Welcome to your weekly Title III update for October 23, 2017. Again, not much happened in the Court this week but other developments were of great importance.
We should start in Washington where Governor Rosselló met with President Trump and other lawmakers last week. Since then, some of these lawmakers are sounding off, but without the facts. Senator Menendez took to the Senate floor to claim that the Trump administration was planning to use the $4.9 billion Community Disaster Loans (CDL) program to pay bondholders, through the new approval process established under this relief legislation, which requires the Secretaries of Treasury and Homeland Security to sign-off on requests from San Juan. What this tells me is that San Juan’s requests will be heavily scrutinized, and come with stringent conditions imposed by the Trump administration. This is not exactly what Governor Rosselló had hoped for. We will see if this forces greater transparency in the Title III process, which has been limited to date by the Board and Governor’s obfuscation.
In other news, Bettina Whyte, the COFINA agent, had requested leave from the Court to retain Centerview Partners LLC for several services, such as familiarizing itself with the fiscal condition of the Commonwealth and COFINA, including financial projections and forecasts; reviewing and evaluating COFINA’s capital structure and advising on possible restructuring strategies; providing expert testimony at any hearings in connection with the Commonwealth-COFINA Dispute; and assisting and advising with negotiation and mediation strategy. The cost for these services would be $1.75 million, plus expenses. Both the Board and AAFAF objected saying the scope of what the agent wants the expert is beyond the scope of its authority as per the parties’ stipulation. Judge Swain decided Monday, Judge Swain denied the request without prejudice and stated:
These disputes, which will be argued at a hearing on the companion application on October 25, 2017, highlight certain ambiguities in the stipulated Procedures and persuade the Court that the proper scope and terms of retention of a financial advisor, if any, for the COFINA Agent, cannot properly be addressed prior to clarification of the scope of the COFINA Agent’s duties and authority. Among the more significant scope issues to be determined is whether formulation of hypothetical restructuring scenarios is an appropriate exercise of the COFINA Agent’s negotiation responsibilities under the Procedures even though PROMESA reserves to the Oversight Board the exclusive power to propose any plan of adjustment for confirmation. Only after such clarification can the appropriate potential range and valuation of the proposed Centerview services be assessed. For this reason alone, denial of the Centerview Application, without prejudice, is appropriate at this juncture.
From reading this it seems the COFINA agent wants to make a deal with the Commonwealth in order to preserve some of its alleged lien, but the Board does not want that. I remember Martin Bienestock arguing during the first hearing that the Board would reserve the right to veto any settlement in the dispute. It seems that idea has not gone away. We will know more on Wednesday.
Also on the COFINA v. Commonwealth case, the UCC and COFINA agent filed a motion informing the Court of an agreement as to discovery, which would allow for discovery to end on February 9, 2018, with a subsequent trial. Interestingly, the Board and AAFAF do not agree to it. It seems that the Board and AAFAF want the COFINA funds at an earlier date. The parties stated they would continue to try to reach an agreement before the October 25 hearing.
Also, the Board filed a notice of amendment of the Management Order to simplify the lifting of stay proceedings. The new proposal would allow the Board to essentially decide without further order to modify the stay. Let’s see what happens.
As expected, no party objected to the idea that federal relief funds would not be available resources to be used to pay creditors but several parties offered amendments to further clarify the situation. Ambac, however, had a rather interesting objection:
First, the definitions of “Federal Disaster Relief Funds” (Motion at 3 n.3) and “Commonwealth Disaster Relief Advances” (Id. ¶ 19 n.6) are overbroad. These definitions should be narrowly tailored to provide that “Federal Disaster Relief Funds” expressly exclude funds and sources of revenue beyond those funds specifically disbursed by the federal government to aid in disaster relief, including funds that are validly pledged to creditors under applicable law. The definitions should further specify that “Federal Disaster Relief Funds” does not include loans. At present, the definition provides that it includes any “funds . . . in the form of grants”; the exclusion of loans received for disaster relief or any other purposes should be made explicit. (Id. At 3 n.3.)
3. Second, given that the Motion contemplates the deobligation of Federal Disaster Relief Funds and the consequences of such deobligation (Motion ¶¶ 7, 22), the Proposed Order should contain a commitment by the Commonwealth, AAFAF, and the Oversight Board to communicate with creditors in good faith for purposes of, inter alia, identifying all recipients of Federal Disaster Relief Funds and the uses to which such funds have been put by the Commonwealth and all such recipients. (bolded added)
The American Federation of State, County and Municipal Employees (AFL-CIO) had filed an adversary proceeding against the Board to stop the implementation of the employee furloughs and pension reduction. Given that the Board had placed that in hiatus, now the plaintiff is requesting a stay of proceedings, obviously waiting for the new fiscal plan. Interestingly, the plaintiff’s motion states the Board agreed to the stay.
In the adversary proceeding of ERS v. Altair, plaintiff argues that the security interest of the defendants has not been perfected. During the case, discovery requests were made and the defendant’s claimed this week:
Unfortunately, the ERS has consistently resisted providing the discovery the Court expected. Initially, the ERS simply argued that no discovery was necessary at all. Then, when that argument was rejected, the ERS claimed that the scope of discovery should be extremely narrow. After that effort failed, the ERS evidently then decided to unilaterally limit what discovery it would provide.
The defendants want more documents produced, 30(b)(6) depositions (person most knowledgeable) and a decision on documents deemed privileged on the deliberative process privilege. The motion was filed Wednesday and last Friday, Magistrate Judge Dein issued an order that plaintiff had to answer Altair’s motion by October 26 and any reply must be filed by October 27. A hearing is to be held in Boston is scheduled for November 2, at 3 pm.
The House Natural Resources Committee was to hold a hearing on October 24, 2017 to determine whether the Board need to have further powers to deal with the alleged graft and corruption in the distribution of relief funds in Puerto Rico. Without given any reason, however, the hearing was continued sine die. I was told by sources that the Board was lobbying Congress for more power so this came as a surprise. Maybe President Trump is thinking of appointing a National Incident Commander as was done after Katrina and the British Petroleum oil spill in the Gulf. This would dispense with any idea of further powers to the Board.
This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.