PROMESA provides two mechanisms to restructure PR’s debt, Title III, a bankruptcy like procedure and Title VI, a mechanism to formalize agreements negotiated between PR and its creditors. Moreover, the way PROMESA is written, Title VI negotiations are indispensable for eligibility to Title III.

Section 206(a)(1) of PROMESA requires that before the Board issues a restructuring certification (permission for Title III) it determine that “the entity has made good-faith efforts to reach a consensual restructuring with creditors” Hence, Title VI negotiations are imperative. What is the procedure for these negotiations? Who negotiates, the Board or the Government of PR? What happens if the parties reach an agreement? What happens if they don’t reach an agreement?

Title VI of PROMESA provides some of the framework for said negotiations. Sections 206(a) and 405(n) of PROMESA establish that the Puerto Rico Government, not the Board, will conduct these negotiations. That does not mean that the PR Government and the Board cannot coordinate negotiations efforts but the former, not the latter, conducts them. The Board, however, has made it clear to PR that only it can approve the agreements, as I will discuss shortly.

Title VI consists of two sections, to wit, 601 and 602. Section 602 simply excludes foreign and international law from Title VI, therefore, section 601 covers the negotiations process. Strangely enough, section 601 does not establish the manner or form of the negotiations but rather structures how bondholders are to vote for the proposed modifying qualifications (modifications of the bond debt).

Once PR and bondholders come to an agreement to modify the bond debt, the Board, PR or the bondholders may propose a Qualifying Modification to such debt. If the Board likes it, it will order voting on that Qualifying Modification and if it does not like it, there will be no chance to have it approved. Once approved by the Board, officials designated by the Governor will establish pools for the different issuers of bonds. For example, if the bonds issued by the Retirement Fund have differences in preferences, or a lien (as the First Circuit recognized to Altair on those bonds), these bonds have to be put in different pools. Once all outstanding bonds, meaning valid bonds that have not been paid (another reason why the Board will conduct its own audit of PR’s debt), have been accounted for and its owners identified, certain information has to be delivered to them. Section 601(f) establishes the following:

Before solicitation of acceptance or rejection of a Modification under subsection (h), the Issuer shall provide to the Calculation Agent, the Information Agent, and the Administrative Supervisor, the following information—

(1) a description of the Issuer’s economic and financial circumstances which are, in the Issuer’s opinion, relevant to the request for the proposed Qualifying Modification, a description of the Issuer’s existing debts, a description of the impact of the proposed Qualifying Modification on the territory’s or its territorial instrumentalities’ public debt;

(2) if the Issuer is seeking Modifications affecting any other Pools of Bonds of the Territory Government Issuer or its Authorized Territorial Instrumentalities, a description of such other Modifications;

(3) if a Fiscal Plan with respect to such Issuer has been certified, the applicable Fiscal Plan certified in accordance with section 201; and

(4) such other information as may be required under applicable securities laws.

As stated above, once this information is delivered to the bondholders, they will vote and if “the affirmative vote of the holders of the right to vote at least two-thirds of the Outstanding Principal amount of the Outstanding Bonds in each Pool that have voted to approve or reject the Qualifying Modification, provided that holders of the right to vote not less than a majority of the aggregate Outstanding Principal amount of all the Outstanding Bonds in each Pool have voted to approve the Qualifying Modification” the modification will be approved. Section 601(j) of PROMESA.

If the Qualifying Modification is approved by the vote of the bondholders, then the agreement is taken to the US Federal District Court for the District of Puerto Rico for the entry of an order that the requirements of Section 601 have been satisfied. Once this order is entered, the Modifying Qualification is binding on all bondholders but this may be questioned in the US Federal District Court for the District of Puerto Rico due to the unlawful application of Section 601 or that in the judgment of the Court it is “manifestly inconsistent” with Section 601.

Undoubtedly agreements will be reached between some issuers and some bondholders, especially with those with weaker claims, to wit, PFC and GDB, the latter which its bondholders had already accepted 53% haircut. In others, such as GO’s and COFINA, it is likely that a Title III filing will ensue, especially if a quick resolution of that controversy is not made by Court resolution. And those filings will make Detroit seem a walk in the park.

Friday March 3, 2017, the Financial Supervisory Board filed a notice of appeal in the Lex Claims case challenging Judge Besosa’s determination of denying its request for stay https://drive.google.com/file/d/0ByCo6S6fmcDlSDFKSTB1U3ljd28/view This move by the Board is puzzling since the aforementioned order cannot be considered an appealable final decision pursuant to 28 U.S.C. § 1291. As the First Circuit said in the recent decision on Peaje Investment LLC v. García Padilla, at page

In the analogous bankruptcy context, we have held that the denial of relief from a stay is not necessarily a final decision sufficient to confer appellate jurisdiction. See In re Atlas IT Exp. Corp., 761 F.3d 177, 185 (1st Cir. 2014). But such a decision is final where it “conclusively decide[s] the fully-developed, unreviewable elsewhere issue that triggered the stay-relief fight.” Id. It rejected the Movants’ substantive arguments, holding that their interests in the collateral were adequately protected. After that ruling, there was nothing left for the district court to do.

Here, different that in Peaje, Judge Besosa has much to do. He has to determine motions to dismiss the substantive claims in the complaint and if he does not, then he has to determine COFINA’s legal standing and whatever implications it may have. It behooves the mind to think the appealed determination is a final order and if it is not, the First Court of Appeals would have no jurisdiction to entertain this appeal. In addition, generally, orders denying a stay of litigation is not a final order, see, Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 275 (1988).

Also, 28 U.S.C. 1292(b) does not grant the Appellate Court jurisdiction. It states:

When a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order. The Court of Appeals which would have jurisdiction of an appeal of such action may thereupon, in its discretion, permit an appeal to be taken from such order, if application is made to it within ten days after the entry of the order: Provided, however, That application for an appeal hereunder shall not stay proceedings in the district court unless the district judge or the Court of Appeals or a judge thereof shall so order.

No such determination has been made by Judge Besosa and the Board has not ask him to do so. Therefore, it is unlikely the First Circuit would grant such an interlocutory appeal review. In addition, the mere filing of the notice of appeal does not stay proceedings and set deadlines such as the March 20, 2017 date for the Board and others to file their “pleadings setting out their claims or defenses for which intervention is sought.”

The real questions is why would the Board resort to filing of a notice of appeal if it is unlikely that it has jurisdiction? In the Peaje litigation, Judge Besosa’s decision was issued November 2, 2016 and the First Circuit decided the appeal by January 11, 2017. If the First Circuit takes the same time to decide the issue, the decision would come down by April 11, 2017, only 19 days before the stay expires on May 1.

The only thing I can imagine is that the Board simply does not want Judge Besosa to decide the issue before the stay expires is that he will not issue an opinion and order if the First Circuit entertains the appeal and by the time there is a decision. Even if the Board loses, its is unlikely that Judge Besosa would decide before the stay expires and on May 2, 2017, the whole Government of PR would be in Title III and all litigation would be stayed. The Board can parade this scenario in front of both COFINA and the GO’s during the Title VI negotiations and try to convince them to come to an agreement. Let’s see what happens.