Windmar Renewable Energy v. PREPA ( 2021 )


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  •           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
    - 5 -
    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.
    - 6 -
    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)
    - 7 -
    (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
    - 8 -
    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.
    - 9 -
    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
    - 10 -
    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.
    - 11 -
    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
    - 12 -
    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.
    - 13 -
    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
    - 14 -
    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
    - 15 -
    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
    - 16 -
    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
    - 17 -
    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
    - 18 -
    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
    - 19 -
    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
    - 20 -
    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
    - 21 -
    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
    - 22 -
    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,
    - 23 -
    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."
    - 24 -
    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
    - 25 -
    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
    - 26 -
    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
    - 27 -
    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
    - 28 -
    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.
    - 29 -
    IV.
    For the foregoing reasons, we affirm the judgment of the
    Title III court.
    - 30 -
    

Document Info

Docket Number: 20-1685P

Filed Date: 8/12/2021

Precedential Status: Precedential

Modified Date: 8/12/2021

Authorities (23)

Malden Mills Industries, Inc. v. Maroun (In Re Malden Mills ... , 303 B.R. 688 ( 2004 )

Ernst & Young v. Depositors Economic Protection Corp. , 45 F.3d 530 ( 1995 )

Eagle Insurance v. Bankvest Capital Corp. (In Re Bankvest ... , 360 F.3d 291 ( 2004 )

Federal Deposit Insurance Corporation v. P.L.M. ... , 834 F.2d 248 ( 1987 )

Autoridad De Energ a Electrica De Puerto Rico v. Ericsson ... , 201 F.3d 15 ( 2000 )

Rhode Island Ass'n of Realtors v. Whitehouse , 199 F.3d 26 ( 1999 )

In Re Klein Sleep Products, Inc., Debtor. Nostas Associates ... , 78 F.3d 18 ( 1996 )

Mirant Corp. v. Potomac Electric Power Co. (In Re Mirant ... , 378 F.3d 511 ( 2004 )

Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc.... , 756 F.2d 1043 ( 1985 )

in-re-ionosphere-clubs-inc-eastern-air-lines-inc-and-bar-harbor , 85 F.3d 992 ( 1996 )

In Re Orion Pictures Corporation, Debtor, Orion Pictures ... , 4 F.3d 1095 ( 1993 )

City of Covington v. Covington Landing Limited Partnership , 71 F.3d 1221 ( 1995 )

12-collier-bankrcas2d-1202-bankr-l-rep-p-70593-richmond-leasing-co , 762 F.2d 1303 ( 1985 )

Mason v. Official Committee , 330 F.3d 36 ( 2003 )

Trenwick America Litigation Trust v. Ernst & Young, L.L.P. , 906 A.2d 168 ( 2006 )

in-re-pomona-valley-medical-group-inc-debtor-chandrahas-agarwal-md , 476 F.3d 665 ( 2007 )

ReGen Capital I, Inc. v. UAL Corp. (In Re UAL Corp.) , 635 F.3d 312 ( 2011 )

In Re Bh S&B Holdings LLC , 420 B.R. 112 ( 2009 )

In Re Old Carco LLC , 406 B.R. 180 ( 2009 )

Geltzer v. Bay Harbour Management LC , 807 F. Supp. 2d 199 ( 2011 )

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