Union De Trabajadores De La Industria Eléctrica Y Riego (Utier) v. Fin. Oversight & Mgmt. Bd. (In re Fin. Oversight & Mgmt. Bd. for P.R.)

• Decision Date: 12 August 2021
• Docket Number: No. 20-2041,20-2041
• Citation: 7 F.4th 31
• Parties: 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 Eléctrica Y Riego (Utier); Sistema De Retiro De Los Empleados De La Autoridad De Energía Eléctrica (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.
• Court: U.S. Court of Appeals — First Circuit

7 F.4th 31

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 Eléctrica Y Riego (Utier); Sistema De Retiro De Los Empleados De La Autoridad De Energía Eléctrica (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.

No. 20-2041

United States Court of Appeals, First Circuit.

August 12, 2021

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.

Before Howard, Chief Judge, Lynch and Kayatta, Circuit Judges.

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.

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 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 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. § 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 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, 134 S.Ct. 1744, 188 L.Ed.2d 829 (2014) ; In re Fin. Oversight & Mgmt. Bd....