United States Court of Appeals
For the First Circuit
No. 20-2041
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; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Public Buildings Authority,
Debtors.
UNION DE TRABAJADORES DE LA INDUSTRIA ELECTRICA Y RIEGO (UTIER);
SISTEMA DE RETIRO DE LOS EMPLEADOS DE LA AUTORIDAD DE ENERGIA
ELECTRICA (SREAEE),
Interested Parties, Appellants,
v.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD, as representative
for the Puerto Rico Electric Power Authority (PREPA),
Debtor, Appellee,
PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY,
Movant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain, U.S. District Judge*]
Before
Howard, Chief Judge,
Lynch and Kayatta, Circuit Judges.
Jessica E. Méndez Colberg, with whom Rolando Emmanuelli
Jiménez and Bufete Emmanuelli, C.S.P. were on brief, for
appellants.
Martin J. Bienenstock, with whom Timothy W. Mungovan, John E.
Roberts, Mark D. Harris, Ehud Barak, Margaret A. Dale, Daniel
Desatnik, Shiloh A. Rainwater, Paul V. Possinger, Joseph S.
Hartunian, and Proskauer Rose LLP were on brief, for appellee
Financial Oversight and Management Board for Puerto Rico, as
representative of the Puerto Rico Electric Power Authority.
Peter Friedman, with whom John J. Rapisardi, Elizabeth L.
McKeen, Ashley M. Pavel, and O'Melveny & Myers LLP were on brief,
for appellee the Puerto Rico Fiscal Agency and Financial Advisory
Authority.
August 12, 2021
* Of the Southern District of New York, sitting by
designation.
LYNCH, Circuit Judge. The Puerto Rico Electric Power
Authority ("PREPA") is one of the largest public power utilities
in the United States and is the only electrical energy distributor
in Puerto Rico. PREPA has suffered catastrophic failures to
provide power to the citizens of Puerto Rico, causing great
hardship. In 2016, in response to the government debt crisis
affecting Puerto Rico and its instrumentalities like PREPA,
Congress passed the Puerto Rico Oversight, Management, and
Economic Stability Act ("PROMESA"), and the president signed the
bill into law. See 48 U.S.C. §§ 2101-2241. Among other things,
PROMESA created the Financial Oversight and Management Board for
Puerto Rico ("FOMB"). Id. § 2121. In 2017, FOMB, appellee here
in several capacities, filed for bankruptcy on behalf of PREPA.
Three years later, in 2020, PREPA entered a contract with LUMA
Energy, LLC and LUMA Energy ServCo, LLC (collectively, "LUMA"), a
private consortium, to transfer the operations and management of
PREPA to LUMA.
This particular appeal concerns whether the PROMESA
Title III court committed any legal error in allowing certain
expenses incurred by PREPA under this contract as entitled to
administrative expense priority pursuant to § 503(b)(1)(A) of the
Bankruptcy Code. See In re Fin. Oversight & Mgmt. Bd. for P.R.
("Administrative Expense Order"), 621 B.R. 289, 303 (D.P.R. 2020).
We find no error and affirm.
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I. Facts and Procedural History
Puerto Rico created PREPA to provide reliable electric
power to the Commonwealth. See P.R. Laws Ann. tit. 22, §§ 193,
196. In 2016, the president signed into law PROMESA, which
Congress passed in response to the government debt crisis in Puerto
Rico. 48 U.S.C §§ 2101-2241. Title III of PROMESA made many
sections of the Bankruptcy Code applicable in restructuring
proceedings for Puerto Rico and its instrumentalities. See id.
§§ 2161-2177.
In July 2017, after PREPA became unable to service its
debt, FOMB began restructuring proceedings on its behalf, overseen
by the Title III court. See In re Fin. Oversight & Mgmt. Bd. for
P.R. (In re PREPA), 899 F.3d 13, 18 (1st Cir. 2018). This triggered
an automatic stay of pre-petition creditors' claims against PREPA.
See 11 U.S.C. § 362(a); 48 U.S.C. § 2161(a) (incorporating the
automatic stay provision).
Appellants Unión de Trabajadores de la Industria
Eléctrica y Riego ("UTIER") and Sistema de Retiro de los Empleados
de la Autoridad de Energía Eléctrica ("SREAEE") are pre-petition
creditors whose claims were stayed when PREPA's restructuring
proceedings began. UTIER is a labor union representing PREPA
workers, and SREAEE is a private trust created pursuant to a
collective bargaining agreement between PREPA and UTIER. As of
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June 2020, PREPA owes SREAEE approximately $3.8 billion in unfunded
pension obligations.
In June 2018, Puerto Rico passed the Puerto Rico Electric
Power System Transformation Act to partially privatize PREPA. P.R.
Laws Ann. tit. 22, §§ 1111-1125. Puerto Rico's Public-Private
Partnerships Authority ("P3 Authority"), a public corporation,
then began a competitive bidding process to find a private entity
to assume control over PREPA's power transmission and distribution
system ("T&D System").
Two years later, in June 2020, PREPA and the P3 Authority
entered a contract ("T&D Contract") with LUMA Energy to gradually
transfer operations and management of PREPA to LUMA. The T&D
Contract included a front-end transition plan. That plan is
divided into three phrases: assess, analyze, and act. Each phase
detailed tasks and services LUMA agreed to provide to PREPA to
facilitate its operational takeover. These services included
reviewing PREPA's performance data (assess), identifying root
causes of performance issues and the requirements for
reengineering PREPA's business processes (analyze), and conducting
a cost-benefit analysis of proposed solutions to PREPA's problems
(act). PREPA agreed to pay LUMA the costs of performing these
front-end transition services, which are estimated to amount to
$76 million, as well as a $60 million flat fee (the "Front-End
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Transition Service Fee").1 PREPA also agreed to pay any late fees
that might become due as a result of its untimely payments. PREPA
agreed to "file a motion with the Title III Court seeking
administrative expense treatment for any accrued and unpaid
amounts required to be paid by [PREPA] . . . during the Front-End
Transition Period, including the Front-End Transition Service
Fee." See 11 U.S.C. § 503(b)(1)(A). If the Title III court
refused to grant the motion, LUMA could terminate the T&D Contract.
On July 7, 2020, PREPA, FOMB, and the Puerto Rico Fiscal Agency
and Financial Advisory Authority ("AAFAF"), PREPA's fiscal agent
under Puerto Rico law, moved before the Title III court for entry
of the order. UTIER, SREAEE, and other parties opposed the motion.
In October 2020, the Title III court granted the motion
in part and denied it in part. See Administrative Expense Order,
621 B.R. at 303. After holding that the motion was ripe for
review, the Title III court addressed the objectors' argument that
operating expenses like the Front-End Transition Service Fee
cannot be given administrative expense priority under
§ 503(b)(1)(A) of the Bankruptcy Code. The objectors argued that
§ 503(b)(1)(A) gives priority to "necessary costs and expenses of
preserving the estate." Id. at 298 (quoting 11 U.S.C.
1 The exact fee is calculated according to a formula in
the T&D Contract.
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§ 503(b)(1)(A)). They argued this section cannot apply on its own
terms because there is no "estate" in Title III proceedings. Id.
The Title III court rejected that argument. Id. at 299.
It held that "the text and structure of PROMESA compel the
conclusion that operating expenses of PREPA are eligible for
administrative expense priority." Id. In so holding, the Title
III court reasoned that the fact that Congress incorporated § 503
of the Bankruptcy Code in its entirety through PROMESA "provides
a strong indication that Congress did not intend to preclude the
applicability of section 503(b)(1)(A) in the Title III context."
Id. Further, it stated that "there is no conceptual basis for
excluding expenses relating to the preservation of property of a
debtor in Title III debt adjustment proceedings from treatment as
administrative expenses." Id. The Title III court ruled that the
cases cited by the objectors were "not controlling and . . .
unpersuasive." Id. at 300.
The Title III court then determined that AAFAF, PREPA,
and FOMB "have satisfied their burden of demonstrating that the
Front-End Transition Obligations other than any Late Fees
associated therewith . . . are, to the extent incurred and payable
under the T&D Contract, reasonable and necessary expenses of
preserving PREPA" and granted the motion in part. Id. at 303. As
to the late fees, it denied the motion in part without prejudice
"solely to the extent that it seeks an allowed administrative
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expense claim for any amounts that might become due . . . as a
result of PREPA's untimely payment of any Front-End Transition
Obligations." Id. at 302.
The Title III court declined to address the objectors'
argument that granting the motion "would contravene subsections
201(b)(1)(B) and 201(b)(1)(C) of PROMESA." Id. at 303 n.12. The
subsections require fiscal plans to "ensure the funding of
essential public services" and "provide adequate funding for
public pension systems." Id. (quoting 48 U.S.C. § 2141(b)(1)(B),
(C)). FOMB certified a fiscal plan and budget for PREPA that
include the Front-End Transition Service Fee, and the Title III
court held that it lacked jurisdiction under 48 U.S.C. § 2126(e)
to decide the objectors' challenge to that certification decision.
Id.
UTIER and SREAEE timely appealed.
II. Analysis
We review the Title III court's legal conclusions de
novo. See Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 572
U.S. 559, 563 (2014); In re Fin. Oversight & Mgmt. Bd. for P.R.
(Díaz Mayoral v. Fin. Oversight & Mgmt. Bd. for P.R.), 998 F.3d
35, 40 (1st Cir. 2021). We review the court's application of the
law to the facts for abuse of discretion. See Highmark, 572 U.S.
at 563; In re Francis, 996 F.3d 10, 16 (1st Cir. 2021); In re
Energy Future Holdings Corp. (NextEra Energy, Inc. v. Elliott
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Assocs., L.P.), 904 F.3d 298, 314 (3d Cir. 2018) ("Exercising . . .
discretion and taking into account all of the relevant
circumstances, the bankruptcy court must make what is ultimately
a judgment call about whether the proposed fee's potential benefits
to the estate outweigh any potential harms, such that the fee is
'actually necessary to preserve the value of the estate.'" (quoting
11 U.S.C. § 503(b)(1)(A))).
A. Section 503(b)(1)(A) of the Bankruptcy Code Applies in Title
III Cases, Contrary to Appellants' Arguments.
We consider first the text of Title III of PROMESA in
determining whether § 503(b)(1)(A) of the Bankruptcy Code applies
in Title III cases. See Merit Mgmt. Grp., LP v. FTI Consulting,
Inc., 138 S. Ct. 883, 893 (2018); Woo v. Spackman, 988 F.3d 47,
50-51 (1st Cir. 2021). Section 503(b) of the Bankruptcy Code
allows for administrative expenses in bankruptcy proceedings,
including "the actual, necessary costs and expenses of preserving
the estate." 11 U.S.C. § 503(b)(1)(A). Congress incorporated
numerous provisions of the Bankruptcy Code into Title III of
PROMESA, including § 503 in its entirety. See 48 U.S.C. § 2161(a).
Title III of PROMESA further directs that "property of the estate,"
when used in an incorporated provision of the Bankruptcy Code,
means "property of the debtor." Id. § 2161(c)(5).
Appellants argue that § 503(b)(1)(A) of the Bankruptcy
Code cannot apply to Title III cases because there is no "estate"
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in Title III proceedings. See In re Fin. Oversight & Mgmt. Bd.
for P.R. (Gracia-Gracia v. Fin. Oversight & Mgmt. Bd. for P.R.),
939 F.3d 340, 349 (1st Cir. 2019).2 Appellants further argue that
48 U.S.C. § 2161(c)(5) does not apply to § 503(b)(1)(A) of the
Bankruptcy Code because § 503(b)(1)(A) uses the terminology
"estate" rather than "property of the estate."
These arguments fail because of the text and structure
of Title III and the Bankruptcy Code. Like § 503(b)(1)(A), other
incorporated Bankruptcy Code provisions use the term "estate"
notwithstanding the absence of an estate in Title III proceedings.
See, e.g., 11 U.S.C. § 365(i)(2)(A) ("rights against the estate");
id. § 365(k) ("relieves the trustee and the estate from any
liability"); id. § 502(e)(1)(A) ("such creditor's claim against
the estate is disallowed"); id. § 507(a)(2) ("fees and charges
assessed against the estate"); id. § 510(c)(2) ("such a
subordinated claim be transferred to the estate"); id. § 550(a)
2 In support of their position, appellants cite to one
case and two treatises that discuss the applicability of
§ 503(b)(1)(A) to the Chapter 9 municipal bankruptcy context. See
In re New York City Off-Track Betting Corp., 434 B.R. 131, 142
(Bankr. S.D.N.Y. 2010); 6 Collier on Bankruptcy ¶ 901.04 (16th ed.
2021); 5 Norton Bankruptcy Law and Practice 3d § 90:14. These
authorities are not binding on us and do not address the unique
circumstances of Title III proceedings. The opinion in Off-Track
Betting Corp. also does not address that Chapter 9, like Title
III, directs that "property of the estate" means "property of the
debtor" when used in an incorporated provision of the Bankruptcy
Code. See 11 U.S.C. § 902(1). We need not explore whether Off-
Track Betting Corp. was correctly decided because its analysis in
the Chapter 9 context is not applicable to the Title III context.
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("for the benefit of the estate"); id. § 551 (same); id.
§ 557(c)(2)(F) ("orderly administration of the estate"); see also
48 U.S.C. § 2161(a) (incorporating the foregoing provisions of the
Bankruptcy Code into Title III of PROMESA).
Courts interpret statutes to "give effect, if possible,
to every word Congress used," Nat'l Ass'n of Mfrs. v. Dep't of
Def., 138 S. Ct. 617, 632 (2018) (quoting Reiter v. Sonotone Corp.,
442 U.S. 330, 339 (1979)), and to reject "interpretation[s] of the
statute that would render an entire subparagraph meaningless."
Id. Under appellants' interpretation, these statutory provisions
would be rendered meaningless in Title III proceedings despite
Congress's explicit decision to incorporate the provisions into
PROMESA. We do not believe Congress so intended.
Congress chose to incorporate the entirety of § 503 into
PROMESA, even though it could have elected to incorporate only
certain provisions of that section as it had done with other
sections of the Bankruptcy Code. See, e.g., 48 U.S.C. § 2161(a)
(incorporating into PROMESA subsections 364(c), 364(d), 364(e),
and 364(f) of the Bankruptcy Code, but not other provisions in
§ 364). As a result, each provision in § 503, including
§ 503(b)(1)(A), must be given effect. See City of Providence v.
Barr, 954 F.3d 23, 37 (1st Cir. 2020). That is strengthened
further by the fact that PROMESA specifically incorporates
§ 507(a)(2), and no other provision of § 507, which grants priority
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status to administrative expenses under § 503(b), a provision which
only concerns the "estate." The failure to substitute the term
"estate" as used in § 503(b)(1)(A) with "property of the debtor"
would render both it and § 507(a)(2) meaningless in the PROMESA
context.
There is another reason why reading "estate" in the
context of § 503(b)(1)(A) to mean "property of the debtor" is
sensible in light of the text and structure of Title III and the
Bankruptcy Code. Section 541 of the Bankruptcy Code defines
"estate" as "property of the estate," which includes "property of
the debtor." See 11 U.S.C. § 541; see also Czyzewski v. Jevic
Holding Corp., 137 S. Ct. 973, 978 (2017) (noting that "[f]iling
for Chapter 11 bankruptcy" creates "an estate . . . comprising all
property of the debtor" (citing 11 U.S.C. § 541(a))). Although
Title III does not incorporate § 541, see 48 U.S.C. § 2161(a), it
states that "[a] term used in a section of [the Bankruptcy Code]"
that was "made applicable in a [Title III] case" is supplied with
"the meaning given to the term for the purpose of the applicable
section, unless the term is otherwise defined in [Title III]."
Id. § 2161(b). The "meaning given to" the term "estate" for "the
purpose" of § 503(b)(1)(A) is the meaning given to it under § 541,
which is "property of the estate." "Property of the estate" is
"otherwise defined" in Title III to mean "property of the debtor,"
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and so we can reasonably understand "estate" in the context of
§ 503(b)(1)(A) to mean "property of the debtor."
To the extent there is any ambiguity in the statutory
text, the historical context and legislative purpose of PROMESA's
enactment further support our conclusion. See Bostock v. Clayton
Cnty., 140 S. Ct. 1731, 1749 (2020); In re Weinstein, 272 F.3d
39, 48 (1st Cir. 2001) ("After holding the text of the Bankruptcy
Code ambiguous . . . we have considered inferences to be drawn
from the text of the statute, its historical context, its
legislative history, and the underlying policies that animate its
provisions.").
Congress enacted PROMESA in response to a "fiscal
emergency in Puerto Rico," resulting in the Commonwealth being
"unable to provide its citizens with effective services." 48
U.S.C. § 2194(m)(1)-(2). Among its purposes, PROMESA "provide[s]
the Government of Puerto Rico with the resources and the tools it
needs to address an immediate existing and imminent crisis." Id.
§ 2194(n)(1). One such tool is § 507(a)(2) of the Bankruptcy Code,
which Congress incorporated into Title III of PROMESA. Id.
§ 2161(a). Section 507(a)(2) grants priority to administrative
expenses under § 503(b). Without an assurance of priority, third
parties, like LUMA, entering contracts with Puerto Rico's
instrumentalities, like PREPA, have no guarantee their claims to
payment will be paid. Indeed, it is unlikely that any post-
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petition third party would contract with Puerto Rico's
instrumentalities or risk default on their obligations. Congress
surely did not intend PROMESA's provisions to be ineffective.
B. The Title III Court Did Not Abuse Its Discretion in Applying
the Requirements of § 503(b)(1)(A).
We next review whether the Title III court abused its
discretion in finding that the front-end transition services
satisfied the requirements of § 503(b)(1)(A). Administrative
Expense Order, 621 B.R. at 303. A request for administrative
expense treatment under § 503(b) may qualify if "(1) the right to
payment arose from a postpetition transaction with the debtor
estate, . . . and (2) the consideration supporting the right to
payment was beneficial to the estate of the debtor" or, in this
case, PREPA. In re Hemingway Transp., Inc., 954 F.2d 1, 5 (1st
Cir. 1992).
The Title III court permissibly credited the declaration
of Omar J. Marrero ("Marrero Declaration"), submitted by
appellees, in finding that the front-end transition services were
beneficial to PREPA. Administrative Expense Order, 621 B.R. at
301.3 The Marrero Declaration stated that many aspects of the
front-end transition services were necessary prerequisites to LUMA
3 Appellants did not provide any contrary factual evidence
that the front-end transition services do not benefit PREPA. To
the extent appellants argue that the Title III court's factual
findings are clearly erroneous, that argument is frivolous.
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assuming control over PREPA's T&D System. These services include
"mobilization of the LUMA Energy transition team, transition of
management, mobilization of employees and establishment of benefit
plans for employees of LUMA Energy, information technology
transition and development, development of a system remediation
plan and initial operating and capital budgets, preparation to
take over customer services and billing and other financial
management functions, preparing to manage federal funding,
increasing emergency response preparedness, and assessing the
chain of supply for fuel and power."
The Marrero Declaration also noted present benefits to
PREPA from the front-end transition services that would actualize
before the full transition of control over PREPA's T&D System.
These benefits include "(i) locating inefficiencies in the T&D
System; (ii) identifying and implementing non-personnel related
cost-saving measures; (iii) preparing for management of federal
funding; (iv) assessing and beginning to improve the chain of
supply for fuel and power; and (v) supporting privatization efforts
regarding PREPA's generation assets."
Appellants' arguments as to the Title III court's
application of § 503(b)(1)(A) also fail. Contrary to appellants'
assertions, the Title III court recognized that the burden was on the
government parties to show that the payments at issue qualified for
an administrative expense priority. It found that they had "satisfied
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their burden" through the Marrero Declaration, which "provided
evidence of their determination that numerous aspects of the Front-
End Transition Services will inure to PREPA's benefit."
Administrative Expense Order, 621 B.R. at 301, 303.
The Title III court did not abuse its discretion in
finding that appellees satisfied their burden under 11 U.S.C.
§ 503(b)(1)(A). PREPA filed for bankruptcy in 2017 after decades
of operational and financial challenges that resulted in
inefficient, expensive power service and serious electric power
failures in Puerto Rico. The Title III court did not err in
according administrative expense priority to PREPA's payments for
the front-end transition services.
C. The Title III Court Correctly Held That 48 U.S.C. § 2126(e)
Prevents it from Reviewing Challenges to FOMB's Certification
Decision.
Appellants also argue that granting administrative
expense priority status to the front-end transition service costs
contravenes 48 U.S.C. § 2141(b)(1). The Title III court held that
§ 2126(e) prevents judicial review of appellants' challenges under
§ 2141(b)(1). Administrative Expense Order, 621 B.R. at 303 n.12.
We agree. Section 2141(b)(1) lists requirements for
fiscal plans developed under PROMESA. The requirements include
"ensur[ing] the funding of essential public services" and
"provid[ing] adequate funding for public pension systems." 48
U.S.C. §§ 2141(b)(1)(B), (C). Section 2141(c)(3) further states
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that FOMB shall review any fiscal plan for compliance with the
§ 2141(b)(1) requirements and has "sole discretion" to determine
whether to certify a fiscal plan or budget as compliant with those
requirements. Id. § 2141(c)(3). PROMESA insulates FOMB's
certification determinations from judicial review in the federal
courts. Id. § 2126(e) ("There shall be no jurisdiction in any
United States district court to review challenges to the Oversight
Board's certification determinations under this chapter."); In re
Fin. Oversight & Mgmt. Bd. for P.R. (Méndez-Núñez v. Fin. Oversight
& Mgmt. Bd. for P.R.), 916 F.3d 98, 112 (1st Cir. 2019).
FOMB certified the PREPA 2020 fiscal plan in June 2020,
which included a $132 million deficit in 2021 to account for the
Front-End Transition Service Fee to LUMA under the T&D Contract.
Under the terms of the T&D Contract, PREPA agreed to seek
administrative expense treatment for the front-end transition
service costs, and LUMA may terminate the contract if
administrative expense treatment is not granted. As such,
appellants' § 2141(b) challenge is nothing more than a challenge
to PREPA's inclusion of the Front-End Transition Service Fee in
its fiscal plan and FOMB's certification of that plan. The Title
III court correctly held that § 2126(e) insulates these
certification decisions from judicial review.
Finally, appellants' argument that the Title III court's
interpretation of 48 U.S.C. § 2126(e) violates the nondelegation
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doctrine is waived because they never raised the issue before the
Title III court, and no exceptional circumstances warrant
consideration of this argument for the first time on appeal. See
United States v. Rodrigues, 850 F.3d 1, 13 n.6 (1st Cir. 2017).
III. Conclusion
The judgment of the district court is affirmed. Costs
are awarded to appellees.
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