Case Type:
Case Status:
20-2041 (1st Circuit, Aug 12,2021) Published
The Court of Appeals affirms the Title III Court's ruling allowing certain expenses incurred by PREPA under a post petition contract to transfer the operations and management of PREPA to a private entity as entitled to administrative expense priority pursuant to § 503(b)(1)(A) of the Bankruptcy Code.
Procedural context:
When PREPA requested allowance of administrative expense treatment for any accrued and unpaid amounts required to be paid by PREPA under the post petition contract entered into with LUMA Energy, a as part of its reorganization process, UTIER, SREAEE and other parties opposed arguing that operating expenses like the Front-End Transition Service Fee cannot be given administrative expense priority under § 503(b)(1)(A) of the Bankruptcy Code. The objectors argued that § 503(b)(1)(A) gives priority to "necessary costs and expenses of preserving the estate." They argued this section cannot apply on its own terms because there is no "estate" in Title III proceedings. The Title III Court rejected that argument and reasoned that the fact that Congress incorporated § 503 of the Bankruptcy Code in its entirety through PROMESA "provides a strong indication that Congress did not intend to preclude the applicability of section 503(b)(1)(A) in the Title III context." As to the late fees contracted, it denied the motion in part without prejudice "solely to the extent that it seeks an allowed administrative expense claim for any amounts that might become due . . . as a result of PREPA's untimely payment of any Front-End Transition Obligations." The Title III court declined to address the objectors' argument that granting the motion "would contravene subsections 201(b)(1)(B) and 201(b)(1)(C) of PROMESA. The subsections require fiscal plans to "ensure the funding of essential public services" and "provide adequate funding for public pension systems." Id. (quoting 48 U.S.C. § 2141(b)(1)(B), (C)). FOMB certified a fiscal plan and budget for PREPA that include the Front-End Transition Service Fee, and the Title III court held that it lacked jurisdiction under 48 U.S.C. § 2126(e) to decide the objectors' challenge to that certification decision. UTIER and SREAEE timely appealed.
In 2016, the president signed into law PROMESA, which Congress passed in response to the government debt crisis in Puerto Rico. 48 U.S.C §§ 2101-2241. Title III of PROMESA made many sections of the Bankruptcy Code applicable in restructuring proceedings for Puerto Rico and its instrumentalities. In July 2017, after PREPA became unable to service its debt, FOMB began restructuring proceedings on its behalf, overseen by the Title III court. Appellants Unión de Trabajadores de la Industria Eléctrica y Riego ("UTIER") and Sistema de Retiro de los Empleados de la Autoridad de Energía Eléctrica ("SREAEE") are pre-petition creditors whose claims were stayed when PREPA's restructuring proceedings began. In June 2018, Puerto Rico passed the Puerto Rico Electric Power System Transformation Act to partially privatize PREPA. P.R. Laws Ann. tit. 22, §§ 1111-1125. Two years later, in June 2020, PREPA and the P3 Authority entered a contract ("T&D Contract") with LUMA Energy to gradually transfer operations and management of PREPA to LUMA. The T&D Contract included a front-end transition plan. PREPA agreed to pay LUMA the costs of performing these front-end transition services, which are estimated to amount to $76 million, as well as a $60 million flat fee (the "Front-End Transition Service Fee").1 PREPA also agreed to pay any late fees that might become due as a result of its untimely payments. PREPA agreed to "file a motion with the Title III Court seeking administrative expense treatment for any accrued and unpaid amounts required to be paid by [PREPA] . . . during the Front-End Transition Period, including the Front-End Transition Service Fee." UTIER, SREAEE, and other parties opposed the motion.
Howard, Lynch, and Kayatta

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