are unambiguous, then, th[e] first canon [of statutory

13 We use the definition of "derive" in its intransitive
sense, as opposed to in its transitive sense (as the Bondholders
do). See Bell Commc'ns Research, Inc. v. Fore Sys., Inc., 62 Fed.
App'x 951, 959 (Fed. Cir. 2003) (interpreting similar "derived
from" language as intransitive and concluding the best definition
for "derive" was "to have or take origin: ORIGINATE: STEM,
EMANATE").

14 The legislative history of § 902(2)(D) also supports our
conclusion. It indicates that Congress intended § 902(2)(D) to
capture miscellaneous revenues accruing from government services
to the public, like "regulatory fees and stamp taxes imposed for
the recording of deeds," H.R. Rep. No. 100-1011, at 7 (1988), as
reprinted in 1988 U.S.C.C.A.N. 4115, 4121; S. Rep. No. 100-506, at
21 (1988), or "tolls or fees relating to a particular service or
benefit," S. Rep. No. 100-506, at 21.

- 34 -
construction] is also the last: 'judicial inquiry is complete.'"

(quoting Rubin v. United States, 449 U.S. 424, 430 (1981))).

The System does not charge any fees, much less any in

which the purported "special revenues" could originate. Employers

do not, as the Bondholders assert, pay the System in exchange for

it later paying pension benefits to employees. Instead, the

employers (and employees) pool retirement savings in the System,

a trust, for the future benefit of the employees. The Employers'

Contributions originate in the work of the employees that generate

the contributions15 and the statutory obligation of employers to

contribute.

Neither the System's "particular function" nor its

"ownership" or "operation" of its system of providing pension

services produces any revenue. Indeed, the Employers'

Contributions, far from deriving from a "particular function" of

the System, come from annual appropriations of the Commonwealth.

P.R. Laws Ann. tit. 3, § 781(g) (repealed 2013). As the Title III

15 The Bondholders argue that, because most government
labor does not actually generate revenue, the Employers'
Contributions are not derived from the labor of the employees.
But this lacks merit. The profitability of the employees is
irrelevant. Under the Enabling Act, an employer must contribute
to the System a percentage of the salary it pays its employee.
P.R. Laws Ann. tit. 3, §§ 781(d), 786-5. This salary, in turn,
originates in the employee's labor. But for the labor of the
employee and this statutory obligation, the employer would not
need to contribute. Accordingly, the Employers' Contributions are
derived from employee labor.

- 35 -
court correctly concluded, the System merely "functions as a

conduit for distribution of Employers' Contributions."

Andalusian, 385 F. Supp. 3d at 154.

As to § 902(2)(A), the Employers' Contributions do not

originate in either the System's ownership or disposition of

pension assets, or its ownership or operation of the pension system

as a whole. That the Puerto Rico legislature may have intended to

direct the Employers' Contributions to the System because it owned

or operated a system of pension services does not mean the

Contributions originate in the System's ownership or operation.

The Contributions originate in, and so are derived from, employee

labor and statutory obligations, both of which occur and exist

separately from any of the System's ownership interests or

operation activities. In consequence, the Employers'

Contributions are not special revenues under § 902(2)(A).16

Similarly, as to § 902(2)(D), that the "particular

functions" of the System relate to the management, investment, and

distribution of these funds does not mean the Contributions

originate in these activities. We conclude that, although the

Contributions may relate to and support the System's functions,

they do not originate in them, analogously to our § 902(2)(A)

16 We need not decide the congressional meaning of "other
services" in § 902(2)(A), as the Employers' Contributions are not
derived from the System's ownership, operation, or disposition of
its system of pension services.

- 36 -
reasoning. The Contributions originate in employee labor and the

statutory obligation. Accordingly, the Employers' Contributions

are not derived from any "particular function" of the System, and

so are not "special revenues" under § 902(2)(D).

V.
Section 552 Applies Retroactively to the Security Agreement

We address the Bondholders' fallback argument that if

our reading of § 552 led to a rejection of their arguments, then

applying § 552 to them would "raise grave constitutional

questions." We disagree. The Bondholders frame the issue as one

of constitutional avoidance. They argue first that Congress has

not explicitly commanded that PROMESA applies § 552 retroactively.

The Bondholders then argue that the canon of constitutional

avoidance requires us to interpret PROMESA as applying § 552

prospectively only, because, in their view, interpreting § 552 to

impair retroactively the Bondholders' liens would violate the

Takings Clause. See Jones v. United States, 529 U.S. 848, 857

(2000) (discussing the role of the canon of constitutional

avoidance "where a statute is susceptible of two constructions"

(quoting U.S. ex rel. Att'y Gen. v. Del. & Hudson Co., 213 U.S.

366, 408 (1909))). The Bondholders argue that, because § 552 did

not apply to liens granted by Puerto Rico and its instrumentalities

at the time when the Bondholders purchased the bonds in 2008, see

Franklin Cal. Tax-Free Tr. v. Puerto Rico, 805 F.3d 322, 329–31

- 37 -
(1st Cir. 2015), aff'd 136 S. Ct. 1938 (2016), then applying § 552

to the Security Agreement after they purchased the bonds would

constitute an unconstitutional taking.

The Title III court addressed similar arguments and

concluded that Congress, by its purpose in enacting PROMESA to

address Puerto Rico's financial crises, clearly intended to apply

§ 552 retroactively. Andalusian, 385 F. Supp. 3d at 154–55. That

ruling was correct.

Courts typically presume Congress intends a statute to

operate only prospectively, but will give retrospective operation

to a statute if such construction is "the manifest intention of

the legislature." Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494

U.S. 827, 844 (1990) (quoting Union Pac. R.R. Co. v. Laramie Stock

Yards Co., 231 U.S. 190, 199 (1913)). PROMESA's plain language

controls here and determines the issue. A court cannot adopt a

statutory construction "plainly contrary to the intent of

Congress" to avoid a constitutional question. Miller v. French,

530 U.S. 327, 341 (2000) (quoting Edward J. DeBartolo Corp. v.

Fla. Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575

(1988)). The canon of constitutional avoidance can apply only

when the statute is ambiguous. See id. (citing Pa. Dep't of Corr.

v. Yeskey, 524 U.S. 206, 212 (1998)).

PROMESA's effective date states that "[s]ubchapters III

and VI shall apply with respect to debts, claims, and liens (as

- 38 -
such terms are defined in section 101 of Title 11) created before,

on, or after [June 30, 2016]." 48 U.S.C. § 2101(b)(2) (emphasis

added). PROMESA incorporates § 552 of the Bankruptcy Code under

Subchapter III. Id. § 2161(a). PROMESA also adopts the Code's

definitions of "lien" and "security interest." Id. § 2161(a),

(c); see also 11 U.S.C. § 101(37) (defining "lien" as a "charge

against or interest in property to secure payment of a debt or

performance of an obligation"); 11 U.S.C. § 101(51) (defining

"security interest" as a "lien created by an agreement"). This

shows that Congress plainly intended to apply § 552 to security

interests and agreements created before the enactment of PROMESA.17

See, e.g., Vartelas v. Holder, 566 U.S. 257, 267 (2012) (stating

17 Given the plain language of the statute, we need not
address the parties' arguments regarding PROMESA's underlying
policy rationale or that the Bondholders waived any argument
regarding § 2101(b)(2).
The Bondholders have not raised in their initial
appellate brief an argument based on their counterclaim V for
declaratory judgment. We do not decide an argument not presented
to us. See Pignons S.A. de Mecanique v. Polaroid Corp., 701 F.2d
1, 3 (1st Cir. 1983). Nor is it clear that we would have
jurisdiction over such a Takings Clause claim if it were made.
See Horne v. Dep't of Agric., 569 U.S. 513, 527 (2013) ("A claim
for just compensation under the Takings Clause must be brought to
the Court of Federal Claims in the first instance, unless Congress
has withdrawn the Tucker Act grant of jurisdiction in the relevant
statute." (quoting E. Enters. v. Apfel, 524 U.S. 498, 520 (1998)
(plurality opinion of O'Connor, J.))).
Indeed, the Bondholders brought a different action in
the Court of Federal Claims under its exclusive Tucker Act
jurisdiction, alleging that the 2017 Amendment effected an
unconstitutional taking of their liens on Employers'
Contributions. Altair, 138 Fed. Cl. at 752–54.

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that a statutory provision applying "before, on, or after" the

statute's enactment date required retroactive application);

Goncalves v. Reno, 144 F.3d 110, 131–32 (1st Cir. 1998) (same).

PROMESA's statutory language clearly expresses an intent

that § 552 apply retroactively, which distinguishes the instant

case from United States v. Security Industrial Bank, 459 U.S. 70

(1982), which the Bondholders argue requires us to give only

prospective effect to PROMESA's incorporation of § 552. This

contention lacks merit. Security Industrial Bank held that "[n]o

bankruptcy law shall be construed to eliminate property rights

which existed before the law was enacted in the absence of an

explicit command from Congress." Id. at 81 (emphasis added).

There, the Supreme Court concluded that 11 U.S.C. § 522(f)(2), a

recently enacted provision of the Bankruptcy Reform Act of 1978,

did not apply retroactively.18 Id. at 82. Whether or not there

is a property right at issue, as said, Congress provided an

explicit command at 48 U.S.C. § 2101(b)(2) to apply PROMESA

retroactively. Congress did not do so for the statute at issue in

Security Industrial Bank. See 459 U.S. at 81.

The Bondholders rely on PROMESA's "[a]pproval of fiscal

plans" provision for their interpretation argument, but that

18 Security Industrial Bank did not address any issues
regarding PROMESA or the application of an existing bankruptcy
provision to a previously unprotected debtor.

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reliance is misplaced. 48 U.S.C. § 2141. The Bondholders argue

that, because PROMESA requires the Board to develop a "Fiscal Plan"

that "respect[s] the relative lawful priorities or lawful liens,

as may be applicable, in the constitution, other laws, or

agreements of a covered territory or covered territorial

instrumentality in effect prior to June 30, 2016," id.

§ 2141(b)(1)(N), Congress intended that PROMESA not alter the

"status quo" existing before PROMESA's enactment. But this

provision governs only the Board's Fiscal Plan, not the operation

of Title III of PROMESA. We cannot read it to find Congress did

not intend for § 552 to apply retroactively, in light of the

express language earlier. We reject the Bondholders' prospective

construction argument.

VI.
Conclusion

We emphasize that we decide each of these three claims

narrowly, based on these specific facts.

Affirmed. Costs are awarded to the Board.

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