United States Court of Appeals For the First Circuit

Nos. 23-2036, 23-2049, 23-2050, 23-2052, 23-2053, 23-2054, 23-2057

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 OF THE PUERTO RICO ELECTRIC POWER AUTHORITY; PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY; THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF ALL TITLE III DEBTORS,

Plaintiffs-Appellees/Cross-Appellants,

CORTLAND CAPITAL MARKET SERVICES LLC, AS ADMINISTRATIVE AGENT; SOLA LTD.; SOLUS OPPORTUNITIES FUND 5 LP; ULTRA MASTER LTD; ULTRA NB LLC; UNION DE TRABAJADORES DE LA INDUSTRIA ELECTRICA Y RIEGO INC. (UTIER); SISTEMA DE RETIRO DE LOS EMPLEADOS DE LA AUTORIDAD DE ENERGIA ELECTICA (SREAEE),

Plaintiffs-Appellees,

v.

U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE; ASSURED GUARANTY CORP.; ASSURED GUARANTY MUNICIPAL CORP.; GOLDENTREE ASSET MANAGEMENT LP; SYNCORA GUARANTEE, INC.; ALLIANCE BERNSTEIN L.P.; ARISTEIA CAPITAL, L.L.C.; CAPITAL RESEARCH AND MANAGEMENT COMPANY; COLUMBIA MANAGEMENT INVESTMENT ADVISORS, LLC; DELAWARE MANAGEMENT COMPANY, A SERIES OF MACQUARIE INVESTMENT MANAGEMENT BUSINESS TRUST TO THE FORM 2019; ELLINGTON MANAGEMENT GROUP, L.L.C.; GOLDMAN SACHS ASSET MANAGEMENT L.P.; INVESCO ADVISERS, INC.; MACKAY SHIELDS LLC; MASSACHUSETTS FINANCIAL SERVICES COMPANY; RUSSELL INVESTMENT COMPANY, ON BEHALF OF RUSSELL INVESTMENT COMPANY TAX-EXEMPT HIGH YIELD BOND FUND; SIG STRUCTURED PRODUCTS, LLC; T. ROWE PRICE; TOWER BAY ASSET MANAGEMENT,

Defendants-Appellants/Cross-Appellees,

NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION; BLACK ROCK FINANCIAL MANAGEMENT, INC.; FRANKLIN ADVISERS, INC.; NUVEEN ASSET MANAGEMENT, LLC; TACONIC CAPITAL ADVISORS L.P.; WHITEBOX ADVISORS LLC,

Defendants-Appellees.

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

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

Before

Kayatta, Howard, and Rikelman, Circuit Judges.

Martin J. Bienenstock, with whom Mark D. Harris, Margaret A. Dale, Dietrich L. Snell, Ehud Barak, Shiloh Rainwater, Henrique N. Carneiro, Timothy W. Mungovan, John E. Roberts, Elliot R. Stevens, Lucas Kowalczyk, and Proskauer Rose LLP were on brief, for appellee/cross-appellant the Financial Oversight and Management Board for Puerto Rico, as representative of the Puerto Rico Electric Power Authority. Peter Friedman, with whom Maria J. DiConza, Elizabeth L.

 Of the Southern District of New York, sitting by designation. McKeen, Ashley M. Pavel, Jason Zarrow, O'Melveny & Myers LLP, Luis C. Marini-Biaggi, Carolina Velaz-Rivero, and Marini Pietrantoni Muñiz LLC were on brief, for appellee/cross-appellant the Puerto Rico Fiscal Agency and Financial Advisory Authority. Pedro A. Jimenez, with whom Luc A. Despins, Eric D. Stolze, Stephen B. Kinnaird, Stephen Sepinuck, Paul Hastings LLP, Juan J. Casillas Ayala, Israel Fernández Rodríguez, Juan C. Nieves González, and Casillas, Santiago & Torres LLC were on brief, for appellee/cross-appellant The Official Committee of Unsecured Creditors of All Title III Debtors. Richard G. Mason, Amy R. Wolf, Emil A. Kleinhaus, Angela K. Herring, Michael H. Cassel, Wachtell, Lipton, Rosen & Katz, Nayuan Zouairabani, Victoria Rivera Llorens, and McConnell Valdés LLC on brief for appellee Cortland Capital Market Services LLC. Sarah E. Phillips, Simpson Thacher & Bartlett LLP, Jose L. Ramirez-Coll, and Antonetti Montalvo & Ramirez Coll on brief for appellees SOLA LTD, Solus Opportunities Fund 5 LP, Ultra Master LTD, and Ultra NB LLC. Michael C. McCarthy, Clark T. Whitmore, John T. Duffey, and Maslon LLP on brief for appellant/cross-appellee U.S. Bank National Association. Matthew D. McGill, with whom Jeremy M. Christiansen, Lochlan F. Shelfer, Gibson, Dunn & Crutcher LLP, Howard R. Hawkins, Jr., Mark C. Ellenberg, Casey J. Servais, William J. Natbony, Thomas J. Curtin, Cadwalader, Wickersham & Taft LLP, Heriberto Burgos Perez, Ricardo F. Casellas-Sánchez, Diana Pérez-Seda, and Casellas Alcover & Burgos P.S.C. were on brief, for appellants/cross-appellees Assured Guaranty Corp. and Assured Guaranty Municipal Corp. Glenn M. Kurtz, with whom Claudine Columbres, Isaac Glassman, Thomas E. MacWright, Thomas E. Lauria, John K. Cunningham, Keith Wofford, Michael C. Shepherd, Jesse L. Green, White & Case LLP, Lydia M. Ramos Cruz, and Ramos Cruz Legal were on brief, for appellant/cross-appellee GoldenTree Asset Management LP. Susheel Kirpalani, Eric Kay, Quinn Emanuel Urquhart & Sullivan, LLP, Rafael Escalera, Carlos R. Rivera-Ortiz, and Reichard & Escalera on brief for appellant/cross-appellee Syncora Guarantee, Inc. G. Eric Brunstad, Jr., with whom Stephen D. Zide, David A. Herman, Dechert LLP, Dora L. Monserrate-Peñagarícano, Fernando J. Gierbolini-González, Richard J. Schell, and Monserrate Simonet & Gierbolini, LLC were on brief, for appellants/cross-appellees PREPA Ad Hoc Group. Kevin Carroll, Laura E. Appleby, Kyle R. Hosmer, and Faegre Drinker Biddle & Reath LLP on brief for Securities Industry and Financial Markets Association, amicus curiae. Jason S. Miyares, Attorney General of Virginia, Andrew N. Ferguson, Solicitor General of Virginia, Kevin M. Gallagher, Deputy Solicitor General of Virginia, Brendan T. Chestnut, Special Assistant to the Solicitor General of Virginia, Steve Marshall, Attorney General of Alabama, Christopher M. Carr, Attorney General of Georgia, Kris Kobach, Attorney General of Kansas, Michael T. Hilgers, Attorney General of Nebraska, Gentner F. Drummond, Attorney General of Oklahoma, Ken Paxton, Attorney General of Texas, Patrick Morrisey, Attorney General of West Virginia, Ashley Moody, Attorney General of Florida, Brenna Bird, Attorney General of Iowa, Austin Knudsen, Attorney General of Montana, Dave Yost, Attorney General of Ohio, Alan Wilson, Attorney General of South Carolina, Sean D. Reyes, Attorney General of Utah, on brief for the Commonwealth of Virginia and 13 Other States, amici curiae.

November 13, 2024 KAYATTA, Circuit Judge. In this opinion, we consider

the rights of parties holding certain revenue bonds issued by the

Puerto Rico Electric Power Authority ("PREPA" or "the Authority")

before it entered reorganization proceedings under Title III of

the Puerto Rico Oversight, Management, and Economic Stability Act

("PROMESA"). 48 U.S.C. §§ 2161–78. We hold that these bondholders

have a non-recourse claim on PREPA's estate for the principal

amount of the bonds, plus matured interest. We also hold that

this claim is secured by PREPA's Net Revenues -- as that term is

defined by the underlying bond agreement -- and by liens on certain

funds created by that bond agreement. We do not decide what

effect, if any, confirmation of a plan of reorganization will have

on the bondholders' security interest, nor do we attempt to

estimate the economic value of that security interest. Our

reasoning follows.

I.

A.

Puerto Rico passed the Puerto Rico Electric Power

Authority Act ("Authority Act") in 1941. See

. The Authority Act created PREPA, a public electric

utility.

§ 193(a). More than eighty years later, PREPA

remains the "sole electric utility in Puerto Rico." Puerto Rico

Electric Power Authority (PREPA), P.R. Fiscal Agency & Fin.

Advisory Auth., https://perma.cc/F7HA-QNVH. It owns electrical

- 5 - generation, transmission, and distribution assets in the

Commonwealth, and serves around 1.5 million customers. Id.

The Authority Act permits PREPA to raise money by issuing

revenue bonds secured by its "entire gross or net revenues and

present or future income."

(e)(1);

see also

§ 196(o). In this manner, PREPA can raise money

without granting a lien on its physical assets, such as power

plants or transmission lines. Pursuant to the Authority Act, PREPA

in 1974 executed the Trust Agreement with First National City Bank,

which was then acting as trustee.1 Under the Trust Agreement,

PREPA raised money to finance its system by issuing revenue bonds

(the "Revenue Bonds"). PREPA promised to repay the bondholders

over time,2 in accordance with the Trust Agreement. Several

articles of the Trust Agreement frame the issue before us.

First, the Trust Agreement opens with a Preamble,3 the

text and meaning of which we discuss in detail in Part II.A.1 of

this opinion.

1 The current trustee is U.S. Bank National Association (to which we refer as the "Trustee"). 2 The lower-case phrase "the bondholders" refers generally to the creditors that loaned PREPA money under the Trust Agreement. When specifically discussing the bondholders and insurers that are parties in this action, we use the capitalized term "Bondholders." 3 The Bondholders propose different labels for this provision, such as the "Now, Therefore paragraph," or the "Granting Clause." While we opt for the simpler "Preamble," our choice of

- 6 - Second, Article I of the Trust Agreement defines key

terms, including "Revenues" and "Net Revenues." PREPA's

"Revenues" are (1) "all moneys received by [PREPA] in connection

with or as a result of its ownership or operation" of its

electricity generation and distribution system, (2) "any proceeds

of use and occupancy insurance on the System or any part thereof,

and (3) "income from investments made under" either the Trust

Agreement or a 1947 predecessor agreement.4 PREPA's "Net Revenues"

are any Revenues remaining after deducting reasonable and

necessary operating expenses. Article I also defines the phrase

"Opinion of Counsel," which means any opinion filed by PREPA's

counsel to "authenticate bonds under [the Trust] Agreement."

Third, Article V of the Trust Agreement establishes a

"waterfall" structure for distributing PREPA's Revenues (as the

term is defined in Article I) into certain funds. The Revenues

first flow into the General Fund.5 PREPA pays its reasonable

operating expenses ("Current Expenses") out of the General Fund.

The remaining dollars -- the Net Revenues -- then flow into the

label does not bear on whether the provision is operative or prefatory. 4The Trust Agreement carved out several forms of investment income from this definition. Those exceptions are not relevant to this case, so we do not detail them here. 5This excludes investment income, certain types of which qualify as "Revenue" but nevertheless do not flow into the General Fund.

- 7 - Revenue Fund, minus a reserve to cover future operating expenses.

From there, Net Revenues flow first into the Sinking Fund, and

then into a series of Subordinate Funds. The Net Revenues

deposited into the Sinking Fund cover debt service. The Net

Revenues deposited into the Subordinate Funds cover internal PREPA

operations, such as extraordinary repairs or capital improvements.

There are four Subordinate Funds: the Construction Fund,6

the Self-Insurance Fund, the Capital Improvement Fund, and the

Reserve Maintenance Fund. If there is not enough money in the

Sinking Fund to cover PREPA's debt service obligations, Article V

(specifically, sections 512 through 512B) broadly requires PREPA

to draw on the Subordinate Funds -- other than the Construction

Fund -- to pay bondholders.

Fourth, and relatedly, Articles IV and V grant security

interests in certain funds both within and outside of the waterfall

structure described in Article V. Section 401 of the Trust

Agreement creates a "lien and charge in favor of the [bondholders]"

in moneys residing in the Construction Fund. Similarly, under

section 507 of the Trust Agreement, the moneys in the Sinking Fund

and remaining Subordinate Funds -- that is, the Subordinate Funds

6The Construction Fund is not technically part of the waterfall structure established in Article V. Instead, the Construction Fund is replenished by bond proceeds and certain Net Revenues preemptively siphoned off from the Revenue Fund. For the sake of simplicity, however, we include it in the broader category of Subordinate Funds.

- 8 - within the Article V waterfall -- are "subject to a lien and charge

in favor of the [bondholders]."7 Section 513 confirms that the

Sinking Fund moneys are "pledged to and charged with" debt service

payments to the bondholders.

Fifth, Article VI of the Trust Agreement specifies how

PREPA should hold and invest the moneys it receives. Specifically,

section 601 of the Trust Agreement states that:

All moneys received by the Authority under the provisions of this Agreement shall be deposited with a Depositary or Depositaries, shall be held in trust, shall be applied only in accordance with the provisions of this Agreement and shall not be subject to lien or attachment by any creditor of the Authority.

Sixth, Article VII of the Trust Agreement outlines

specific contractual covenants between the bondholders and PREPA.

In section 701, PREPA covenants that it will "promptly pay the

principal of and the interest on" the Revenue Bonds. PREPA also

covenants that the Revenue Bonds are "payable solely from the

Revenues and said Revenues are hereby pledged to the payment

thereof in the manner and to the extent hereinabove particularly

specified." In sections 705 and 712, PREPA also agrees not to

create -- "or suffer to be created" -- any lien or charge on "the

Revenues ranking equally with or prior to the [Revenue Bonds]."

7 Sections 401 and 507 both grant a lien to the Trustee, not the bondholders. But those sections confirm that this lien is for the benefit of the bondholders.

- 9 - Finally, Article VIII of the Trust Agreement outlines

the bondholders' remedies. Section 804 permits the bondholders to

file a suit "in equity or at law . . . for the appointment of a

receiver as authorized by the Authority Act[,] or for the specific

performance of any covenant or agreement contained herein." The

same provision entitles the bondholders to "recover and enforce

any judgment or decree against the Authority, but solely as

provided herein and in such bonds, for any portion of such amounts

remaining unpaid . . . and to collect (but solely from moneys in

the Sinking Fund and any other moneys available for such purpose)

in any manner provided by law, the moneys adjudged or decreed to

be payable."

B.

In 2017, PREPA defaulted on its fundamental obligations

under the Trust Agreement, including its obligation to pay the

bondholders. But for the passage of PROMESA, the Trustee and/or

the bondholders could have pursued various remedies authorized by

the Authority Act and the Trust Agreement. Those remedies include

suits at law and/or equity to enforce contractual covenants, to

obtain an accounting, and to place PREPA in receivership.

(a)–(b), 208(a)(1)–(3).

Congress, however, changed all this by enacting PROMESA.

Among other things, PROMESA created the Financial Oversight and

Management Board ("FOMB" or "Board").

(b)(1).

- 10 - PROMESA empowered the Board to place Commonwealth entities into

bankruptcy-type restructuring proceedings (often called "Title III

proceedings"), which resemble municipal bankruptcy proceedings

under Chapter 9 of the Bankruptcy Code. In re Fin. Oversight &

Mgmt. Bd. for P.R.,

, 124–25 (1st Cir. 2019); see

generally

(a) (incorporating broad swaths of the

Bankruptcy Code into PROMESA). In July 2017, the Board commenced

a Title III proceeding in district court (also called the

"Title III court") to restructure PREPA. See In re Fin. Oversight

& Mgmt. Bd. for P.R.,

(1st Cir. 2018). As a

result, the bondholders' ability to pursue any remedies against

PREPA under Commonwealth law was automatically stayed. See

(a) (incorporating section 362 of the Bankruptcy Code

into PROMESA);

(a) (stating that a bankruptcy

petition automatically stays actions against the debtor's estate).

After two years of on-and-off negotiations and

skirmishes, the Board filed an adversary proceeding within the

Title III restructuring proceeding. The purpose of the adversary

proceeding was to define the rights and remedies that bondholders

had against PREPA. After the parties negotiated a restructuring

agreement for PREPA in 2019, the Board agreed not to prosecute the

adversary proceeding. See In re Fin. Oversight & Mgmt. Bd. for

P.R.,

, 506 n.3 (1st Cir. 2024). The Commonwealth's

government unilaterally terminated the restructuring agreement in

- 11 - March 2022, so the Board moved to revive its original complaint.

. The Board filed its amended complaint in October of

that year, and this remains the operative complaint for purposes

of this appeal. The amended complaint included three allegations

that are relevant here.

First, the Board alleged that bondholders only had

security interests in moneys deposited in the Sinking or

Subordinate Funds. According to the Board, bondholders did not

have a security interest in PREPA's current or future Revenues/Net

Revenues, unless those Revenues/Net Revenues resided in the

Sinking or Subordinate Funds. Second, the Board alleged that

bondholders only had perfected security interests in the Sinking

Fund and one of the Subordinate Funds (i.e., the Self-Insurance

Fund), meaning the Board could avoid the remaining unperfected

interests pursuant to

(a). Finally, the complaint

alleged that the Revenue Bonds were non-recourse, meaning

bondholders could only recover owed moneys from the liened Funds,

rather than any other part of PREPA's estate.

The bondholders that are parties to this case (again,

"the Bondholders") filed an answer denying the Board's

allegations. The Bondholders also filed a counterclaim. Among

other things, the counterclaim alleged that PREPA had

misappropriated moneys "for uses other than Current Expenses

instead of paying [the] [B]ondholders," and had therefore breached

- 12 - its obligations to hold "all moneys received under the provisions

of the Trust Agreement in trust for the benefit of the

[B]ondholders." The Bondholders asked for a declaratory judgment

that PREPA was in breach of trust, and an "order requiring an

accounting of PREPA's revenues" pursuant to

(a)(2). According to the Bondholders, this "accounting"

would require equitable disgorgement of any moneys that PREPA

wrongly diverted from the Sinking and/or Subordinate Funds.

C.

On March 22, 2023, the Title III court issued a partial

summary judgment order in the adversary proceeding. First, the

court agreed with the Board that the Trust Agreement only granted

the Bondholders security interests in "moneys actually deposited

to the Sinking Fund and the [Subordinate Funds]." The Trust

Agreement did not grant a broader security interest in PREPA's

current or future Revenues (or Net Revenues). Second, the court

concluded that the Board could avoid any unperfected security

interests under

(a).8 Third, the Title III court

8 The parties have since stipulated that the Bondholders' security interests in the Reserve Maintenance Fund, the Capital Improvement Fund, and the Construction Fund are unperfected. Joint Stipulation & Proposed Agreed Order of the Financial Oversight and Management Board for Puerto Rico, U.S. Bank National Ass'n as PREPA Bond Trustee, the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp., and Syncora Guarantee, Inc. Resolving Perfection-Related Issues at 5–7, In re Fin. Oversight & Mgmt. Bd. for P.R.,

(D.P.R. 2023) (Adv. Proc. No. 19-

- 13 - rejected the Board's argument that the Revenue Bonds were

non-recourse, holding instead that the Bondholders could sue PREPA

to recover moneys outside the Sinking and Subordinate Funds.

With respect to the non-recourse holding, the Title III

court emphasized that even though the Bondholders lacked a security

interest in PREPA's Revenues or Net Revenues, section 804 of the

Trust Agreement still permitted them to seek a court order forcing

PREPA to divert moneys into the Sinking Fund. Recall that

section 804 authorized any bondholder to sue in law or equity for

the "specific performance of any covenant or agreement contained"

in the Trust Agreement. In the court's view, the existence of

this equitable specific performance remedy gave bondholders an

unsecured deficiency claim on PREPA's Net Revenues. The precise

amount of this claim would "aris[e] from liquidation of the value

of the Trust Agreement's equitable remedies related to specific

performance." A court may -- for purposes of claim

allowance -- estimate a claim in bankruptcy "arising from a right

to an equitable remedy for breach of performance."

(c)(2). The Title III court applied that provision,

estimating the specific performance remedy (and therefore the

unsecured claim on Net Revenues) at around $2.4 billion.

00391). There is one notable exception to this stipulation: The Bondholders may still argue that they have a perfected security interest in PREPA's Revenues, and that this perfection extends to the moneys in these Subordinate Funds.

- 14 - The court's partial summary judgment order did not reach

the Bondholders' trust-related arguments. But its final summary

judgment order, which it issued on November 28, 2023, did. There,

the Title III court concluded that the Bondholders had failed to

state a claim for breach of trust. It also rejected their related

demand that PREPA equitably disgorge, via an "accounting," any

misappropriated moneys pursuant to

(a)(2). The court found that PREPA was not a trustee under

the plain language of the Trust Agreement, and that an "accounting"

under the Authority Act did not require the sweeping restitution

remedy the Bondholders requested.

D.

Upon issuance of the Title III court's final summary

judgment order, the Bondholders filed separate notices of appeal.

The Bondholders challenged the Title III court's holdings that

they lacked a security interest in PREPA's current or future

Revenues or Net Revenues; that any such interest was potentially

avoidable under

(a); that they had failed to state

a claim for breach of trust; and that they were not entitled to an

"accounting" of misappropriated PREPA moneys. The Bondholders

also challenged the Title III court's estimation order, arguing

that the court erred by allowing an unsecured claim of

$2.4 billion, rather than almost $9 billion (i.e., the face value

- 15 - of the Revenue Bonds). Alternatively, the Bondholders challenged

the estimation order's methodology.

The Board and associated plaintiff-

appellees -- specifically the Official Committee of Unsecured

Creditors ("Committee") and the Puerto Rico Fiscal Agency and

Financial Advisory Authority ("AAFAF") -- cross-appealed. In

addition to rejecting the Bondholders' arguments, the Board and

its allies argued that the Title III court erred in allowing any

unsecured claim at all on PREPA's Net Revenues. In the Board's

view, the Revenue Bonds were non-recourse, so the Bondholders could

only recover from their collateral, i.e., the moneys in the Sinking

and Subordinate Funds. In the alternative, the Board and its

allies argued that the Title III court's $2.4 billion estimation

should be affirmed. Finally, the Board contended that if there

were a lien on Net Revenues, it would be avoidable as unperfected.

We consolidated these appeals and ordered expedited

briefing and oral argument.9

9 In our analysis, we frequently refer to arguments made by the Bondholders. In their briefing, several Bondholders -- specifically, GoldenTree Asset Management LP, Syncora Guarantee, and U.S. Bank National Association -- incorporate by reference arguments made by other Bondholders, pursuant to Federal Rule of Appellate Procedure 28(i). The PREPA Ad Hoc Group does not do so. But neither the Board nor its allies suggests that the Bondholders' invocation of Rule 28(i) was improper, or that the PREPA Ad Hoc Group's failure to invoke Rule 28(i) constitutes waiver of arguments raised exclusively by other Bondholders. So, where a

- 16 - II.

We begin by asking whether the Trust Agreement grants

the Bondholders a lien on any of PREPA's revenues other than those

that make it into the Sinking or Subordinate Funds. We hold that

the Trust Agreement grants the Bondholders a lien on PREPA's Net

Revenues, even if they are not placed in one of the Funds. Our

reasoning follows.

A.

1.

The dispute about the scope of the Bondholders' lien

begins with the Trust Agreement's Preamble. In pertinent part,

the Preamble provides: "Now, Therefore, This Agreement

Witnesseth, that . . . in order to secure the payment of [the

Revenue Bonds,] . . . [PREPA] does hereby pledge to the Trustee

the revenues of the System . . . and other moneys to the extent

provided in this Agreement as security for the payment of the

[Revenue Bonds] . . . , and it is mutually agreed and

covenanted . . . as follows . . . ."10

Bondholder sufficiently develops a given argument, we attribute that argument to all "the Bondholders." 10 The full text of the Preamble reads: Now, Therefore, This Agreement Witnesseth, that in consideration of the premises, of the acceptance by the Trustee of the trusts hereby created, and of the purchase and acceptance of the bonds by the holders thereof, and also for and in consideration of the sum of One Dollar to the Authority in hand paid by the Trustee at or before

- 17 - According to the Bondholders, the Preamble grants a lien

on all of PREPA's "Revenues," which are defined as PREPA's gross

revenues with several exceptions not relevant here. In sharp

contrast, the Title III court found that the Preamble did not

create any lien at all, let alone a lien on PREPA's gross revenues.

The court gave two reasons for this conclusion.

the execution and delivery of this Agreement, the receipt of which is hereby acknowledged, and for the purpose of fixing and declaring the terms and conditions upon which the bonds are to be issued, executed, authenticated, delivered, secured and accepted by all persons who shall from time to time be or become holders thereof, and in order to secure the payment of all the bonds at any time issued and outstanding hereunder and the interest and the redemption premium, if any, thereon according to their tenor, purport and effect, and in order to secure the performance and observance of all the covenants, agreements and conditions therein and herein contained, the Authority has executed and delivered this Agreement and has pledged and does hereby pledge to the Trustee the revenues of the System, subject to the pledge of such revenues to the payment of the principal of and the interest on the 1947 Indenture Bonds (hereinafter mentioned), and other moneys to the extent provided in this Agreement as security for the payment of the bonds and the interest and the redemption premium, if any, thereon and as security for the satisfaction of any other obligation assumed by it in connection with such bonds, and it is mutually agreed and covenanted by and between the parties hereto, for the equal and proportionate benefit and security of all and singular the present and future holders of the bonds issued and to be issued under this Agreement, without preference, priority or distinction as to lien or otherwise, except as otherwise hereinafter provided, of any one bond over any other bond, by reason of priority in the issue, sale or negotiation thereof or otherwise, as follows:

- 18 - First, the court concluded that the Preamble was a

non-binding "prefatory clause" -- much like a "whereas

clause" -- rather than a "self-effectuating granting clause." The

Board does not defend this reading of the Preamble, calling it

"beside the point." In its brief, AAFAF actually concedes that

the Preamble's language is "operative." Only the Committee and a

group of intervenors defend the contention that the Preamble is

not operative. The former labels the clause "not an operative

term at all," but rather a "lead-in" or "recital." And the latter

calls the clause "prefatory."

We agree with the Bondholders that the Preamble is a

granting clause, rather than a prefatory clause. To be sure,

language that only expresses the aspirations of the parties (such

as a classic "whereas" clause) can be a mere table-setter, often

without legal force. See Minturn v. Monrad,

, 15 (1st

Cir. 2023). And the Trust Agreement does begin with table-setting

"whereas" clauses. But the relevant Preamble language does not

appear in such a clause. Instead, it debuts in a subsequent "Now

Therefore . . ." clause, which states that the Authority "does

hereby pledge to the Trustee the revenues of the System . . . and

other moneys to the extent provided in this Agreement as security

for the payment of the bonds." (Emphasis added.) This language

reflects a grant, not merely an aspiration or a description of

background facts.

- 19 - Puerto Rico case law supports the conclusion that the

Preamble is not merely prefatory.11 In a case interpreting an

unrelated bond agreement, the Puerto Rico Supreme Court found that

a provision beginning with "Now, Therefore" was one of the "main

clauses" in the contract. D'All Concrete Mix, Inc. v. Raúl

Fortuño, Inc.,

, 956 (1983) (per curiam).

We see no reason to read the Preamble differently, especially given

that no party identifies any contrary Puerto Rico authority.

Our conclusion that the text of the Preamble is not

merely prefatory brings us to the Title III court's alternative

finding that the Preamble did not create any kind of security

interest because it did not use the words "lien" or "charge."

Again, the Board and its allies do not defend the court's

reasoning. The Board even concedes that the Preamble's "pledge"

is enough to create a security interest.

The Board is correct. There is no "magic words"

requirement for creating a security interest under Puerto Rico

law. Instead, a security agreement need only "indicate an

[objective] intent to create a security interest." In re Esteves

Ortiz,

(B.A.P. 1st Cir. 2003) (applying Puerto

Rico law). The Preamble clearly evinces such an intent. It states

that "in order to secure the payment" of the Revenue Bonds, PREPA

Under section 1301 of the Trust Agreement, Puerto Rico law 11

governs the contract's construction.

- 20 - "pledge[s] . . . the revenues of the System . . . and other moneys

to the extent provided in this Agreement as security for the

payment of the bonds." This language closely resembles language

that we have previously found sufficient to create a security

interest. See, e.g., In re Navigation Tech. Corp.,

(1st Cir. 1989) (finding that an assignment of contractual

rights "[t]o secure the payment of [a] debt" was enough to create

a security interest).

Revealingly, the Authority Act -- which, as the

Title III court found, authorizes PREPA to grant liens in its

revenues -- uses the same phrasing as the Preamble. Section 206

of the Authority Act states that PREPA may "pledg[e]" its current

or future revenues to "secure payment of [revenue bonds]." See

(e)(1). In other words, the Authority

Act expressly contemplates that a "pledge" to "secure payment" of

a bond can create a security interest. It would therefore be

paradoxical to hold that the identical language in the Preamble

does not create such an interest.

2.

Having established that the Preamble creates a security

interest, we next determine the scope of that security interest.

The Trust Agreement specifies that PREPA pledges as security for

the Revenue Bonds "the revenues of the System . . . and other

moneys to the extent provided in this Agreement . . . as follows."

- 21 - This text poses two questions. First, what are the "revenues of

the System," given that the Trust Agreement never expressly defines

the phrase? And second, does the phrase "to the extent provided

in [the Trust Agreement]" apply to both the pledge of the "revenues

of the System" and the pledge of "other moneys," or just to one of

those pledges? We address each question in turn.

i.

We begin with the Bondholders' ambitious claim that the

"revenues of the System" means PREPA's Revenues (i.e., gross

revenues). The Trust Agreement does not define "revenues of the

System." It does, however, define "Revenues" to mean "all moneys

received by the Authority in connection with or as a result of its

ownership or operation of the System [minus a variety of

investments and transactions]." It also defines "Net Revenues" to

mean "the excess of the Revenues . . . over the Current Expenses."

By eschewing the defined terms "Revenues" and "Net Revenues" in

favor of the undefined term "revenues of the System," the

Preamble's text leaves unclear precisely what is being pledged.

To resolve this ambiguity, we turn to the more

fundamental rule that a court should read a contract "as a whole."

See 11 Williston on Contracts § 32:5 (4th ed.); see also Entact

Serv., LLC v. Rimco, Inc.,

(D.P.R. 2007)

(citing

) ("[W]hen interpreting

contracts, [a court applying Puerto Rico law] must read contract

- 22 - provisions in relation to one another, giving unclear provisions

the meaning which arises from considering all provisions

together."). And that rule brings clarity.

When negotiating a contract governing billions of

dollars in bonds, the parties understandably agreed to accompany

any bond issuance with an opinion of counsel that would confirm

the creditors' rights and responsibilities. This opinion of

counsel would need to describe the security that PREPA purported

to provide its creditors. The parties supplied that description

in section 101 of the Trust Agreement. Under section 101, an

opinion of counsel must state that the Trust Agreement "creates a

legally valid and effective pledge of the Net Revenues . . . and

of the moneys, securities and funds held or set aside under this

Agreement as security for the bonds, subject to the application

thereof to the purposes and on the conditions permitted by this

Agreement . . . ." (Emphasis added.) We refer to this

language -- which the parties drafted to direct future counsel on

how to describe the collateral securing the Revenue Bonds in

connection with the issuance and delivery of any such bonds -- as

the "Opinion of Counsel Clause." And given this agreed-upon

description, we construe the phrase "revenues of the System" in

the Preamble to mean "Net Revenues" (i.e., gross revenues minus

Current Expenses) rather than "Revenues" (i.e., gross revenues).

- 23 - The Bondholders retort that other Trust Agreement

provisions -- namely, sections 516(c), 705, and 712 -- suggest

that the lien is on Revenues, not Net Revenues.12 These provisions

generally forbid PREPA from granting a lien equal or superior to

the lien "secured hereby upon the Revenues."13 (Emphasis added.)

These sections are about lien priority, not lien scope. And none

of these sections says that the Bondholders' lien is secured by

all the Revenues. That is, even if a bondholder were to have a

lien on part of the Revenues (for example, the Net Revenues), one

could still describe that lien as "upon the Revenues." Moreover,

even if the Bondholders' preferred reading were plausible, drive-

by references to "Revenues" must take a back seat to the drafters'

focused description of the collateral in the Opinion of Counsel

Clause. See Restatement (Second) of Contracts § 203, cmt. e (Am.

L. Inst. 1981) ("Attention and understanding are likely to be in

better focus when language is specific or exact, and in case of

conflict the specific or exact term is more likely to express the

meaning of the parties with respect to the situation than the

general language.").

12 The Bondholders also reference section 701's statement that the "Revenues are hereby pledged to the payment of [the Revenue Bonds]." Our analysis applies to that language as well. 13 Sections 516(c) and 705 use this language, while section 712 describes a lien on the "Revenues of the bonds issued under and secured by this Agreement."

- 24 - Finally, and most practically, even if the Bondholders'

reading of the Trust Agreement were correct, they would likely end

up in the same place. As all parties agree, PREPA's Revenues and

Net Revenues are "special revenues" under the Bankruptcy Code (a

term that we define more precisely later). See infra note 15.

And under the Code, any lien on special revenues is subordinate to

a utility's reasonable and necessary post-petition operating

expenses. See

(b);

(a)

(incorporating section 928 into PROMESA). Accordingly, as the

Bondholders conceded at oral argument, "even a gross revenue pledge

becomes a net pledge in [a Title III proceeding]." 5 Norton

Bankruptcy Law & Practice § 90:13 (3d ed. 2024).

ii.

The Board and its allies agree that the Bondholders do

not have a lien on PREPA's gross Revenues. But they insist that

this is only half the story. They argue that the Bondholders'

security interest does not even attach to all Net Revenues.

Instead, they claim that it attaches only to those Net Revenues

that have flowed into the Sinking Fund and/or the Subordinate

Funds. This argument trains on the text of the Preamble, which

states in relevant part that PREPA "does hereby pledge to the

Trustee the revenues of the System . . . and other moneys to the

extent provided in this Agreement . . . as follows." (Emphasis

added.)

- 25 - The Board's reasoning is thus: (1) The Preamble's

revenue pledge is only "to the extent provided in [the Trust

Agreement] . . . as follows"; (2) section 701 of the Trust

Agreement states, in turn, that PREPA's "Revenues are hereby

pledged . . . in the manner and to the extent hereinabove

particularly specified"; (3) therefore, the Preamble and

section 701 are "bookends" that limit the Bondholders' security

interest to the more specific grants that appear between those two

contractual provisions; (4) those more specific grants -- in

sections 401, 507, and 513 -- only expressly provide for liens in

the Sinking and Subordinate Funds; (5) so, the Trust Agreement

narrows the Preamble's revenue pledge to those Net Revenues that

are actually deposited into the Sinking and Subordinate Funds.

The first step in this argument poses a classic

antecedent puzzle. Recall that in the Preamble, the modifying

phrase "to the extent provided in [the Trust Agreement]"

immediately follows the pledge of "other moneys." But the Board's

argument assumes that this modifying phrase applies to both of its

antecedent phrases: "revenues of the System" and "other moneys."

Put differently, in the Board's view, the Preamble pledges (1) the

"revenues of the System . . . to the extent provided in [the Trust

Agreement]," and (2) "other moneys to the extent provided in [the

Trust Agreement]." Unsurprisingly, the Bondholders counter that

- 26 - the phrase "to the extent provided in [the Trust Agreement]"

modifies only its immediate antecedent: "other moneys."

The parties' respective readings rely on arguably

opposing interpretative canons. On the one hand, "[w]hen several

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

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

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

Paroline v. United States,

(2014) (quoting Porto

Rico Ry., Light & Power Co. v. Mor,

(1920)). In

a prior PROMESA case, we cited Paroline to interpret a similar

bond agreement between creditors and Puerto Rico's government

employee pension system. See In re Fin. Oversight & Mgmt. Bd. for

P.R.,

, 467 (1st Cir. 2020) ("Andalusian"). There,

the bond agreement defined "Employers' Contributions" as "the

contributions . . . made by the Employers and any assets in lieu

thereof or derived thereunder which are payable to the System

pursuant to [certain statutory sections]."

. We

rejected the argument that the modifying phrase beginning with

"which are payable to the System" only applied to its immediate

antecedent: "any assets in lieu thereof or derived thereunder."

. Instead, we found that the modifying phrase also

naturally referred to "the contributions . . . made by the

Employers."

The Board urges us to reach a similar conclusion

- 27 - here: that the "to the extent" phrase applies to both of its

antecedents.

On the other hand, there is the canon of the last

antecedent. This canon of statutory interpretation broadly

prescribes that "a limiting clause or phrase . . . should

ordinarily be read as modifying only the noun or phrase that it

immediately follows." Barnhart v. Thomas,

(2003).

If we apply this canon, then the "to the extent" phrase underlined

above only modifies its immediate antecedent: "other moneys."

Thus, the Preamble would pledge (1) "the revenues of the System,"

and (2) "other moneys to the extent provided in [the Trust

Agreement]."

Faced with the opposing indications of two

interpretative guides, we opt for the interpretation that the

drafters sanctioned in the Opinion of Counsel Clause. Notably,

that clause both "follows" the Preamble and comes before

section 701's command to construe the Trust Agreement's revenue

pledge "in the manner and to the extent hereinabove particularly

specified." And in describing the security granted by the Trust

Agreement to protect bondholders, the clause states in pertinent

part that the Trust Agreement establishes a "legally valid and

effective pledge of the Net Revenues . . . and of the moneys,

securities and funds held or set aside under this Agreement as

security for the bonds." (Emphases added.) This language -- with

- 28 - its two "and[s]" -- draws a clear grammatical distinction between

the pledge of the "Net Revenues" and the pledge of the "moneys,

securities and funds held or set aside under this Agreement." That

distinction runs directly counter to the Board's contention that

the Trust Agreement only pledges Net Revenues to the extent they

reside in the Sinking or Subordinate Funds.

In agreeing on how to describe the Revenue Bonds'

collateral to potential investors in the Opinion of Counsel Clause,

the parties presumably used words that accurately conveyed their

mutual intent. We are loath to read ambiguous language in the

Trust Agreement in a manner suggesting that the Agreement calls

for investors to be misled, as would be the case if we were to

hold that the Bondholders' collateral was limited to moneys in the

Sinking and Subordinate Funds. See Asociacion de Condominos v.

Centro I, Inc.,

, 268 (1977) (explaining

that contract interpretation should consider practical

consequences of a proffered reading). We also find it very

unlikely that an objectively reasonable party to the transaction

giving rise to the Revenue Bonds would have expected the source of

repayment not to be subject to a lien while in the debtor's hands.

To defend its preferred reading, the Board embraces the

Title III court's view that the Trust Agreement cannot create

overlapping liens in the Net Revenues and the moneys in the Sinking

and Subordinate Funds. The basic argument here is that if the

- 29 - Bondholders have a lien on all Net Revenues, then the Fund-specific

liens outlined in sections 401, 507, and 513 would be superfluous,

because the Sinking and Subordinate Funds also contain Net

Revenues. But at least one Subordinate Fund -- the Construction

Fund -- also includes bond proceeds, which the parties agree are

not Net Revenues.14 So, at least one Fund-specific pledge covers

moneys not captured by the pledge of the Net Revenues.

To be sure, that still leaves us construing the text as

granting an arguably superfluous lien in (at least) the Sinking

Fund. But such superfluity is hardly unheard of in revenue bond

agreements. See In re Las Vegas Monorail Co.,

(Bankr. D. Nev. 2010) (interpreting a contract that granted a

lien against net revenues, even though the creditor also held liens

in the funds that received those net revenues); cf. Unisys P.R.,

Inc. v. Ramallo Bros. Printing, No. CE-89-754,

, at

*11 (P.R. Offic. Trans.) (noting that when interpreting a contract,

a court may consider the parties' intent in light of prevailing

industry practices). Indeed, in this case, such a

belt-and-suspenders approach likely offered valuable assurance to

the bondholders. For example, section 507 of the Trust Agreement

states that the Sinking Fund is held by the Trustee, not by PREPA.

14 The parties disagree on whether other categories of moneys -- such as letters of credit and federal subsidies -- also qualify as Net Revenues. We need not resolve that issue here.

- 30 - By expressly noting that the Sinking Fund is "subject to a lien

and charge" in favor of the bondholders, the Trust Agreement

eliminates any risk that the transfer of moneys from the PREPA-held

Revenue Fund to the Trustee-held Sinking Fund would impair the

lien initially placed on those moneys as Net Revenues. Given this

context, the mere fact that our interpretation of the Trust

Agreement creates superfluity is not enough to invalidate it. See

Restatement (Second) of Contracts § 203, cmt. b (1981) ("Even

agreements tailored to particular transactions sometimes include

overlapping or redundant or meaningless provisions.").

The Board also points to section 601 of the Trust

Agreement, which states in pertinent part: "All moneys received

by [PREPA] under the provisions of this Agreement . . . shall not

be subject to lien or attachment by any creditor of [PREPA]."

According to the Board, this provision means that no lien can

attach to Net Revenues in their liminal, pre-Sinking Fund (or

pre-Subordinate Fund) state. This argument proves too much. The

Sinking and Subordinate Funds contain only "moneys received" by

PREPA. If "moneys received" are not subject to a lien, then

section 601 would cast doubt on every lien created by the Trust

Agreement. And it would undo the work done by both the Preamble

and the Opinion of Counsel Clause.

The more sensible reading of section 601 is that no

non-bondholder creditor may -- absent the bondholders'

- 31 - consent -- secure a lien on moneys received by PREPA. This reading

aligns with the Authority Act, which states that "[n]o lien

whatsoever may be placed on the assets of [PREPA] insofar as the

Trust Agreement with the bondholders or other agreements with the

creditors of [PREPA] do not allow."

(o). Thus, the Authority Act distinguishes between

agreements with "bondholders" and agreements with PREPA's other

"creditors."

And if we apply this distinction to section 601,

then that provision's prohibition on "lien or attachment by any

creditor of [PREPA]" clearly refers to creditors that are not

bondholders. (Emphasis added.) By contrast, section 601 does not

bar bondholders from obtaining a lien on "moneys received" by

PREPA. On the contrary, it guarantees that any such lien is

presumptively superior to a lien held by a non-bondholder creditor.

In sum, we find that as security for the Revenue Bonds,

PREPA pledged the Net Revenues and not just those moneys that made

it into the Sinking and Subordinate Funds.

B.

We have established that the Bondholders have a lien on

PREPA's Net Revenues. But that is not the end of the matter. The

parties disagree on a more fundamental question: Does the lien on

Net Revenues also apply to future Net Revenues, i.e., Net Revenues

that PREPA has not yet acquired? We conclude that the answer is

yes. Our reasoning follows.

- 32 - 1.

Commonwealth law determines whether -- and to what

extent -- a trustee or bondholder may have a security interest in

the assets of a bankrupt borrower. See Butner v. United States,

, 54 & n.9 (1979). Here, the Authority Act expressly

permits PREPA to pledge the "entire gross or net revenues and

present or future income of [PREPA], including the pledging of all

or any part thereof to secure payment" of the Revenue Bonds.

(e)(1). Puerto Rico has also adopted the

Uniform Commercial Code ("UCC"), which sanctions security

interests in "after-acquired collateral," i.e., liens extending to

property that the debtor does not possess at the time of the

underlying security agreement (also known as "floating liens").

(a); see also U.C.C. § 9-204, cmt. 2

(Unif. L. Comm'n 2024) ("[A] security interest arising by virtue

of an after-acquired property clause is no less valid than a

security interest in collateral in which the debtor has rights at

the time value is given."). In sum, several provisions in

Commonwealth law establish that the Bondholders may hold a security

interest in yet-to-be-acquired Net Revenues.

Congress has also recognized that a revenue bond can be

secured by future income. Under section 552(a) of the Bankruptcy

Code, a lien on after-acquired property does not attach to property

acquired after the debtor files for bankruptcy. See 11 U.S.C.

- 33 - § 552(a). But section 928 of the Bankruptcy Code makes clear that

a lien on "special revenues" -- like the one at issue

here -- continues to attach to revenues acquired post-petition,

notwithstanding the general bar in section 552(a).15 See

(a). As the legislative history shows, Congress passed

section 928 to alleviate the concern that municipalities would use

section 552(a) to avoid "long-term pledges of [project-specific]

revenues." See S. Rep. No. 100–506, at 25 (1988) (appended letter

providing views of Department of Justice). Thus, the Bankruptcy

Code not only recognizes that a debtor may grant a lien on future

revenues -- it also expressly states that such liens continue to

attach to revenues acquired after the filing of a bankruptcy

petition.

Several courts have also considered the scope of a

municipal revenue lien like the one before us. And all of them

have concluded (or at least implied) that a revenue lien can extend

to revenues to be acquired at a later date. See, e.g., In re

Jefferson County,

(Bankr. N.D. Ala. 2012)

(holding that under Alabama law, a revenue lien is a lien on a

"source of revenues," rather than a "possessory lien" on revenues

15 "Special revenues" include "receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used . . . to provide transportation, utility, or other services, including the proceeds of borrowings to finance the projects or systems."

(2)(A). The parties agree that PREPA's Net Revenues are "special revenues."

- 34 - already acquired); In re City of Chester,

, 567 (Bankr.

E.D. Pa. 2023) (recognizing a lien on revenues "payable or to be

received" by the city (emphasis added)); In re Fin. Oversight &

Mgmt. Bd. for P.R.,

(1st Cir. 2019) (noting in

passing dictum that applying section 552(a) to special revenue

bonds risks the "termination of creditors' security interests in

future special revenues"). We have not discovered -- nor has the

Board identified -- any contrary authority.

Thus, Puerto Rico law, the Bankruptcy Code, and prior

case law all indicate that the Net Revenues that PREPA acquires in

the future will be subject to the pledge of Net Revenues made by

PREPA in the Trust Agreement.

2.

The Board nevertheless lodges several objections to the

conclusion that the Bondholders' lien extends to PREPA's future

Net Revenues.

i.

The Board argues that under our opinion in Andalusian,

a revenue lien cannot extend to future-acquired revenues. But

Andalusian is inapposite. That case involved bonds issued by

Puerto Rico's Employees Retirement System ("ERS"), which were

secured by employer contributions to the ERS's multi-employer

pension plan. See 948 F.3d at 462–64.

- 35 - For two main reasons, this court held that the ERS

bondholders' lien on employer contributions did not attach to

post-petition contributions. First, the court reasoned that the

future employer contributions were not "proceeds" within the

meaning of Bankruptcy Code section 552(b)(1) because their receipt

depended on intervening appropriation by the Puerto Rico

legislature.16

at 467–70. So, ERS had a "mere expectancy" of

receiving future employer contributions, not a conveyable right of

receipt that could support a section 552(b)(1) claim on the

post-petition proceeds of that pre-petition collateral.

at

468 & n.8. Second, the court found that employer contributions to

ERS were not special revenues within the meaning of section 928(a).

Id. at 463, 473. Therefore, the ERS bondholders could not rely on

that section to avoid section 552(a)'s general rule that

pre-petition floating liens are ineffective as to collateral

acquired post-petition.

Here, though, the parties agree that PREPA's Net

Revenues -- unlike the contributions at issue in Andalusian -- are

special revenues within the meaning of section 928(a). That status

Broadly, under section 552(b)(1), a creditor maintains a 16

post-petition lien on the "proceeds" of collateral acquired pre-petition.

(b)(1). The bondholders in Andalusian argued that post-petition employer contributions were "proceeds" of collateral they had acquired pre-petition (i.e., ERS's right to receive employer contributions). See 948 F.3d at 466.

- 36 - by itself distinguishes this case from Andalusian unless we were

to treat its discussion of special revenues as superfluous, which

we will not.

ii.

The Board next argues that recognizing any interest in

future PREPA Net Revenues is contrary to the Commonwealth's

adoption of Article 9 of the UCC. The Board contends that a

security interest cannot attach to property under the UCC until

(1) the property exists; and (2) the debtor has a transferable

right in that property. As a general proposition, this is true.

See

(a) (explaining that a security

interest attaches when it becomes enforceable);

§ 2233(b)

(providing that a security interest is enforceable when, among

other things, "the debtor has rights in the collateral or the power

to transfer rights in the collateral to a secured party").

However, the Board's argument proves only that a

creditor cannot enforce a floating lien with respect to specific

units of yet-to-be-acquired collateral. See U.C.C. § 9-204,

cmt. 2 (validating a "floating lien" in a debtor's "existing and

(upon acquisition) future assets" (emphasis added)). For example,

the floating lien does not permit Bondholders to demand now Net

Revenues that the debtor will receive in five years. But this

does not mean that PREPA cannot convey an initial overarching

interest in any Net Revenues that come through the door in five

- 37 - years. In other words, the Board's objection goes to when a

revenue lien attaches to (and is perfected with respect to) future

Net Revenues. It does not undermine our initial conclusion that,

under Commonwealth law, a debtor may convey a lien on future Net

Revenues. See

(a);

(e)(1).

3.

We also address an argument raised by the Title III

court, but not by the Board. In its opinion below, the court

agreed with us that PREPA could grant a lien that would attach to

its future-acquired revenues, but it found "no evidence" that PREPA

had actually done so. However, both the Board and the Bondholders

construe the pledged collateral as encompassing moneys received

after the signing of the Trust Agreement. To construe it otherwise

would suggest that the bondholders paid billions in return for a

pledge of Net Revenues that applied only to the small amount of

Net Revenues already received and retained the day the Trust

Agreement was executed. See Asociacion de Condominos, 6 P.R.

Offic. Trans. at 268 (considering the practical consequences of a

proposed contractual interpretation).

III.

As an alternative basis for affirming, the Board argues

that even if the Bondholders have a lien on PREPA's current and

future Net Revenues, that lien is avoidable under 11 U.S.C.

- 38 - § 544(a). Section 544(a) grants the bankruptcy trustee (or, in a

PROMESA case, the Board) the powers of a hypothetical creditor who

"extends credit . . . at the [beginning] of the case," and thereby

obtains "a [judgment] lien on all property on which a creditor on

a simple contract could have obtained such a [judgment] lien."

See

(a);

(c)(7).

In Puerto Rico, a judgment lien is superior to any

unperfected security interest. See

.

So, if the Net Revenue lien is unperfected, then the Board may

avoid it. The Title III court did not address whether the Net

Revenue lien was perfected because it concluded that no such lien

existed. Having established that the Net Revenue lien exists, and

with the benefit of full argument and briefing, we conclude that

it is perfected, or will be perfected, at the very latest,

immediately upon PREPA's acquisition of those Net Revenues. This

means no hypothetical judgment creditor can outrank the

Bondholders with respect to those Net Revenues.

A.

In arguing to the contrary, the Board and its allies

contend that there is a mismatch between the nature of the

collateral and the form of perfection attempted by the Bondholders.

The Board argues that because the Net Revenues pledged as

collateral consist "of the excess of the Revenues . . . over the

Current Expenses," and "revenues" consist of "all moneys received

- 39 - by" PREPA, Trust Agreement § 101, the Net Revenues should be

classified as either "money" or "deposit accounts." And given

that a security interest in collateral classified as such is not

perfected by the means employed by the Bondholders (i.e., filing

a financing statement), FOMB argues that the Bondholders lack a

perfected interest in the Net Revenues. The Bondholders do not

dispute that a security interest in collateral classified as

"money" or "deposit accounts" is not perfected by the filing of a

financing statement. Instead, they argue that PREPA's Net Revenues

as pledged in the Trust Agreement are more properly classified as

either "accounts" or "general intangibles" -- security interests

that all parties agree are perfected by the filing of a financing

statement.

We consider first the Board's superficially attractive

claim that PREPA's "moneys" as collateral should be classified as

"money." As the Board acknowledges, though, the term "money" as

used to classify collateral for purposes of perfection "[m]eans a

medium of exchange authorized or adopted by a . . . government,"

(24); i.e., currency. And no party

points to any indication in the record that any substantial portion

of the collateral subject to dispute was received in the form of

currency.

So, that leaves the Board with its other candidate for

classifying Net Revenues as a form of collateral -- a "deposit

- 40 - account." A deposit account is a "demand, time, savings, passbook,

or similar account maintained with a bank."

§ 2212(a)(29).

The Board argues that when the Net Revenues flow into any one of

the many funds recognized by the Trust Agreement, the "security

interest in those revenues becomes a security interest in a

'deposit account.'" See In re O.P.M. Leasing Servs., Inc.,

, 670 n.5 (Bankr. S.D.N.Y 1985) (explaining that, where

"the parties clearly intended to create a security interest in the

money" in their agreement, that security interest continued to

attach to the deposit account into which the money was deposited).

Here, though, Article I of the Trust Agreement effected a

conditional pledge of both "the Net Revenues . . . and of the . . .

funds held or set aside . . . as security for the bonds."

(Emphases added.) Further bolstering the conclusion that the

parties intended to treat the Net Revenues and the funds as

distinct entities is the fact that some but not all of the funds

are held or set aside as collateral themselves. Trust Agreement

§ 507. This favors the view that the Bondholders have a security

interest in the Net Revenues that PREPA receives from its ownership

and operation of its energy system, whether or not they are held

at any moment in any particular bank account. We therefore remain

unconvinced that the special revenues defined as PREPA's current

and future Net Revenues are best themselves categorized as only a

deposit account under this particular agreement.

- 41 - Treating the collateral as the moneys that are not

currency rather than just the deposit accounts into which those

moneys move and out of which they exit at any moment also aligns

with the manner in which the Trust Agreement allows the debtor to

directly control the several funds that separate operating and

other costs from the revenues net of those costs.

That leaves "accounts" and "general intangibles" as the

remaining options. Which one we choose has no effect on the

outcome of this appeal because the parties agree that perfection

in either case requires the filing of a financing

statement -- which all agree the Bondholders have done.

In our initial, now withdrawn opinion, we settled on

"account" as the better option. The Board, though, makes a

reasonable argument that an "account" might describe PREPA's

receivables, but it provides a poor fit for PREPA's present or

future receipts. Puerto Rico defines an "account" as, inter alia,

"a right to payment of a monetary obligation . . . for energy

provided or to be provided."

(a)(2)(v). While the Bondholders have a right to repayment

by PREPA, and PREPA acquires rights to repayment by its customers,

nothing in the Trust Agreement seems to convey any pledge of either

such right. Rather, PREPA pledged its receipts, net of expenses.

And the Bondholders point to no authority treating a pledge of

receipts as necessarily encompassing the receivables that give

- 42 - rise to these receipts. So, without necessarily deciding the

issue, we assume the Board is correct and turn our focus to the

category of "general intangibles," which is after all something of

a catch-all for interests that do not fit other categories.

The Commonwealth defines "general intangibles" as a form

of collateral that is "personal property," but is not "accounts,

chattel paper, commercial tort claims, deposit accounts,

documents, goods, instruments, investment property, letter-of-

credit rights, letters of credit, life insurance policies, money,

and oil, gas, or other minerals before extraction."

§ 2212(a)(42) (emphases added). No party argues that Net Revenues

are not personal property or that we should consider as options

any of the listed types of personal property other than accounts,

deposit accounts, or money. So, given our findings and assumption

concerning those options, we are left to conclude that the Net

Revenues under the Trust Agreement are best categorized as a form

of general intangibles.

The Board cites two cases in opposition to this

conclusion. In re O.P.M. Leasing Services held that an escrow

account was not a general intangible because it was "for all

intents and purposes, money"; but the court failed to consider

whether the money in question was actually hard currency, even as

it relied only on a case in which the money was clearly hard

currency. See

n.5 (citing In re Midas Coin Co.,

- 43 - Inc.,

(E.D. Mo. 1967), aff'd sub nom Zuke v.

St. Johns Cmty. Bank,

(8th Cir. 1968)). The Board

also cites In re Barr, which also held that certain property

(utility deposits) was not a general intangible because it was

money.

(Bankr. N.D. Tex. 1995). Yet, again,

that court did not consider at all the definition of money

applicable here -- instead, it focused its discussion on a "utility

deposit . . . used to secure performance of contractual rights."

More closely on point, the court also held that profits of a

cooperative credited to a patron, but not yet paid to the patron,

constituted a general intangible. See

; see also In re

Beck,

(Bankr. C.D. Ill. 1988) (accepting party's

uncontested assertion that retained earnings account was a general

intangible). Meanwhile, two of the Bondholders cite a case even

more closely apposite: In re Ocean Place Development, LLC,

(Bankr. D.N.J. 2011). There, the court found that the

pledged revenues of money received from the debtor's operations

should be characterized as "'accounts' or 'payment intangibles,'

as defined under Article 9."

.17 In short, while

scant, the case law favors the view that PREPA's Net Revenues as

such should be classified as a general intangible for purposes of

determining whether a lien in those revenues has been perfected.

The applicable provision defined "payment intangibles" as 17

a form of "general intangible." Ocean Dev.,

n.4.

- 44 - This is not to say that all special revenues should be

classified as we classify them. Different agreements may warrant

different treatments. We simply hold that under this Trust

Agreement, the security interest in PREPA's Net Revenues received

now or in the future that are not held in the form of currency are

best classified as general intangibles. And that conclusion leaves

us as before -- the Bondholders have perfected their lien with

respect to PREPA's Net Revenues.

In Puerto Rico, an interest in a general intangible is

perfected by filing a financing statement.

(a). A financing statement is valid for at least five years.

§ 2335(a); see also id. § 2335(f) (providing that a financing

statement lasts indefinitely where "debtor is a transmitting

utility and a filed financing statement so indicates"). Here, the

Bondholders filed an updated financing statement in August 2013,

which described the underlying collateral as the "Revenues of the

System (as each such term is defined in the Agreement) and other

moneys to the extent provided in the Agreement."18 The Board filed

18 The language of the financing statement seems to imply that the Bondholders' lien is in Revenues, rather than Net Revenues. But under Commonwealth law, the financing statement cannot create an interest beyond that created by the Trust Agreement. See Xynergy Healthcare Cap. II LLC v. Municipality of San Juan,

, 155–56 (D.P.R. 2021) ("Where a security agreement covers only certain assets, the financing statement's inclusion of additional assets is ineffective to create a security interest in the additional assets omitted from

- 45 - its restructuring petition for PREPA in July 2017, so the August

2013 financing statement was timely. Moreover, the Board does not

argue that the August 2013 financing statement insufficiently

described the Bondholders' collateral or suffered from any other

flaw that would render the Net Revenue lien unperfected.

Accordingly, the Bondholders have perfected their lien

with respect to Net Revenues that PREPA acquires. See

(b) (providing that a security interest

attaches once a "debtor has rights in the collateral or the power

to transfer rights in the collateral to a secured party");

§ 2258 (instructing that perfection requires attachment).

B.

The Board also argues that because future Net Revenues

do not yet exist, it can avoid any lien in those future Net

Revenues. To see why this is not so requires some background on

the applicable law.

Under

(b), a bankruptcy trustee may avoid

a debtor's pre-petition transfer of property to a creditor, if

such transfer: (1) was made for an antecedent debt; (2) was made

while the debtor was insolvent; (3) was made within a certain time

period (usually ninety days); and (4) gives the creditor more than

it would receive in a liquidation scenario that did not include

the security agreement." (quoting In re Levitz Ins. Agency,

(Bankr. D. Mass. 1992))).

- 46 - the transfer. See also 5 Collier on Bankruptcy ¶ 547.01 (16th ed.

2023) (providing an overview of section 547). Before 1978, a body

of case law emerged to reconcile section 547's language on

pre-petition transfers with the UCC's recognition of liens on

after-acquired property. See, e.g., 4 White & Summers' Uniform

Commercial Code § 32:24 nn. 2–5 (6th ed. 2023) (collecting

authorities). To understand the problem, consider a simplified

example of a creditor with a lien on a merchant's revolving

inventory (i.e., a lien on after-acquired property). If we

conceive of the creditor as holding a distinct lien on each unit

of inventory, which arises only as the inventory is acquired,

then -- all else being equal -- any liens on inventory acquired in

the ninety-day pre-petition period would arguably be avoidable as

preferences under section 547. The upshot is that the creditor

would have no bulletproof lien on inventory acquired even months

before the bankruptcy petition date.

To avoid this outcome, several courts proposed the

"entity" or "stream" conception of liens on after-acquired

property. See, e.g., Grain Merchs. of Ind., Inc. v. Union Bank &

Sav. Co.,

, 215–17 (7th Cir. 1969); DuBay v. Williams,

, 1287 n.8 (9th Cir. 1969) (describing the idea in

dicta without adopting it); Manchester Nat'l Bank v. Roche,

(1st Cir. 1951) (same). On this view, the creditor's

security interest was not in each individual piece of inventory.

- 47 - Instead, the interest was in the "entity of [inventory] as a whole,

and not in the individual components, so that the [relevant]

transfer of property occurred [] when the interest in the

[inventory] as an entity was created and the financing statements

were duly filed," rather than when the debtor acquired rights in

a particular piece of inventory. Grain Merchs.,

.

One commentator put it in more philosophical terms, suggesting

that "[t]he secured creditor's interest is in the stream of

accounts flowing through the debtor's business, not in any specific

accounts. As with the Heraclitean river, although the accounts in

the stream constantly change, we can say it is the same stream."

William E. Hogan, Games Lawyers Play with the Bankruptcy

Preference Challenge to Accounts and Inventory Financing,

, 560 (1968).

Congress amended the Bankruptcy Code in 1978 to overrule

Grain Merchants, noting that for preference purposes, the relevant

transfer only occurred when "the debtor has acquired rights in the

property transferred."

(e)(3); see also S. Rep.

No. 95-989, at 89 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787,

5875 (expressing intent to overrule Grain Merchants). In its

briefing, the Board implies that by adopting what would become

section 547(e)(3), Congress expressly "disapprov[ed] of the

'stream' [conception]" of after-acquired property that the

pre-1978 cases espoused, and which the Bondholders seem to endorse.

- 48 - Just a decade later, though, Congress executed a u-turn

by adding section 926(b) to the Bankruptcy Code. Under that

provision, a transfer of property "for the benefit of any holder

of a bond or note" is not avoidable under section 547.

(b). So, at least with respect to revenue bond payments,

Congress appeared to resurrect the pre-1978 "stream" or "entity"

theory of after-acquired property. And the legislative history

suggests as much. To quote the accompanying Senate committee

report: "[I]n the municipal finance context, if the lien on future

revenues is voided as a preference, the result is at odds with

public policy and state enabling legislation which almost

invariably provides that pledges of such revenues are effective

when made and good against other creditors." S. Rep. No. 100-506,

at 7 (1988) (emphases added).

The "stream" or "entity" theory discussed in Grain

Merchants -- and reiterated in the legislative history of

section 926(b) -- resembles the theory that the Bondholders

advance now. In essence, the Bondholders argue that their lien

covers the "stream" of Net Revenues as a whole, not the individual

batches of Net Revenues as they come in the door. Thus, the

Bondholders argue that by virtue of their perfected lien in the

"stream" of Net Revenues, they currently hold perfected interests

in both already-acquired and future-acquired Net Revenues.

- 49 - Puerto Rico has not expressly adopted a "stream" theory

of after-acquired collateral. Nor is there any Commonwealth case

that applies the reasoning from Grain Merchants (or Congress's

adoption of section 926(b)) to revenue bonds. We therefore

hesitate to endorse the Bondholders' sweeping assertion

that -- under Commonwealth law -- their perfected lien on the Net

Revenue "stream" means they hold an already-perfected interest in

future-acquired Net Revenues.

Moreover, even if we were to assume that Commonwealth

law recognizes the "stream" theory in some form, it does not follow

that the Bondholders currently have a perfected lien on all

not-yet-acquired Net Revenues. Indeed, some commentators read

Grain Merchants as holding that lien attachment (and therefore the

potential for perfection) still only arises when the debtor

acquires the collateral. On this view, when a creditor holds a

lien in a collateral "stream," the creditor does not automatically

hold a perfected interest in each piece of collateral within that

"stream." Instead, the creditor's interest in a piece of

collateral attaches upon acquisition and is treated as if perfected

at the time of the initial financing statement. See, e.g., Rafael

I. Pardo, On Proof of Preferential Effect,

,

305 (2004) ("[T]he [Grain Merchants] lien creditor test related

the timing of the transfer of a security interest acquired under

a floating lien back to the filing of a financing statement by the

- 50 - secured party."); Richard F. Duncan, Preferential Transfers, the

Floating Lien, and Section 547(c)(5) of the Bankruptcy Reform Act

of 1978,

, 7 n.29 (1982) (noting that a security

interest in after-acquired collateral would be perfected "under

the earlier filing"). This slightly modified approach to the

"stream" theory finds some footing in Commonwealth law. As noted

above, under Commonwealth law, a lien attaches to property upon

acquisition.

(b); see also U.C.C.

§ 9-204, cmt. 2. It therefore seems to follow that the Bondholders

cannot currently hold a perfected lien in property that PREPA has

not yet acquired.

Ultimately, we need not identify the precise contours of

the Commonwealth law governing attachment and perfection. Under

any plausible conception of Commonwealth law, the Bondholders'

lien on future-acquired Net Revenues is not avoidable. If the

Commonwealth adopts the Bondholders' sweeping view -- i.e., that

their perfection of the lien in the Net Revenue "stream" means

they already hold a perfected interest in future-acquired Net

Revenues -- then the lien is clearly unavoidable. If the

Commonwealth adopts the modified conception of "stream" theory

discussed above, then the Bondholders' lien will attach to future

Net Revenues when PREPA acquires them, at which point the lien

will be treated as if it was perfected at the time of the initial

financing statement. And if the Commonwealth adopts no "stream"

- 51 - theory at all, then perfection would also occur as soon as PREPA

acquires any future Net Revenues. See

("A security interest is perfected when it attaches if the

applicable requirements are satisfied before the security interest

attaches."). In that case, there would be no intervening period

during which a judgment creditor could obtain a superior lien.

Cf. Arthur J. Harrington, Insecurity for Secured Creditors: The

Floating Lien and Section 547 of the Bankruptcy Act,

, 467 n.75 (1980) ("Since attachment is immediate, there

is simply no intervening time between the debtor's acquisition of

the collateral and perfection of the secured party's

rights . . . during which the [judgment] creditor's right can

attach to the debtor's inventory and accounts receivable."). Thus,

section 544(a) would not apply.

Accordingly, we hold that the Bondholders' lien is not

avoidable under section 544(a).19

IV.

We have held that the lien granted by the Trust Agreement

covers PREPA's present and future Net Revenues and that the

19 As noted earlier, see supra note 8, the Bondholders have reserved the right to argue that perfection of the lien on Net Revenues also perfects the liens on moneys deposited into certain Funds. Because the district court had no opportunity to rule on this issue, and because we have not received focused briefing on it, we offer no opinion on whether -- or to what extent -- perfection of the Net Revenue lien influences perfection of the liens in the Sinking and/or Subordinate Funds.

- 52 - Bondholders' lien is not avoidable. This leaves unanswered the

following question: How should the Title III court account for

that lien in PREPA's restructuring? Some of the Bondholders ask

us to the answer that question now. We decline to do so.

Without focused briefing from the parties or insight

from the Title III court, it is difficult to determine precisely

what must be decided. The Title III court never discussed how to

account for a Net Revenue lien during PREPA's restructuring. It

had no occasion to do so, because it held that no lien in the Net

Revenues existed. Instead, the court answered the materially

different question of how to account for a lien that covered only

moneys in the Sinking and Subordinate Funds.

In their briefing, some Bondholders point to the

Title III court's suggestion that a plan of adjustment will "cut[]

off accretions of the [Bondholders'] security interest." They

argue that this language amounts (incorrectly, they say) to a

holding that a plan of adjustment can unilaterally "cut off" the

Bondholders' security interest, no matter what form that interest

takes. But the court's language only applied to a lien on the

Sinking and Subordinate Funds. Basically, the court held that a

plan of adjustment would discharge PREPA's contractual obligation

to replenish the Sinking and Subordinate Funds. Therefore, any

"accretions" to those Funds would stop on the confirmation date,

meaning the Bondholders' security interests in those Funds would

- 53 - not grow in value after the confirmation date. That holding says

nothing about the extent to which a lien on Net Revenues received

post-confirmation is dischargeable in a plan of adjustment.

We therefore decline to tell the Title III court -- in

the first instance and without adequate briefing -- how it should

deal with the Bondholders' Net Revenue lien during plan

confirmation. In working through the difficult, novel, and

important questions posed by the Title III proceedings in this

case and others, we have found the considered opinions and insights

of the Title III court to be extremely helpful. This has been

true even in the handful of cases (like this one) where we have,

with the benefit of time and further briefing, arrived at a

different outcome.

V.

Next, the parties ask us to consider two disputes

regarding related questions that the Title III court did address:

(1) What is the size of the claim that the Net Revenue lien

secures?; and (2) If the Bondholders' collateral only satisfies

part of that claim, may the Bondholders file a deficiency claim

for the remainder?

A.

We start with the first question: What is the amount of

the Bondholders' claim on PREPA's estate? We conclude that the

- 54 - proper amount of the Bondholders' claim is the face value (i.e.,

principal plus matured interest) of the Revenue Bonds.

1.

We begin by summarizing the Title III court's holding on

this question. In the proceedings below, the court concluded that

the Bondholders only had a secured claim on moneys deposited into

the Sinking and Subordinate Funds. As our preceding discussion

makes clear, we do not share this view. But the Title III court

also found that the Bondholders had an unsecured claim on PREPA's

Net Revenues, even if they were not yet deposited in the Sinking

and Subordinate Funds.

To understand the Title III court's finding, we must

look to section 101(5) of the Bankruptcy Code. Under that section,

a creditor can have two types of claim on a bankrupt debtor's

estate. First, a creditor's claim can stem from a "right to

payment."

(5)(A). Second, a creditor's claim can

stem from a "right to an equitable remedy for breach of

performance[,] if such breach gives rise to a right to payment."

§ 101(5)(B).

The Title III court found that the Bondholders'

unsecured claim on Net Revenues derived from a "right to an

equitable remedy for breach of performance." Id. Recall the

remedies outlined in the Trust Agreement. If PREPA breached its

contractual covenant to transfer Net Revenues into the Sinking and

- 55 - Subordinate Funds, then the Bondholders could force PREPA to change

course by placing PREPA into receivership, or by seeking specific

performance. Those are equitable remedies. And those remedies

would, by definition, reach Net Revenues not yet deposited into

the Sinking and Subordinate Funds. Therefore, the court found,

the Bondholders had a claim on the Net Revenues that derived from

their "equitable remed[ies] for breach of performance." Id. And

the amount of that claim was limited to "[what] could be achieved

through the application of the equitable remedies to fulfill

the . . . covenant to pay the [Revenue] Bonds from the Net Revenues

of the System."

That brings us to section 502(c)(2) of the Bankruptcy

Code. Under that section, a court may estimate (i.e., assign a

dollar amount to) a "right to payment arising from a right to an

equitable remedy for breach of performance." See id. § 502(c)(2).

Applying section 502(c), the district court estimated the

Bondholders' unsecured claim on the Net Revenues at $2.4 billion.

Broadly speaking, the Title III court reached that number by

estimating how much Net Revenue a receiver would be able to direct

into the Sinking and Subordinate Funds (while complying with the

rest of the Trust Agreement) over the next 100 years and then

discounting that figure to present value.

- 56 - 2.

We disagree with the foundational assumption of the

Title III court's valuation analysis: that the Bondholders' claim

on the Net Revenues was a "right to payment arising from a right

to an equitable remedy for breach of performance" subject to

estimation under section 502(c)(2). Instead, we find that the

Bondholders had a legal "right to payment" rooted in the covenants

outlined in the Trust Agreement. Because the Revenue Bonds specify

the amount that PREPA legally owes the Bondholders, there was no

need to estimate the Bondholders' "right to payment" under

section 502(c).

A creditor holds a "right to payment" when the debtor is

legally obligated to pay "under the relevant non-bankruptcy law."

In re Chateaugay Corp.,

(2d Cir. 1995) (quoting

In re Nat'l Gypsum Co.,

(Bankr. N.D. Tex. 1992)).

Here, that non-bankruptcy law is the law of contracts (and the

Authority Act) as applied to the Trust Agreement. And the Trust

Agreement clearly requires PREPA to pay the bonds in full. In

section 701 of the Trust Agreement, PREPA promises to "promptly

pay the principal of and interest on each and every bond issued"

under the Trust Agreement. This covenant creates a legal right to

payment. To be sure, but for the automatic stay on actions against

PREPA's estate, the Bondholders could deploy various equitable

remedies -- such as receivership -- to enforce their right to

- 57 - payment if PREPA breaches the covenant. See

. But the underlying right remains a legal one.

Indeed, the Trust Agreement expressly permits the Bondholders to

proceed at law to challenge any breach of the Trust Agreement's

covenants.

When a legal right to payment arises from a debt

instrument, the "proper amount of claim in a bankruptcy case" is

the "full face amount of [the instrument]." In re Oakwood Homes

Corp.,

, 596–97 (3d Cir. 2006) (emphasis omitted)

(quoting 4 Collier on Bankruptcy ¶ 502.03 (5th rev. ed. 2005));

see also In re Trendsetter HR L.L.C.,

, 910 n.22 (5th

Cir. 2020) (citing the same Collier section).

This makes sense. As an analogy, consider how courts

have applied section 502(c)(1), another estimation provision that

applies to "contingent or unliquidated claim[s]."

(c)(1). The purpose of that provision is to assign a dollar

amount to "undetermined claims of an unsettled amount." In re

Trendsetter, 949 F.3d at 910 n.22. By contrast, section 502(c)(1)

does not apply to "liquidated claims" -- that is, claims with an

amount determinable "by reference to an agreement or by a simple

computation." In re Nicholes,

(B.A.P. 9th Cir.

1995). When dealing with "liquidated claims," the court can often

look to an underlying agreement to determine the claim amount.

("[D]ebts arising from a contract are generally liquidated.");

- 58 - see also In re Flaherty,

(Bankr. N.D. Ill. 1981)

(the amount of a liquidated claim "may be ascertained by

computation or reference to the contract out of which the claim

arises") (quoting Zimek v. Ill. Nat'l Cas. Co.,

(1939)); 2 Norton Bankruptcy Law & Practice § 48:13 (3d ed. 2024)

("Liquidated claims . . . should be calculated directly from the

underlying obligation under applicable law.").

The case law around section 502(c)(1) informs our

analysis of section 502(c)(2). A claim "arising from a right to

an equitable remedy for breach of performance" resembles a

"contingent or unliquidated claim." In both cases, the amount of

the claim is not easy to discern, so estimation is appropriate.

(c)(1)–(2). But here, the Bondholders' claim

resembles a "liquidated claim." We can easily determine its amount

by looking to the contract from which it arises: the Trust

Agreement. In re Flaherty,

. According to that

contract, the face value of the Revenue Bonds (i.e., the principal

plus matured interest) is just under $8.5 billion.20 So, that is

the amount of the Bondholder's claim on the Net Revenues.

Only one party -- AAFAF -- attempts to defend the

Title III court's estimation analysis. The agency argues that the

For our purposes, the face value of a debt instrument is 20

the principal plus any matured interest. The bankruptcy court must disallow any portion of a claim attributable to unmatured interest. See

(b)(2).

- 59 - Bondholders do not have a contractual right to payment in full,

because section 804 of the Trust Agreement permits paying the

Bondholders "solely from the Sinking Fund and other moneys

available for such purpose." So, AAFAF argues, the Bondholders

only have a right to payment from non-deposited Net Revenues if

they deploy their equitable remedies to force those Net Revenues

into the Sinking Fund. The upshot of this argument is that any

right to payment from the Net Revenues is equitable, not legal.

There are two problems with this argument. First, AAFAF

conflates the mechanism by which the Bondholders are paid with the

Bondholders' underlying legal right to payment. The fact that

payments come from the Sinking Fund says nothing about the

Bondholders' underlying entitlement to those payments in the first

place. That legal right stems from the payment covenant in

section 701, which never states that the Bondholders are only

entitled to payment from the Sinking Fund. Second, the text of

section 804 undercuts AAFAF's position. That provision permits

payment of the Bondholders from the "Sinking Fund and any other

moneys available for such purpose." (Emphasis added.) Net

Revenues are "available" for debt service. The only pre-debt

service payments required by the Trust Agreement are the deduction

of Current Expenses from incoming Revenues, which is required under

section 505. After that, Net Revenues are eligible for debt

payments, as evidenced by the text of section 804 referring to

- 60 - "other moneys" available for debt service, not "other funds"

available for debt service.

Accordingly, the proper amount of the claim is the

principal plus matured interest of the bonds, or roughly

$8.5 billion (the district court can determine the precise

amount). Importantly, this is not to say that the Bondholders

must be paid $8.5 billion. Rather, it is to say that the

Bondholders' allowed claim on PREPA's estate is on the order of

$8.5 billion. And that allowed claim is only secured "to the

extent of the value of [the Bondholders'] interest" in the Net

Revenues and the Sinking and Subordinate Funds.

(a)(1). If the value of those liens is less than the allowed

claim amount, then the Bondholders are undersecured. In that

event, what (if anything) can the Bondholders do to recover the

difference between the allowed claim amount and the value of their

collateral? We turn to that question next.

B.

In the proceedings below, the parties took opposing

positions on whether the Bondholders had any recourse against PREPA

beyond their rights to the collateral securing the Revenue Bonds.

Given our holding that the Bondholders' collateral does include

PREPA's Net Revenues, the significance of this issue has likely

shrunk, but not disappeared.

- 61 - Under section 1111(b) of the Bankruptcy Code, a secured

creditor -- subject to limited exceptions -- has "recourse against

the debtor on account of [its secured] claim," even if the creditor

is otherwise nonrecourse under applicable non-bankruptcy law.

§ 1111(b)(1)(A). However, under section 927 of the Bankruptcy

Code, this presumption of recourse does not apply to a "holder of

a claim payable solely from special revenues of the debtor." Id.

§ 927.

The Bondholders contend that section 927 does not apply,

because their secured claim is not payable "solely" from special

revenues. Instead, they claim, the Revenue Bonds are also payable

from non-special revenue sources like investment earnings, federal

subsidies, or insurance proceeds. This argument overreads the

word "solely" in section 927. The purpose of section 927 is to

deny special revenue bondholders any recourse to the general funds

of a municipality, which are often subject to "statutory or

constitutional limits on debt issuance." 6 Collier on Bankruptcy

¶ 927.02 (16th ed. 2024). Thus, a claim is payable "solely from

special revenues" under section 927 when the claimant lacks "any

right to claim from the general treasury of the municipality."

Id. Here, the Trust Agreement expressly states that the Revenue

Bonds are not "general obligations of [the] Commonwealth of Puerto

Rico." So, section 927 applies, and the Bondholders' recourse is

- 62 - limited to their collateral unless the Trust Agreement says

otherwise.

Nothing in the Trust Agreement makes the Bondholders

recourse creditors. The only contractual provisions cited by the

Bondholders are sections 804 and 805. Section 804 permits the

Bondholders' Trustee to sue PREPA for unpaid moneys and to demand

payment from the "Sinking Fund and any other moneys available for

[debt service]." As noted above, only the Net Revenues (and the

non-Net Revenue moneys in the liened Funds) are available for debt

service. Section 505 of the Trust Agreement requires payment of

Current Expenses (i.e., conversion of Revenues to Net Revenues)

before any payments may flow to the Bondholders. So, section 804

simply states that the Bondholders may reach the Net Revenues and

the liened Funds to recover unmade payments. It does not grant

any further recourse. The same logic applies to section 805, which

states that if moneys in the Sinking Fund are insufficient to make

debt service payments, the Bondholders may reach the moneys in the

Sinking Fund and "any moneys then available or thereafter becoming

available for [debt service]." Again, only Net Revenues and the

liened Funds are available for debt service. So again, section 805

does not broaden the Bondholders' recourse beyond their

collateral.

Thus, the Bondholders are nonrecourse creditors. A

nonrecourse creditor may "look only to its collateral for

- 63 - satisfaction of its debt and does not have any right to seek

payment of any deficiency from a debtor's other assets." In re

680 Fifth Ave. Assocs.,

, 732–33 (Bankr. S.D.N.Y.

1993). The Bondholders may not file an unsecured deficiency claim

against PREPA, because that claim would naturally reach assets

other than the Bondholders' collateral. This conclusion is hardly

novel. In fact, it aligns with the standard market practice for

special revenue bonds. See 4 Norton Bankruptcy Law & Practice

§ 90:13 (3d ed. 2024) ("[S]pecial revenue bonds usually are

non-recourse debt . . . . [I]n the event of default the

bondholders have no claim against the municipality's general fund

or other non-pledged revenues or assets . . . . [B]ondholders

assume the risk that the revenues will not be enough to pay the

bonds.").

VI.

Finally, the Bondholders appeal two related holdings by

the Title III court pertaining to PREPA's trust obligations (or

lack thereof). First, some of the Bondholders challenge the

court's dismissal of their breach of trust claim. Second, they

challenge the court's dismissal of their "accounting" claim, which

is rooted in the Authority Act's command that PREPA "account as if

[it] were the trustee of an express trust" in favor of the

Bondholders.

(a)(2).

- 64 - We affirm the dismissal of the breach of trust claim,

but we reverse the dismissal of the accounting claim.

A.

Some of the Bondholders claim that when PREPA received

Revenues, it held them in trust for the benefit of the Bondholders.

But the Trust Agreement clearly identifies First National City

Bank and its successors -- not PREPA -- as Trustee. In response,

the Bondholders point to language in section 601 stating, in

pertinent part, that all moneys received by PREPA "shall be

deposited with a Depositary or Depositaries [and] shall be held in

trust." But nothing in section 601 states that PREPA receives and

holds its moneys in trust in the first instance. On the contrary,

section 601 -- which is captioned "Deposits constitute trust

funds" -- states that "[a]ll moneys deposited with each Depositary,

including the Trustee, shall be credited to the particular fund or

account to which such moneys belong." (Emphasis added.) This

language shows that the "Trustee" must be a "Depositary," i.e., a

financial institution designated to hold deposits under the Trust

Agreement. PREPA is not a Depositary. So, we read section 601 as

requiring PREPA to deposit moneys with Depositories, who then hold

the moneys in trust and apply them in accordance with the Trust

Agreement. Section 601 does not make PREPA itself a trustee.

The text of the Authority Act elsewhere reinforces our

conclusion. The Authority Act requires PREPA to "account as if

- 65 - [it] were the trustee of an express trust."

(a)(2) (emphasis added). As the Title III court

properly noted, this language would be unnecessary if PREPA were

already a trustee with respect to all moneys received.

B.

The Bondholders also appeal the Title III court's

dismissal of their accounting claim. Here, the Bondholders are on

firmer footing. We agree that the accounting claim should be

reinstated.

The Authority Act permits the Bondholders, subject to

the terms of the Trust Agreement, to bring an equitable action

requiring PREPA to "account as if [it] were the trustee of an

express trust."

(a)(2). And the

Trust Agreement does not limit this authority. Section 804 permits

the Trustee to sue (on the Bondholders' behalf) for "the

enforcement of any proper legal or equitable remedy."

The concept of an "accounting" is not defined in the

Trust Agreement, the Authority Act, or Puerto Rico law.

Historically, though, an "accounting" has been an equitable remedy

much like restitution or disgorgement. See Liu v. SEC,

, 79 (2020) (noting that an equitable cause of action to

"deprive[] wrongdoers of their net profits from unlawful activity"

has been variously called accounting, restitution, or

disgorgement).

- 66 - Taken together, the Trust Agreement and Authority Act

appear to permit the Bondholders to bring an equitable action for

Net Revenues wrongly diverted from debt service. Indeed, in their

brief, the Bondholders suggest that PREPA has spent Net Revenues

on unreasonable Current Expenses, thereby starving the Sinking and

Subordinate Funds of cash and slowing debt payments to the

Bondholders. So, the Bondholders appear to have an accounting

claim, unless any relevant authorities suggest otherwise.

In dismissing the accounting claim, the Title III court

concluded that a creditor requesting an "accounting" under Puerto

Rico law is entitled only to information about the debtor's unpaid

obligations. It relied on two authorities for this proposition,

but we do not find either one apposite.

First, the court relied on

, which defines a "request for an accounting" as a "record

authenticated by a debtor requesting that the recipient provide an

accounting of the unpaid obligations secured by collateral."

(a)(2). As the text makes clear, this

provision concerns a debtor's request for an accounting, not a

creditor's request for an accounting. Moreover, the definition of

"request for an accounting" that appears in section 2240 is

expressly limited to that section.

§ 2240(a).

Second, the court relied on our holding in Citibank

Global Mkts., Inc. v. Rodríguez Santana,

(1st Cir.

- 67 - 2009). There, an account holder sued a broker-dealer, broadly

alleging overcharging of commissions.

at 21–22. The account

holder alleged the broker-dealer had fraudulently induced him to

sign a settlement agreement concerning those overcharges.

. He argued that the settlement would only have been valid if

the broker-dealer (acting as his agent) had "provide[d] an

accounting of its . . . overcharges."

. The

broker-dealer had, in fact, provided a "detailed forty-plus page

analysis of the overcharges."

. The Citibank court did

not pass on whether such an accounting was, in fact, required. It

simply held that, if an accounting were required, nothing in Puerto

Rico law suggested that the broker-dealer's analysis was

insufficient.

Thus, Citibank did not define the remedy of

"accounting" under Puerto Rico law. And even if it did define

that remedy, it did so in the context of agency law, not secured

transactions.

Citibank therefore provides little guidance

here.

To conclude, the Bondholders have properly pled a claim

for an equitable accounting. That said, we emphasize, as the Board

correctly does, that any equitable accounting will not expand the

Bondholders' recourse beyond the Net Revenues. Under the Authority

Act, a claim for an equitable accounting is subject to the terms

of the Trust Agreement.

(a). And as

discussed above, sections 804 and 805 of the Trust Agreement state

- 68 - that in any legal or equitable action to enforce payment of the

Revenue Bonds, the Bondholders may only reach moneys available for

debt service. Thus, while the Bondholders stated a claim for an

accounting under the Authority Act, that claim will not entitle

them to reach any moneys or funds in which they do not already

hold a security interest.

VII.

For the foregoing reasons, the judgment of the Title III

court is affirmed in part and reversed in part. All parties shall

bear their own costs.

- 69 -