United States Court of Appeals For the First Circuit

No. 22-1080

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 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 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 OF THE PUERTO RICO PUBLIC BUILDINGS AUTHORITY,

Debtors,

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 EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE OF THE PUERTO RICO PUBLIC BUILDINGS AUTHORITY,

Debtors, Appellees,

v.

FEDERACION DE MAESTROS DE PUERTO RICO, INC.; GRUPO MAGISTERIAL EDUCADORES(AS) POR LA DEMOCRACIA, UNIDAD, CAMBIO, MILITANCIA Y ORGANIZACION SINDICAL, INC.; UNION NACIONAL DE EDUCADORES Y TRABAJADORES DE LA EDUCACION, INC.,

Objectors, Appellants, PFZ PROPERTIES, INC.; OSCAR ADOLFO MANDRY APARICIO; MARIA DEL CARMEN AMALIA MANDRY LLOMBART; SELMA VERONICA MANDRY LLOMBART; MARIA DEL CARMEN LLOMBART BAS; OSCAR ADOLFO MANDRY BONILLA; GUSTAVO ALEJANDRO MANDRY BONILLA; YVELISE HELENA FINGERHUT MANDRY; MARGARET ANN FINGERHUT MANDRY; VICTOR ROBERT FINGERHUT MANDRY; JUAN CARLOS ESTEVA FINGERHUT; PEDRO MIGUEL ESTEVA FINGERHUT; MARIANO JAVIER MCCONNIE FINGERHUT; JANICE MARIE MCCONNIE FINGERHUT; VICTOR MICHAEL FINGERHUT COCHRAN; MICHELLE ELAINE FINGERHUT COCHRAN; ROSA ESTELA MERCADO GUZMAN; EDUARDO JOSE MANDRY MERCADO; SALVADOR RAFAEL MANDRY MERCADO; MARGARITA ROSA MANDRY MERCADO; ADRIAN ROBERTO MANDRY MERCADO; VICENTE PEREZ ACEVEDO; CORPORACION MARCARIBE INVESTMENT; ANTONIO MARTIN CERVERA; MARIA TERESITA MARTIN; WANDA ORTIZ SANTIAGO; NANCY I. NEGRON-LOPEZ; DEMETRIO AMADOR INC.; DEMETRIO AMADOR ROBERTS; SUIZA DAIRY CORP.; MARUZ REAL ESTATE CORP.; GROUP WAGE CREDITORS; YASHEI ROSARIO; ANA A. NUNEZ VELAZQUEZ; EDGARDO MARQUEZ LIZARDI; MARIA M. ORTIZ MORALES; ARTHUR SAMODOVITZ; MIGUEL LUNA DE JESUS; ISMAEL L. PURCELL SOLER; ALYS COLLAZO BOUGEOIS; MILDRED BATISTA DE LEON; JAVIER ALEJANDRINO OSORIO; SERVICE EMPLOYEES INTERNATIONAL UNION (SEIU); INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE AND AGRICULTURAL IMPLEMENT WORKERS OF AMERICA; MAPFRE PRAICO INSURANCE COMPANY; CERTAIN CREDITORS WHO FILED ACTIONS IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO; MED CENTRO, INC., f/k/a Consejo de Salud de la Comunidad de la Playa de Ponce, Inc.; ASOCIACION DE JUBILADOS DE LA JUDICATURA DE PUERTO RICO; HON. HECTOR URGELL CUEBAS; COOPERATIVA DE AHORRO Y CREDITO VEGABAJENA; LORTU-TA LTD., INC.; LA CUARTEROLA, INC.; JUAZA, INC.; CONJUGAL PARTNERSHIP ZALDUONDO-MACHICOTE; FRANK E. TORRES RODRIGUEZ; EVA TORRES RODRIGUEZ; FINCA MATILDE, INC.; UNIVERSITY OF PUERTO RICO RETIREMENT SYSTEM TRUST; PETER C. HEIN; MIRIAM E. LIMA COLON; BETZAIDA FELICIANO CONCEPCION; ANGEL L. MENDEZ GONZALEZ; ASOCIACION DE MAESTROS PUERTO RICO; ASOCIACION DE MAESTROS DE PUERTO RICO-LOCAL SINDICAL; MORGAN STANLEY & CO. LLC; GOLDMAN SACHS & CO. LLC; J.P. MORGAN SECURITIES LLC; SANTANDER SECURITIES LLC; SIDLEY AUSTIN LLP; BMO CAPITAL MARKETS GKST, INC.; CITIGROUP GLOBAL MARKETS INC.; SAMUEL A. RAMIREZ & CO., INC.; MESIROW FINANCIAL, INC.; MERRILL LYNCH, PIERCE, FENNER & SMITH INC.; MERRILL LYNCH CAPITAL SERVICES, INC.; BARCLAYS CAPITAL INC.; RBC CAPITAL MARKETS, LLC; RAYMOND JAMES & ASSOCIATES, INC.; COMMUNITY HEALTH FOUNDATION OF P.R. INC.; QUEST DIAGNOSTICS OF PUERTO RICO, INC.; U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee for the PRPFC Outstanding Bonds and PRIFA Bonds, and Fiscal Agent for PRPBA Bonds; U.S. BANK NATIONAL ASSOCIATION, as Trustee for the PRPFC Outstanding Bonds and PRIFA Bonds, and Fiscal Agent for PRPBA Bonds; NILSA CANDELARIO; JORGE RAFAEL EDUARDO COLLAZO QUINONES; EL OJO DE AGUA DEVELOPMENT, INC.; PEDRO JOSE NAZARIO SERRANO; JOEL RIVERA MORALES; MARIA DE LOURDES GOMEZ PEREZ; HECTOR CRUZ VILLANUEVA; LOURDES RODRIGUEZ; LUIS M. JORDAN RIVERA; TACONIC CAPITAL ADVISORS LP; AURELIUS CAPITAL MANAGEMENT, LP; CANYON CAPITAL ADVISORS LLC; FIRST BALLANTYNE LLC; MOORE CAPITAL MANAGEMENT, LP; PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY; HON. PEDRO R. PIERLUISI URRUTIA; UNITED STATES, on behalf of the Internal Revenue Service; ASOCIACION PUERTORRIQUENA DE LA JUDICATURA, INC.; COOPERATIVA DE AHORRO Y CREDITO ABRAHAM ROSA; COOPERATIVA DE AHORRO Y CREDITO DE CIALES; COOPERATIVA DE AHORRO Y CREDITO DE JUANA DIAZ; COOPERATIVA DE AHORRO Y CREDITO DE RINCON; COOPERATIVA DE AHORRO Y CREDITO DE VEGA ALTA; COOPERATIVA DE AHORRO Y CREDITO DR. MANUEL ZENO GANDIA; MARIA A. CLEMENTE ROSA; JOSE N. TIRADO GARCIA, as President of the United Firefighters Union of Puerto Rico,

Objectors, Appellees,

VAQUERIA TRES MONJITAS, INC.; BLACKROCK FINANCIAL MANAGEMENT, INC.; EMSO ASSET MANAGEMENT LIMITED; MASON CAPITAL MANAGEMENT, LLC; SILVER POINT CAPITAL, L.P.; VR ADVISORY SERVICES, LTD; AURELIUS CAPITAL MANAGEMENT, LP, on behalf of its managed entities; GOLDENTREE ASSET MANAGEMENT LP, on behalf of funds under management; WHITEBOX ADVISORS LLC, on behalf of funds under management; MONARCH ALTERNATIVE CAPITAL LP, on behalf of funds under management; TACONIC CAPITAL ADVISORS L.P., on behalf of funds under management; ARISTEIA CAPITAL, LLC, on behalf of funds under management; FARMSTEAD CAPITAL MANAGEMENT, LLC, on behalf of funds under management; FOUNDATION CREDIT, on behalf of funds under management; CANYON CAPITAL ADVISORS LLC, in its capacity as a member of the QTCB Noteholder Group; DAVIDSON KEMPNER CAPITAL MANAGEMENT LP, in its capacity as a member of the QTCB Noteholder Group; SCULPTOR CAPITAL LP, in its capacity as a member of the QTCB Noteholder Group; SCULPTOR CAPITAL II LP, in its capacity as a member of the QTCB Noteholder Group; AMBAC ASSURANCE CORPORATION; ANDALUSIAN GLOBAL DESIGNATED ACTIVITY COMPANY; CROWN MANAGED ACCOUNTS, for and on behalf of Crown/PW SP; LMA SPC, for and on behalf of Map 98 Segregated Portfolio; MASON CAPITAL MASTER FUND LP; OAKTREE-FORREST MULTI- STRATEGY, LLC (SERIES B); OAKTREE OPPORTUNITIES FUND IX, L.P.; OAKTREE OPPORTUNITIES FUND IX (PARALLEL), L.P.; OAKTREE OPPORTUNITIES FUND IX (PARALLEL 2), L.P.; OAKTREE HUNTINGTON INVESTMENT FUND II, L.P.; OAKTREE OPPORTUNITIES FUND X, L.P.; OAKTREE OPPORTUNITIES FUND X (PARALLEL), L.P.; OAKTREE OPPORTUNITIES FUND X (PARALLEL 2), L.P.; OAKTREE VALUE OPPORTUNITIES FUND HOLDINGS, L.P.; OCEANA MASTER FUND LTD.; OCHER ROSE, L.L.C.; PENTWATER MERGER ARBITRAGE MASTER FUND LTD.; PWCM MASTER FUND LTD.; REDWOOD MASTER FUND, LTD.; BANK OF NEW YORK MELLON; OFFICIAL COMMITTEE OF UNSECURED CREDITORS; ASSURED GUARANTY CORP.; ASSURED GUARANTY MUNICIPAL CORP.; OFFICIAL COMMITTEE OF RETIRED EMPLOYEES; NATIONAL PUBLIC FINANCE GUARANTEE CORP.; FINANCIAL GUARANTY INSURANCE COMPANY; AMERINATIONAL COMMUNITY SERVICES, LLC, as servicer for the GDB Debt Recovery Authority; CANTOR-KATZ COLLATERAL MONITOR LLC, as Collateral Monitor for GDB Debt Recovery Authority; ATLANTIC MEDICAL CENTER, INC.; CAMUY HEALTH SERVICES, INC.; CENTRO DE SALUD FAMILIAR DR. JULIO PALMIERI FERRI, INC.; CIALES PRIMARY HEALTH CARE SERVICES, INC.; CORP. DE SERV. MEDICOS PRIMARIOS Y PREVENCION DE HATILLO, INC.; COSTA SALUD, INC.; CENTRO DE SALUD DE LARES, INC.; CENTRO DE SERVICIOS PRIMARIOS DE SALUD DE PATILLAS, INC.; HOSPITAL GENERAL CASTANER, INC.; GNMA & US GOVERNMENT TARGET MATURITY FUND FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico GNMA & U.S. Government Target Maturity Fund, Inc.; MORTGAGE-BACKED & US GOVERNMENT SECURITIES FUND FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Inc.; PUERTO RICO RESIDENTS BOND FUND I, f/k/a Puerto Rico Investors Bond Fund I; PUERTO RICO RESIDENTS TAX-FREE FUND, INC., f/k/a Puerto Rico Investors Tax- Free Fund, Inc.; PUERTO RICO RESIDENTS TAX-FREE FUND II, INC., f/k/a Puerto Rico Investors Tax-Free Fund II, Inc.; PUERTO RICO RESIDENTS TAX-FREE FUND III, INC., f/k/a Puerto Rico Investors Tax-Free Fund III, Inc.; PUERTO RICO RESIDENTS TAX-FREE FUND IV, INC., f/k/a Puerto Rico Investors Tax-Free Fund IV, Inc.; PUERTO RICO RESIDENTS TAX-FREE FUND V, INC., f/k/a Puerto Rico Investors Tax-Free Fund V, Inc.; PUERTO RICO RESIDENTS TAX-FREE FUND VI, INC., f/k/a Puerto Rico Investors Tax-Free Fund VI, Inc.; TAX-FREE FIXED INCOME FUND FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico Fixed Income Fund, Inc.; TAX-FREE FIXED INCOME FUND II FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico Fixed Income Fund II, Inc.; TAX-FREE FIXED INCOME FUND III FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico Fixed Income Fund III, Inc.; TAX-FREE FIXED INCOME FUND IV FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico Fixed Income Fund IV, Inc.; TAX-FREE FIXED INCOME FUND V FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico Fixed Income Fund V, Inc.; TAX-FREE FIXED INCOME FUND VI FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico Fixed Income Fund VI, Inc.; TAX FREE FUND FOR PUERTO RICO RESIDENTS, INC., f/k/a Tax-Free Puerto Rico Fund, Inc.; TAX FREE FUND II FOR PUERTO RICO RESIDENTS, INC., f/k/a Tax-Free Puerto Rico Fund II, Inc.; TAX-FREE HIGH GRADE PORTFOLIO BOND FUND FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico AAA Portfolio Bond Fund, Inc.; TAX-FREE HIGH GRADE PORTFOLIO BOND FUND II FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico AAA Portfolio Bond Fund II, Inc.; TAX-FREE HIGH GRADE PORTFOLIO TARGET MATURITY FUND FOR PUERTO RICO RESIDENTS, INC., f/k/a Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; TAX FREE TARGET MATURITY FUND FOR PUERTO RICO RESIDENTS, INC., f/k/a Tax-Free Puerto Rico Target Maturity Fund, Inc.; UBS IRA SELECT GROWTH & INCOME PUERTO RICO FUND; SERVICIOS INTEGRALES EN LA MONTANA (SIM),

Creditors, Appellees,

UNITED STATES,

Respondent, Appellee.

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

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

Before

Thompson, Howard, 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 Jeffrey W. Levitan, Mark D. Harris, Brian S. Rosen, Ehud Barak, Lucas Kowalczyk, Timothy W. Mungovan, John E. Roberts, Paul V. Possinger, Jordan Sazant, and Proskauer Rose LLP, were on brief, for appellee Financial Oversight and Management Board for Puerto Rico. John E. Mudd on brief for appellee Servicios Integrales en la Montaña. Joseph R. Palmore, James M. Peck, Gary S. Lee, James A. Newton, Lena H. Hughes, Andrew R. Kissner, and Morrison & Foerster LLP, on brief for appellee Ad Hoc Group of Constitutional Debtholders. Mark T. Stancil and Willkie Farr & Gallagher LLP on brief for appellee Ad Hoc Group of General Obligation Bondholders. Gregory Silbert and Weil, Gotshal & Manges LLP on brief for appellee National Public Finance Guarantee Corporation.

* Of the Southern District of New York, sitting by designation. Kurt A. Mayr, David L. Lawton, David K. Shim, P. Sabin Willett, and Morgan, Lewis & Bockius LLP on brief for appellee QTCB Noteholder Group. Howard R. Hawkins, Jr., Mark C. Ellenberg, Casey J. Servais, William J. Natbony, Thomas J. Curtin, Cadwalder, Wickersham & Taft LLP, Heriberto Burgos Pérez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, and Casellas Alcover & Burgos P.S.C. on brief for appellees Assured Guaranty Corp. and Assured Guaranty Municipal Corp. Rafael Escalera, Sylvia M. Arizmendi, Carlos R. Rivera-Ortiz, Reichard & Escalera, Susheel Kirpalani, Daniel Salinas, and Quinn Emanuel Urquhart & Sullivan, LLP on brief for appellee Lawful Constitutional Debt Coalition. Dennis F. Dunne, Atara Miller, Grant R. Mainland, John J. Hughes, III, Jonathan Ohring, and Milbank LLP on brief for appellees Ambac Assurance Corporation. Martin A. Sosland, James E. Bailey III, Adam M. Langley, Butler & Snow LLP, María E. Picó, and Rexach & Picó, CSP on brief for appellee Financial Guaranty Insurance Company. Arturo J. García-Solá, Nayuan Zouairabani, and McConnell Valdes LLC on brief for appellee AmeriNational Community Services, LLC. Douglas I. Koff, Peter Amend, Douglas S. Mintz, and Schulte, Roth & Zabel on brief for appellee Cantor-Katz Collateral Monitor LLC.

April 26, 2022 KAYATTA, Circuit Judge. This case presents several

issues of first impression. It arises out of the years-long effort

to put Puerto Rico on the path to financial recovery by

restructuring the Commonwealth's sovereign debt under Title III of

the Puerto Rico Oversight, Management, and Economic Stability Act

(PROMESA). In January, the court charged with overseeing the

Title III proceedings confirmed a plan of adjustment for the debts

of the Commonwealth and two of its instrumentalities ("the Plan of

Adjustment" or "the Plan"). The appellants -- various

organizations that represent some public school teachers and

educators participating in the Commonwealth's pension system

(collectively, "the Teachers' Associations") -- object to the

manner in which the Plan treats their claims to current and future

pension payments. In a nutshell, the Plan rejects the right of

public school teachers to accrue further retirement pension

benefits under the Commonwealth's existing defined benefit plan,

and makes them eligible instead to receive benefits under a defined

contribution plan that is materially less favorable for most

participants.

After the Title III court approved the Plan of

Adjustment over the objections of the Teachers' Associations, the

associations appealed that order, sought a stay pending appeal by

the Title III court, see Fed. R. Bankr. P. 8007(a)(1)(A), and then,

after that stay was denied, moved in this court on March 3 for

- 7 - such a stay, see Fed. R. App. P. Rule 8(a)(2)(A)(ii). By order

dated March 11, 2022, we denied that request for a stay, and the

Plan became effective on March 15.1 We now consider the merits of

the Teachers' Associations' appeal from the Title III court's

order confirming the Plan. For the following reasons, we affirm.

I.

By 2017 the Commonwealth of Puerto Rico had accumulated

approximately $55 billion in unfunded pension liabilities. That

is to say, the Commonwealth's government had promised its public

servants $55 billion that it neither had nor could reasonably

expect to have when those bills became due. The Commonwealth also

had outstanding approximately $30.5 billion in government-backed

bonds without the wherewithal to make the payments due under the

bonds. These excessive liabilities left the island of over three

million people in a serious fiscal crisis, threatening the

Commonwealth's economic stability and contributing to an

accelerated out-migration of residents and businesses. See

(m)(1)–(3). Congress reacted to Puerto Rico's fiscal

emergency by passing the Puerto Rico Oversight, Management, and

Economic Stability Act,

et seq., known as PROMESA.

1 By notice on March 15, 2022, the Board informed the Title III court that the Plan of Adjustment went into effect and was "substantially consummated."

- 8 - See In re Fin. Oversight & Mgmt. Bd. for P.R.,

(1st Cir. 2019).

In enacting PROMESA, Congress found that "[a]

comprehensive approach to fiscal, management, and structural

problems and adjustments . . . is necessary, involving independent

oversight and a Federal statutory authority for the Government of

Puerto Rico to restructure debts in a fair and orderly process."

(m)(4). To develop and implement this

comprehensive approach, Congress created the Financial Oversight

and Management Board (the "Board"), see

§ 2121(b)(1), "to

assist the Government of Puerto Rico in reforming its fiscal

governance and support the implementation of potential debt

restructuring," id. § 2194(n)(3).

Among the numerous responsibilities assigned to the

Board was the development of fiscal plans for the Commonwealth and

its instrumentalities to "provide a method to achieve fiscal

responsibility and access to the capital markets." Id.

§ 2141(b)(1). Toward that end, PROMESA established the Board as

a creature of the territorial government, see id. § 2121(c), and

empowered the Board, even absent agreement from the Governor and

the Legislature, to develop, review, approve, and certify fiscal

plans that would in turn dictate the bounds of any annual budgets

adopted by the Commonwealth, see id. §§ 2141(c)–(e), 2142(c)(1).

- 9 - PROMESA also created in Title III a modified version of

the municipal bankruptcy code for territories and their

instrumentalities. Id. § 2161 et seq. Title III authorized the

Board to place the Commonwealth and its instrumentalities into

bankruptcy proceedings and to develop a plan of adjustment for

restructuring the Commonwealth's debts to wind down the bankruptcy

in a manner that would "reform[] . . . fiscal governance," id.

§ 2194(n)(3). See id. § 2175.

Beginning in 2017, the Board initiated proceedings under

Title III to restructure the debts of the Commonwealth and a number

of its instrumentalities. After several years of labor --

involving extensive mediation and negotiations with numerous

stakeholders -- the Board presented the Plan of Adjustment (the

Eighth Amended version) for the Commonwealth and two of its

instrumentalities. Pursuant to section 1123(a)(1) and (3) of the

Bankruptcy Code, as incorporated into Title III,

,

the Plan designated classes of claims and specified a treatment

for any class of claims that was impaired by the Plan. Among the

claims treated under the Plan were those held by the Commonwealth's

public pensioners.

The Plan elicited objections from several stakeholders,

including the Teachers' Associations. Of particular concern to

the Teachers' Associations is the Plan's treatment of the terms of

the publicly funded pensions provided through the Commonwealth's

- 10 - Teachers Retirement System, in which many of the associations'

members participate.

Prior to 2013, the Teachers Retirement System provided

for all participants a defined benefit pension plan, which promised

a specified monthly benefit amount upon retirement based on, among

other things, age and years of service, and included cost-of-

living adjustments. See 2004 P.R. Act 91 § 40; see also 2007 P.R.

Act 35. That pension arrangement proved to be unsustainable for

the Commonwealth's finances. And the attempt to fund the pension

plan and other current expenses with debt proved ruinous for the

fiscal wellbeing of the Commonwealth.

In 2013, the Puerto Rico Legislative Assembly enacted

Act 160-2013 ("Act 160") which sought to end the defined benefit

program by freezing accruals under the existing plan and

transferring active and future members to a defined contribution

plan, which would be funded by employee and employer contributions.

See 2013 P.R. Act 160, art. 5. The Puerto Rico Supreme Court

ultimately overturned Act 160, but only as to teachers who were

hired before the law went into effect in August 2014. See

Asociación de Maestros de P.R. v. Sistema de Retiro para Maestros

de P.R.,

,

(2014). The net result

was that teachers hired before August 2014 remained on the defined

benefit plan while teachers hired after August 2014 were enrolled

in the defined contribution plan.

- 11 - Under the Plan, participants in the Teachers Retirement

System who have already accrued rights to payments are still

entitled to receive 100% of those benefits. See Plan §§ 55.3(a),

55.6(a), 55.9(a). However, the Plan freezes future accruals under

the defined benefit plan held by teachers hired prior to August

2014 and eliminates for all teachers certain cost-of-living

adjustments going forward. See id.; see also id. Ex. F-1. The

Teachers' Associations objected to the Plan insofar as it proposed

to change the manner in which pension benefits would be determined

under the Plan from March 15, 2022, onward.

The Title III court heard and overruled these

objections, entering an order confirming the Plan, see In re Fin.

Oversight & Mgmt. Bd. for P.R.,

(D.P.R. 2022), along

with findings of fact and conclusions of law supporting that order,

see In re Fin. Oversight & Mgmt. Bd. for P.R., No. 17-BK-3283,

(D.P.R. Jan. 18, 2022). This appeal followed.2

II.

We review the Title III court's legal conclusions de

novo and factual findings for clear error. See In re Fin.

Oversight & Mgmt. Bd. for P.R.,

, 10 (1st Cir. 2021); cf.

In re SW Bos. Hotel Venture, LLC,

(1st Cir.

2014). And we review the Title III court's application of the law

2We thank the parties for their expedited briefing and argument on these complex issues in an exigent posture.

- 12 - to the facts for abuse of discretion. See In re Fin. Oversight &

Mgmt. Bd. for P.R.,

, 36 (1st Cir. 2021).

III.

Under PROMESA, the Title III court shall confirm a plan

of adjustment so long as certain requirements are met, including

that:

the debtor is not prohibited by law from taking any action necessary to carry out the plan; . . . any legislative, regulatory, or electoral approval necessary under applicable law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval; . . . [and] the plan is feasible.

(b).

The Teachers' Associations put forward three reasons why

the Plan of Adjustment cannot be confirmed and must be set aside.

First, they challenge the Plan's provision and the Title III

court's finding that portions of several Commonwealth statutes

providing for the continued payment of pension benefits under the

pre-March 15 regime are rendered ineffective, either as rejected

executory contracts or as preempted by PROMESA. Second, they argue

that the Plan lacks the requisite enabling legislation to implement

its proposed changes to the Teachers Retirement System. Third,

the associations assert that the Plan requires and has not obtained

effective legislative authorization for the issuance of the new

- 13 - debt instruments called for by the Plan. We consider each of these

arguments in turn.

A.

The Teachers' Associations' lead argument trains on the

fact that the Commonwealth's legislature has not revoked the

statutes establishing the continued accrual of defined pension

benefits with cost-of-living adjustments just as they were paid

prior to March 15.3 The Plan of Adjustment deems those laws

preempted to the extent they conflict with PROMESA. See Plan

§§ 55.3(b), 55.6(b), 55.9(c); see also id. Ex. K-1 § III. And the

Title III court's findings of fact and conclusions of law explain

that the relevant statutes conflict with PROMESA "to the extent

they are inconsistent with the discharge of claims and treatment

provided for pension benefits and payments by the Plan . . . and

would undermine the restructuring contemplated by the Plan." In

re Fin. Oversight & Mgmt. Bd. for P.R.,

, at *39;

see also

.

The associations agree that pension obligations are

contractual in nature and may be rejected under section 365 of the

Bankruptcy Code. Cf. Bayrón Toro v. Serra,

,

, 663 (1987) (recognizing that

3The Teachers' Associations identify these laws as Act 106- 2017, Act 160-2013, and Act 91-2004. See 2017 P.R. Act 106; 2013 P.R. Act 160; 2004 P.R. Act 91.

- 14 - "[Commonwealth] pension plans are obligations in the nature of

contracts"). And the record is clear that the Plan rejects any

obligation owed to individual workers for accrual of future

benefits under the existing regime. See Plan § 55.9(b) ("To

effectuate the freeze of the contractual rights of Active [Teachers

Retirement System] Participants to accrue pension benefits under

Puerto Rico law . . . the contractual obligations of the

Commonwealth to accrue such benefits, including, without

limitation, pursuant to the [Teachers Retirement System laws],

shall be deemed rejected pursuant to section 365(a) of the

Bankruptcy Code."). The Teachers' Associations nevertheless

contend that the Commonwealth laws calling for such pension

payments remain extant unless preempted by PROMESA, and they

explain that there is no basis for preempting those laws because

PROMESA's text is silent as to the Commonwealth's pension

obligations.

The Teachers' Associations, however, do not explain why

the Plan's rejection of the Commonwealth's forward-going

obligation to provide certain pension benefits does not render

unenforceable the statutes that give rise to that obligation. This

is not a case in which the debtor is a private party and seeks to

override a law. Rather, this is a case in which the debtor is the

Commonwealth and seeks to reject its own commitment which, while

effected by statute, is by Puerto Rico law deemed to be a

- 15 - contractual commitment as between the Commonwealth and its covered

employers. See Bayrón Toro, 19 P.R. Offic. Trans. at 663.4

In any event, the Board need not ride on rejection alone.

Its quiver contains more pointedly the concept of preemption.

PROMESA includes an express preemption provision, which provides

that: "The provisions of this chapter shall prevail over any

general or specific provisions of territory law, State law, or

regulation that is inconsistent with this chapter."

. See In re Fin. Oversight & Mgmt. Bd. for P.R.,

(explaining that "PROMESA's provisions preempt any

inconsistent 'general or specific provisions of territory law'"

(quoting

)). While this provision need not

necessarily mean that every Commonwealth law inconsistent with the

Plan is also inconsistent with PROMESA, the Plan's treatment of

the Teachers Retirement System participants' claims makes clear

that the portions of existing laws that enshrine defined-benefit-

plan accruals and cost-of-living adjustments are preempted.

To see why this is so, we break down the Plan's proposed

treatment of the pensioners' claims into its component parts. We

begin with the claims in question. Participants in the Teachers

4 To the extent the Teachers' Associations claim that there could not be rejection due to the absence of notice and a hearing, the rejection language was in the Plan of Adjustment, and the Title III court permitted objections and held multiple hearings on those objections throughout the process. Indeed, the Teachers' Associations have regularly made use of those procedures.

- 16 - Retirement System possess claims to further payments under the

existing retirement regime. Having determined that it must adjust

these claims, the Plan's treatment of the claims is to reject some

set of promised future obligations -- i.e., further accrual of

defined benefit plans and cost-of-living adjustments -- and to

transfer participants in defined benefit plans to defined

contribution plans. This treatment would not be possible if the

same participants also remain eligible to receive duplicative and

additional benefit payments under the Commonwealth statutes as

they currently exist.

So, which gives way, the Plan's proposed treatment or

the Commonwealth's laws? Congress provided the answer by

incorporating section 1123(a)(3) and (5) of the Bankruptcy Code

into PROMESA. See

(a). Those provisions provide

that a plan of adjustment under Title III will "specify the

treatment of any class of claims or interests that is impaired by

the plan" and "provide adequate means for the plan's

implementation" "[n]otwithstanding any otherwise applicable

nonbankruptcy law."

(a)(3), (5). Preemption under

section 1123(a) is, of course, "not unbounded"; the "purpose of

Congress is the ultimate touchstone." In re Irving Tanning Co.,

(Bankr. App. 1st Cir. 2013) (quoting In re Fed.-

Mogul Glob. Inc.,

(3d Cir. 2012)). Here, we

need not dwell any longer on the appropriate limits of

- 17 - section 1123(a) preemption in the context of Title III, for

Title III was designed by Congress with the clear purpose of

facilitating the adjustment of the Commonwealth's debt

obligations. PROMESA therefore preempts Commonwealth law insofar

as that law purports to dictate (contrary to the Plan) the

adjustment of the Commonwealth's financial obligations to

participants in its pension plans.5

This conclusion makes particular sense in the broader

context of PROMESA. We have previously noted the "sui generis

nature of PROMESA." Peaje Invs. LLC v. García-Padilla,

(1st Cir. 2017). The Teachers' Associations say that

"Congress enacted [PROMESA] with the purpose of restructuring the

island's outstanding debt." This is true, but incomplete.

Congress also enacted PROMESA because it found that "[a]

comprehensive approach to fiscal, management, and structural

problems and adjustments . . . is necessary."

(m)(4). And in creating the Board as a part of the

Commonwealth government, Congress sought "to provide a method for

a covered territory to achieve fiscal responsibility and access to

the capital markets."

(a).

5 Because our review of legal conclusions is de novo, see In re SW Bos. Hotel Venture, LLC,

(1st Cir. 2014), the Teachers' Associations' complaint that the Title III court did not discuss this issue at greater length is of no moment.

- 18 - Toward these ends, Congress gave the Board a controlling

role in creating a fiscal plan for the Commonwealth, see

(c)–(e); required that Commonwealth budgets align with the

fiscal plan, see

§§ 2104(6), 2142(c)–(e); and provided for the

Board to retain an oversight role for at least four years after a

successful restructuring, see id. § 2149. In short, Congress was

plainly intent on not just reducing the island's debt, but also

improving its government's fiscal practices going forward.

Given this context, it would make little sense for the

Board to have no ability to restrict accruals under the very

pension payment regime that helped create the crisis in the first

place. Indeed, the Commonwealth's 2021 fiscal plan makes clear

that "[o]nly with pension reform can the Government help restore

both fiscal balance and the promise for current and future retirees

to safeguard their assets and their future pensions." Fin.

Oversight & Mgmt. Bd. for P.R., 2021 Fiscal Plan for Puerto Rico

274 (Apr. 23, 2021). The Title III court echoed this sentiment

when it found that the contemplated elimination of defined-

benefit-plan accruals and cost-of-living adjustments was critical

to the viability of the Plan, noting that the estimated impact of

retaining such benefits would amount to $5.6 billion over thirty

years. See In re Fin. Oversight & Mgmt. Bd. for P.R.,

, at *52. In light of these uncontested findings, the

Title III court concluded -- and we agree -- that "[a]bsent

- 19 - preemption," the Commonwealth statutes establishing these

obligations "would undermine the restructuring contemplated by the

Plan."

.

Apart from express preemption, the Teachers'

Associations' arguments would also fail as a matter of conflict

preemption. Cf.

(preempting Commonwealth law

"inconsistent with" PROMESA). We have explained that "federal law

preempts state laws that 'stand[] as an obstacle to the

accomplishment and execution of the full purposes and objectives

of Congress.'" Franklin Cal. Tax-Free Tr. v. Puerto Rico,

(1st Cir. 2015) (quoting Pac. Gas & Elec. Co. v.

State Energy Res. Conservation & Dev. Comm'n,

(1983)). For the reasons discussed already, compliance with the

Commonwealth's laws mandating future defined-benefit-plan accruals

and cost-of-living adjustments would plainly "frustrate the

purposes of the federal scheme" set out in PROMESA. SPGGC, LLC v.

Ayotte,

(1st Cir. 2007).

The Teachers' Associations try to recharacterize the

preemptive effect of the Plan under PROMESA by contending that the

Plan's treatment of their members' claims effectively constitutes

the enactment of new Commonwealth law. But their argument

misapprehends what the Plan does. The pension laws previously in

effect established obligations of the Commonwealth that the

Commonwealth treats as equivalent to contractual commitments. The

- 20 - Plan of Adjustment simply replaces those commitments. Although

the Teachers' Associations insist that this replacement

constitutes a de jure amendment of the current laws, this is not

so. Rather, the Plan rejects pre-Plan obligations going forward,

adopts substitute obligations as part of the Plan, and preempts

Commonwealth laws only "to the extent [they are] inconsistent with

the treatment" of the pensioners' claims under the Plan. Plan

§ 55.9; see also id. §§ 55.3, 55.6. In short, the Plan does not

amend or replace any law but instead treats pensioners' claims

through a combination of rejection, assumption of new obligations

as creatures of the Plan, and preemption of only inconsistent

components of Commonwealth laws. And that preemption, as we have

already explained, is authorized by section 1123(a) as construed

in the context of PROMESA.

The Teachers' Associations, primarily in reply, also

complain that the precise nature of the effect on Commonwealth

pension laws is "confusing." We agree that in an ideal world the

Plan and the Title III court's order might have included a copy of

the relevant pension laws with all preemptive effects highlighted

in redline or by annotation. But on the whole, the main thrust of

the Plan's resulting treatment is reasonably clear. As the Board

explains in its brief, and the Teachers' Associations do not

dispute, the Plan "ensur[es] full payment of any defined benefits

accrued up to the Plan's effective date, . . . enroll[s] affected

- 21 - teachers in the Commonwealth's tax-deferred defined contribution

plan, and . . . enroll[s] certain teachers in the federal Social

Security system with mandatory contributions to be made by the

Commonwealth." As to the details of the Plan's administration, we

find no abuse of discretion in the Title III court's approval of

a more general test that preempts portions of laws "inconsistent"

with the treatments specified by the Plan but leaves the details

of what constitutes inconsistency to be determined if and as

concrete issues arise. This conclusion draws reinforcement from

the fact that even the Teachers' Associations, in objecting to the

Plan in the Title III court, pointed to no matters of

implementation or administration that could not be handled under

the approach taken in the Plan.

B.

The Teachers' Associations next contend that the Plan

lacks essential enabling legislation, as required by PROMESA, to

change the Commonwealth's retirement laws. Here, the associations

rely on language from PROMESA section 314(b)(5), which conditions

confirmation of the Plan on obtaining "any legislative,

regulatory, or electoral approval necessary under applicable law

in order to carry out any provision of the plan."

(b)(5). Thus, the associations argue, before the Plan can

require any modification to the Commonwealth's retirement systems,

- 22 - the Puerto Rico Legislative Assembly must first enact those

reforms.

However, section 314(b)(5) only requires any "approval

necessary under applicable law" and does not by its plain terms

require enabling legislation for every component of the Plan.

Indeed, the Teachers' Associations point us to no law that requires

any legislative approval before discharging the obligations in

question.

Finally, the Plan's adjustment of pension obligations is

authorized by enabling legislation, namely section 1123 of the

Bankruptcy Code. See

(a) (requiring, among other

things, that a plan of adjustment "specify the treatment of any

class of claims or interests that is impaired under the plan" and

"provide adequate means for the plan's implementation"); see also

§ 1123(b)(2) (explaining that a plan of adjustment may provide

for the rejection of the executory contracts of the debtor).

Accordingly, we conclude that the lack of specific

Commonwealth legislation permitting the Plan to modify the

Commonwealth's obligations to public school teachers does not bar

the Plan's confirmation.

C.

The Teachers' Associations' final contention is that the

Plan is not confirmable because a Commonwealth law, Act 53-2021

("Act 53"), prevents the issuance of new securities through the

- 23 - Plan. In the negotiations leading up to the Plan, a set of

bondholders entitled to receive new securities under the Plan

secured the Board's agreement that the Commonwealth would obtain

affirmative legislation authorizing the issuance of the new

securities that would replace (in smaller amounts) certain pre-

petition debt. Act 53 was enacted by the Puerto Rico Legislative

Assembly to do precisely that. But it also contained a caveat

conditioning its effectiveness on a change to the manner in which

the then-current, Seventh Amended version of the proposed plan of

adjustment treated pension benefits.

The Seventh Amended version of the plan of adjustment

contained three sets of provisions that are relevant here. The

first two did not lower the amount owed to any participant as of

the plan's effective date; rather they proposed eliminating any

additional accrual of rights in the defined benefit plan and any

future cost-of-living adjustments that would otherwise increase

benefits due. By contrast, the third provision, called the Monthly

Benefit Modification, cut already accrued benefits for some

participants by reducing by up to 8.5% pension payments in excess

of $1,500 per month.

All parties agree that Act 53 plainly conditioned the

approval of the new instruments on the elimination of the Monthly

Benefit Modification. The law said so expressly in article 104:

"The Legislative Assembly authorizes the issuance of the [new

- 24 - securities] subject to the [Board] filing an amended Plan for

confirmation by the Title III Court that eliminates the Monthly

Benefit Modification." And, it repeated this sentiment in

article 605: "The effectiveness of this Law is conditioned to the

[Board] filing an amended Plan for confirmation by the Title III

Court that eliminates the Monthly Benefit Modification . . . ."

The parties' disagreement concerns, instead, whether

Act 53 should also be read as conditioning approval of the new

securities on the elimination of the provisions in the plan of

adjustment that bar further accruals under the defined benefit

plans and eliminate cost-of-living adjustments. Act 53 mentions

neither provision by name. However, three passages voice a

legislative purpose to avoid "cuts" to public pensions. First, in

its Statement of Motives, Act 53 explains that a policy aim of the

law is "zero cuts to pensions of current retirees and current

accrued benefits of active public employees." Second, article 603

states that "[i]t is the express and unequivocal will of [the]

Legislative Assembly that [the relevant authorizations] are not

enforced, if the suspensive condition to avoid any cut of

pensions . . . are left without effect." And finally, article 605

of the law specifies that "[t]he continued effect of this act is

contingent upon [z]ero cuts to pensions."

The Teachers' Associations urge that we should read

these references to "zero cuts" as specifying an additional

- 25 - condition in Act 53 -- namely that the plan of adjustment must be

modified to remove the freeze to defined-benefit-plan accruals and

restore the cost-of-living adjustments before the necessary

securities can be issued. For two reasons, we do not read Act 53

in this manner.

First, it is not at all evident that the freeze to

further accruals or cost-of-living eliminations are "cuts" in the

same sense that the Monthly Benefit Modification plainly is. Those

two provisions preclude further increases to pension benefits

rather than reduce already accrued benefits. Of course, a plan

participant who hopes to secure a larger benefit in the future

will regard any loss of the chance to earn such an increase as a

"cut" if not to benefits, at least to the value of future plan

participation. And these measures undoubtedly reduce the benefit

amount that a participant would have expected to gain under

existing retirement laws. So, a broad reading of "cuts" as

covering a lost opportunity for an increase might be tenable in

some contexts.

Here, though, the context points otherwise. Act 53 was

enacted against the backdrop of negotiations over the Seventh

Amended version of the plan of adjustment. It specifically named

the elimination of the Monthly Benefit Modification -- the

provision that reduced already accrued benefits -- as an aim. Were

we to read the reference to "zero cuts" to also include the accrual

- 26 - freeze and the elimination of cost-of-living adjustments, it would

render the law's reference to the Monthly Benefit Modification

largely superfluous. Cf. Akebia Therapeutics, Inc. v. Azar,

(1st Cir. 2020) ("Whenever feasible, courts ought to

interpret statutory language in ways that avoid rendering specific

words or phrases superfluous."). Moreover, Article 104 of the law

describes its policy as "protect[ing] the accrued pensions of [the

Commonwealth's] public servants." (Emphasis added). Seen in this

light, the most natural reading of the references to "zero cuts"

in Act 53 is to emphasize that -- with the Monthly Benefit

Modification eliminated -- there will be no reduction at all in

any already accrued benefits.

Second, if the Legislative Assembly had intended to

adopt a broader definition of a cut or reduction to pension

benefits that would have encompassed the two other changes

prominently called for by the Plan, it could have quite easily

said so. As the Title III court found, the financial implications

of the accrual freeze and cost-of-living adjustment provisions are

more substantial than are the financial implications of the Monthly

Benefit Modification. See In re Fin. Oversight & Mgmt. Bd. for

P.R.,

, at *52. We think it very unlikely that a

legislature intending to refer to all three would only mention by

name the seemingly least significant.

- 27 - Accordingly, we conclude that Act 53 conditioned the

issuances of new bonds on the elimination of the Monthly Benefit

Modification. And given that the Teachers' Associations concede

that the Plan of Adjustment as approved by the Title III court

eliminated that reduction, the Teachers' Associations' argument

that a lack of authorization to issue the new bonds rendered the

Plan of Adjustment unconfirmable fails.6

IV.

None of the foregoing should be read as overlooking the

fact that any substantial reduction in hoped for future pension

benefits may create great distress and economic harm for affected

pensioners, or that public school teachers provide critical

government services for the Commonwealth's residents. It is

presumably for these reasons that the Plan treats pension plan

participants in substantial respects more favorably than many

other persons affected by the Plan.7 In the end though, teachers,

6 The Teachers' Associations' final contention that the Plan of Adjustment cannot be confirmed because it is not feasible relies on the success of its other arguments. Because the associations have not convinced us on any of those points, we see no reason to disturb the Title III court's conclusion that the Plan is feasible. 7 For instance, while participants in the Teachers Retirement System are entitled to receive 100% of their already accrued defined pension benefits, the claims of other unsecured creditors are subject to only percentage-based recovery caps and/or pro- rated shares of aggregate recovery. See, e.g., Plan §§ 17.1 (providing that holders of general unsecured claims against the Puerto Rico Building Authority will receive cash in the amount equal to 10% of their claims), 62.1 (providing that holders of

- 28 - like many others, were given unfunded promises. Congress left it

to the Board, subject to review by the Title III court, to adjust

those unfunded promises so that the Commonwealth would have a

chance to reset its financial footing and, in so doing, ultimately

benefit all of the island's residents. Accordingly, with respect

to the specific challenges lodged by the Teachers' Associations,

we affirm the Title III court's order confirming the Plan of

Adjustment.

general unsecured claims against the Commonwealth will receive only a pro-rated share of recovery capped, generally, at 40%).

- 29 -