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

. Among other things,

PROMESA created the Financial Oversight and Management Board for

Puerto Rico ("FOMB").

§ 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"),

, 303 (D.P.R. 2020).

We find no error and affirm.

- 3 - I. Facts and Procedural History

Puerto Rico created PREPA to provide reliable electric

power to the Commonwealth. See

,

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),

(1st Cir. 2018). This triggered

an automatic stay of pre-petition creditors' claims against PREPA.

See

(a);

(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

- 4 - 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.

. 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

- 5 - 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

(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.

- 6 - § 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

- 7 - 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

(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

(e)

to decide the objectors' challenge to that certification decision.

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.,

(2014); In re Fin. Oversight & Mgmt. Bd. for P.R.

(Díaz Mayoral v. Fin. Oversight & Mgmt. Bd. for P.R.),

, 40 (1st Cir. 2021). We review the court's application of the

law to the facts for abuse of discretion. See Highmark,

; In re Francis,

, 16 (1st Cir. 2021); In re

Energy Future Holdings Corp. (NextEra Energy, Inc. v. Elliott

- 8 - Assocs., L.P.),

(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

(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.,

(2018); Woo v. Spackman,

(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."

(b)(1)(A). Congress incorporated

numerous provisions of the Bankruptcy Code into Title III of

PROMESA, including § 503 in its entirety. See

(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."

§ 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"

- 9 - in Title III proceedings. See In re Fin. Oversight & Mgmt. Bd.

for P.R. (Gracia-Gracia v. Fin. Oversight & Mgmt. Bd. for P.R.),

, 349 (1st Cir. 2019).2 Appellants further argue that

(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.,

(i)(2)(A) ("rights against the estate");

§ 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.,

(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

(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.

- 10 - ("for the benefit of the estate");

§ 551 (same); id.

§ 557(c)(2)(F) ("orderly administration of the estate"); see also

(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.,

(2018) (quoting Reiter v. Sonotone Corp.,

(1979)), and to reject "interpretation[s] of the

statute that would render an entire subparagraph meaningless."

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.,

(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,

(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

- 11 - 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

; see also Czyzewski v. Jevic

Holding Corp.,

(2017) (noting that "[f]iling

for Chapter 11 bankruptcy" creates "an estate . . . comprising all

property of the debtor" (citing

(a))). Although

Title III does not incorporate § 541, see

(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]."

§ 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,"

- 12 - 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.,

(2020); In re Weinstein,

(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."

(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."

§ 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-

- 13 - 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.,

, 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.

- 14 - 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

- 15 - 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

(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

(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

(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."

(b)(1)(B), (C). Section 2141(c)(3) further states

- 16 - 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.),

(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

(e) violates the nondelegation

- 17 - 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,

, 13 n.6 (1st Cir. 2017).

III. Conclusion

The judgment of the district court is affirmed. Costs

are awarded to appellees.

- 18 -