Abraham Giménez Plaintiff Grp. v. Dep't of Transp. & Pub. Works (In re Fin. Oversight & Mgmt. Bd. for P.R.)

92 F.4th 355

IN RE: The FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO,

as Representative for the Commonwealth of Puerto Rico;

The Financial Oversight and Management Board for Puerto Rico,

as Representative for the Puerto Rico Sales Tax Financing Corporation, a/k/a Cofina;

The Financial Oversight and Management Board for Puerto Rico,

as Representative for the Employees Retirement System

of the Government of the Commonwealth of Puerto Rico;

The Financial Oversight and Management Board for Puerto Rico,

as Representative for the Puerto Rico Highways and Transportation Authority;

The Financial Oversight and Management Board for Puerto Rico,

as Representative for the Puerto Rico Electric Power Authority (PREPA);

The Financial Oversight and Management Board for Puerto Rico,

as Representative of the Puerto Rico Public Buildings Authority, Debtors.

The Abraham Giménez Plaintiff Group,a/k/a Group Wage Creditors in the Litigation Captioned Abraham Giménez, et al. v. Department of Transportation and Public Works, CASP Case No. 2021-05-0346;

The Cruz Hernandez Plaintiff Group, a/k/a Group Wage Creditors

in the Litigation Captioned Carmen Socorro Cruz Hernandez, et al. v. Family Department, ARV, and AIJ of the Commonwealth of Puerto Rico,Case No. K AC 1991-0665; The Beltran-Cintron Plaintiff Group,a/k/a Group Wage Creditors in the Litigation Captioned Francisco Beltran-Cintron, et al. v. Family Department, ARV, and AIJ of the Commonwealth of Puerto Rico,CASP Case No. 2021-05-0345; The Acevedo-Camacho Plaintiff Group,a/k/a Group Wage Creditors in the Litigation Captioned Madeline Acevedo-Camacho, et al. v. Family Department, ARV, and AIJ of the Commonwealth of Puerto Rico,CASP Case No. 2016-05-1340; The Acevedo Arocho Plaintiff Group,a/k/a Group Wage Creditors in Litigation Captioned Prudencio Acevedo Arocho, et al. v. Puerto Rico Department of Treasury, Case No. K AC-2005-5022, Appellants, v. The Financial Oversight and Management Board for Puerto Rico,as Representative for the Commonwealth of Puerto Rico, Appellee.

No. 23-1045

No. 23-1046

No. 23-1047

No. 23-1048

No. 23-1049

United States Court of Appeals, First Circuit

February 9, 2024

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Laura Taylor Swain,^* U.S. District Judge]

Jesus E. Batista Sánchez, with whom The Batista Law Group, PSC, was on brief, for appellants.

Shiloh A. Rainwater, with whom Timothy W. Mungovan, John E. Roberts, Martin J. Bienenstock, Brian S. Rosen, Mark D. Harris, and Proskauer Rose LLP were on brief, for appellee.

Before Montecalvo, Lipez, and Thompson, Circuit Judges.

MONTECALVO, Circuit Judge.

We consider again the application of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"), this time in the context of administrative-expense-priority provisions of the federal Bankruptcy Code that are incorporated into PROMESA. Appellants are five groups of current and former public employees in the Commonwealth of Puerto Rico (the "Commonwealth") who allege they are owed millions of dollars in back pay for work they performed before and after commencement of the Commonwealth's debt restructuring case under Title III of PROMESA (the "Five Groups"). They appeal an order by the court overseeing the Commonwealth-wide debt restructuring litigation (the "Title III court") on their motions to secure administrative-expense priority for their back pay claims. For the reasons explained below, we affirm the Title III court's ruling on these motions.

I. Background

In response to the government debt crisis in Puerto Rico, Congress passed PROMESA in 2016, which created the Puerto Rico Financial Oversight and Management Board (the "Board") to restructure the Commonwealth's massive debt. See 48 U.S.C. §§ 2121, 2194(m). Title III of PROMESA authorizes the Board to file a debt-restructuring case on the Commonwealth's behalf, see 48 U.S.C. §§ 2164, 2175, and the Board commenced such a case in May 2017.

In various litigation and administrative actions separate from the Title III case, appellants have claimed that their public employers' decisions to adjust upward the wages paid to other employees who previously were paid below the minimum wage while leaving appellants' wages unchanged eliminated merits-based distinctions and rendered inoperative the progressive compensation system mandated by Puerto Rico law. Each of the Five Groups previously sued their public employers (in Puerto Rico commonwealth courts, not federal courts) for back pay to compensate for the employers' failure to adjust appellants' wages upward.

One of the Five Groups, the Cruz-Hernandez Group, has already had a judgment entered in its underlying litigation in Puerto Rico court against the group members' public employers. The parties in that case reached a settlement agreement in the underlying litigation concerning updated pay scales, and, in 2006, the court entered judgment approving that settlement. The outstanding unpaid claims for that group are for back pay for work performed prior to the 2017 Title III petition. Thus, we refer to these claims as "pre-petition" and "post-judgment" claims.

The underlying cases filed by the other four groups against their public employers remain pending in Puerto Rico court -- there has not yet been a determination of liability or final judgment entered in those cases (i.e., they are all "pre-judgment" claims).¹ Those cases seek back pay for work performed both pre-and post-Title III petition.

In June 2022, the Five Groups moved the Title III court for administrative-expense priority for their claims for back pay for work performed both before and after the 2017 Title III petition date. "Administrative-expense priority" refers to the priority status that expenses qualifying as "administrative expenses" receive in the order of payment in a bankruptcy case. See In re Powermate Holding Corp., 394 B.R. 765, 771-72 (Bankr. D. Del. 2008). This category of expenses is paid by debtors to creditors earlier than other categories of expenses in a Title III case. See id.; In re Fin. Oversight & Mgmt. Bd. for P.R., 7 F.4th 31, 37 (1st Cir. 2021). The definition of "administrative expense" in a Title III case comes from section 503(b) of the Bankruptcy Code, which PROMESA incorporates. See 11 U.S.C. § 503(b); 48 U.S.C. § 2161; see also In re Fin. Oversight & Mgmt. Bd. for P.R., 7 F.4th at 37. The provision provides:

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—

(1)

(A) the actual, necessary costs and expenses of preserving the estate including—

(i) wages, salaries, and commissions for services rendered after the commencement of the case; and (ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of Federal or State law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title[.]

§ 503(b). Congress added subsection (ii) above as an amendment to the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 329, 119 Stat. 23, 101 (2005); see also In re Powermate, 394 B.R. at 772.

The Title III court had previously, in 2021, rejected earlier efforts by individual plaintiffs in the appellant groups to assert administrative-expense priority for back pay for work performed before the Commonwealth's petition date. In re Fin. Oversight & Mgmt. Bd. for P.R., No. 17-BK-3283 (Bankr. D.P.R. filed Apr. 18, 2022) (docket no. 20569). In rejecting these efforts, the Title III court held that only claims attributable to the post-petition period can qualify as administrative expenses. Id. at 3.

The subsequent June 2022 motions to secure administrative-expense priority by the Five Groups concerned back pay for work performed both before and after the 2017 Title III petition date. In an oral order, the Title III court made the following three general categories of rulings on the administrative-expense-priority claims.

First, the court denied the requests to the extent they sought immediate payment of back pay for claims still pending/lacking final judgment in the underlying commonwealth court and agency proceedings, reasoning that "administrative expense claimants have the burden of conclusively establishing the liability of the debtor before seeking a ruling on entitlement to priority treatment."

Second, the court declined to rule on whether any of the claims arising from work performed post-petition qualified for administrative-expense status because those claims were contingent on appellants obtaining judgments in the still-pending underlying commonwealth court and agency actions. The court explained that though it was "not ruling on [whether the still-pending post-petition work claims qualified for administrative-expense status] today," the court was "leaving it to the Debtor to handle liquidation and any payment of that claim or objection to that claim in the ordinary course of resolution of claims" after judgment issued in the underlying cases. Relatedly, the court denied the requests for a "comfort order" that appellants' post-petition wage claims would count as administrative expenses if they won the underlying still-pending cases (at a future date). It also denied the requests for the court to order the Commonwealth to set aside hundreds of millions of...