Windmar Renewable Energy v. PREPA

United States Court of Appeals
For the First Circuit
No. 20-1685
IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, as Representative for the Commonwealth of Puerto Rico; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Highways and Transportation
Authority; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR
PUERTO RICO, as Representative for the Puerto Rico Electric
Power Authority (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT
BOARD FOR PUERTO RICO, as Representative for the Puerto Rico
Sales Tax Financing Corporation, a/k/a Cofina; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Employees Retirement System of the
Government of the Commonwealth of Puerto Rico; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Public Buildings Authority,
Debtors.
CAMPAMENTO CONTRA LAS CENIZAS EN PENUELAS, INC.; ALIANZA
COMUNITARIA AMBIENTALISTA DE SURESTE, INC.; AMIGOS DEL RIO
GUAYNABO, INC.; CAMBIO P.R.; COALICION DE ORGANIZACIONES ANTI-
INCINERACION, INC.; COMITE YABUCOENO PRO-CALIDAD DE VIDA, INC.;
COMITE DIALOGO AMBIENTAL, INC.; EL PUENTE DE WILLIAMSBURG, INC.,
Enlace Latino de Accion Climatica; SIERRA CLUB PUERTO RICO,
INC.; MAYAGUEZANOS POR LA SALUD Y EL AMBIENTE, INC.,
Interested Parties, Appellants,
v.
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 Electric Power Authority
(PREPA),
Debtors, Appellees.
No. 20-1709
IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, as Representative for the Commonwealth of Puerto Rico; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Highways and Transportation
Authority; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR
PUERTO RICO, as Representative for the Puerto Rico Electric
Power Authority (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT
BOARD FOR PUERTO RICO, as Representative for the Puerto Rico
Sales Tax Financing Corporation, a/k/a Cofina; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Employees Retirement System of the
Government of the Commonwealth of Puerto Rico; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Public Buildings Authority,
Debtors.
UNION DE TRABAJADORES DE LA INDUSTRIA ELECTRICA Y RIEGO (UTIER),
Interested Party, Appellant,
v.
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 Electric Power Authority
(PREPA),
Debtors, Appellees.
No. 20-1710
IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO
RICO, as Representative for the Commonwealth of Puerto Rico; THE
FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Highways and Transportation
Authority; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR
PUERTO RICO, as Representative for the Puerto Rico Electric
Power Authority (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT
BOARD FOR PUERTO RICO, as Representative for the Puerto Rico
Sales Tax Financing Corporation, a/k/a Cofina; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Employees Retirement System of the
Government of the Commonwealth of Puerto Rico; THE FINANCIAL
OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as
Representative for the Puerto Rico Public Buildings Authority,
Debtors.
WINDMAR RENEWABLE ENERGY, INC.,
Interested Party, Appellant,
v.
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 Electric Power Authority
(PREPA),
Debtors, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Laura Taylor Swain,* U.S. District Judge]
Before
Lynch and Kayatta, Circuit Judges,
and Woodcock,** District Judge.
Jessica E. Méndez Colberg, with whom Rolando Emmanuelli
Jiménez and Bufete Emmanuelli, C.S.P., were on brief, for appellant
UTIER.
Fernando E. Agrait for appellant Windmar Renewable Energy,
Inc.
Daniel Desatnik, with whom Martin J. Bienenstock, Mark D.
Harris, Paul V. Possinger, Ehud Barak, Timothy W. Mungovan, John
* Of the Southern District of New York, sitting by designation.
** Of the District of Maine, sitting by designation.
E. Roberts, Adam L. Deming, and Proskauer Rose LLP were on brief,
for appellees.
August 12, 2021
KAYATTA, Circuit Judge. This PROMESA case turns on the
Financial Oversight and Management Board's authority to assume
certain long-term power supply contracts on behalf of the Puerto
Rico Electric Power Authority (PREPA) under 11 U.S.C. § 365 and 48
U.S.C. § 2161. The appellants -- PREPA's primary labor union, an
energy company that has other contracts with PREPA, and several
environmental groups -- contend that the Board abused
section 365's assumption procedure to avoid the competitive
bidding process ordinarily required for such contracts under
Commonwealth law. The Title III court disagreed and granted the
Board's motion to assume the contracts. We affirm.
I.
Electricity satisfying approximately forty percent of
Puerto Rico's baseload power demand comes from PREPA's "LNG-to-
Power Program," under which liquefied natural gas (LNG) is imported
and converted into power generation capacity (or energy, for
short). Before 2019, the LNG-to-Power program depended in relevant
part on two PREPA contracts: (1) a 1995 power purchase and
operating agreement (PPOA) with EcoEléctrica, the owner and
operator of a power plant in Peñuelas, Puerto Rico, and (2) a
2012 gas sale and purchase agreement (GSPA) with Naturgy, a natural
gas provider that is also a majority shareholder in EcoEléctrica.
Under the 1995 PPOA, EcoEléctrica purchased natural gas, converted
it into energy in the Peñuelas power plant, and sold the final
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product to PREPA. Under the 2012 GSPA, Naturgy sold natural gas
directly to PREPA, which would then convert it into energy in a
PREPA-owned power plant known as Costa Sur. At some point, Naturgy
began selling natural gas to EcoEléctrica as well, presumably
pursuant to a separately negotiated agreement.1
In 2017, the Board filed a bankruptcy petition on PREPA's
behalf under Title III of PROMESA. See In re Fin. Oversight &
Mgmt. Bd., 899 F.3d 13, 18 (1st Cir. 2018). As part of the debt
restructuring process, the Board certified fiscal plans in 2018
and 2019 that contemplated the renegotiation of both the PPOA and
the GSPA. In view of those fiscal plans, and mindful that the
contracts were set to expire in March 2022 and December 2020,
respectively, PREPA separately initiated negotiations with
EcoEléctrica and Naturgy to amend the terms of each contract. An
outside consultant assisted PREPA throughout the negotiations by
analyzing the likely results of several potential strategies.
By March 2020, PREPA had successfully renegotiated both
the PPOA and the GSPA. The renegotiated PPOA provided that PREPA
(not EcoEléctrica) would purchase natural gas on the front end and
supply it to EcoEléctrica, which would then convert it into energy
1 The record on appeal does not include copies of the
original Naturgy GSPA or the original ECO PPOA. As such, we rely
on a consultant's report, which the parties treat as accurate, to
describe the terms of the original contracts, their differences
from the terms of the renegotiated contracts, and the circumstances
surrounding the renegotiated contracts.
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for PREPA. The renegotiated GSPA expanded the original GSPA so
that Naturgy would sell PREPA enough gas to supply both PREPA's
Costa Sur plant and EcoEléctrica's Peñuelas plant (rather than
just the Costa Sur plant). Both contracts were extended until
September 2032, and both were executed subject to several
conditions precedent.
One of the conditions included in the renegotiated PPOA
and GSPA was that the Puerto Rico Energy Bureau (PREB) approve the
terms of the agreements. PREPA accordingly sought PREB's
regulatory approval of the renegotiated GSPA and PPOA, which PREB
granted in March 2020. Windmar Renewable Energy, a power company
that has other PPOAs with PREPA, sought to intervene in the PREB
proceeding and moved for reconsideration of PREB's approval
decision. Similar motions were also filed by the labor union
representing most of PREPA's employees, Unión de Trabajadores de
la Industria Eléctrica y Riego, Inc. (UTIER), and a number of
environmental groups. As of the date this appeal was argued, PREB
had not yet decided the motions for reconsideration. Nor have the
parties advised us of any subsequent decision.
The other condition precedent relevant here required
that the Title III court enter an order allowing PREPA to assume
the renegotiated PPOA and GSPA. See 11 U.S.C. § 365(a) (providing
that a trustee may choose to either "assume or reject" certain
contracts with the court's approval); 48 U.S.C. § 2161(a)
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(incorporating 11 U.S.C. § 365 into PROMESA). Choosing whether to
assume or reject a contract under section 365(a) is "one of the
basic reorganizational tools available to debtors under the
Bankruptcy Code." In re BankVest Cap. Corp., 360 F.3d 291, 296
(1st Cir. 2004). Assumption "accepts both the burdens and the
benefits of the bargain, and any liabilities incurred in the
contract's postpetition performance will be treated as
administrative expenses with priority status." Id. Rejection
"release[s] the debtor's estate from burdensome obligations that
can impede a successful reorganization," leaving creditors with a
general unsecured claim for contract damages. Id. (quoting NLRB
v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984)).
In an effort to satisfy this condition, the Board moved
on PREPA's behalf to assume the PPOA and GSPA in April 2020 (after
PREPA had secured PREB's approval, pending resolution of the
motions for reconsideration and any subsequent appeal). Windmar
and UTIER, both unsecured creditors of PREPA, objected to the
Board's motion, possibly fearing that assumption of the contracts
would divert funds from the pot available to be shared by unsecured
creditors. The following environmental groups also objected:
Alianza Comunitaria Ambientalista del Sureste, Inc.; Amigos de Río
Guaynabo, Inc.; CAMBIO PR, Inc.; Campamento Contra las Cenizas en
Peñuelas, Inc.; Coalición de Organizaciones Anti-Incineración,
Inc.; Comité Diálogo Ambiental, Inc.; Comité Yabucoeño Pro-Calidad
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de Vida, Inc.; El Puente de Williamsburg, Inc.-Enlace Latino de
Acción Climática; Mayagüezanos por la Salud y el Ambiente, Inc.;
and Sierra Club Puerto Rico, Inc. Among other things, the
objectors argued that the Board's motion to assume was premature,
that the GSPA and PPOA were post-petition contracts not eligible
for assumption under 11 U.S.C. § 365(a), and that the contracts
were not in the best interest of PREPA or of the public. The
Title III court rejected these arguments and granted the Board's
motion to assume. The objectors appealed.2
II.
We begin by addressing a threshold issue of jurisdiction
and justiciability: UTIER and Windmar's argument that the Board's
motion to assume was not ripe for judicial resolution. "[R]ipeness
doctrine seeks to prevent the adjudication of claims relating to
'contingent future events that may not occur as anticipated, or
indeed may not occur at all.'" Reddy v. Foster, 845 F.3d 493, 500
(1st Cir. 2017) (quoting Texas v. United States, 523 U.S. 296, 300
(1998)). Ripeness analysis focuses on two factors: "fitness" and
"hardship." N.H. Lottery Comm'n v. Rosen, 986 F.3d 38, 52 (1st
Cir. 2021) (quoting Reddy, 845 F.3d at 501). "Fitness involves
2 On appeal, the environmental groups adopted the arguments
made in UTIER's opening brief and did not file anything further.
All subsequent references to arguments by UTIER should therefore
be understood as referring to arguments by both UTIER and the
environmental groups.
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issues of 'finality, definiteness, and the extent to which
resolution of the challenge depends upon facts that may not yet be
sufficiently developed,' while hardship 'typically turns upon
whether the challenged action creates a direct and immediate
dilemma for the parties.'" Id. at 53 (quoting R.I. Ass'n of
Realtors, Inc. v. Whitehouse, 199 F.3d 26, 33 (1st Cir. 1999)).
Focusing on fitness first, UTIER and Windmar assert that
the Board's motion to assume is unripe because it depends on
contingent future events. Their argument proceeds in five steps:
(1) The agreements are conditioned on PREB's approval; (2) that
approval must be final before the condition can be satisfied;
(3) PREB's March 2020 approval order is not yet final because
several motions for reconsideration remain pending, and appeals to
the courts of the Commonwealth will likely follow; (4) there is no
way to predict the results of those proceedings, making it
impossible to know whether or when PREB's March 2020 approval order
will become final; and (5) as such, the Board prematurely moved to
assume the contracts.
UTIER and Windmar's argument fails at the second step.
It is true that "obtaining approval of . . . PREB" is a
"condition[] precedent" to the renegotiated GSPA and PPOA taking
effect. But nothing in the text of the agreements expressly
indicates that an order of approval by PREB only qualifies as
"approval of . . . PREB" within the meaning of the contracts after
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all opportunities for appellate review have been exhausted. And
the Board, which speaks on behalf of PREPA, represents in its brief
that the parties to the agreements did not intend to impose such
a finality condition. Because UTIER and Windmar identify no
evidence to the contrary, we reject their contention that a
condition precedent to the contracts was unsatisfied and that the
Board's motion to assume those contracts was therefore unfit for
judicial resolution.3
Putting the terms of the contracts aside, UTIER asserts
that the Title III court's standing procedural order independently
required PREB's order approving the contracts to be final and
unappealable before the Board could seek assumption. But the
procedural order provides only that PREPA obtain "to the extent
required, the consent and approval of [PREB]" before the Board may
file a motion to assume a PPOA. The order does not provide guidance
as to when such approval is "required," nor does it specify that
such approval must be "final," i.e., no longer subject to appellate
review. Indeed, by granting the motion to assume in this case,
the Title III court implicitly rejected reading such a finality
requirement into its procedural order. We see no error in that
determination. Moreover, even if the Board had violated the
3 Accordingly, we need not and do not decide whether the
Board's motion to assume would have been ripe (or whether the
contracts would have been eligible for assumption) if we had found
that a condition precedent was unfulfilled.
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procedural order by filing its motion to assume before PREB's
approval was final, that violation would go to the timeliness of
the motion, not its fitness for judicial resolution.
UTIER and Windmar object that, as a matter of comity,
the motion to assume should not be resolved until all issues of
Commonwealth law arising out of the PREB proceeding are finally
adjudicated, given that the same issues arise in this proceeding.
But appellants can point to no instance in which the Title III
court's assumption ruling has tied the hands of PREB. Nor is such
an occurrence likely. In considering a motion to assume under
section 365(a), "a bankruptcy court sits as an overseer of the
wisdom with which the bankruptcy estate's property is being managed
by the trustee or debtor-in-possession, and not, as it does in
other circumstances, as the arbiter of disputes between creditors
and the estate." In re Orion Pictures Corp., 4 F.3d 1095, 1099
(2d Cir. 1993). As such, any decision on the merits of the Board's
motion to assume the renegotiated GSPA and PPOA is "[i]n no
way . . . a formal ruling" on legal issues related to the
contracts. Id. Moreover, as a matter of practical comity, one
suspects that PREB would benefit from knowing sooner rather than
later whether the Title III court would allow assumption. We
therefore reject UTIER and Windmar's contention that PREB's
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ongoing review process inherently renders the Board's motion to
assume unfit for judicial resolution.4
As for the hardship prong of ripeness analysis, we have
little trouble concluding that delaying resolution of the motion
to assume would "create[] a direct and immediate dilemma" for
PREPA, its creditors, and the public. R.I. Ass'n of Realtors, 199
F.3d at 33 (quoting Ernst & Young v. Depositors Econ. Prot. Corp.,
45 F.3d 530, 535 (1st Cir. 1995)). The original GSPA and PPOA
were set to expire in December 2020 and March 2022, respectively,
and the renegotiated GSPA and PPOA were conditioned on the Board's
assumption of the contracts. If the motion to assume had not been
resolved promptly, the original GSPA almost certainly would have
lapsed, jeopardizing PREPA's ability to maintain up to forty
percent of Puerto Rico's baseload power supply. In short, the
Board's motion to assume was ripe for resolution by the Title III
court and remains so on appeal.
4 For the same reasons, we reject Windmar's argument that
procedural irregularities in PREB's process preclude consideration
of the Board's motion. We also reject Windmar's argument that the
motion to assume is not fit for judicial resolution because the
COVID-19 pandemic created uncertainty about the stability of the
Puerto Rican economy, calling into question the "future [of] Puerto
Rico, in general, and PREPA, in particular." This criticism bears
on the wisdom of the agreements, not on the ripeness of the Board's
motion to assume them.
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III.
We now turn to UTIER and Windmar's claim that the
Title III court erred in granting the Board's motion to assume the
renegotiated contracts. The appellants' arguments center on the
proper application of 11 U.S.C. § 365(a), which provides that,
with some exceptions not relevant here, "the trustee, subject to
the court's approval, may assume or reject any executory contract
or unexpired lease of the debtor." See 48 U.S.C. § 2161(a)
(incorporating 11 U.S.C. § 365 into PROMESA). We review the
Title III court's factual findings for clear error and its
conclusions of law de novo. See Colón-Torres v. Negrón-Fernández,
997 F.3d 63, 68 (1st Cir. 2021).
A.
UTIER and Windmar's principal challenge rests on two
propositions: (1) The GSPA and PPOA, as renegotiated, are entirely
new, post-petition agreements; and (2) entirely new, post-petition
contracts may not be assumed under section 365(a).
We begin by noting what is not at issue: UTIER and
Windmar do not argue that merely amending a contract renders it
unassumable. See Richmond Leasing Co. v. Cap. Bank, N.A., 762
F.2d 1303, 1311 (5th Cir. 1985) ("Nothing in the Code suggests
that the debtor may not modify its contracts when all parties to
the contract consent."); accord City of Covington v. Covington
Landing Ltd. P'ship, 71 F.3d 1221, 1227 (6th Cir. 1995); see also
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In re Ionosphere Clubs, Inc., 85 F.3d 992, 1001–02 (2d Cir. 1996)
(indicating that a debtor may negotiate modifications to an
executory contract, including a reduction in its overall monetary
obligation, before moving to assume the contract); Josiah M.
Daniel III, Lawyering on Behalf of the Non-Debtor Party in
Anticipation, and During the Course, of an Executory Contract
Counterparty's Chapter 11 Bankruptcy Case, 14 Hous. Bus. & Tax
L.J. 230, 250–51 (2014) (stating that "the debtor and the other
party may, subject to court approval, agree to amend an executory
contract that the debtor then assumes").
Rather, UTIER and Windmar contend that the renegotiated
contracts were unassumable because they novated, i.e.,
extinguished and replaced, the original agreements. Under the
Civil Code of Puerto Rico, which the parties agree applies here,
a contractual modification is an extinctive novation only if it is
"expressly declared" as such or if "the old and new [obligations
are] incompatible in all points." P.R. Laws Ann. tit. 31, § 3242.
Whether a novation has occurred is a question of the parties'
intent, and "novation is never presumed." Warner Lambert Co. v.
Superior Court, 1 P.R. Offic. Trans. 527, 544 (1973). Rather, it
"must be established without any trace of doubt." Id. Applying
these standards, the Title III court determined as a matter of
contract interpretation that the renegotiated contracts did not
novate the original agreements. We review that legal determination
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de novo. See Autoridad de Energía Eléctrica v. Ericsson Inc., 201
F.3d 15, 18 (1st Cir. 2000); Colón-Torres, 997 F.3d at 68.
Here, as the district court found, the renegotiated
contracts expressly declare an intent to "amend[] and restate[]"
the original agreements, not to extinguish them. So UTIER and
Windmar are reduced to arguing that the renegotiated agreements
are so incompatible with the original agreements that we must
disregard the parties' stated purpose and infer an intent to
novate. To prevail on this uphill argument, UTIER and Windmar
must show that the language of the contracts and the circumstances
surrounding the agreements reveal "such a radical change in the
nature of the new obligation[s] with respect to the old one[s],
that both cannot coexist for being mutually exclusive." Goble &
Jimenez, Inc. v. Doré Rice Mill, Inc., 8 P.R. Offic. Trans. 90, 95
(1978).
UTIER and Windmar have not made such a showing with
respect to either the GSPA or the PPOA. Under the original GSPA,
Naturgy supplied fuel to PREPA's Costa Sur plant. The renegotiated
Naturgy GSPA expands the original agreement so that Naturgy
supplies fuel to PREPA for use in EcoEléctrica's Peñuelas plant as
well. Under the renegotiated contract, "[t]he original relation
remains untouched," and Naturgy "continues performing the same
transactions assigned to [it]" as before the contract was amended.
Goble, 8 P.R. Offic. Trans. at 96. The only difference is that
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Naturgy must provide more fuel to PREPA than previously
contemplated. Such a quantitative change does not operate as a
novation under Commonwealth law. See id. (finding no novation
where a distribution contract was expanded to cover new products
and new territories); see also FDIC v. P.L.M. Int'l, Inc., 834
F.2d 248, 251 (1st Cir. 1987) (holding that the addition of new
obligations of the same type did not extinguish previous
obligations because the new agreement "complement[ed] and buil[t]
upon" the earlier agreements). For the same reasons, UTIER and
Windmar cannot establish a novation by pointing to the quantitative
amendments made to the GSPA's pricing and hedge formulas, the
minimum and maximum contract quantities, and PREPA's take-or-pay
obligations.
The PPOA presents an arguably closer question, but the
post-petition amendments made to that contract still fall well
short of establishing a novation. Under the original PPOA,
EcoEléctrica purchased its own fuel from Naturgy and converted it
into energy for PREPA to distribute to consumers. PREPA, in turn,
reimbursed EcoEléctrica for fuel expenses and paid EcoEléctrica
for the costs of conversion. Under the renegotiated PPOA, PREPA
purchases fuel directly from Naturgy and pays EcoEléctrica for
converting it into energy. As such, the renegotiated agreement
technically makes PREPA a supplier to EcoEléctrica, creating a
relationship not envisioned by the prior agreement and changing
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the structure of services provided and payments received by
EcoEléctrica. But this change makes little practical difference:
Even under the renegotiated agreement, Naturgy delivers fuel
directly to EcoEléctrica, just as it did previously. And
EcoEléctrica converts that fuel into energy for PREPA as before.
See Goble, 8 P.R. Offic. Trans. at 91 (explaining that "the
surrounding circumstances at the moment the agreements between the
parties were reached" are relevant to determining whether the
parties had the "will to novate"). The only material change is
the point at which PREPA pays for the fuel provided by Naturgy.
We do not think this is the sort of "radical change," id. at 95,
that indicates an intent to novate "without any trace of doubt,"
Warner Lambert Co., 1 P.R. Offic. Trans. at 544.
UTIER asserts that EcoEléctrica previously purchased
fuel from other suppliers, not just Naturgy, and contends that the
renegotiated PPOA therefore novated the original contract.
However, UTIER points to no evidence in the record supporting this
contention. Even if UTIER is correct on this point, it makes no
dispositive difference. Under the original PPOA, EcoEléctrica
would have been free to obtain fuel from any supplier, including
PREPA and/or Naturgy. The renegotiated PPOA therefore requires
only that EcoEléctrica obtain fuel from a supplier it could have
been using all along. We see no mutual exclusivity between
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EcoEléctrica's obligations under the original PPOA and those under
the renegotiated PPOA.
UTIER and Windmar nevertheless maintain that PREPA
intended to novate the original GSPA and PPOA, pointing to certain
statements allegedly made by PREPA that the renegotiated contracts
were "new" or "substantially amended." Such shorthand, informal
characterizations cannot overcome an analysis of the contractual
obligations themselves. That analysis turns on the compatibility
of old and new obligations, not on whether a contract that has
been substantially amended is in some sense "new." And while this
reasoning by itself disposes of any argument based on the
statements to which UTIER and Windmar point, we can add belt to
suspenders because the exhibits containing these statements were
never admitted into the district court record. As such, the
statements are not properly part of the record on appeal, see Fed.
R. App. P. 6(b)(2)(B), and need not be considered, see Amoah v.
McKinney, 875 F.3d 60, 61 (1st Cir. 2017) (affirming summary
judgment "based on the record that remained" after the district
court properly struck certain statements). For each of these
reasons, we reject UTIER and Windmar's contention that PREPA has
admitted an intent to novate the original contracts.
UTIER finally contends that we should treat the
renegotiated GSPA and PPOA as "entirely new," rather than as
amended versions of the original contracts, because the
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renegotiated contracts could not become effective "until the
District Court enter[ed] an order approving assumption." But
adopting this reasoning would bar debtors from negotiating
amendments to pre-petition contracts as a quid pro quo for
assumption. UTIER offers no reason to erect such a bar, and none
occurs to us. In sum, we reject all of UTIER's and Windmar's
contentions that the renegotiated contracts were brand new
contracts that, as such, could not be assumed.
B.
The only remaining question is whether the Title III
court properly granted the Board's motion to assume the
renegotiated contracts under the customary standards of
section 365(a). Bankruptcy courts "generally approve" motions
brought under section 365(a) under the "deferential 'business
judgment' rule." Mission Prod. Holdings, Inc. v. Tempnology, LLC,
139 S. Ct. 1652, 1658 (2019) (quoting Bildisco, 465 U.S. at 523).
UTIER and Windmar argue that the business-judgment rule does not
properly apply to PREPA's motion to assume and that, even if the
business-judgment rule applies, the Title III court erred in
approving the motion. We address these arguments in turn.
1.
UTIER and Windmar first contend that a higher standard
ought to apply given the federal interests at stake and the public
importance of the contracts at issue. They primarily rely on NLRB
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v. Bildisco & Bildisco, which imposed a heightened standard on
employers' motions to reject collective bargaining agreements.
465 U.S. at 524, 526–27. Specifically, the Bildisco Court held
that collective bargaining agreements could not be rejected unless
"reasonable efforts to negotiate a voluntary modification ha[d]
been made and [were] not likely to produce a prompt and
satisfactory solution." Id. at 526. Recognizing that employers
in bankruptcy had no enforceable duty to bargain in good faith
with unions under the National Labor Relations Act (NLRA), id. at
533 (citing 29 U.S.C. § 158(a)(5)), the Court found that this
"reasonable efforts" requirement was necessary to avoid
undermining the NLRA's "policies of avoiding labor strife and
encouraging collective bargaining," id. at 526 (citing 29 U.S.C.
§ 151). The Court also reasoned that "because of the special
nature of a collective-bargaining contract, and the consequent
'law of the shop' which it creates," id. at 524, bankruptcy courts
considering motions to reject collective bargaining agreements
must "balanc[e] the interests of the affected parties," including
the debtor, creditors, and employees, as they "relate to the
success of the reorganization," id. at 527.
Analogizing to Bildisco, one court of appeals has
imposed a heightened balance-of-equities standard on motions to
reject an energy contract under section 365(a), see In re
FirstEnergy Sols. Corp., 945 F.3d 431, 454 (6th Cir. 2019), and
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another has contemplated doing the same, see In re Mirant Corp.,
378 F.3d 511, 525 (5th Cir. 2004). Both cases were limited to the
"unique" context of contracts "for the interstate sale of
electricity" that had been filed with the Federal Energy Regulatory
Commission (FERC) pursuant to the Federal Power Act, 16 U.S.C.
§ 824. In re FirstEnergy Sols., 945 F.3d at 453 (quoting In re
Mirant Corp., 378 F.3d at 525). Because obligations under such
"filed contracts" can be changed or abrogated outside the
bankruptcy context only upon a finding by FERC that the contracts
"seriously harm[] the public interest," id. at 443–44, the courts
in both cases indicated that applying the deferential business-
judgment rule to a rejection motion would threaten the policies
underlying the Federal Power Act, see id. at 454; In re Mirant
Corp., 378 F.3d at 525.
UTIER and Windmar assert that the PPOA and GSPA are
likewise governed by federal law, pointing to certain provisions
of the Federal Power Act, 16 U.S.C. § 824, and the Natural Gas Act
of 1938, 15 U.S.C. § 717(a). As such, they say, the higher
balance-of-equities standard should apply to the Board's motion to
assume those contracts as well. But Bildisco, In re FirstEnergy
Solutions, and In re Mirant Corp. concerned motions to reject, not
assume, contracts. In each case, allowing rejection of the
contracts under the deferential business-judgment standard
necessarily would have undermined the federal laws and policies
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that otherwise governed the contracts. Nothing in those cases
suggests that a motion to assume a preexisting contract poses a
symmetrical need for heightened scrutiny. Far from it: Had the
debtors in Bildisco, In re FirstEnergy Solutions, or In re Mirant
Corp. sought to assume the contracts at issue, the federal
regulatory framework under which the contracts were originally
negotiated would have been affirmatively furthered, rather than
undermined.
The fact that PREPA agreed with its contractual
counterparts to amend the PPOA and GSPA before assuming them does
not change the result. Indeed, the Court in Bildisco expressly
endorsed "voluntary modification[s]" to preexisting contracts as
a desirable alternative to rejection motions, given the importance
of good-faith negotiations between employers and unions under the
NLRA. 465 U.S. at 526. Perhaps In re FirstEnergy Solutions and
In re Mirant Corp. can be read to suggest that a motion to assume
an amended contract might be subject to heightened scrutiny if the
original contracts were filed with FERC. See In re FirstEnergy
Sols., 945 F.3d at 443–44 (explaining that any change to filed
rates must be approved by FERC); In re Mirant Corp., 378 F.3d at
525 (same). But UTIER and Windmar do not suggest that the original
GSPA or PPOA were filed with FERC, nor that PREPA would need to
seek FERC's approval to renegotiate them in ordinary course. They
simply assert, without any supporting factual or legal analysis,
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that the "underlying policies" of the Federal Power Act and Natural
Gas Act are relevant to the contracts at issue.
Another factual distinction removes this case even
further from Bildisco and its progeny. Part of what drove the
results in Bildisco, In re First Energy Solutions, and In re Mirant
Corp. was that the relevant regulatory agencies in those cases
lacked authority to take independent action to enforce the federal
laws implicated by the rejection motions. See Bildisco, 465 U.S.
at 532–33; In re First Energy Sols., 945 F.3d at 445–46, 453–54;
In re Mirant Corp., 378 F.3d at 522, 525. Thus, it was in no way
redundant to consider those agencies' concerns in resolving the
rejection motions in those cases; rather, as discussed above, such
review was necessary to ensure that important federal policies
were not disregarded in bankruptcy. Here, by contrast, the amended
GSPA and PPOA that the Board seeks to assume are subject to review
by PREB, the Commonwealth agency that exercises regulatory
authority over such contracts. We see no need to deviate from the
business-judgment rule in order to duplicate the same type of
review that PREB has undertaken. Indeed, doing so might raise the
comity concerns cited by UTIER and Windmar above. As Windmar
recognizes, "it is PREB who makes the [balance-of-equities]
judgment."
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2.
We turn finally to the question of whether the Title III
court clearly erred in finding that the renegotiated agreements
were an exercise of sound business judgment by PREPA. See, e.g.,
In re Pomona Valley Med. Grp., Inc., 476 F.3d 665, 670 (9th Cir.
2007) (explaining that applications of the business-judgment rule
are reviewable under the clearly erroneous standard because they
"involve questions of fact"). Courts have articulated the
business-judgment rule differently. Some require the debtor to
persuade the court that assumption will benefit the estate. See
In re UAL Corp., 635 F.3d 312, 319 (7th Cir. 2011); In re Orion
Pictures, 4 F.3d at 1099. Others summarily approve motions to
assume unless the debtor's rationale for assumption is so
unreasonable as to suggest bad faith. See In re Pomona Valley,
476 F.3d at 670; Lubrizol Enters., Inc. v. Richmond Metal
Finishers, Inc., 756 F.2d 1043, 1047 (4th Cir. 1985), abrogated on
other grounds as recognized by Mission Prod. Holdings, 139 S. Ct.
at 1664.
We need not decide which of these formulations is
precisely correct because the Board's motion to assume the
renegotiated PPOA and GSPA would satisfy either of them. As the
district court found based on a report prepared by PREPA's
consultant, the renegotiated contracts would result in $81 million
in annual savings for PREPA over five years, exceeding the savings
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targets contemplated by the 2019 fiscal plan certified by the
Board. We see no clear error in this factual finding, and it
plainly establishes that assumption of the contracts is a
reasonable business decision likely to benefit PREPA.
UTIER asserts that assumption harms its members and
other unsecured creditors of PREPA by granting administrative
expense priority to post-petition liabilities arising out of the
renegotiated GSPA and PPOA. See In re FBI Distrib. Corp., 330
F.3d 36, 42 (1st Cir. 2003). According to UTIER, the better course
would have been to continue performing the original GSPA and PPOA
and to negotiate new contracts effective upon their expiration.
However, as the Board argues, liabilities arising under both the
old and new contracts in that hypothetical scenario would also be
eligible for administrative expense priority. See id. at 42–43
(explaining the different standards for granting priority to post-
petition expenses incurred pursuant to assumed pre-petition
contracts and those incurred pursuant to unassumed pre-petition
contracts); In re Malden Mills Indus., Inc., 303 B.R. 688, 706
(B.A.P. 1st Cir. 2004) (explaining that liabilities incurred
pursuant to post-petition contracts can be treated as
administrative expenses if they benefited the estate); see also In
re Klein Sleep Prods., Inc., 78 F.3d 18, 25 (2d Cir. 1996)
(expressing the view that the business-judgment standard under 11
U.S.C. § 365(a) and the test for granting administrative expense
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priority to post-petition liabilities under 11 U.S.C. § 503(b) are
substantially equivalent).
UTIER next argues that the renegotiated GSPA and PPOA
are not beneficial because PREPA could have obtained an even better
deal with EcoEléctrica. However, as the Title III court
recognized, the business-judgment rule does not ask whether the
debtor has made the best possible business decision. See In re
Fin. Oversight & Mgmt. Bd., 618 B.R. 349, 361 (D.P.R. 2020) (citing
In re Old Carco LLC, 406 B.R. 180, 196 (Bankr. S.D.N.Y. 2009)).
Rather, it asks at most whether the debtor's estate will benefit
from assumption of the relevant contracts.
UTIER and Windmar fall back on the argument that the
GSPA and PPOA cannot be considered the products of sound business
judgment because the agreements are unlawful as amended.
Specifically, they argue that the renegotiation process violated
the Commonwealth law requiring competitive bidding for public
contracts and that the contracts violate federal and Commonwealth
antitrust laws by granting Naturgy an unlawful monopoly over the
natural gas market in Puerto Rico. We are not persuaded. The
fact that a course of action poses some non-zero risk cannot by
itself mean that a decision to take such an action must fail
scrutiny under the business-judgment rule. See In re BH S & B
Holdings LLC, 420 B.R. 112, 146 (Bankr. S.D.N.Y. 2009) ("The
business judgment rule exists precisely to ensure that directors
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and managers acting in good faith may pursue risky strategies that
seem to promise great profit." (quoting Trenwick Am. Litig. Tr. v.
Ernst & Young, L.L.P., 906 A.2d 168, 194 (Del. Ch. 2006))), aff'd
as modified, 807 F. Supp. 2d 199 (S.D.N.Y. 2011). Otherwise, most
courses of action would be precluded, given how few would be risk-
free.
Thus, for example, a corporation may adopt a potentially
invalid contract if, in the exercise of business judgment, it
determines that the benefits of the contract outweigh the risk
that the contract will later be found unenforceable. Cf. In re
Orion Pictures, 4 F.3d at 1099 (explaining that a bankruptcy court
may validly grant a motion to assume if, as a matter of business
judgment, "the court thinks it unlikely that [another] court would
hold that the debtor had breached the contract"); In re
Infotechnology, Inc., 89 F.3d 825 (2d Cir. 1995) (unpublished
decision) (finding that a settlement was a sound exercise of
business judgment because it depended in relevant part on
predictions about the likely outcome of potential future legal
proceedings that were supported by existing precedent).
Here, UTIER and Windmar offer no reason to think that
the risk they have identified was so great that it rendered the
Board's decision necessarily unreasonable, let alone that the
Title III court's finding to the contrary was clearly erroneous.
They have not identified a single case invalidating a public
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utility contract under either the Commonwealth's competitive
bidding law or the antitrust statutes they rely on. Cf. United
States v. Gonzalez, 949 F.3d 30, 39 (1st Cir. 2020) (requiring
"on-point authority" to establish "clear or obvious error" in the
plain-error context). Moreover, as the district court noted, PREPA
obtained permission and approval from a number of local and federal
authorities throughout the negotiation process, and the agreements
themselves are conditioned on the preparation of legal opinions as
to their lawfulness. As such, we have little doubt that PREPA's
agreement to the terms of the renegotiated GSPA and PPOA was a
valid business judgment.
Finally, UTIER and Windmar object that Naturgy used its
monopoly over the natural gas market in Puerto Rico to "strong-
arm[]" PREPA into agreeing to the renegotiated terms, resulting in
"an overpayment of billions of dollars" by PREPA. In other words,
UTIER and Windmar assert that if there were more competition in
Puerto Rico's natural gas market, PREPA could have negotiated even
better terms for the amended GSPA and PPOA. But, as we have
already explained, a hypothetical better option does not negate
the Board's concrete showing that the renegotiated contracts stand
to benefit PREPA. We therefore see no clear error in the Title III
court's finding that the renegotiated GSPA and PPOA were the
products of sound business judgment by PREPA.
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IV.
For the foregoing reasons, we affirm the judgment of the
Title III court.
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