Monday Update – October 30, 2017

Welcome to your weekly Title III update for October 30, 2017. This week is dominated by the Whitefish scandal, which will undoubtedly affect the PROMESA litigation and the Board’s roll vis-à-vis the Puerto Rico government.

Whitefish is a recently incorporated Montana-based company with only two employees and reported sales of $1,000,000. The company has no history of mayor reconstruction work, yet, somehow, landed a $300,000,000 contract to reconstruct the PREPA grid. Ricardo Ramos, PREPA’s executive director, said right after Hurricane Irma that the utility had sufficient supplies to repair itself – a claim later debunked. Mr. Ramos stated later that if another hurricane came he would call the American Public Power Association, which would provide its crews for the reconstruction of the power grid. When the APPA crews did not appear, he first said that he had called the association for assistance but received no answer. When the APPA chairman said he had not called, Ramos changed the tune to say they were asking for millions in deposit, something Whitefish did not.  There was no bid for the contract. The contradictions were many and Congressional cries to investigate were loud. Moreover, the contract became public but rather than answer questions it created more. Paragraph 59 reads, “[i]n no event shall PREPA, the Government of Puerto Rico, the FEMA administration, the Comptroller General of the United States, or any of their authorized representatives have the right to audit or review the cost and profit elements of the labor rates specified therein.” This section reeks of bad faith and lack of transparency. Further, in any event would be void as contrary to the law, moral and public order, both in Common Law and Puerto Rico’s Civil Law.  FEMA will have to decide soon whether it will reimburse PREPA for the Whitefish contract – a question sure to be raised when FEMA Administrator Brock Long testifies before Congress this week.   Now, it’s reported the Federal Bureau of Investigation is investigating the Whitefish contract.

Further, on October 26, 2017, Congressman Rob Bishop, chairman of the House Natural Resources Committee, requested from Ricardo Ramos a series of documents pertaining to the adjudication of this contract. Congressman Bishop, in a not very subtle tone, made clear to Mr. Ramos to preserve all communications with Whitefish, which include emails, phone calls, and Linked In messages – the method a Whitefish spokesperson claims is how he first contacted Mr. Ramos. In what seems like a coordinated action with Chairman Bishop’s Committee, the Board announced on October 25, 2017, the designation of Mr. Noel Zamot as the Chief Transformation Officer for PREPA. The next day, the Board filed a motion with Judge Swain in the PREPA Title III proceeding asking for Mr. Zamot to be appointed as CTO, whose duties and responsibilities makes him PREPA’s new CEO, see motion at page 2. The motion, at page 17, states as follows:

“Section 305 of PROMESA provides that, “notwithstanding any power of the court, unless the Oversight Board consents or [the debtor’s Title III] plan [of adjustment] so provides, the court may not by any stay, order or decree, in the case or otherwise, interfere with –(1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.” PROMESA § 305. As this Court reasoned in its rejection of the lift stay motion, a receiver could not be appointed because “permission to require the appointment of a receiver to manage PREPA’s operations and seek the approval of rates higher than those PREPA has thus far chosen to charge – is facially inconsistent with Section 305 of PROMESA [and cannot be ordered by the court] absent the Oversight Board’s consent, which has not been given here.” Order Denying Receiver Motion at 10–11. It follows that, to the extent it is argued that the CTO would necessarily exercise or interfere with political or governmental powers in carrying out its responsibilities, the Court may order the appointment of the CTO provided the Oversight Board consents. The Oversight Board’s consent is given through this Urgent Motion, and it respectfully requests appointment of the CTO with the powers and authority described herein.”

Moreover, at page 19 of the motion, the Board states “[n]othing herein shall prevent the Oversight Board from seeking an order from the court to amend, alter, expand, or limit the Powers and Authority vested in the CTO by any order of the court.” Hence, the Board may seek even more powers for the CTO. This begs the question; can the Board obtain the appointment of a CTO for the Commonwealth Government at some time to eclipse Governor Rosselló? The government has vowed to oppose this latest Board action but I see little chance it may succeed. Judge Swain on Friday ordered the government to oppose the Board’s motion no later than November 3, any reply by November 8 and the oral argument will be on November 13, at 11 am. Fireworks are to be expected unless Governor Rosselló relents.

Why is the Board moving for the Zamot designation? Mostly because it wants to control the María recovery funds, something that is barred at this time by PROMESA section 204(d)(2), and to prove that it is a useful oversight authority rather than simply a tool rip up contracts with Puerto Rico’s creditors. As I said, Judge Swain is very likely to side with the Board since sections 305 and 315 of PROMESA allow the Board to do so.

On Wednesday October 25, the Court held the hearing on the recovery funds motion by the Board and surprisingly, loans were removed by AFFAF from the definition of recovery funds. The language was negotiated between the parties for as I said, there was no real opposition to the Board’s motion, only to some of the language. Also, the UCC said that it expected to settle the COFINA v. Commonwealth litigation, hastily adding that litigation was very costly. Undoubtedly, over 90% of federal cases are settled, but any settlement here that does not involve 100% of COFINA funds for the Commonwealth will be challenged by the GO bondholders, leading to even more litigation.

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.

Monday Update – October 23, 2017

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.

Monday Update – October 16, 2017

Welcome to your weekly Title III update for October 16, 2017. Again, this week not much happened in the Court but other developments were of great importance.

Judge Swain granted the Board’s extension of the time to meet and discuss lifting of the stay in those case where the time expired on September 19 on, as well as the time for Puerto Rico to respond to motions to lift stay. Delay seems to be the name of the game.

On October 12, Judge Swain ordered the Board to “submit a revised proposed order to the Court that includes a procedure for retroactive Court approval of any automatic stay modifications. For example, such procedures may provide the following:

(a) The Debtors, in their discretion, and without immediate leave of Court, may (i) enter into stipulations modifying or lifting the automatic stay and (ii) agree to modify or lift the automatic stay with respect to any prepetition ordinary course civil action against a Debtor;

(b) The Debtors must file Omnibus Lift Stay Motions, every sixty (60) days, identifying each automatic stay modification agreed to by the Debtors during the relevant period and seeking that the Court approve such modifications nunc pro tunc to the relevant modification date; and

(c) Each Omnibus Lift Stay Motion must include personalized information for each automatic stay modification including, as applicable, a brief description of the modification, case information (including case number and court), and counterparty.

Seems the Board wants to further remove the Court’s control over certain proceedings but Judge Swain seems reluctant. Let’s see what happens.

The Board had also filed a motion to set the last date for filing proof of claims but on October 13, withdrew the motion, allegedly due to Hurricane María. This means that there is no bar date for filing of proofs of claim at this time in any of the Title III cases. To this we have to add the withdrawal of the Board of its motion in the PREPA case to establish a procedure to cancel power purchasing agreements.

In the Commonwealth v. COFINA case, the UCC continues serving subpoenas to different parties. In addition, Judge Swain has ordered the parties that no later than October 20, “a proposed revised schedule to govern the remaining briefing and discovery deadlines in the Commonwealth-COFINA Dispute. Such proposal may not include any deadlines starting prior to October 25, 2017.” This may move the Court to continue the December 4-8 hearings for a later date, further delaying decision in the controversy.

Governor Rosselló sent a letter to the Secretary of the Treasury and stated, inter alia:

“Without immediate access to a significant federal liquidity facility, we will be unable to provide essential services to our citizens, such as paying the salaries for teachers and first responders, providing healthcare, and paying pensions.”

“Personnel and advisors from the Government of Puerto Rico and the Fiscal Oversight and Management Board for Puerto Rico (“FOMB”) have been working closely with your staff to provide estimates on the magnitude of the shortfall. This shortfall results primarily from large declines in government revenues and operating deficits at PREPA and PRASA in addition to the need to fund near term recovery efforts.”

In addition, the Board sent a letter to Secretary of the Treasury and stated, inter alia:

 “The Government of Puerto Rico’s ability to provide essential services, such as paying the salaries for teachers and first responders, providing healthcare, and paying pensions, is in jeopardy unless Puerto Rico is given immediate access to a significant federal liquidity facility.”

“This proposal has the flexibility to provide Puerto Rico with the cash that it will need to operate core government services and its disaster response efforts in the near term, in addition to being integrated with PROMESA, its monitoring mechanisms, its fiscal reform goals, and the prehurricane certified fiscal plans.”

The obvious question is what proposal is the Board talking about? I have not seen it and neither has anyone in Puerto Rico, outside the Board and some government officials. Maybe the Centro de Periodismo Investigativo is finding out. I am sure everyone in Puerto Rico and the US want to know.

Congress responded by approving a $36 billion plus aid package with $4.9 billion, supposedly for loans, according to the Governor, who claims most of the monies will go to Puerto Rico.

In other news, the Board hired Williams and Jensen PLLC for $720,000 a year and Off Hill Strategies, LLC, for $180,000 a year to lobby in Congress and the Executive. Before you tell me María has made this necessary, the hiring was effective August 14, 2017, more than a month before the hurricane’s visit. Obviously, this hiring was done to protect the Board from any Congressional attempt to curtail its prerogatives. Power is very beguiling.

Also, the Board officially hired Donald Verrilli, Obama’s Solicitor General, as its attorney in the Aurelius and Utier constitutional challenge. At least five lawyers will be working on the case, at $1,225, $800, $735, $660, and $600 an hour. Clearly, contrary to what some analyst opine, the Board is taking this challenge very seriously. The next step is to wait for the US Solicitor General to announce whether he will defend the law. The Solicitor General usually defends Congressional laws but the Solicitor General asked for an extension to announce its determination.

Finally, to complicate my already complicated life, on Sunday October 15, the Board and AAFAF filed a motion entitled Urgent Joint Motion of the Commonwealth of Puerto Rico, Puerto Rico Highways and Transportation Authority, Puerto Rico Electric Power Authority, and the Puerto Rico Fiscal Agency and Financial Advisory Authority For Order Concerning Receipt and Use of Anticipated Federal Disaster Relief Funds and Preserving Rights of Parties, seeking an:

“. . . order confirming that with respect to the Commonwealth and its instrumentalities’ receipt and use of anticipated Federal Disaster Relief Funds: (i) the Commonwealth and its instrumentalities, including public corporations, will deposit Federal Disaster Relief Funds into new, segregated, non-commingled, unencumbered accounts held in the name of the instrumentality to whom the funds have been allocated according to a governing Project Worksheet or otherwise under applicable law (the “Disaster Relief Accounts”); (ii) no liens, encumbrances, priorities, or other claims by pre-existing creditors of the Commonwealth or Non-Federal Entities in any form whatsoever, shall be asserted against such Federal Disaster Relief Funds, Commonwealth Disaster Relief Advances, or the Disaster Relief Accounts; (iii) such funds shall be applied only to pay or reimburse parties for expenditures within the scope of work identified on a FEMA Project Worksheet or otherwise in accordance with federal law or regulation, and shall not be considered available funds, resources, or revenues for any other purpose in connection with any restructuring proceeding under PROMESA; (iv) no other party in interest shall be permitted to interfere with the transfer of Federal Disaster Relief Funds to Disaster Relief Accounts or parties entitled to payment; and (v) to the extent any Federal Disaster Relief Funds become disobligated, the Commonwealth, as recipient of such funds, shall have a superpriority administrative expense claim against any Non-Federal Entity that is a debtor in a case under Title III of PROMESA to which it transferred such funds.” (Pages 10-11 of the motion)

At pages 7-8, the motion states “[u]nder the FEMA Agreement, the Commonwealth is designated as the sole recipient of all Federal Disaster Relief Funds provided by FEMA. The Commonwealth is then responsible for administering subgrants and transferring Federal Disaster Relief Funds to Commonwealth instrumentalities, public corporations, municipalities, and other eligible non-federal entities, as determined under applicable law, including HTA and PREPA (“Non-Federal Entities”).” This means, as I have mentioned before, that Puerto Rico, not the Board, will handle the relief money, giving Governor Rosselló much needed independence from the Board.

In addition, there is no need to state this since it is clear law. Why did the Board do so? No creditor has claimed that the relief money belongs to them and I doubt any will. What’s even stranger, as a result of federal relief monies, it’s likely Puerto Rico won’t necessarily be required to tap its own resources to pay for the relief effort. Conversely, the Board has also already stated it will review the Fiscal Plan and will likely reduce available monies for debt service to zero. This is despite withdrawing the adversary proceeding to force the Commonwealth to implement the furloughs, and pension reforms, which are being paid out of the Commonwealth Budget. Something doesn’t add up. The Board must do more to reconcile where the revenue from the Treasury is going if it isn’t sending it to bondholder payments nor recovery efforts.

It will be important to watch out for the relief money, FEMA direct payments and insurance payments will pour into the island in early 2018, like it did after Hugo (1989) and Georges (1998). If history is any indicator, the economy will grow and it will be difficult to justify the continued payment of pensions and employees and yet zero debt payment with this economic growth. This will be a big row once the Board “reveals” its new fiscal plan.

Also, at page 5, the Board states that PRASA also suffered damages due to María. Since PRASA has no income at the moment, it remains to be seen if there is Title III in the future for the agency.

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.

Monday Update – October 9, 2017

Welcome to your weekly Title III update for October 9, 2017. This week not much happened in the Court but what did transpire can have profound effects on the Title III litigation.

On October 2, 2017, the Solicitor General of the United States filed a motion for an extension of time notice whether it will defend the way in which PROMESA set out the appointments of members of the Board that has been challenged by Aurelius and UTIER, PREPA’s union. The motion stated, inter alia, “The United States now respectfully seeks an extension of time to file its Notice and, if necessary, its brief in support of the constitutionality of PROMESA. The Government’s deliberation on the issue has taken longer than initially anticipated. Indeed, the approval of the Solicitor General is required for the United States to defend the constitutionality of a federal statute.” It seems to me the Solicitor General and the White House are taking a very close look at PROMESA to determine whether it passes constitutional muster, but beware not to look too much into this. Let’s see what happens.

In response to the above petition, the Court issued an order moving the dates to resolve the Constitutional question. By November 3, 2017, the parties in interest, including the Oversight Board, must file opposition papers to the Aurelius Motions and “answer or otherwise respond to the complaint filed in the UTIER Adversary Proceeding.” By November 6, 2017, the Attorney General of the United States is “to notify the Court of its intent with respect to intervention in connection with the Aurelius Motions and the UTIER Adversary Proceeding.” The oral argument on the constitutional challenge will be held on January 10, 2017, which makes a decision before February/March unlikely.

The UCC continued its mission of intervening in most of the adversary proceedings filed in the Puerto Rico bankruptcies. Just today, the Board responded to the UCC’s motion to intervene stating that the UCC “should be allowed to ‘raise, appear and be heard’ on issues and review discovery and attend depositions subject to any relevant protective order, and nothing more.” The response showed just how unhappy they are with the UCC by outright denying that they have constitutional or prudential standing to control any of the issues at hand. The UCC continues to claim, however, that it does.

It seems likely that the limited interventions sought by the UCC will be granted by Judge Swain. It is also likely that at some point during the pendency of these cases, the UCC will seek greater involvement in the cases, much to the displeasure of the Board. It will be interesting to see what Judge Swain’s reaction will be.

In addition, the Board dismissed its adversary proceeding against the Governor for the furloughs and will not renew it until at least July of 2018 with the new fiscal year. Remains to be seen what will happen.

The Board has also requested an extension on the review of petitions to lift the stay and answers to motions to lift the stay, claiming the Department of Justice has difficulty accessing its files. Since I had to oppose said motion, I will not comment here on its legal implications and correctness.

Late Friday October 6, Assured Guaranty Corp., Assured Guaranty Municipal Corp. (f/k/a Financial Security Assurance Inc.) and National Public Finance Guarantee Corporation filed a notice of voluntary dismissal of their complaint, 17-ap-125, which was up for oral argument on October 11. Although the notice gives no reasons, plaintiffs made the following statement to the press:

“While we continue to believe the current fiscal plan is illegal, we have determined to voluntarily dismiss our complaint without prejudice at this time due to the crisis in Puerto Rico following Hurricane Maria, and the high likelihood that the fiscal plan will have to be revised,’ Dominic Frederico, chief executive of Assured Guaranty said in a statement.”

Since the Board announced it would revise the fiscal plan, it makes sense to dismiss the case, especially since the new one will be even more outrageously anti-bondholder than the original.

Finally, while Washington does not have a direct role in the Title III proceedings, the decisions they make in the coming weeks will have a profound impact on their outcome.  There are two major issues confronting Washington: first, Puerto Rico’s request for federal financial assistance, and second, whether or not PROMESA will be amended.

On October 3, 2017, the Board sent a letter to Congress seeking help for Puerto Rico claiming damages of up to $95 billion across the island.  Anyone who has followed Congress knows that with luck Puerto Rico will get $10-15 billion in aid. Where will the rest of the funds come from, especially when the Government claims it will run out of funds this month? One logical place is COFINA.

Last week, we discussed the possibility of “borrowing” from COFINA but this could take some time. Rather than write letters, a more efficient way for the Board to help would be for the Board to instruct Marty Bienenstock to file an injunction and declaratory judgment requesting that COFINA be declared unconstitutional, borrowing from the UCC’s causes of action 12-13. This would obviate the need for lengthy discovery, could get Puerto Rico some quick cash and reduce San Juan’s SOS calls to Washington for tax dollars.

The Board isn’t the only one writing letters to Congress for relief. Governor Rosselló has been all over cable news demanding that Washington provide loans or a line of credit to service Puerto Rico’s “immediate liquidity needs.”

It’s worth recalling that Janet Yellen, chair of the Federal Reserve, testified before Congress last year that the Fed’s authority, “is extremely limited and it wouldn’t be appropriate for us to give loans to Puerto Rico. We have very limited authority to buy municipal debt and the authority we have if we were to buy eligible debt, I don’t think would be helpful to Puerto Rico, and beyond that we have no ability to make emergency loans, we could not use 13(3) or powers of that type to extend a loan to Puerto Rico, and this is inherently a matter for Congress and is not appropriate for the Federal Reserve.” 

Now, that might not stop the U.S. Treasury from extending a loan to Puerto Rico.  If they do, it would raise significant questions, including whether any new loans would take priority over existing senior creditors as well as if the loan will simply be backed by the federal government, requiring the Puerto Rican Government to go to the private market to secure new monies.

What could be just as important, sources tell me the Trump Administration and some in Congress are demanding accurate and transparent financial information from the Board and the Commonwealth as a precursor and basis for any loans, especially given that there is no precedent for such financial assistance.

Puerto Rico and the Board should use the passage of Hurricane María to get a settlement of all bond claims, but in order to achieve it, they will have to substantially up the 26% payment they have been pushing.

Lastly, there’s been growing discussion regarding possibly amending, and possibly strengthening, PROMESA, which has been raised by Members of Congress. In a recent House Natural Resources Committee press briefing, Representative Rob Bishop went so far as to state that, “[amending and re-opening PROMESA] will be in consideration. Obviously, as we start moving beyond simply the initial way of saving lives as best you can and move to the restructuring and rebuilding process there has to be a way to do that faster than it has been done.” We will see if their suggestions garner any other supporters, but we should keep a close eye on how the conversation develops.

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.

Monday Update –October 2, 2017

Welcome to your weekly Title III update for October 2, 2017. Due to Hurricane María, I was unable to do the September 25 update. Fortunately, my family and I survived with no structural damage. We have water but no electricity or phone service and very limited internet service in the lobby of my condo.

As the last effects of María left the island, the First Circuit Court of Appeals made the Title III cases a lot more interesting. On August 10, 2017, Judge Swain issued an order denying the UCC’s motion to intervene in an Assured litigation. The UCC filed an interlocutory appeal and argued the case. On September 22, the First Circuit issued its ruling. At page 5-6, the Court stated:

“The UCC was appointed in June 2017. Such a creditors’ committee, the duties and powers of which are outlined by statute, see 11 U.S.C. § 1103(c), is intended to serve as “the primary negotiating bod[y] for the formulation of the plan of reorganization” representing the interests of the “class[] of creditors . . . from which [it was] selected.” H.R. Rep. No. 95-595, at 401 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6357. A creditors’ committee is ‘arguably the one party in interest that, for all practical purposes, typically represents stakeholders with the most interest in the outcome of virtually every proceeding.’”

Later, at page 12, the Court stated:

“We believe that the Second and Third Circuits have the better view and, accordingly, hold that the UCC was entitled to intervene under § 1109(b) and Rule 24(a)(1). The statutory language is, indeed, quite broad, providing that ‘a creditor’s committee . . . may raise and may appear and be heard on any issue in a case under this chapter.’”

Although the Circuit also opined that the District Court has discretion to limit the UCC’s participation, the decision definitely broadens its role in the Commonwealth’s bankruptcy. Moreover, the First Circuit mentioned (without a need to do so), that the UCC is a “primary negotiating bod[y] for the formulation of the plan of reorganization.” This means that the Board is not the only one who will be formulating the Plan of Adjustment pursuant to section 312 of PROMESA. The Board must be thrilled.

I must add that the Board stated that it would review the fiscal plan to determine whether there is a need to changes to the Fiscal Plan and the Title III cases. This brings us to an interesting crossroads in the case. Congress and the President have pledged to provide billions to Puerto Rico for its reconstruction, which begs the question of whether the Board will control this money. Section 204(d) of PROMESA states inter alia:

“IMPLEMENTATION OF FEDERAL PROGRAMS.—In taking actions under this Act, the Oversight Board shall not exercise applicable authorities to impede territorial actions taken to—

(1) comply with a court-issued consent decree or injunction, or an administrative order or settlement with a Federal agency, with respect to Federal programs;

(2) implement a federally authorized or federally delegated program;”

What this means is that the Board WILL NOT legally have control over any new money coming in from the Federal Government, but rather the Commonwealth government and Governor Rosselló will. Despite this, as we see recovery efforts ramp up, the Board, notwithstanding section 204(d), wants to be the administrator of the recovery funds and is even trying to lobby Congress to that effect. Further, section 203(e) of PROMESA states:

“TERMINATION OF BUDGET REDUCTIONS.—The Oversight Board shall cancel the reductions, hiring freezes, or prohibition on contracts and financial transactions under subsection (d) if the Oversight Board determines that the territorial government or covered territorial instrumentality, as applicable, has initiated appropriate measures to reduce expenditures or increase revenues to ensure that the territorial government or covered territorial instrumentality is in compliance with the applicable certified Budget or, in the case of the fiscal year in which the Oversight Board is established, the budget adopted by the Governor and the Legislature.”

Therefore, can the Governor argue to the Board that it has “increased revenues” with the addition of more federal funds and furloughs are not necessary? The Board seems to believe it can and announced Saturday, September 30, that there would be no discussion of furloughs until the summer of 2018.

Also, can Bondholders claim they should be paid more if the PR Government will receive greater amounts of federal funding? Questions, questions. What is clear is that the Board’s influence and power has been reduced since María came to PR.

Of lesser importance, although the Board requested that the October 4 hearing be postponed only until October 18, Judge Swain ordered that most of the motions will be decided without oral arguments and others postponed until the November 15 hearing. The Utier/Aurelius constitutional challenge briefing may also be moved. In addition, the Ad Hoc Group of PREPA Bondholders filed a notice of Interlocutory Appeal from Judge Swain’s denial of their request for lifting of the stay in order to request the appointment of a receiver. Let’s see what happens.

Finally, COFINA. COFINA money is currently being held by NY Mellon bank as per Judge Swain’s order. The Board, however, since June has been telling Judge Swain that the Government would likely need to borrow from COFINA come November/December. With the disaster left by hurricane María, not only will Judge Swain be inclined to allow such “borrowing”, she may also be further inclined to declare that COFINA is property of the Commonwealth as the UCC claims in its lawsuit. Trial in that case will be held from December 4-8 and could completely destroy COFINA claims in the amount of $17.6 billion. Would not be surprised to hear COFINA attempting to strike a deal to keep the entity in existence. Should the Government and the Board do a deal that keeps COFINA alive, surely it will set off numerous questions about the Commonwealth’s financial sustainability, whether this is just more of the same financial gimmicks and certainly more legal challenges. It would also likely result in the GO bondholders renewing their claims that COFINA is illegal and the funds are available resources for payment of their bonds.  Let’s not forget about the UCCs role here, too.

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.