Windmar Renewable Energy v. PREPA

• Court: Court of Appeals for the First Circuit
• Decided: August 12, 2021
• Docket: 20-1685P
• Status: Published

Opinion

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,

UNION DE TRABAJADORES DE LA INDUSTRIA ELECTRICA Y RIEGO (UTIER),

Interested Party, Appellant,

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,

WINDMAR RENEWABLE ENERGY, INC.,

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),

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 -