Hearing on UCC Document Request

On June 18, 2018, Magistrate Judge Dein presided over a hearing regarding a request by the UCC on documents currently held by the Oversight Board and their independent investigator, Kobre & Kim.  AAFAF informed that it had handed over all of the GDB’s non-privileged documents to the court and that by Wednesday a privileged log would be made public barring any problem in signing the Non-Disclosure Agreement with the UCC.

Kobre & Kim stated that it had shared the term searches with the UCC used with Banco Santander, Banco Popular Puerto Rico and the GDB. All third parties have denied the investigator the permission to share the documents with the UCC. Hence, it has not shared with the UCC search terms or identity of document custodians.

Kobre & Kim said that it wants to deposit all documents in a room and then have any interested party petition to see them. Those who oppose this, will have the right to do so. The Board’s investigator will file his exit plan by July 3 but before doing so they will meet and consult with the UCC and the Retiree Committee, and reaffirmed the report will be complete by August 15.

The UCC explained that Kobre & Kim had only shared the documents it was provided. In the case of the GDB, certain search terms resulted in over 100,000 documents, but decided to have copies total slightly over 5,000 pages. Judge Dein said she did not want the UCC reviewing those documents given the volume. The UCC said the parties would work something out. The UCC also claimed that the GDB waived its privilege when it gave the Board’s investigator the documents.

Moreover, and interestingly, the UCC said that the stumbling block on the NDA was AAFAF’s claim that it wanted to retain those documents that could cause harm to elected officials.

At this time, AAFAF insisted that there were no documents that fell into that category but that it would be appropriate to have the fiscal agency prove its right to do so if the issue was raised. Judge Dein, quite correctly, said she was not going to rule on documents that did not exist.  She further noted she will reserve this right in the NDA if the documents do come up then she will give her ruling. AAFAF also raised the issue that many of the documents that were produced to the Board pursuant to PROMESA section 104(c) were documents pursuant to a particular federal law, which the UCC did not necessarily have access to, since the power of the Board to get the documents was broader than a subpoena.

The issue of AAFAF claiming a right to reserve documents that could cause harm to elected officials flies in the face of all of Puerto Rico’s case law regarding the public’s access to government documents. It behooves the mind to hear this and makes you wonder what AAFAF is hiding. Maybe AAFAF is protecting 3 board members – Caco Garcia, Jose Ramon Gonzalez and Jose Carrion – and Mr. Portela himself, all of which have tricky connections to the debt. I can’t see how, if AAFAF claims to do this, the Court would allow it. Guess we will have to wait and see.

As to the Board’s power under section 104(c)(2), which is the one applicable to the Government of Puerto Rico, it states:



Notwithstanding any other provision of law, the Oversight Board shall have the right to secure copies, whether written or electronic, of such records, documents, information, data, or metadata from the territorial government necessary to enable the Oversight Board to carry out its responsibilities under this Act. At the request of the Oversight Board, the Oversight Board shall be granted direct access to such information systems, records, documents, information, or data as will enable the Oversight Board to carry out its responsibilities under this Act. The head of the entity of the territorial government responsible shall provide the Oversight Board with such information and assistance (including granting the Oversight Board direct access to automated or other information systems) as the Oversight Board requires under this paragraph.

Does this mean that the Government of Puerto Rico could not invoke any privilege against the Board? Was any privilege invoked against the Board? Questions, questions. In fairness, AAFAF does have a point, depending on how these questions are answered. Again, we need to wait and see what happens.

Monday Update – June 18, 2018

Welcome to your weekly Title III update for June 18, 2018. Not much happened this week in the case or outside the case.

In the issue of the UCC’s request for discovery on the causes of the debt crises, the Board filed a report by the investigator. The report states, inter alia:

The Final Report will provide a comprehensive discussion of claims and avenues for recovery. Parties in interest or members of the public may review the Final Report and determine that they require access to documents that have been collected by the Independent Investigator. Accordingly, in advance of publishing its Final Report, the Independent Investigator will seek court approval for procedures governing the storage of, and access to, documents collected during the Investigation, all of which will be placed into a secure document depository for the future use of various stakeholders. . .

 The Independent Investigator anticipates filing a motion for approval of these proposed procedures concerning the documents on or before July 3, 2018, so that it may be heard before the end of July 2018. The filing of this motion will precede the publication of the Final Report, in part, because the motion will also seek to establish procedures for resolving any confidentiality disputes that arise in connection with the publication of the Final Report. As noted, various producing witnesses have entered into confidentiality agreements with the Independent Investigator. Although these agreements generally provide the Independent Investigator with broad discretion to disclose a witness’s confidential information if doing so is in the public interest or necessary to enable the Independent Investigator to fulfill its obligations under PROMESA, witnesses will generally be provided with advance notice of the disclosure of their confidential information, and they may elect to seek a protective order or similar relief prior to such disclosure. The document procedures will seek to funnel any such disputes to a single forum that will apply a uniform set of dispute resolution procedures.

This means that the Investigator will have the report ready by August 2018, with avenues for recovery of claims. If true, the Board would then have to evaluate the “avenues” and make a determination of whether it will pursue these “avenues.” Even without reviewing the documentation and witness testimony, I find it difficult to evaluate whether such “avenues” are promising. Hence, the Board would need to seek permission from the Court to review the documents and witnesses to make sure the “avenues” are, in fact, viable. Then and only then, would the Board be able to pursue said “avenues.”

This time frame is important as 11 U.S.C. § 546(1)(A) limits the time for the trustee – in this case the Board – to seek avoidance of transactions, etc., to 2 years from the date of the filing of the petition, which in the case of the Commonwealth, would be May 2019. Moreover, the Board may decide not to pursue a particular cause of action, but pursuant to 11 U.S.C. § 926(a):[i]f the debtor refuses to pursue a cause of action under section 544545547548549(a), or 550 of this title, then on request of a creditor, the court may appoint a trustee to pursue such cause of action.”This means even more delays, which has always been the UCC’s point in seeking to commence its investigation. This will undoubtedly come up in the June 18, 2018 hearing with Magistrate Judge Dein.

The Board is playing legal games, so if the UCC is serious about conducting an investigation, it will have to consider what additional “avenues” are available to it.

The Puerto Rico legislature finally approved the “Bill to Transform the Puerto Rico Electric System.” It is only in Spanish at this time. Although it has yet to be signed by Governor Rosselló, there is no indication he will not. The bill, however, is definitely not what we expected.

You may remember Bruce Walker, Department of Energy Undersecretary, saying his department had paid the Southern States Energy Board “in association with DOE, is working in coordination with the governor and legislature of Puerto Rico to establish a reliable, affordable, and sustainable electric energy grid system, and to develop a policy and legal framework to provide a regulatory process for possible privatization efforts.” This aspect of the sale was totally ignored by the bill, which only talks about the Southern States Energy Board and the Department of Energy helping with the evaluation of public policy on energy and a regulatory framework necessary for the transformation of PREPA. Moreover, this is contrary to what the Board told Senator Murkowski in a letter in May:

As the representative of PREPA in the Title III court proceedings, the Oversight Board leads the negotiations to restructure PREPA’s legacy obligations, such as debt and unfunded pension. The Oversight Board also plays an integral role in the process to transform PREPA into a modern electric utility that provides low-cost, reliable energy because any transaction to effectuate that transformation will have to be approved by the Title III court as part of PREPA’s plan of adjustment to emerge from Title III. The Oversight Board has retained Citigroup Global Markets, Inc. as the financial advisor, representing both the Oversight Board and the Government, on any potential transformation transactions. Among other things, Citi intends to conduct a broad market sounding exercise to gauge interest level in participating in any potential such transformation transactions that could entail a long-term concession for the transmission and distribution system and the potential sale of generation assets. This market sounding will help shape the RFQ and RFP process that will be conducted pursuant to the amended P3 legislation that is currently being debated in the Puerto Rico Legislature.

It is difficult to reconcile the bill with these statements, especially if you consider that it does not mention the role of the Oversight Board. Further, the bill puts the Public Private Authority Commission in charge of the sale. In addition, the bill requires ratification of the legislature for any sale of the generation. Moreover, the bill requires that to any extent possible, the proceeds of the sale go to the PREPA retirement system and specifies that “the system cannot be suspended by this law or by any transaction it authorizes. The Retirement System can be defined by subsequent legislation.” Unions will not be happy with this.

The bill also states that “[t]he energy public policy and the regulatory framework must be approved by the Legislative Assembly in a period that must not exceed one hundred eighty (180) days since the approval of this law.” During this period, no contract for the sale of PREPA will be finalized. The problem with this is that how can anyone agree to buy a part of PREPA if it does not know the “the energy public policy and the regulatory framework?”  Moreover, PREPA has not completed its integrated resources plan, which the new buyer has to comply with. This will delay any sale – hence the PREPA Plan of Adjustment.

One can easily see that a conflict with the Board will rise. More litigation and expenses while the Board still lords over Puerto Rico. Oh, well.

Finally, the House of Representatives approved another version of the repeal of Law 80 but the Senate president said he does not agree with its changes. Normally, this would go to a Conference Committee that would iron out any discrepancies.  However, the budget, which must be approved by June 30, is dependent on its repeal. If not, the Board will reinstate the previously approved Fiscal Plan with deep cuts on the budget including the elimination of Christmas bonuses. A total mess.

The entire Law 80 debacle has exposed a deeper flaw: the Fiscal Plan and economic assumptions associated with it can be adjusted at the whim by the Board. On one hand, you remove Law 80, and the economy will create thousands of jobs, but the surplus goes down. On the other hand, if Law 80 isn’t repealed, the budget cannot be approved without eliminating the Christmas bonus. This fuzzy math doesn’t add up.  The Board is in a pickle.  Expect creditors to raise these concerns during the Plan of Adjustment. Remember, they now have access to Mr. Wolfe’s data.

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.

Making Sense of the Commonwealth and COFINA Agent’s Agreement

Over the last few days there has been a lot of reporting on the Commonwealth -COFINA Agent Agreement, but not much of it was substantive.  Is this return fire from the Agent’s following the GO-COFINA global settlement?  Every step made from here, both in and out of the court, will have huge implications for the case. Here, I attempt to break down the agreement, examine key questions, and look at the road ahead.

First, it might help just to clarify who the Agents exactly are and who they represent.  The Agent for the Commonwealth is actually the Unsecured Creditors Committee (UCC).  The Agent for COFINA is not the COFINA creditors (comprised of COFINA Seniors, COFINA Subordinate (Jrs.) and Capital Appreciation Bonds (CAB), both Senior and Jr.), but Bettina Whyte, appointed to help bring the conundrum of who represents the interests of COFINA (Commonwealth, Board or the creditors themselves) to an end.

Second, while I think the reporting has improved since the deal was first announced, this Agreement is not a GO-COFINA settlement.

Third, this deal raises substantial questions and by no means is it a done deal.  Here’s just some of the questions:

  1. The Commonwealth’s taxing authority; can Board surrender it?
  2. Is this the best possible deal?
  3. What is the role of the Government of Puerto Rico?
  4. What are essential services?
  5. What is the future protection for the SUT (locally and federally)?
  6. What is the GO priority claim?
  7. The Board rejected the voluntary agreement between GO-COFINA creditors but has not rejected this… why?
  8. Finally, how many does it take to tango…? 2 or 3?

Overview of the Agreement

The deal, which is 8 pages long and only an agreement in principle, states as follows:

“COFINA will receive (a) 53.65% of the yearly scheduled PSTBA (beginning with payments made on 7/1/18), and (b) 100% of the cash held in trust at Bank of New York Mellon as of 6/30/18.

COFINA’s 53.65% portion of the PSTBA would be the first dollars of the 5.5% SUT distributed each year.

Securities to be structured subsequently.

COFINA’s Title III  plan of adjustment shall provide that, to the extent permitted under applicable law, all restructured securities issued by reorganized COFINA (or a new entity established pursuant to COFINA’s Title III plan of adjustment) will be tax-exempt, with the COFINA Agent being satisfied (in its sole discretion), prior to execution of the settlement agreement, that this condition will be met.

The PSTBA shall be equal to the sum of “original fixed income” as prescribed in section 3 of Act 91 (as amended and currently in effect), i.e., the amount of $783.2 million for Fiscal Year 2019, growing at 4% annually up to a cap of $1.85 billion by Fiscal Year 2041. In no event shall the make-whole provision of section 5(d) of Act 91 (as amended and currently in effect) operate to fund amounts on COFINA bonds by reason of any purported acceleration or defaults.

The Commonwealth will receive 46.35% of the yearly scheduled PSTBA (beginning with payments made on 7/1/18), any residual of the 5.5% SUT, and the additional 4.5% SUT surcharge.

The Commonwealth’s 46.35% share of the PSTBA would be received by the Commonwealth each year after COFINA receives its full 53.65% share of the PSTBA.

COFINA shall own each year the first dollars of the 5.5% SUT up to the amount of COFINA’s 53.65% share of the PSTBA, and the Commonwealth shall own each year the 5.5% SUT in excess of such amount.

Escrow Account

The Commonwealth’s share of the PSTBA will be held in escrow by an escrow agent selected by the Commonwealth Agent (in its sole discretion, but after consultation with the Oversight Board)  and approved pursuant to an order of the Title III court, with such escrowed funds being allocated to holders of claims against the Commonwealth under a Commonwealth Title III plan of adjustment; provided, however, that the Commonwealth shall have recourse to the funds in escrow (after exhausting its ordinary sources of liquidity) to the extent necessary to pay for essential services, as determined by the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) (or a subsequent entity (if any) having similar supervisory authority as the Oversight Board after confirmation of the Commonwealth’s Title III plan of adjustment).

Therefore, COFINA surrenders 46.35% of its funding to the Commonwealth, resulting in a possible haircut in that amount. There is no indication in the document of how this 53.65% will be distributed between Seniors, Jrs, or CAB’s. Depending on what each get, this deal could be approved, or not. More on this later. Also, COFINA gets the money held by Mellon Bank, about one year of payments but the agreement does not explain how it is going to be divided within the Seniors and Jrs. Also, the UCC filed today a motion so there will be no further deposits to Mellon Bank, essentially putting a cap on what COFINA will get. In any event, will it all go to the Seniors as payment for what they will not get from the PSTBA? Will some of it go to the CAB’s, which are not supposed to be payed until they mature? Questions, questions.

In addition, the Commonwealth’s 46.35% is going to be used for payment of “holders of claims against the Commonwealth under a Commonwealth Title III Plan of Adjustment.” Notice that it does not say payment of GO bonds, but rather holders of claims. This means that the money’s will be used for the payment of all creditors and even then, it may be clawed back for payment of “essential services” as (finally) determined by the Board, who until today, has refused to define them. What will they be is anyone’s guess but I can assure you it will not make bondholders happy. Also interesting is that the agreement says “or a subsequent entity (if any) having similar supervisory authority as the Oversight Board after confirmation of the Commonwealth’s Title III plan of adjustment.” Does the Board suspect the PROMESA structure will be soon changed by Congress? Questions, questions.

Further down, the agreement states:

“Post-July 1, 2018 Collection of SUT

SUT revenues collected on or after July 1, 2018 (up to the PSTBA amount) shall be deposited into an escrow account at Delaware Trust Company (the “Interim Escrow Account”) pending approval of the settlement by the Title III court, provided that:

upon the effective date of the settlement, such escrowed funds shall be released to COFINA and the Commonwealth (subject to the escrow arrangement above) in accordance with the percentage shares of the PSTBA set forth above; and

in the event that either (i) the Agents do not execute a settlement agreement within 60 days after the date that the Commonwealth Agent and the COFINA Agent agree to the terms set forth herein, or (ii) the effective date of COFINA’s Title III plan of adjustment approving the settlement does not occur within 200 days after the Commonwealth Agent and the COFINA Agent have executed the settlement agreement (as such deadlines may be extended pursuant to the terms hereof), then the ruling by the Title III court concerning the ownership of Pledged Sales Taxes not yet collected by the Commonwealth (as of June 30, 2018) shall be determinative of the disposition of the funds in the Interim Escrow Account (it being understood that neither party is waiving any appellate rights with respect to such determination).”

Apparently, the escrowed account before July 1, 2018 will be handed over to COFINA, which is a substantial amount, and from that date on it will be escrowed until the deal is finalized upon the approval of the Plan of Adjustment. The timetable, which could be extended, is for the approval to come in approximately 260 days, which would be in the beginning of 2019. In addition, the deal states:


The effectiveness of the settlement is conditioned on the following:

An injunction (or some federal legislative action) barring, as part of the settlement, any future challenges to (i) all of the terms of the settlement, (ii) the 5.5% SUT, and (iii) the COFINA structure and its related legislation, with the COFINA Agent being satisfied (in its sole discretion), prior to execution of the settlement agreement, that this condition will be met; provided, however, that any factual or legal findings made by the Title III court in connection with the approval of the settlement (i.e., the order confirming COFINA’s Title III plan of adjustment and the order approving the settlement in the Commonwealth’s Title III case) with respect to the COFINA structure and its related legislation shall have no preclusive, collateral estoppel, res judicata, precedential, or other similar effect on any aspect of the Title III cases of the Commonwealth of Puerto Rico and its instrumentalities (whether such cases are currently pending before the Title III court or to be commenced in the future) (collectively, the “Title III Cases”), (b) no factual or legal inference may be drawn from such findings in connection with any aspect of the Title III Cases, and (c) no party or counsel for any party shall be precluded from taking a position inconsistent with such findings in any other proceeding or contested matter in the Title III Cases, except (in each of (a), (b), or (c)) to the extent necessary to protect or enforce the terms of the settlement (whether in the Title III Cases or in any other court or proceeding). The purpose and goal of an injunction would be to preclude any future challenges to COFINA and the Commonwealth’s respective ownership and other rights to the 5.5% SUT under the settlement.

I am sure Congress can change the Puerto Rico Constitution (not that they will necessarily), but I am not inclined to believe that the Court can or would be inclined to do so. Also, those confined to the COFINA litigation could be bound by res judicata etc., but then it says it cannot be used against the agreement. The rules of res judicata, collateral estoppel, etc., in Federal Court are established by the federal common law but in Commonwealth law, they are ruled by statute and civil law. The rules on the application of those doctrines from federal court to Commonwealth courts are have been delineated in case law. Moreover, a prohibition from ever challenging the ownership of the SUT seems illegal to me, although of course, I have not made any research on this.

Commonwealth Debt Priority

Moreover, this seems to violate the priorities clause of the Puerto Rico Constitution, Article VI, section 8 and priority established for the GOs in PROMESA section 201(b)(1)(N). Furthermore, without a doubt, Congress can pass legislation that destroys that priority but it is questionable whether the Court can, under these circumstances, issue an order steamrolling the Puerto Rico Constitution.  And as I stated, they already addressed priority of the Commonwealth debt in PROMESA.

Also important, the deal states:

Non-Recourse to Commonwealth and 40-Year Maturity

The restructured COFINA securities will (a) be non-recourse to the Commonwealth (including the portion of the PSTBA allocated to the Commonwealth under the terms of the settlement) and (b) have a fixed maturity of not more than 40 years commencing on July 1, 2018.


Treatment of monoline insurance policies and commutation will be addressed in COFINA’s Title III plan of adjustment.

As it is now, the COFINA bonds can only be paid from the PSTBA, now shrunk by 46.35%. It is important, however, that the deal does not mention or have anything to do with how the insurers will be dealt with. They will probably be reimbursed from the escrowed accounts but what happens later? Will they accept these deep cuts? If they are not mentioned here, somehow I doubt they’ll have a right to vote in the Plan of Adjustment. The agreement continues saying:

Conditions to Effectiveness

  1. Effectiveness of settlement to be conditioned on:

Title III court enters (a) an order in COFINA’s Title III case confirming COFINA’s Title III plan of adjustment that incorporates the settlement and (b) an order in the Commonwealth’s Title III case approving the Commonwealth’s entry into the settlement. Entry of the settlement order in the Commonwealth’s Title III case shall be a condition to confirmation of COFINA’s Title III plan of adjustment.

The settlement shall terminate automatically if the effective date of COFINA’s Title III plan of adjustment approving the settlement does not occur within 200 days after the Commonwealth Agent and the COFINA Agent have executed the settlement agreement; provided, however, that the Commonwealth Agent may extend, in its sole discretion, the outside date for the effective date of COFINA’s Title III plan of adjustment. If the Oversight Board determines it is impracticable to schedule a timely confirmation hearing on a Commonwealth Title III plan of adjustment embodying the settlement, then the Commonwealth Agent shall use reasonable best efforts to seek approval by the Title III court of the settlement agreement in its Title III case (by filing a motion in its Title III case on or before the later of (a) three days after the deadline to vote on COFINA’s Title III plan of adjustment or (b) the day that is 45 days before the date scheduled for the hearing on confirmation of COFINA’s Title III plan) contemporaneously with confirmation of COFINA’s Title III plan of adjustment incorporating the settlement. The COFINA Agent shall use reasonable best efforts to obtain confirmation of its Title III plan of adjustment incorporating the settlement (accounting for the fact that the Oversight Board is the only party that may propose a Title III plan of adjustment).

At or before execution of the settlement agreement, the Commonwealth Agent shall be satisfied (in its sole discretion) that a sufficient number of holders of COFINA debt will support COFINA’s Title III plan of adjustment incorporating the settlement.

  1. The settlement would not be conditioned or tied to the confirmation or effectiveness of a Commonwealth Title III plan of adjustment.

I think the above needs to be more thoroughly addressed.  It has huge implications for the case.

The settlement becomes effective when the COFINA Plan of Adjustment is approved but it is also necessary that a settlement order be entered in the Commonwealth case. Bankruptcy Rule of Procedure 9019(a) deals with settlements and states:

a) Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.

Moreover, Second Circuit precedent favors settlements. In Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983) states:

“In undertaking an examination of the settlement, we emphasize that this responsibility of the bankruptcy judge, and ours upon review, is not to decide the numerous questions of law and fact raised by appellants but rather to canvass the issues and see whether the settlement “fall[s] below the lowest point in the range of reasonableness”, Newman v. Stein, 464 F.2d 689, 693 (2 Cir.), cert. denied sub nom. Benson v. Newman, 409 U.S. 1039, 93 S.Ct. 521, 34 L.Ed.2d 488 (1972). We shall not attempt to deal with every argument advanced by appellants but will concentrate on what seem the most nearly persuasive.

Even with this easy standard, Judge Swain will be hard pressed to accept a settlement where part of the parties involved cannot agree to said settlement. For example, if the COFINA Jrs. don’t know what their cut is going to be, how will they agree to the settlement? And we have not yet started on the other stakeholders’ position on the agreement. Therefore, the internal COFINA distribution is of paramount importance. In addition, the 200-day period to have the Plan of Adjustment approved may be extended.

As to the settlement not being affected by the Commonwealth’s Plan of Adjustment, seems unlikely since that Plan of Adjustment will be deeply influenced by this agreement and how can the COFINA deal stand if not accepted in the Commonwealth Title III case? Moreover, the COFINA Plan of Adjustment must include the COFINA bondholders as a class in said plan but does it have to include the GO’s as a class? Does the Plan of Adjustment have to include the Commonwealth as a creditor? What if the Commonwealth does not agree to the settlement? Questions, questions.

Also, COFINA may issue future debt, conditioned to this:

Permitted Future Debt Issuances

COFINA may issue securities to refinance the restructured COFINA securities issued under COFINA’s Title III plan of adjustment, subject to the limitations that (a) regardless of the terms of such new securities, COFINA shall not be entitled to an increase of its share of the PSTBA under the settlement and (b) the maturity date of such new securities is no later than the maturity date of the restructured COFINA securities.

To the extent the Oversight Board determines that it is beneficial to the Commonwealth and/or COFINA, the restructured COFINA securities would be callable after a period of time on terms to be negotiated with the Oversight Board.

The Commonwealth may cause COFINA to issue future debt or securities out of COFINA (the “Additional Securities”); provided, however, that COFINA will be prohibited from issuing such Additional Securities, unless (i) the interests of the holders of such Additional Securities in the portion of the 5.5% SUT in COFINA’s 53.65% share of the PSTBA under the settlement, or subsequently transferred to COFINA by the Commonwealth, is subordinate to the interests of the holders of restructured COFINA securities (or any securities refinancing such securities) in the portion of the 5.5% SUT allocated in COFINA’s 53.65% share of the PSTBA under the settlement, (ii) the preceding year’s collections of the 5.5% SUT (grown annually at a percentage that is equal to (a) for the fiscal years 2019 through 2023, the SUT growth rates as stated in the Certified Fiscal Plan dated April 19, 2018, and (b) for the fiscal years after fiscal year 2023, the average SUT growth rate for the preceding 5 years) is at least 1.75x times the COFINA debt service for each year (pro forma for any new debt/securities), (iii) the preceding year’s collections of the 5.5% SUT is at least 1.10x the maximum COFINA debt service for any year (pro forma for any new debt/securities), and (iv) such Additional Securities are included for purposes of calculating the Commonwealth’s debt limitation under Article VI, Section 2 of the Puerto Rico Constitution.

The new COFINA bonds would be subordinated to the COFINA bonds now issued and they would be subject to the 15% limit of Article VI, section 2 of the Puerto Rico Constitution. At least something positive.

The settlement releases are as follow:


Except as set forth in the settlement agreement, the settlement fully, finally, and forever resolves and releases all claims against and ownership interests in any SUT revenues, including without limitation all claims, causes of action, and counterclaims (i) that were or could have been asserted consistent with the Stipulation and (ii) concerning or relating to the Pledged Sales Taxes or the Commonwealth-COFINA Dispute.

Except as to the rights expressly set forth in the settlement agreement, COFINA, all insurers of COFINA bonds, and all holders of COFINA bonds shall be barred from bringing or pursuing any and all claims (a) in the case of the insurers of COFINA bonds and holders of COFINA bonds, arising out of their capacities as COFINA bondholders/insurers in any way related to the COFINA structure, the SUT, or the Pledged Sales Taxes and (b) in the case of COFINA, in any way related to the COFINA structure, the SUT, or the Pledged Sales Taxes, against the Commonwealth, its instrumentalities, the Commonwealth Agent, the COFINA Agent, the Oversight Board, and each of their respective current and former officers, directors, agents, attorneys, employees, affiliates, advisors, consultants, attorneys, and members.

For the avoidance of doubt, there shall be no release of any claims by any party against the underwriters of the COFINA bonds or the GO bonds, including their current and former officers, directors, agents, attorneys, employees, affiliates, advisors, consultants, attorneys, and members.

Again, monolines and GO’s are not part of this agreement, at this time. Moreover, both GO’s and Assured, a monoline, expressed objections to the agreement and insisted in being part of the negotiations. The GO’s stated, inter alia:

The GO Group does not object to the requested 60-day delay, with the expectation that this period will be used not merely to document the terms of the Agents’ agreement but to engage in good faith with all affected constituents—including the GO Group—regarding those terms. As we explain below, the Agents’ agreement in principle in its current form represents a breach of the Commonwealth Agent’s duties to its constituencies and suffers from a number of serious flaws: Certain of its provisions are simply unlawful, such as the conspicuous attempt to surrender the sovereign power of the Commonwealth to wield its own taxing authority. Indeed, the agreement in principle appears to elide this fundamental gating issue, laying claim to 40 years of future tax revenues while simply declaring that some (unspecified) way will be devised to prevent the sovereign from disturbing those future taxes. . .

What is more, there were serious shortcomings regarding the process pursuant to which this agreement in principle was reached. The so-ordered stipulation governing this litigation (Dkt. 996 in Case No. 17-03283-LTS) (the “Stipulation”) guaranteed a representative selected by the GO Group a right of consultation with the Commonwealth Agent, but the Commonwealth Agent ignored multiple requests for information regarding the key terms of the agreement. The Commonwealth Agent thus denied itself the input and expertise of the parties most able to assist in this process. This course of conduct has resulted in an agreement in principle in which COFINA will receive first-dollars recourse to the Commonwealth’s sales and use tax (the “SUT”), which will lead to a massive diversion of value to COFINA that may exceed $3 billion over and above what COFINA’s bondholders would have received under a prior, pari passu settlement framework that commanded the support of key COFINA stakeholders. This value grab is likely to result in COFINA’s senior bondholders receiving approximately 125 percent of the face amount of their bonds. The GO Group cannot countenance the waste of Commonwealth’s resources, which is precisely why the Stipulation included consultation rights. Indeed, the massive diversion of value will make any consensual restructuring of the Commonwealth’s obligations nearly impossible.

Our hope and expectation is that the period of abeyance requested in the Motion will be used to address these provisions—as contemplated by the terms of the Stipulation affording the GO Group and others consultation and other rights in connection with these proceedings—and present a settlement to the Court that does not suffer from these fundamental defects. In its current form, the agreement in principle is a recipe for further litigation, not the constructive solution this case so urgently needs.

Here’s the GO’s explanation as to what they mean by the 125% of face amount of bonds:

This distinction is of vital economic significance. Because the stream of future cash flows that would be paid to COFINA under the Agents’ deal is substantially more secure than the ones that would have been earmarked for COFINA claimholders in the creditor-initiated framework, the appropriate discount rate for valuing that stream is substantially lower than the one used to value recoveries under the creditor-initiated framework. Depending upon the appropriate discount rate, the Agents’ deal may represent an incremental recovery for COFINA’s bondholders of $3 billion (or more) beyond what numerous COFINA stakeholders were prepared to accept as part of the creditor-initiated framework—an increase in value of approximately 25% (or more) for the COFINA entity. And that, in turn, is likely to translate to a recovery for COFINA’s senior bondholders well in excess of 100 percent of their claim amount. Following the senior-subordinate split in the creditor framework, for example, the Agents’ agreement in principle would lead to a recovery for COFINA’s senior bondholders in excess of 125 percent of the face amount of their bonds.

The claim of 125% is at the heart of this settlement. The Oversight Board was quick to reject the GO-COFINA settlement framework, but they have not done so here.  How so, if the 125% is accurate?

The GO motion also objects to the agreement in other areas:

“The Agents’ agreement in principle also attempts to glide over a crucial gating issue. More particularly, the agreement promises to insulate COFINA not only from the core legal challenges in this case (whether the Commonwealth’s SUT revenues were transferred to COFINA, and whether such a transfer was constitutional) but also to deprive the Commonwealth of its core sovereign authority over the remaining 40 years of the COFINA structure. It does so by providing that, as a term of the Agents’ deal, the COFINA Agent must be satisfied that the SUT “would not be subject to repeal [or] limit.” Term Sheet 3. In other words, the Agents appear to anticipate that this Court’s approval of their arrangement would prevent the Commonwealth from repealing the SUT or reducing its amount—in effect, stripping the Commonwealth of its sovereign power for the next 40 years.

By purporting to bind the Puerto Rico legislature’s hands in this manner, the Agents’ deal is inconsistent with the basic principle that, because “one legislature cannot abridge the powers of a succeeding legislature,” Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 135 (1810), a statute is “alterable when the legislature shall please to alter it.” Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803); see also, e.g., Dorsey v. United States, 567 U.S. 260, 274 (2012) (explaining that “statutes enacted by one Congress cannot bind a later Congress, which remains free to repeal the earlier statute, to exempt the current statute from the earlier statute, to modify the earlier statute, or to apply the earlier statute but as modified”). The Agents’ agreement on this point asks the Court to exceed its own authority and lacks any lawful basis. It must be removed.

  1. Finally, the Agents’ agreement in principle would inappropriately prejudge the priority of stakeholders’ claims on the Commonwealth’s share of the SUT, by providing that these funds may be invaded by the Commonwealth to fund whatever the Oversight Board (or any successor entity) deems to be “essential services.” Term Sheet 1-2. Whether, and to what extent, the Board’s unbounded view of essential services may justify compromising the claims of prepetition creditors is sure to be a hotly contested issue when this Court is asked to confirm a plan of adjustment for the Commonwealth.

The message being sent here by the GO’s is very clear; the agreement, as it stands, invites substantial litigation by this group as well as others. Better to negotiate a deal in which we all can agree upon. Cleverly, the GO motion discuss such a deal:

Under the creditor-initiated framework announced in May, a new trust would be created and would be stipulated to take ownership of the full 5.5% Commonwealth SUT. Dkt. 3140-3 in Case No. 17-03283-LTS, at 1-2. The trust would hold all COFINA bonds contributed to the trust pursuant to a plan of adjustment for COFINA, and would make an exchange offer for Commonwealth general obligation bonds and general unsecured claims. Id. at 1. Importantly, all holders of the resulting trust certificates—including holders of COFINA claims and Commonwealth claims—would share in the trust’s distributable value on a pari passu basis. In other words, the creditor-initiated framework does not include any senior-subordinate structure, under which a shortfall in SUT receipts would affect only a subordinated class of securities, while leaving senior recoveries intact. Thus, holders of COFINA claims and Commonwealth claims shared equally in the risk that the Commonwealth’s future SUT receipts might fall below expectations, because in that instance all creditors’ recoveries would be reduced proportionately.

The recovery for holders of COFINA securities under the creditor-initiated settlement framework—an amount that key stakeholders on the COFINA side publicly acknowledged they would accept in settlement of their claims—was approximately $12.132 billion in present value terms, using an appropriate discount rate for a pari passu securitization structure of this sort. Dkt. 3140-3 in Case No. 17-03283-LTS, at 7. The settlement framework was publicly criticized

by the Commonwealth and Oversight Board as providing creditor recoveries that were too generous. See, e.g., Financial Oversight and Management Board for Puerto Rico, Press Release, Oversight Board States Terms Of GO-COFINA Creditor Proposal Are Unaffordable, Do Not Align With Certified Fiscal Plan, May 14, 2018 (stating that the “economic terms” of the settlement framework were “completely unaffordable”); Puerto Rico Fiscal Agency and Financial Advisory Authority, Press Release, Response To Joint Settlement Proposal From Commonwealth-COFINA Creditors, May 14, 2018 (stating that the debt-service requirements contemplated by the settlement framework “are not sustainable”).

Importance of Pari Passu

The pari passu aspect of the deal is important. Right now, pursuant to the agents’ deal, the COFINA Jrs. do not know how much they stand to lose and they should be concerned because it could be a lot. Under the GO-COFINA proposal, they would get equal shares. This is politically very important since the COFINA Jrs. bonds were only sold in PR, although it is unknow how many locals are holders at this moment. In addition, there are more outstanding COFINA Jrs. bonds outstanding than COFINA Senior.  Also, if COFINA Jrs. are essentially wiped out, it is likely they would sue the Commonwealth for fraud, since the sale documents made clear assurances as to the legality of the structure and now the Commonwealth claims it is the owner of the SUT and not COFINA.

Assured is a monoline that ensures GO bonds, among others. It stated in its motion:

“Assured does not oppose the Agents’ request in the Motion for a 60-day delay in the Court’s issuance of a decision on the summary judgment motions in the Commonwealth-COFINA Dispute, provided that the Agents use the requested 60-day abeyance period to (i) involve Assured and other GO Bond creditors in the negotiations and (ii) remedy a number of important defects in the preliminary Terms and Conditions of Agreement in Principle to Resolve Commonwealth-COFINA Dispute (the “Term Sheet”) disclosed by the Agents on June 7, 2018.

See Exhibit A to Joint Informative Motion of Commonwealth Agent and COFINA Agent Disclosing Agreement in Principle, Adv. Proc. No. 17-257-LTS, ECF No. 486-1.

For example, the Term Sheet provides for the establishment of an escrow account

to hold the Commonwealth’s share of PSTBA, with “such escrowed funds being allocated to holders of claims against the Commonwealth under a Commonwealth Title III plan of adjustment.” Adv. Proc. No. 17-257-LTS, ECF No. 486-1 at 1. The Term Sheet then goes on to provide that “the Commonwealth shall have recourse to the funds in escrow . . . to the extent necessary to pay for essential services, as determined by the Financial Oversight and Management Board for Puerto Rico.” Id. at 2. This provision raises several substantive and procedural problems, and, accordingly, requires additional discussion.

As another example, the Term Sheet in its present form contains various overly broad releases that—inadvertently or not—could be read to undermine the GO Bonds’ constitutional first-priority claim to all “available resources” (including PSTBA). Id. at 5-6. These releases need to be significantly narrowed and refined before they could be incorporated into a viable settlement or Title III plan.”

Puerto Rico Government Position

It doesn’t seem the Puerto Rico Government is entirely on board with this proposal. Gerardo Portela has stated that he had not been part of the negotiations but welcomed any effort to solve differences.On Monday, however, the motion filed by AAFAF was anything but welcoming. It stated:

“The Government does not oppose the Court holding its decision in abeyance for a period of 60 days to allow discussions among all parties regarding the proposed agreement in principle reached by the Commonwealth and COFINA Agents. These discussions must include the Government and various bondholders and other constituents that are not party to the proposed agreement in principle.

The Government is evaluating whether the proposed agreement in principle serves the best interest of Puerto Rico, and will actively work with all parties to reach consensus on a comprehensive restructuring solution.

If consensus is not reached in the next 60 days, decisions on critical issues such as whether the Pledged Sales Taxes are property of the Commonwealth or COFINA should move toward judicial resolution. AAFAF therefore reserves the right to oppose further motions to hold such decisions in abeyance.”

Global Resolution

The Commonwealth wants all of the SUT—that is clear.  It also seems to me that AAFAF wants to sit down with all parties and come to a Global Settlement. That’s smart politics, and Governor Rosselló understands this. As it stands, this agreement is only with COFINA. By contrast, the GO-COFINA deal included the two strongest bonds and $35 billion of the $72 billion PR owes. If such a deal could be had, it would create momentum for other deals to be completed. Once you have the first one, and the bigger the better, the others fall in line.

Looking Ahead

There remain key questions, many of which we don’t have answers to. What would happen if the Commonwealth does not agree with the agreement as it stands? Can the Board nevertheless get an approval of the agreement in the Title III via Rule 9019 and the Plan of Adjustment? It is complicated. Rule 9019 states that the compromise may be presented by the Trustee, which is the Board, but the agreement also calls for the Commonwealth to surrender its taxing power to COFINA, which is an inherent power of any territory as long as authorized by Congress. Article VI, section 2 of the PR Constitution unequivocally states “The power of the Commonwealth of Puerto Rico to impose and collect taxes and to authorize their imposition and collection by municipalities shall be exercised as determined by the Legislative Assembly and shall never be surrendered or suspended.” On the other hand, section 108(a)(2) of PROMESA allows the Board to request that the enforcement of said part of the Constitution  “impair[s] or defeat[s] the purposes of this Act, as determined by the Oversight Board.” Would the Board invoke this? Would the Judge agree to it? From her order approving the 60-day extension to finalize the agreement with a provision for extension of the term, it is quite obvious Judge Swain wants a deal. Section 314(b) of PROMESA however, requires that the “the debtor is not prohibited by law from taking any action necessary to carry out the plan” in reference to Plan of Adjustment. If PR cannot surrender its power to tax, and both the UCC and the Retirees Committee argued that it could not, then it is questionable whether the Board can force PR to surrender said power. Would Judge Swain confirm a Plan of Adjustment without the approval of the Commonwealth? Difficult question. Hence, Governor Rosselló may have a veto power over any settlement involving the taxing power of the Commonwealth. Finally, 11 U.S.C. section 1129(a)(3) requires that the Plan of Adjustment be filed in “good faith and not by any means forbidden by law.” If the Plan of Adjustment hinges on illegally surrendering Puerto Rico’s taxing power, how can Judge Swain approve it?

Seems to me the best bet for a settlement to be approved would be a global settlement with GO-COFINA where Board, Commonwealth, UCC, Retirees, COFINA and GO’s all agree. This would require, however, a clear breakdown of what goes to Seniors, Jrs. and GO’s.. That is something we don’t have at this time but can be achieved with some common sense negotiations.

Moreover, who will be able to vote in the Plan of Adjustment? Only those COFINA creditors whose claims are impaired may vote, which brings us to another issue; the Board, as the only one allowed to file a Plan of Adjustment in the COFINA Title III, will group creditors in classes. I have a feeling that it will put all COFINA bondholders in one class since the Bankruptcy Code requires that all classes agree to the Plan of Adjustment. That way, it would need 2/3 of the debt amount and more than half of the number of creditors in that class to approve it. For example, if the Jrs. are in another class, they may vote against the plan but if bunched together with the seniors, it may work out. But where, if anywhere, would the Commonwealth be if it rejects the agreement? No idea.

Does it take Two to Tango or is it Three or Four?

If you are not a lawyer who understands bankruptcy and PROMESA, you may be tempted to believe that this deal only needs some fine tuning and the blessing of the UCC and COFINA. Not quite, though. As you have seen, the GO’s and Assured both say the deal, as it is written, violates Puerto Rico’s Constitution and PROMESA. Moreover, they want to be included in the negotiations. The Commonwealth government, far from giving the deal a ringing endorsement, wants to be included in the negotiations, as well as other interested parties. If they are not included, it is likely they will fight tooth and nail against the agreement, both in the Commonwealth Title III and in the COFINA Plan of Adjustment. Let’s remember that Judge Swain has made it clear she cannot review the Fiscal Plan until the Plan of Adjustment stage, which will open it to claims that section 201(b)(1)(N) is being violated by not respecting the “relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act.” Moreover, the Retirees Committee has endorsed this agreement but if the GO’s and the Commonwealth are invited to the negotiations, will they be invited also? If the Board wishes to avoid further litigation on all these issues it seems logical that they will include all these parties to negotiate the deal, which will increase the chances of a global settlement. Otherwise, all I foresee is more and more wasteful litigation.

I will be working on a new post to explain how the Plan of Adjustment and its approval works. Until next time.

Monday Update – June 11, 2018

Welcome to your weekly Title III update for June 11, 2018. This week, many things happened in the case and outside the case.

This week, we had the Omnibus hearing, which I reported on and the Commonwealth and COFINA agents presented their draft settlement agreement. More on this later, but what no one in the press even mentioned is that on June 5, 2018, the First Circuit listened to oral arguments on the PREPA bondholders request for lifting of the stay to appoint a receiver and the Peaje request for adequate protection, and surprise, surprise, things may change. The oral argument were with Judges Howard, Kayatta, and Torresen (District Court Judge from Maine). Judges Howard and Kayatta were two of the three judges in the Peaje First Circuit decision of January 11, 2017. Continuity seems to be important in PROMESA.

During the oral argument, the Judges had difficulty understanding what bondholders collateral was. The Board’s position was that it was movant’s fault, but then one of the Judges asked “how can you do the balancing of interests [in the lifting of stay] if you don’t know what the collateral is?” The Board did not provide a satisfactory answer to the question.

The Judges also asked whether Judge Swain could attack the adequate protection issue if she can’t touch the revenues as she interprets sections 305 and 315 of PROMESA unless the Board agrees to it. The Board’s answer was very surprising: Mr. Bienenstock stated unequivocally that if movant’s 5th Amendment rights were impaired, Judge Swain could dismiss the Title III case, but she cannot micromanage the Board. The Judges asked, her leverage is I am out of here? Answer, yes that is what the movants want. Difficult to swallow, in my opinion.

Another of the Judges questions to the Board was what protects movants’ property interests? Answer, PREPA’s transformation, better fuel mixture which will bring fewer costs. The most movants can hope for is for a plan that will change PREPA. In order words, trust us, we are the Board. I would definitely not trust the Board.

In rebuttal, movants emphasized that the receiver does not raise rates – that is the Energy Board’s job. The Board does not manage PREPA, that is the PREPA Board’s job and the receiver would substitute this Board, subject to the Oversight Board’s powers and of course, the Court’s powers.

All during this oral argument, the Judges kept hammering as to what was the security interest; whether the Judge could do the balancing act required by the petition to lift the stay if she did not know what the actual collateral was. Moreover, at the end of movant’s argument, Judge Torresen said she still had many questions and repeated this same statement at the end of movants’ reply. Given this, I would not be surprised if the First Circuit reverses Judge Swain with detailed instructions on the actual questions they have. This would require an evidentiary hearing and another round of appeals for whomever loses. More expenses in the case.

Things were a little different in the Peaje oral argument. There was a repeat of questions pertaining to the Judges power pursuant to section 305 of PROMESA. Seems they have difficulty wrapping their heads around what Judge Swain decided. They questioned movants if they had a lien opposable to third parties, in other words, if their collateral was sent to a third party, could Peaje collect from them. The answer was yes.

The Board argued that Judge Swain saw this case ending in two more years, which would be in 2020. The Board also argued that no lien rights can be affected until the Plan of Adjustment but in the case of Peaje, it did not have a lien. The Judges asked the amounts of the lien and the Board said the lien, if it existed, was limited to the amount in the account at the time of Title III, no more. But the Judges said you pledged your revenue stream and special revenues can be more than revenues with a lien. Another question was how can you balance injury (important in the injunction stage) or relief of stay without knowing which is which, in clear reference to whether there is a lien. This case, given there was a full evidentiary hearing, will be less probable to be remanded for further consideration but the issue of the lien and pledge looms large and it is definitely possible the Judges would like further clarification.

At the end of the arguments, the Judges said they were aware of their obligation and decided to expeditiously the issues and would endeavor to do so. I foresee a quick resolution of the issues but not necessarily in a manner that will satisfy the Board.

On May 7, 2018, Gerardo Portela, Executive Director of AAFAF, sent the Board a letter in which he assured it the audited financial statements for the year 2015 would be completed and issued by June 8, 2018. As usual, this did not happen. The Puerto Rico Treasury Secretary said the Commonwealth sent the financial statements to its auditors the previous week. Difficult to see how something so large and complicated could be completed in one week, but what do I know? There is no timetable for their completion.

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.

Omnibus Hearing Special Update – June 7, 2018

Earlier this week, the Board, the COFINA agent and the Commonwealth agent filed an urgent motion announcing a settlement in principle in case 17-257 and requested 60-days to finalize their agreement. Contrary to what has been reported, this is not a COFINA-GO deal. Although the motion cautioned that there were still many details to be discussed and it could all fall through, Judge Swain was obviously pleased and praised the parties at the start of the Omnibus hearing noting, “I am pleased with the settlement agreement… It is an enormous significant development.” She granted until next Monday to specific objections to the COFINA motion and replies by next Wednesday.

Later in the morning, the UCC mentioned that the COFINA deal would be done within the Plan of Adjustment and the Board lawyers assured the Judge that they would endeavor to the have issued resolved before the 60 day period end. The UCC also mentioned that they will have to deal with the COFINA acceleration claims and the COFINA Juniors.

I always had the sense that the COFINA Seniors wanted to make a deal for they believed they would lose the litigation. Why settle if they were absolutely sure they had an ironclad lien?

Moreover, the Board desperately needed a creditor whose claim was impaired in order to have a cramdown, see PROMESA section 314(c), 11 U.S.C. sections 1129(b)(1), 1129(b)(2(A) and 1129(b)(2)(B). The settlement with one class that is impaired, be it only COFINA Seniors or all COFINA bondholders, will ensure, in the Board’s view, a cramdown by Judge Swain. This view, however, may be premature. As the UCC has said, there are several issues to smooth out with the COFINA bondholders, and the agreement has not even been made public, yet. If and when they are smoothed out, Judge Swain will have the deal made public (at least to parties in interest), there will be a hearing where anyone who objects, will. It seems likely the GO’s would object since any COFINA deal will involve the Commonwealth accepting they have a right to a part of the SUT. It will be interesting to see if the Governor, who desperately wants the SUT for the General Fund, will object. Depending on the deal, Junior COFINA holders could object to the deal since the COFINA Seniors claim they get paid first.

Also, although the UCC is party to the deal, any unsecured creditor could also object claiming that the COFINA structure, as the UCC claimed in its court documents, is illegal and hence it is not bond debt. Whether any of the challenges will succeed in derailing any agreement is open to question, but the effort will almost surely be made.

The Board’s attorneys presented an update of the situation in the cases and discussed the certification of the Fiscal Plans, the oral argument on the Peaje and PREPA lifting of stay, that to date there were 17,000 proofs of claim, which will be subject to objections with a procedure with low discovery and low litigation as to the claims to be put in the Plan of Adjustment. Once the objections are made, it becomes a contested matter pursuant to Bankruptcy Rule of Procedure 9014 and becomes a mini-trial. Hence the low discovery and low litigation. I will have to examine the procedure to know.

AAFAF presented an update on the GDB Title VI procedure, stating that it had secured the approval of slightly more than half the creditors and $2.6 billion of the $4.5 billion of outstanding debt. Title VI needs 2/3 of the amounts and 51% of the number of creditors for it to be approved. The debt will be exchanged for new bonds for approximately 55% of the debt. One of the problems, however, is that some of the money from which the bonds will be payed include a GDB proof of claim for $905 million loan (after set-offs for deposits) against the Commonwealth. Wonder how this will work. In addition, the Legislature still has to approve legislation dealing with this transaction. Solicitations for votes will begin in July 5, 2018.

The Court informed AAFAF that it would not be available for a hearing on the last week of August, so it will have to be scheduled for later in September. The September Omnibus hearing could be used but there is a need for a proposed timetable for either a contested matter with discovery and hearing or a confirmation hearing with discovery. The UCC, however, stated that it needed more information on the role of the GDB and Government and could object to the Title VI and challenge the proceeding. Interesting. Of course, AAFAF questioned the standing of the UCC but the gauntlet has been dropped.

Siemens has an adversary proceeding against the GDB claiming it is the owner of some money held by the bank. It wants the issue resolved in the adversary proceeding not in the Title VI hearing. The issue has been taken under advisement. Judge Swain reminded everyone there is only one of her. It is very true but she has several hot topics to decide, including Aurelius challenge to the Board appointment, review of the Fiscal Plan and others.

PREPA reported that it does not foresee the need for a loan for the time being. What a surprise. Judge Swain asked about efforts to strengthen PREPA’s response to future hurricanes. The answer was that PREPA was coordinating with FEMA and USACE. Is this accurate? Each week the Governor complains about the USACE, and then gives new contracts to PREPAs favored contractors. The Judge was right to ask this question, but the Court should not be satisfied with the response.

The Fee Examiner, the entity that makes sure the lawyers and experts do not overcharge debtors, had a presentation. During the presentation, the Fee Examiner and the Court reminded the parties to file joint motions on that in which they agreed. Good point. The Court suggested that there be a presumptive fee for attendance to mediation hearings and if the party exceeded that, it would have to file a confidential memo with the Fee Examiner to justify it. Electronic research has decreased in costs but users should explain if providers charge them a flat fee and what percentage of the flat fee is the research done. The Court approved the Fee Examiner’s adjusted fees and allowed him to look at previous bills to see if the changes suggested had been made.

The Fee Examiner suggested that McKenzie’s fees be reviewed and approved by the Board since no agreement could be reached. The Judge demurred and said she could not delegate that authority to the Board, citing sections 316 and 317 of PROMESA. She insists there must be metrics to be reviewed by the Fee Examiner.

PREPA requested that it be allowed to remove cases from state court all the way to the Plan of Adjustment. Again, the Court demurred but gave them 180-day extension until November 30, 2018. If PREPA needs more time, it could seek an extension at the November Omnibus.

Next, the Court heard the Retirees’ Committee motion requesting that a committee for PREPA retirees be appointed or its authority expanded to do so. The US Trustee’s office had no position but the PREPA Retirement Board objected, saying it was doing the job. After hearing the argument, Judge Swain cautioned that there were serious retiree issues, but denied the motion without prejudice. She asked the parties to monitor the situation and if they thought it was needed to file again.

In the afternoon, Judge Dein heard arguments on the UCC’s renewed motion for Rule 2004 discovery on the origins of the debt crisis. The UCC stated, quite correctly, that the Investigator appointed by the Board had said that it was not going to point fingers at anyone, but to make recommendations so there was not a repeat of the crisis.

In addition, the UCC said that it was receiving documents from BPPR and Santander but nothing from the GDB or third parties. That is when things got hairy. Although counsel for AAFAF had made a presentation from NY about the GDB agreement, during this issue, other counsel for AAFAF claimed they did not represent the GDB and that they had nothing to do with GDB documents. Judge Dein was obviously confused and not happy. From what I saw, this does not seem to be something the lawyers staged but that there is a conflict as to how to deal with these issues between the GDB, presided by one Government official and AAFAF, presided by another Government official. A very embarrassing situation.

I am not going to bore you with the legal gerrymandering. Suffice it to say that Judge Dein said very clearly those documents would be produced. Trying to save the rapidly deteriorating situation, the Board’s lawyers read a statement from the Investigator which stated the August 15 report will identify claims and avenues for recovery. This is a good idea since Judge Dein agreed with the UCC that a statute of limitations could run out come May 2019. The UCC wants to review all the documents the Investigator received in order to question the legality of various bond issues. If they were illegally issued, the money would still have to be paid, minus principal and interest paid, but there would not be any lien or Constitutional priority. It would just be another non-secured debt.

Judge Dein insisted she did not want this discussion on the documents being provided to the UCC on August 15, as the Board insisted, but rather right now. She issued an order today that states, inter alia:

“1. The Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) shall submit a status report to the Court on or before June 13, 2018 addressing the Independent Investigator’s position with respect to the issues addressed in the Renewed Motion including, without limitation, a. the Independent Investigator’s position with regard to the disclosure of search terms and custodians to the Official Committee of Unsecured Creditors of all Title III Debtors (other than COFINA) (the “UCC”) and the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (the “Retiree
b. the status of the availability of any production to the UCC and Retiree Committee of documents produced by parties to the Independent Investigator other than the Government Development Bank of Puerto Rico (“GDB”), Santander 2 and the Popular Entities3;
c. a description of the exit plan to be submitted by the Independent Investigator identified by the Oversight Board at the June 6, 2018 hearing. A schedule for the submission of the exit plan will be addressed at the continued hearing scheduled below.
2. The Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) shall submit a status report to the Court on or before June 13, 2018. Therein, AAFAF shall update the Court on:
a. The status of the production of documents from the GDB to the UCC and Retiree
Committee of those documents provided by GDB in the course of the ongoing independent investigation, including any privilege logs if necessary. This should include the parties’ progress on any relevant non‐disclosure agreement.
3. The Court will hold a continued hearing on the Renewed Motion in Boston,
Massachusetts on June 18, 2018 at 2:00 p.m. A representative with full settlement authority from GDB must be present at the hearing. A formal procedures order for the hearing will follow.”

Again, the Puerto Rico Government’s obfuscation is being eroded. A big win for the UCC and transparency. Let’s see what comes of it.

Monday Update – June 4, 2018

Welcome to your weekly Title III update for June 4, 2018. This week, many things happened in the case and outside the case.

I mentioned last week that the Retirees Committee had requested that it be appointed to represent the PREPA retirees and everyone seemed to be in agreement until the Sistema de Retiro de los Empleados de la Autoridad de Energía Eléctrica (SREAEE) filed its opposition saying they should represent these retirees. I thought that filing would be the end of the issue. I was wrong. The Retirees Committee, while professing to be neutral as to the issue of who would represent the PREPA retirees as long as someone represented them, replied to the SREAEE motion by noting it had potential conflicts of interest since 4 of its members were designated by PREPA management, three were active employees and only one was a retiree. The Retirees Committee also pointed out to the litigation in which AAFAF claims that its retirement system is part of PREPA with no independent existence. In addition, the Retirees requested from SREAEE documents to support its contention that “retirees had expressed, through the organizations which group them, that they want to be represented by SREAEE in these Title III proceedings.” The Retirees Committee questions whether this is true and whether they have been informed of the alleged potential conflict of interests. In a sur reply, SREAEE filed a resolution that includes several organizations that purport to represent retirees showing their support to the organization representing them. The resolution purportedly includes three organizations that include around 7,500 retirees. Given that PREPA retirees number 18,500, this still does not answer the Retiree Committees question. Judge Swain has asked that a representative of the US Trustee’s office be present at the June 6, 2018 hearing. Definitely will be interesting to see what the US Trustee has to say about this.

The UCC had filed on May 15 a renewed motion to conduct discovery as to Puerto Rico’s financial institutions, such as but not limited to Banco Popular of Puerto Rico, Popular Securities and Santander Securities, even though the Board hired an investigator to conduct such discovery.  The Board and the objects of the investigation objected to the  UCC motion saying the investigator is doing its job. It is never a good sign when the investigated say the investigator is doing a good job, especially when there are substantial financial ties between three board members (Carrion, Garcia, Ramon Gonzalez) and two of the institutions being investigated (Banco Popular, Santander). It is never a good sign when the investigated say the investigator is doing a good job. The UCC filed an omnibus reply, restating that the job the investigator is going to do and their view of the investigation are different. Also, the UCC points out that the time to file avoidance actions would expire May 2019 before they run the risk of expiring under section 546 of the Bankruptcy Code. The UCC also, quite correctly, states:

“Likewise, the “ownership” arguments rest on the false premise that discovery can only be relevant for the purposes of bringing affirmative claims. That is not the case, and Bankruptcy Rule 2004 allows examination of the “acts, conduct, or property

 [] of the debtor, or to any matter which may affect the administration of the debtor’s estate.” Fed. R. Bankr. P. 2004(b); see also 11 U.S.C. § 1103(c)(2) (Committee may investigate “any other matter relevant to the case or to the formulation of a plan”). Indeed, as the Committee has stated before, discovery from the Puerto Rico Financial Institutions may be used for a number of other purposes, including:

 Evaluating or objecting to the potential claims asserted by the Puerto Rico Financial Institutions (or other entities which are affiliated or have acquired claims through the Puerto Rico Financial Institutions) against the Commonwealth;

 Placing a value on the likelihood of success of potential claims against individuals or entities for the purposes of plan formulation or other negotiations—i.e., as is currently ongoing in the negotiations over the GDB’s Restructuring Support Agreement under title VI of PROMESA. See Renewed Motion, ¶ 20 (noting that GDB has attempted to release directors and officers from liability);

 Evaluating whether certain bonds issued with the assistance of the Puerto Rico Financial Institutions were valid or, instead, violated the Puerto Rico constitution.

 Ensuring that creditors who “re-invest” in the Commonwealth as part of a plan of adjustment understand whether any culpable individuals or entities would remain involved in Commonwealth financial affairs going forward.”

The UCC again points out the conflicts of interest of AAFAF and the Board:

“AAFAF seems to believe that the Committee should not play a role in any of the title III cases, noting for example that “any defenses to creditor claims can be asserted by the Oversight Board or AAFAF.” AAFAF Objection, ¶ 7. While the Oversight Board and AAFAF could certainly take any number of actions—and the parties may indeed share common interests in many areas—the fact of the matter is that debtors often do not always take actions that are in their creditors’ best interests. That is especially true where certain parties are rife with conflicts, such that they cannot plausibly be taken seriously when they claim that they should take the lead as to those entities. The Committee raised these issues at length in its briefing on the Original Motion, but it bears repeating that these agencies are personally led by individuals associated with potential “targets” of the Committee’s discovery:

 AAFAF is led by an investment banker who spent eight years at Santander (including in the municipal finance field) before joining the government and could have participated in many of the transactions that have given rise to the Committee’s concerns.

 At least three members of the Oversight Board are deeply enmeshed with the Puerto Rico Financial Institutions. Two of the Oversight Board’s members, Carlos Garcia and José R. González, were directly employed by Santander and worked on the transactions at issue here. In addition, Oversight Board Chairman José Carrión III is a scion of the family that founded Banco Popular, the son of a former Popular Inc. board member, a relative of the current Executive Chairman of the Board of Popular Inc., and the founder of an insurance firm which has received millions per year in commissions from Popular Inc.

21. As the Committee then observed, and perhaps as a result of these conflicts, the Oversight Board commenced its investigation only after the Committee filed its original Motion—even though it had the authority to do so for more than a year. Conflicts like these, and the need for an outside view by a party most incentivized to “grow the pie,” are part of the reason that Congress has not given debtors a monopoly over any investigation. In fact, the importance of the Committee’s “watchdog” role has already played out in these title III cases, even outside the public eye or its efforts in prompting this investigation. For weeks, AAFAF questioned the Committee’s requests for lists of any bank accounts containing over $2 million in deposits, questioning “the purpose of the bank account request.” See Ex. 5, September 14, 2017 email chain between counsel for Committee and counsel for AAFAF. Interestingly enough, a short time after the Committee’s request, AAFAF announced that it “discovered” nearly $6.9 billion in hundreds of previously “missing” cash accounts. There are likely many other unforeseen examples in which the Committee—equipped with the discovery it now seeks—can advance the overall goals of PROMESA, including the aim of promoting financial transparency.”

Given the obvious conflict of interest and the rollover of the time table of the investigator’s report, it makes sense to me that the Judge, who knows a thing or two about bankruptcy, will think long and hard to the UCC’s request.

On the subject of discovery, several bondholders, the Board and AAFAF, as strongly suggested by Magistrate Judge Dein, came up with a protocol to challenge the latter’s claims of deliberative process privilege, which was promptly approved via order. Hopefully, this will advance the Title III case, which has now been active for over a year.

The American Federation of State County and Municipal Employees had filed a motion requesting and order from the Court against the mediation team and other parties in reference to the COFINA and GO’s stipulation a couple of weeks back. Judge Swain denied the motion saying:

“AFSCME’s Motion seeks to compel the Mediation Team, the FOMB, AAFAF, and the COFINA Agent to “comply immediately with the Stipulation,” and refrain from “participating in any discussions to settle the Commonwealth-COFINA [D]ispute with the Commonwealth Creditor Representative selected by the Ad Hoc Group of General Obligation Bondholders and Assured Guaranty Corp. . . . unless and until such a settlement is reached between the Commonwealth Agent and the COFINA Agent first.” (Docket entry no. 3092-1 at 2.) The Motion focuses primarily on paragraph 4(i) of the Stipulation, which relates to the roles and responsibilities of certain Agents and Representatives in the context of Commonwealth-COFINA Dispute negotiations, and under the dispute resolution structure established pursuant to the Stipulation. Among other things, the Stipulation defines the parameters of the Agents’ authority and requires that settlements negotiated by the Agents be subjected to particular disclosure and approval protocols. Contrary to AFSCME’s structural assumption that paragraph 4(i) prohibits other parties from participating in settlement discussions, the Stipulation does not constrain the ability of any other party in interest to participate in mediation or negotiation of any issues, nor does it constrain the general authorization of the Mediation Team to facilitate such efforts. Thus, the Motion rests on a faulty legal premise. AFSCME’s Motion is also lacking in factual foundation to the extent that it is premised on speculation regarding activity in the confidential mediation setting. The Court makes no assumption about, and will not inquire into, such confidential communications.”

It was a bizarre request that unfortunately took up too much of the Court’s time.

PBJL Energy Corporation filed a RICO complaint against PREPA but ethical considerations bar me from saying anything more. I used to represent plaintiff but not at this time and was not involved in the filing of this complaint.

Western Surety Company and Continental Casualty Company file an adversary proceeding in order from the Court:

“[D]eclaring that the funds retained by the PRHTA to prime contractor in the public work projects, Betteroads Asphalt, LLC and/or Betterecycling Corporation, are not property of the estate of the PRHTA in the pending Title III case, but rather property of the Sureties as result of its equitable lien and rights of subrogation, and pursuant to the terms the General Agreement of Indemnity executed by the prime contractor, among other indemnitors.”

In addition, the Hermandad de Empleados del Fondo del Seguro del Estado, Inc., also known as Unión de Empleados de la Corporación del Fondo del Seguro del Estado, , Asociación de Empleados Gerenciales del Fondo del Seguro del Estado Corp., and Unión de Médicos de la Corporación del Fondo del Seguro del Estado Corp., all labor unions associated with the Puerto Rico Workmans’ Compensation Fund, filed a complaint claiming PROMESA is unconstitutional since it violates the 13th (slavery) and 15th (voting rights) Amendments. Their thesis is that since the members of the unions do not vote for president or Congress, PROMESA is unconstitutional. Although definitely imaginative, this tells us to the extremes the unions in Puerto Rico will go to get rid of PROMESA. Aside from the more obvious problems with the complaint, it is a good idea to remember that no territory has ever voted for the President or Congress. It took the approval of the 23rd Amendment in 1961 for DC residents to be able to vote for President. The Constitution itself reserves presidential and Congressional vote for states, not territories. Let’s see what Judge Swain does with this.

The saga of the Commonwealth budget continues to simmer with the Senate surprisingly approving the prospective elimination of law 80. The Board quickly announced that this was not the agreement with the Government. Then, the House, that originally had said would approve the elimination of Law 80 now seems to have second thoughts. God only knows where this will end. Although the Board recertified the fiscal plan, it is up in the air whether there will be further changes if it believes that the Legislature has not complied with the agreement. This will also delay any future Plan of Adjustment. Looks like one big parody. Again, let’s see what happens.

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.

Weekly Update – May 29, 2018

Welcome to your weekly Title III update for May 29, 2018. This week many things have happened both inside the Courtroom and outside.

As I mentioned in last Tuesday’s update, Magistrate Judge Dein granted, subject to a confidentiality order, discovery as to previous fiscal plans. Unfortunately, I failed to mention that on May 15 the UCC had filed a renewed motion to conduct discovery as to Puerto Rico’s financial institutions, such as but not limited to Banco Popular of Puerto Rico, Popular Securities and Santander Securities, even though the Board hired an investigator to conduct such discovery. The UCC motion states:

“As the Investigator has acknowledged on multiple occasions, his aim is not to advance any particular claims or causes of action. See, e.g., Ex. B, October 30 Report, ¶ 4 (“The Independent Investigator understands its mandate to include maintaining the thematic focus of the investigation on the issues identified by the Special Investigative Committee and statute, and maintaining the independence of the investigation from biases that may arise from participating as a litigant in this or any other litigation involving the matters under investigation.”). For example, the Investigator’s original “Work Plan” was specifically edited to remove a mandate to identify claims, leaving the focus on policy fixes or suggestions for the Commonwealth’s future issuances in the capital markets. See Redline to Investigator’s Work Plan, attached as Exhibit B to Creditors’Committee’s Status Report on 2004 Motion [Docket No. 1284-2] (Oversight Board’s redline of draft work plan removing language regarding the regarding the Investigator’s responsibility to identify “whether there was any misconduct relating to disclosure, selling practices, or use of proceeds in connection with the issuance of debt . . . including the identification of any potential claims . . . as well as the targets of those claims”).”

Obviously, the UCC, who are no fools, believes that there are some bonds that were issued illegally and that Puerto Rico’s financial institutions exerted undue pressure for the Commonwealth to issue bonds. This is exactly the type of “debt audit” that should be performed, not the “ñoñería” (idiomatic expression, akin to nonsense) that certain groups in PR advocate. The Board opposed the motion in a partially sealed and redacted motion, essentially saying that the investigators report would be due in July 2018, that the UCC has participation rights in the investigation (which the UCC denies), that the independent investigator is better situated to do a cost efficient investigation and that at best, the Committee’s request is premature.

Santander Securities filed similar objections. The problem with these and other objections is that the UCC quite correctly has pointed out that Board Chairman José Carrión has familial and business ties with Banco Popular and Carlos García and José Ramón González used to be with Santander Securities. Seems to me that a proper investigation should NOT be directed by the Board. Since I am not able to see all of the Board and UCC’s arguments I cannot in good conscience make a prediction but seems to me both Judges are realizing the need for greater transparency in the proceedings.

On May 22, Magistrate Judge Dein issued her order as to the discovery of fiscal plan materials. It states:

1. The parties to the Motion to Compel shall file a proposed protective order with this Court by May 30, 2018.

2. The 47 documents identified in Exhibit B to the Motion to Compel are hereby ordered produced under Federal Rule of Bankruptcy Procedure 2004 and pursuant to the protective order agreed upon by the parties. As confirmed by the Movants in open court, these 47 documents complete the production of outstanding fiscal plan development materials that existed in the data room as of the filing of the Motion to Compel on April 9, 2018. Movants will not seek to classify as fiscal plan development materials any additional documents which existed in the data room as of that date, and which have not otherwise been deemed produced.

3. The 7 documents identified in Exhibit A to the PREPA Motion are hereby ordered produced under Federal Rule of Bankruptcy Procedure 2004 and pursuant to the existing protective order between the parties to the PREPA Motion. See Dkt. No. 708 in 17BK As confirmed by the PREPA Movants in open court, these 7 documents complete the production of outstanding fiscal plan development materials that existed in the data room as of the filing of the PREPA Motion on April 23, 2018. The PREPA Movants will not seek to classify as fiscal plan development materials any additional documents which existed in the data room as of that date, and which have not otherwise been deemed produced.

4. Respondents the Puerto Rico Fiscal Agency and Financial Advisory Authority, the Financial Oversight and Management Board for Puerto Rico, and PREPA have not waived their right to object to the admissibility of any document produced pursuant to this order.

5. Consistent with the procedures discussed at the hearing, the parties shall submit a proposed process for the production of fiscal plan development material identified after the filing of the Motion to Compel and PREPA Motion. The parties shall do so on or before June 4, 2018.

On May 23, 2018, Assured and other monolines insurers filed an Adversary Proceeding (the complaint has 101 pages) in effect challenging the Fiscal Plans and making some very interesting statements. For example, it challenges the Fiscal Plans’ statement that Puerto Rico has greater debt service that the states since Puerto Rico does not pay federal taxes but the states do. Assured calls many of the Plans’ projections “unreliable” and points out that with the “discovered” $6.85 billion, the Commonwealth could do debt service since it has good liquidity and it has failed to pay $2.9 billion in GO bonds. Moreover, Assured suggests:

“Rather than support the consummation of the PREPA RSA, FOMB decided to reverse course in favor of a scorched-earth strategy that prioritized non-consensual Title III debt adjustment over consensual arrangements with creditors. Such an approach was then, and is today, by no means necessary to maintain sufficient liquidity and “breathing room” to implement financial and structural reforms. Many levers remain available to the parties to ensure the Commonwealth maintains adequate liquidity, while still meeting mutually-agreed-upon, restructured obligations to creditors. Not surprisingly, many of these levers are the same as those agreed to in the PREPA RSA, including haircuts, deferral of principal and interest—whether on all or certain credits—and securitizations to obtain lower-cost financing, including new money investments for growth. In exchange, the Commonwealth could provide current interest, validation of liens and pledges, or other forms of consideration that would not unduly pressure liquidity and that would protect creditors.

202. As a purely illustrative example, the Commonwealth and creditors could agree to a consensual debt restructuring that resets debt service to levels that the Commonwealth can support even based on conservative economic assumptions. For instance, through constructive negotiation, the parties could agree to material accommodations including a principal debt service holiday, an exchange of existing debt for new securities with a long-dated tenor, the use of capital appreciation bonds, and the structuring of an overall limit on debt service set as a percentage of the Commonwealth’s “own source” revenues. . .

203. The following analysis shows that, based on Defendants’ projections in the Revised Fiscal Plan and assuming that the federal government provides at least 40% of Medicaid funding (which is a conservative assumption), there would be sufficient cash available over the next five years to pay an agreed level of contractual debt service. Thereafter, based on Fiscal Year 2023 estimated cash for debt service, the same, reasonable federal Medicaid assumption, and a reasonable assumption of a long-term 2.5% growth rate, the Commonwealth could support over $50 billion of debt at a 5% interest rate and 2053 final maturity. This implied debt capacity exceeds the estimated total Commonwealth claims currently outstanding.”

Subsequently, the complaint gets to the gist of the problem; if the fiscal plan is not in compliance with PROMESA, the Plan of Adjustment based on said fiscal plan cannot be confirmed. It specifically states:

“238. Given that it is already clear that no plan of adjustment based on the Revised Fiscal Plan could be confirmed, the Court should exercise its statutory and equitable powers to declare that the Revised Fiscal Plan is unlawful and unconstitutional, and to further declare that the Court will not hold a confirmation hearing on any plan of adjustment issued under the Revised Fiscal Plan. To the extent necessary, complementary injunctive relief should be granted.

239. Notably, Section 312 of PROMESA provides that only FOMB may file a plan of adjustment. However, where, as here, FOMB fails to file a plan of adjustment with the petition, Section 312 of PROMESA also gives this Court authority to “set” the time at which FOMB “shall file a plan of adjustment.” PROMESA § 312(b). The Court therefore may, and should, exercise its authority under Section 312 to order that FOMB may not file a plan of adjustment until it has approved and certified a fiscal plan that complies with PROMESA and the U.S. Constitution.”

Anyone familiar with PROMESA knows that section 106(e) states that the District Court does not have jurisdiction to review the fiscal plan. Assured states:

“242. Defendants may attempt to point to Section 106(e) of PROMESA as a purported barrier to judicial review. But Plaintiffs do not challenge the Board’s certification decisions; they challenge the violation of multiple independent statutory provisions that require any fiscal plan to adhere to the requirements of Section 201(b), and that impose additional statutory limits on a fiscal plan.

  1. In any event, courts have long held that “even when the statutory language bars judicial review,” an exception exists for claims—like those raised in this Adversary Complaint—that an “agency exceeded the scope of its delegated authority or violated a clear statutory mandate.” Hanauer v. Reich, 82 F.3d 1304, 1307 (4th Cir. 1996) (emphasis added); see also Leedom v. Kyne, 358 U.S. 184, 188 (1958) (applying this principle to vacate a determination made by the National Labor Relations Board “in excess of [the Board’s] delegated powers and contrary to a specific prohibition in the [National Labor Relations Act]”).
  1. Furthermore, Section 106(e) of PROMESA poses no impediment to the Court’s review of Plaintiffs’ claims that the Revised Fiscal Plan violates Sections 303 and 407 of PROMESA and Section 928(a) of the Bankruptcy Code, because FOMB has never made a “certification determination” with respect to Section 303 or Section 407 of PROMESA or section 928 of the Bankruptcy Code and has no authority under PROMESA to do so.

  2. At a minimum, Plaintiffs’ request that the Court decline to hold a confirmation hearing with respect to a proposed plan of adjustment based on the Revised Fiscal Plan cannot possibly be viewed as a challenge to FOMB’s purported certification of the Revised Fiscal Plan, because the Revised Fiscal Plan would remain certified and in effect even if the Court were to grant such relief. Therefore, Plaintiffs’ request that the Court not hold a confirmation hearing based on the Revised Fiscal Plan does not implicate Section 106(e) of PROMESA.”

Finally, Assured claims that without judicial review, PROMESA would be unconstitutional. All in all, a strong complaint with a very good summary of bondholders’ positions as to the nature f the PROMESA controversy.

As readers may remember, my view is that it all boils down to the Plan of Adjustment. The Board now is saying the Plan of Adjustment will not be filed this year but rather in 2019. If Judge Swain were to side with Assured, it would push back this timetable. Also, consistent with the previous attempt of GO’s and COFINA to come to a solution, the complaint states that bondholders are willing to make a deal but the Board and the Commonwealth do not. I think this is another theme that will continue to resonate this year. Let’s see what happens.

On May 24, 2018, Judge Swain decided not to send the COFINA issues to the Puerto Rico Supreme Court. She held:

“Thus, to resolve the central question of ownership the Court will have to, at a minimum, engage the federal bankruptcy law arguments raised in the Commonwealth Parties’ Submissions, even if the Court ultimately rejects those arguments. Further subdividing the ownership question into federal and Puerto Rico law elements would create the possibility of rendering the Supreme Court of Puerto Rico’s decision advisory. . . Because federal law issues are thus necessarily bound up in the antecedent question of ownership, the Commonwealth-COFINA Dispute presents a mixed question of federal and Puerto Rico law that is inappropriate for certification under Rule 25(b).

Certification is also unwarranted here because it will delay resolution of this particular dispute, impede progress towards a plan of adjustment, postpone the conclusion of these Title III proceedings, and consequently delay the debtors’ ability to regain access to financial markets.”

I think this was the correct decision, not only because of the federal law issues but the delay. Judges in the Federal District Court in Puerto Rico are very reluctant to send cases to the local Supreme Court precisely because it can delay for years and then send it back saying it won’t decide.

Also, the Retirees Committee had requested that it be appointed to represent the PREPA retirees and everyone seemed to be in agreement until the Sistema de Retiro de los Empleados de la Autoridad de Energía Eléctrica filed its opposition saying they should represent these retirees. Given the fact that it is the administrator of the plan, makes sense to me that they represent the PREPA retirees. Let’s see what the Commonwealth Retirees replies.

Finally, the issue of the Commonwealth budget continues to simmer with the President of the Puerto Rico Senate, Thomas Rivera Schatz sticking to his guns in refusing to eliminate Law 80. Although I doubt Senator Rivera Schatz’s opposition will last long, it is still an obstacle for the budget. If the law is not eliminated, what will the Board do? Again, let’s see what happens.

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.

Board & Commonwealth Must Hand Over Fiscal Plan Data

Yesterday, Magistrate Judge Dein held a lengthy hearing on the “Fiscal Plan Development Materials” underlying the Fiscal Plans certified in 2017, and the Fiscal Plans proposed and adopted in 2018.  Bondholders had sought this information from the start only to be blocked at every turn by the Oversight Board and Commonwealth.

The motion was brought by the Ad Hoc Group of General Obligation Bondholders, Ambac Assurance Corporation, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., the Mutual Fund Group, and National Public Finance Guarantee Corporation.

Judge Dein’s ruling rejected the Board and Commonwealth’s efforts to block bondholders from accessing these public documents. Her ruling paved the way for the Fiscal Plan Development Materials to be produced outside the dataroom restrictions pursuant to Bankruptcy Rule 2004.  The Board and Commonwealth had insisted these documents be available only in the dataroom, where the documents would be subject to restrictions under the mediation agreement and NDAs that bars bondholders from using the information in litigation.

Judge Dein’s order gives bondholders access to all 47 documents they sought following the February ruling, and ordered these documents be produced subject to the confidentiality order, which will be worked out by the parties in the next two weeks. In addition, all documents pertaining to the preparation of the present Fiscal Plan and future Fiscal Plans would be provided automatically, subject to said confidentiality order. This is without prejudice of the Board objecting to their use in evidence for relevance, hearsay or other objections.

The Board and the Commonwealth’s joint-strategy to evade accountability and limit transparency from the public and creditors has obviously failed.  It will also expose their analysis underpinning the Fiscal Plans to expert examination. This is a significant victory for the movants who can now use this information in litigation.

This is very relevant for the Plan of Adjustment, which must be consistent with the Fiscal Plan. Judge Swain has indicated that it is only at that stage will she review said Fiscal Plan. Hence, the wheels of the Board and AAFAF’s strategy of obfuscation and hiding information are starting to fall-off.  Might be time to grab an old pair of training wheels. Just wish the Puerto Rican people, who pay for these documents, had access to them.

Moreover, during the hearing, counsel for AAFAF mentioned that the Plan of Adjustment would be presented in 2019, which is consistent with a Wall Street Journal story where Ms. Jaresko stated it would be in a year to a year and half. That takes us to either May or November of 2019. If we consider that in the Detroit bankruptcy the confirmation of the Plan of Adjustment took 9 months and it was only $18 billion in debt, the Puerto Rico confirmation may take a whole year or more, taking it past the 2020 governor’s race. You can come to your own conclusions.

Other bondholders were challenging the Board’s privilege log as to 59 series of documents. Judge Dein, quite correctly, started by saying that the parties needed to put some facts into their legal briefs. Movants mentioned that the Board had admitted it had not actually looked at most of the documents and the Board mentioned that movants had not explained what it was they actually objected. After some discussion, Judge Dein made the parties agree to select no more than 12 categories of documents, the Board would present movants an affidavit as to the documents and privilege, if movant wanted more information they could ask for it and then could ask the Board to show the privilege. If this showing does not convince movants, the parties would come to the Court with suggestions on how Judge Dein could review the documents. Although it seems like back to the drawing board, Judge Dein was disturbed by the fact that privilege was raised without there having been a review of the documents. Slowly but surely, bondholders and others are forcing the Board to reveal its secrets.

Pending is the recent renewed motion by the UCC to conduct an audit of the Puerto Rican debt, which the Board said it would do, but has not. Today, the Board must file its opposition to this motion, which it has already announced will include redacted and sealed documentation.

All of this is going to be very interesting.

Monday Update – May 21, 2018

Welcome to your weekly Title III update for May 21, 2018. As last week, the news outside the Court overshadowed the activity inside the Court.

The Oversight Board and Commonwealth announced an agreement on a budget last night. This should come as a surprise to no one. Activity last week indicated that some type of compromise was in the works. When the Board notified the Governor that its budget was in violation of PROMESA, it concludes that the Commonwealth had until May 15, 2018 to provide it with a conforming budget. After meetings and discussions, the Board gave the Commonwealth until May 18, 2018 to provide a conforming budget. The press and other analysts gushed about the wisdom of these conversations in order to bring harmony to these troubled relationships.

The agreement presented with the Board  includes agreement that pensions would not have to be reduced, Christmas bonuses would remain, the Governor’s office and the Legislature’s budget would not be reduced, nor vacation and sick leave. In exchange, the Legislature would file a bill to repeal Law 80. In other words, the Government budget remains intact and only private industry employees will have their rights curtailed.

In typical fashion, Senate President Rivera Schatz reacted surprised to the Governor’s announcement, saying neither he nor the Senate were aware of the agreement. Senator Rivera Schatz is either grandstanding and will reluctantly cooperate, or he will block the agreement. I am inclined to believe the former. Let’s see if there is more to this, or if it is all hot air.

The budget deal helps the Board and Governor present a unified front, which will be necessary as they work to minimize debt payments for the all-important Plan of Adjustment. This is critical. This afternoon at 1:30pm Magistrate Judge Dein will hear arguments the issue of the documents to be provided in Rule 2004 discovery, which the Board insists it does not have to produce. The Board and the Commonwealth are resisting – and for good reason.  If the documents are allowed to be reviewed by creditors – things such as economic projections and the data behind the outmigration claims – it is quite possible the entire Plan of Adjustment bottoms out over the accuracy of the data presented by the Board to date.

Further, the agreement on the budget and the fiscal plan makes a Plan of Adjustment based on the amendments to the fiscal plan highly unlikely to be approved by creditors, who face 70%-80% haircuts. Since the Board has to know this is a likely scenario, it seems they are kicking the can into Judge Swain’s desk, who I feel will not cramdown such Plan of Adjustment, but will suggest that changes be made. It is likely there that the “real” cuts to the Government will occur. That way, neither the Puerto Rico Government nor the Board would be responsible for said cuts. Rather, they will claim we were forced to do this because we had to pay the creditors. Not what Congress originally envisioned as the Board’s job and it will prolong the life of the Title III and the high costs of the case. I will attend the hearing via teleconferencing in the District Court in San Juan.

Last week, the AFL-CIO, requested from the Securities and Exchange Commission an investigation on whether the Governor leaked privileged information to GO bondholders. The basis? The rise in price of GO bonds. Not only is this evidence of nothing, but the AFL-CIO, obviously not happy with the Rosselló administration, forgets that all the information having to do with the fiscal plan was shared with the Board. In any event, I doubt anyone leaked any information to bondholders.

On May 16, 2018, the Board sent a letter to Senator Murkowski as to PREPA and had this to say:

“As the representative of PREPA in the Title III court proceedings, the Oversight Board leads the negotiations to restructure PREPA’s legacy obligations, such as debt and unfunded pension. The Oversight Board also plays an integral role in the process to transform PREPA into a modern electric utility that provides low-cost, reliable energy because any transaction to effectuate that transformation will have to be approved by the Title III court as part of PREPA’s plan of adjustment to emerge from Title III. The Oversight Board has retained Citigroup Global Markets, Inc. as the financial advisor, representing both the Oversight Board and the Government, on any potential transformation transactions. Among other things, Citi intends to conduct a broad market sounding exercise to gauge interest level in participating in any potential such transformation transactions that could entail a long-term concession for the transmission and distribution system and the potential sale of generation assets. This market sounding will help shape the RFQ and RFP process that will be conducted pursuant to the amended P3 legislation that is currently being debated in the Puerto Rico Legislature.”

Since it is not true that Judge Swain has to approve any PREPA sale since section 363 of the Bankruptcy Code was not adopted in PROMESA, the Board wants to make clear to the Senate that it is in charge of the utilities sale. I have seen no reaction from the Commonwealth so I assume they are OK with this. Interesting.

Last week, a COFINA and GO bondholders settlement was announced and although quickly rejected by the Board and AFFAF, it had its impact. It seems that the agreement would leave GO’s with a piece of the COFINA SUT but also with claims against the Commonwealth, something no creditor would accept. Hence, although at first glance it seemed to favor COFINA, it actually favors GO’s. In any event, the American Federation of State, County and Municipal Employees International Union, AFL-CIO (“AFSCME”)—a labor union representing Commonwealth public employees and retirees through its affiliates Servidores Publicos Unidos (“SPU”) and the Capitulo de Retirados de SPU was apparently irked by the proposed settlement. It filed last week a motion stating that “[t]o protect the integrity of Stipulation and any negotiations to settle the Commonwealth-COFINA dispute, AFSCME respectfully asks the Court for exceedingly modest relief: an order compelling the Mediation Team, AAFAF, Oversight Board, and COFINA Agent to comply with the Stipulation by not participating in any discussions to settle the Commonwealth-COFINA dispute with the GO Creditor Representative.”

Bettina Whyte, COFINA representative, quite correctly answered saying she had nothing to say since doing so would violate the confidentiality of mediation. The Board went further and said:

“First, to the extent the Motion insinuates the Oversight Board violated the Stipulation, it is completely wrong. Section 4(n) of the Stipulation expressly provides that notwithstanding anything else in the Stipulation, the Oversight Board can negotiate and propose plans of adjustment that settle the Commonwealth-COFINA dispute. Accordingly, the Oversight Board is fully authorized by PROMESA and the Stipulation to negotiate with any creditors, inside or outside the mediation, and to propose a plan of adjustment resulting from those negotiations, which plan may include a settlement of the Commonwealth-COFINA dispute.”

Also, no action in cases 17-242 and 17-243, the American Federation of State County and Municipal Employees, who sued to set aside the fiscal plan. The cases remain dormant. On the other hand, the UCC, in the case of Cooperativa de Ahorro y Crédito Abraham Rosa v. Commonwealth, 18-28, filed a motion to intervene as follows:

“(i) granting the Intervention Motion and (ii) providing the Committee with the same Participation Rights it received in the Other Adversary Proceedings, including the right to receive document discovery, attend depositions, file briefs, and participate in oral argument, as set out in the attached proposed order.”

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 – May 14, 2018

Welcome to your weekly Title III update for May 14, 2018. Once more, the news outside the Court overshadowed the activity inside the Court.

Today a settlement between various COFINA and GO bondholders and insurers was announced. Exhibit B breaks it down this way:

“A proposed settlement of the Commonwealth

COFINA dispute based on the retention of 5.5% Sales and Use Tax (“SUT”) by a newly formed PR Securitization Trust (the “Trust”)

The Trust would take ownership of the 5.5% SUT through the effective date of COFINA plan of adjustment plus 40 years (or such later date as of which the new trust certificates are paid in full)

COFINA bondholders would receive Trust certificates entitling them to: 52.5% of future 5.5% SUT cash flows and 52.5% of Bank of New York Mellon cash To be structured with 1.2x debt service coverage into Current Interest Bonds (“CIBs”) with a 6.0% interest rate and Capital Appreciation Bonds (“CABs”) with a 6.5% interest rate along with a pro rata interest in the residual cash flows of the 5.5% SUT that remain after payment of interest and principal on the CIBs and CABs (the “Residual,” which has been valued using a 15% discount rate)

Participating GO bondholders would tender their bonds into the Trust and receive: 46.2% of future 5.5% SUT cash flows and 46.2% of Bank of New York Mellon cash. To be structured with 1.2x debt service coverage into CIBs with a 6.0% interest rate and CABs with a 6.5% interest rate along with the Residual Commonwealth/GO remainder claim certificates would be supported by the remainder of GO claims, as of the effective date (assumed to be 7/1/18), in the Commonwealth Title III (as calculated by taking par plus accrued claim amount less the distributable value received by GO bondholders)

Participating Commonwealth General Unsecured Claims (“CW GUCs”) up to an allowed claim amount of $500 MM would have the right to tender their claims to the Trust and receive: 1.3% of future 5.5% SUT cash flows and 1.3% of Bank of New York Mellon cash. To be structured with 1.2x debt service coverage into CIBs with a 6.0% interest rate and CABs with a 6.5% interest rate along with the Residual.”

The agreement would provide recoveries of 58.6% to GO’s, 58.6% to General Unsecured Debt, 64.5% in general for COFINA, broken down to between 93-95% to COFINA senior and 42.2-43.2% to COFINA subordinate. All this would be paid from the 5.5 SUT which would be surrendered to a trustee. What about the Commonwealth and COFINA agents position? The agreement states:

“Pursuant to the Stipulation, in order to settle the Commonwealth-COFINA Dispute, the two agents appointed by the Oversight Board would need to support the Joint Settlement Outline: (i) the official committee of unsecured creditors appointed in the Commonwealth’s Title III case (the “Commonwealth Agent”) and (ii) Bettina Whyte (the “COFINA Agent”).

While the COFINA Agent supported the allocation of the Pledged Sales Tax between the Commonwealth and COFINA, the Commonwealth Agent did not support any portion of the Joint Settlement Outline.”

Unfortunately, the Board and AFFAF quickly rejected the agreement stating that it was contrary to the certified fiscal plan. Whether that is true or not, the agreement is an important milestone. It is the first time the possibility of a path to exit Title 3 and return Puerto Rico to the capital markets has been presented in black and white. Moreover, the agreement was driven by creditors with extremely divergent interests, rather than by the Board or the Commonwealth, who have done very little to advance consensual negotiations or a settlement. More importantly, the fact that their first move was to immediately denounce the deal raises substantial questions as to their true interest in securing a consensual deal. It really feels like more of the same. It is almost like they really prefer a cramdown of a Plan of Adjustment with over 70% cuts for bondholders. If the Board and AFFAF actually pull this off, who will lend to Puerto Rico in the foreseeable future?

On May 8, 2018, the Senate’s Committee on Energy and Natural Resources held a hearing on “The Current Status of Puerto Rico’s Electric Grid and Proposals for the Future Operation of the Grid.” The witness list included Bruce Walker Assistant Secretary, Office of Electricity Delivery and Energy Reliability, U.S. Department of Energy (DOE) and Charles R. Alexander, Jr., Director, Contingency Operations and Homeland Security U.S. Army Corps of Engineers for the Federal Government. From Puerto Rico, Christian Sobrino-Vega, President of the Government Development Bank and Chairman of the Board of the Fiscal Agency & Financial Advisory Authority, Government of Puerto Rico; Mr. Walter Higgins, Chief Executive Officer Puerto Rico Electric Power Authority; Mr. José H. Román Morales, PE Acting Associate Commissioner for the Puerto Rico Energy Board and Mr. Rodrigo Masses, President Puerto Rico Manufacturers Association. Maybe during this hearing we will know who will actually be in charge of planning the PREPA electric grid and the utilities sale, and understanding some more about the recent blackouts.

Senator Murkowski from the start asked very important questions:

“[G]oing forward, who is in charge of the grid? Who is providing the vision for the future of the grid and who should outside parties be in contact with to help fulfill that vision?
Is it the Governor’s office, which is promoting legislation to sell off some of PREPA’s assets and contract with a third party to operate the transmission and distribution lines?
Is it the Financial Oversight and Management Board, which recently certified a new fiscal plan for PREPA that includes a process for privatization?
Or is it PREPA, which has a relatively new Board of Directors, and a new CEO, but could be completely upended by these other plans?
Or is it the PREC, which claims responsibility for setting the overall policy direction for the grid, yet could be dissolved under the Governor’s reorganization plan?
And then how do the Department of Energy and the Army Corps of Engineers fit into this hierarchy? And of course, what about the creditors?”

Unfortunately, no one, not even the Government’s representatives, gave a clear answer. Mr. Walker from the DOE stated:

“Another DOE effort is through grid modeling to support the rebuilding of a more resilient electric power grid system in Puerto Rico. This endeavor will develop a near real time dynamic model of the Puerto Rico power system that will not only be used as an operational tool but for planning purposes as well. This modeling effort will provide technical insight into the resiliency objectives, allowing for coordination and communication of potential solutions across stakeholder groups. Working in partnership with FEMA and the U.S. Department of Housing and Urban Development (HUD), DOE seeks to facilitate collaboration with PREPA as they plan future investments and determine where financial resources will be most beneficial in strengthening Puerto Rico’s grid and increasing its resilience. . .
The Southern States Energy Board (SSEB), in association with DOE, is working in coordination with the governor and legislature of Puerto Rico to establish a reliable, affordable, and sustainable electric energy grid system, and to develop a policy and legal framework to provide a regulatory process for possible privatization efforts. Working in collaboration, SSEB will present Puerto Rico with various options and recommendations for the electricity and other utility sectors. . .
Although some of the additional analysis necessary to support those resilience principles is underway, recommendations that can be acted on today to improve the performance of the system ahead of the 2018 hurricane season are as follows:
1. The Governor and PREPA should immediately ensure that updated, effective mutual aid agreements are primed to quickly provide support during the next event.
2. The Incident Command System should be trained and utilized during a response.
3. The Puerto Rico Energy Commission (PREC) should coordinate a joint study with the Puerto Rico Telecommunications Board to determine and enforce safe loading requirements of distribution poles carrying both electric and telecommunications infrastructure.
4. Electricity transmission towers installed specifically for temporary emergency restoration should be considered for replacement, potentially by monopoles; many of the round monopole structures survived the 2017 storms.
5. The PREC should finalize microgrid regulations, and establish effective and efficient interconnection requirements and wheeling regulations with PREPA. These regulations will allow customers to design their systems to add reliability and resilience to PREPA’s system.
6. The Commonwealth Energy Public Policy Office, in coordination with other appropriate Commonwealth agencies, should consider drafting an updated Energy Assurance Plan, which will provide for an Incident Management Team as well as other important components. Besides preparing for the next hurricane season, acting immediately will allow for leveraging the presence of Federal staff in the Joint Field Office and the Federal data collection efforts that have been underway since September. Finally, the SSEB may be able to facilitate peer-to-peer information sharing and lessons learned among Puerto Rico’s neighboring governments and utilities.”

Mr. Higgins, the new PREPA executive director, also failed to say who was in charge and made it clear that he did not make public policy, but only executed it. Moreover, he stated:

“Since it received the loan, PREPA has consistently collected slightly more than $50 million of accounts receivable per week, and it projects collections to remain near that level through the end of PREPA’s fiscal year on June 30, 2018. PREPA currently believes that these weekly collections, coupled with the loan, will permit PREPA to continue to operate under current conditions without the assistance of additional financing through the end of the current fiscal year and into Fiscal Year 2019. It is worth noting that the continuity of restoration and mitigation/hardening work on the grid is dependent on the continuing receipt of federal funding, which is being closely coordinated with FEMA.”

Again we see that the Board and AFFAF overestimated PREPA’s need for a loan and Judge Swain was correct in denying said loan. Moreover, it is clear that PREPA is able to continue with reconstruction efforts due to federal funding.

Mr. Sobrino, the Governor’s representative before the Board, had this to say:

“Governor Rosselló has set forth a three-phase plan for the transformation of the electric sector. The first phase will define the framework for the transformation through legislation. The second phase will involve marketing, receiving offers from interested parties, and evaluating the technical, economic, and financial capabilities of offerors. In the final phase, the terms of awarding and hiring the selected parties that meet the requirements for the transformation and modernization of our energy system will be negotiated, finalized, and approved. . .

The assumed “base case” for the contemplated transformation involves (i) private ownership and/or operation of all generation assets and a development of greenfield generation projects with a focus on a diversified fuel mix and clean energy and (ii) a private operator of the transmission and distribution system through a concession model, which leaves the ownership of the assets in public hands under the operation of a private operator. I anticipate this “base case” will be subjected to a market test in order to determine the extent of investor interest and whether higher values and/or better transaction terms can be achieved by using an alternative structure. I anticipate the timeline to run the competitive process for the transformation will be at least 12 to 18 months.”

The problem with this is that the legislation for the sale of PREPA is anything but transparent and it does not say how the sale will be done. Moreover, Mr. Higgins and Mr. Sobrino both repeat the mantra of the last 12-18 months, which is what the Governor said in January of 2018, only the House has approved the sale legislation. Seems to me politicians do not want to sell the crown jewel of political patronage and makes me wonder if it would be better for the federal government to handle the sale.

Also during the hearing, Mr. Sobrino tried to blame the federal government for the delay in bringing back electricity to Puerto Rico, implying that the Corps of Engineers had told the Governor it would be done in 40 days. When Sec. Walker demurred, Sobrino said “I was there,” and Walker retorted “So was I.” There is a fine line between being assertive and irritating those whose help you need. I suspect this will not be the last we hear about the Corps of Engineers vs. PREPA fight. Food for thought.

The PREPA loan is not the only area where the Board’s projections were wrong. In the certified Fiscal Plan of the Commonwealth, the Board mentions in footnote 9, a projection of outmigration by a part-time blogging self-taught demographer who is actually a full-time cotton economist at the U.S. Department of Agriculture. The idea is that the Puerto Rican population left in droves due to Hurricane María and will continue to leave, especially this coming summer. A recent study, however, puts these dire predictions into question using data from people’s phones, showing that most of the population that left after María hav returned to Puerto Rico. The Court lacks jurisdiction to review the Fiscal Plan, PROMESA section 106(e), but it can do so in the context of the Plan of Adjustment. We shouldn’t be surprised for one second when all creditors cite this new finding, and ask the Board and Commonwealth to back up their migration claims. Food for thought.

This is just another example of the Board hiding relevant information like it hides the Commonwealth’s financial information to make things look worse than they are in order to convince Judge Swain to impose the cramdown it desires. Given the discovery that will continue in this case pursuant to Bankruptcy Rule 2004, I doubt this strategy will prevail. Moreover, as Judge Swain has stated, she will review the fiscal plan at the plan of adjustment stage. I take this to mean that if the information contained in them is incorrect, there will be no cramdown.

Last week Congressman Bishop attended a fundraiser that was supposedly not a fundraiser, but most likely was a fundraiser (I don’t understand either) and our own José Carrión was the man of the night. So the godfather of PROMESA and the President of Board were schmoozing at a dinner and no one has asked whether this is legal, ethical or right? Mr. Carrión says in the article “I do not think there were conflicts of interest at the dinner . . . My political contributions are well known and of the public record. Everyone in Puerto Rico knows I am a Republican.” I’m also told that Carrión’s firm, CLC, hosted Congressman Bishop for a private luncheon with their clients. Why is it that the Board can investigate any possible pay-for-play with the Commonwealth advisors and lawyers but we have to take their word that nothing wrong is happening in the Bishop-Carrión affair or in Matosantos case? Where are the ethical analysis of these cases? Don’t the Puerto Rico taxpayers have a right to know? The Board’s lack of transparency on these two cases leaves a lot to be desired.

As I reported, on May 4, the Commonwealth handed the Board its proposed budget as was required and on May 8, the Board notified the Governor that it was in violation of PROMESA. The Commonwealth has until May 5, 2018 to provide with a conforming budget. As to be expected, the inclusion of Christmas Bonuses and additional funds for Municipalities did not set well with the Board. In addition, the Commonwealth must:

“Provide a detailed budget of expenses for FY19 that is consistent with the trajectory for the primary fiscal balance in the Fiscal Plan, using the same basis of accounting used to prepare the Fiscal Plan (modified accrual basis of accounting) and in accordance with the accounting policies used to prepare the audited financial statements of the Commonwealth. If the basis of accounting is different than modified accrual, please confirm the basis of accounting being used.

Provide a reconciliation of the budget to the Fiscal Plan for expenditures with explanations of any variance. However, it is not expected that total expenditures would deviate from Fiscal Plan submitted and approved. To the extent the budget changes after May 4, provide the updated reconciliation in excel within five business days of the update and no later than eight business days before certification of the FY19 budget. . .

Where available, provide a comparison of expenditures to prior two budgets and to prior two years of actuals (where available) and latest twelve (“LTM”) months ending December 31, 2017 of actuals and explain key differences. If the actuals for the prior two years or LTM period, are just draft versions, indicate so when providing the information.”

Also, as for public corporations in the Commonwealth Budget, it must:

“Provide a detailed budget of total expenditures defined in this document to include operating expenses and separately capital improvement plan (“CIP”) expenditures for FY19 that is consistent with the trajectory in the Fiscal Plan covers transactions conducted by all subsidiaries. There should be a detailed breakout of operating expenses

Provide a reconciliation of the budget to the Fiscal Plan with explanations of any variance. However, total expenditures should not deviate from the Fiscal Plan operating expenses and CIP submitted and approved. To the extent the budget changes after May 4, 2018 based upon specific information not known at that time, provide the updated reconciliation in excel within five business days of the update and no later than eight business days before certification of the FY19 budget.

Provide a comparison of expenditures to the prior two budgets (FY17 and FY18) and to the prior two years (FY16 and FY17) and year-to-date (“YTD”) from July 1, 2017 through March 31, 2018 of actuals versus July 1, 2016 through March 31, 2017. Explain key differences by both $ and % differences for any variance over 10%. If the actuals for the prior two years or YTD period are draft versions, indicate so when providing the information.”

This is only a small scope of the things that were “requested” from the Commonwealth, making it impossible to comply. Moreover, Mr. Sobrino reacted by saying that some changes would be made to the budget but that Puerto Rico would not increase the Board’s budget, include the labor reform or cut the Christmas bonuses. Ms. Jaresko, however, made it clear that the Commonwealth must comply with the budget order. Eventually, all this will land on Judge Swain’s desk and the people of Puerto Rico will pay for both the Board and AFFAF’s lawyers to determine who is in charge of the Government. A total waste of resources. Oh, well.

This is only the beginning of a long process. Section 202 of PROMESA requires the Board to give the Governor some time (not specified) to correct any errors in the budget. It not corrected, the Board will impose their own budget and send it to the Legislature and the Governor. If the Legislature does not approve a conforming budget, the Board must again give the Legislature time to correct the errors and if not done, section 202(e)(3) specifies:

“If the Governor and the Legislature fail to develop and approve a Territory Budget that is a compliant budget by the day before the first day of the fiscal year for which the Territory Budget is being developed, the Oversight Board shall submit a Budget to the Governor and the Legislature (including any revision to the Territory Budget made by the Oversight Board pursuant to subsection (d)(2)) and such Budget shall be—
(A) deemed to be approved by the Governor and the Legislature;
(B) the subject of a compliance certification issued by the Oversight Board to the Governor and the Legislature; and
(C) in full force and effect beginning on the first day of the applicable fiscal year.”

This belies arguments by the politicians in the Legislature that if they do not approve the budget, last year’s budget will go into effect as per the Puerto Rico Constitution. The devil is in the details.

Last week, the Government Accountability Office issued a report entitled “Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them” and determined this as causes:

“The Puerto Rico government’s inadequate financial management and oversight practices. For example, the Puerto Rico government frequently overestimated the amount of revenue it would collect and Puerto Rico’s agencies regularly spent more than the amounts Puerto Rico’s legislature appropriated for a given fiscal year.
Policy decisions by Puerto Rico’s government. For example, Puerto Rico borrowed funds to balance budgets and insufficiently addressed public pension funding shortfalls.
Puerto Rico’s prolonged economic contraction. Examples of factors contributing to the contraction include outmigration and the resulting diminished labor force, and the high cost of importing goods and energy.”

The report recommended the following:

“Modify the tax exempt status for Puerto Rico municipal debt. Making interest income from Puerto Rico bonds earned by investors residing outside of Puerto Rico subject to applicable state and local taxes could lower demand for Puerto Rico debt. However, reduced demand could hinder Puerto Rico’s ability to borrow funds for capital investments or liquidity.

Apply federal investor protection laws to Puerto Rico. Requiring Puerto Rico investment companies to disclose risks with Puerto Rico bonds and adhere to other requirements could lower demand for the bonds. However, this action could also limit Puerto Rico’s ability to borrow funds.

Modify the Securities and Exchange Commission’s (SEC) authority over municipal bond disclosure requirements. SEC could be allowed to require timely disclosure of materials—such as audited financial statements—associated with municipal bonds. Over the past decade, Puerto Rico often failed to provide timely audited financial statements related to its municipal bonds. Timely disclosure could help investors make informed decisions about investing in municipal bonds. However, a broad requirement could place additional burdens on all U.S. municipal issuers, such as the costs of standardizing reporting.”

Faced with a report saying the triple tax exemption on bonds, possible only for a territory, would be accepted with open arms by a pro-statehood administration. Not so. In a letter from Carlos Mercader, Executive Director of the Puerto Rico Federal Affairs Administration, said that the Government of Puerto Rico was strongly opposed to the elimination of the triple exemption since it was crucial to its efforts to solve the current financial crisis. In other words, although the Government admits that the triple exemption facilitated the financial crisis it is in, it hopes to use it get further loans but claims that statehood is the solution to its problems. Oh, and sans paying the debt. Quixotic, don’t you think?

On the legal front, Judge Swain heard the oral argument on the COFINA motion to certify the Commonwealth v. COFINA question to the Puerto Rico Supreme Court. She took the controversy under advisement and as with the Aurelius, ERS and other controversies, we will have to wait. Seems Judge Swain is taking a page from Judge Rhodes’ book in hopes of solving everything in mediation. Unfortunately, I find this highly unlikely, even with today’s encouraging news from the Commonwealth’s largest creditors.

The Asociación de Profesoras y Profesores del Recinto Universitario de Mayagüez, Inc. has sued the Board and the Commonwealth challenging the UPR certified fiscal plan. The case had been stayed until the new fiscal plan for the UPR was approved and this week the complaint was amended and surprise, surprise, this claim was ditched and now plaintiff requests:

“a. An order declaring that the fiscal plans of the Commonwealth and the UPR are not legislative acts and could not be implemented without the enactments of the necessary laws after the process established by Article III, Section 17 of the Constitution of the Commonwealth of Puerto Rico.

b. An order declaring that the budgets certified by the Oversight Board for the Commonwealth and the UPR could not be implemented without the enactments of the necessary laws after the process established by Article III, Section 17 of the Constitution of the Commonwealth of Puerto Rico.

c. An order declaring that the fiscal plans and budgets certified by the Oversight Board for the Commonwealth and the UPR could not impose budgetary cut that are contrary to Act 3-2017.

d. An order Defendants enjoining and staying from implementing budgetary cuts to the UPR in the fiscal year 2017-2018 neither in the fiscal year 2018-2019, that are not compliant with Act 3-2017.”

It is doubtful this group has standing in this case. Moreover, it is more than likely that PROMESA supersedes the Constitution of Puerto Rico as to these issues. Irrespective of my view, this group is actively challenging the Board’s actions whereas in cases 17-242 and 17-243, the American Federation of State County and Municipal Employees, who also sued to set aside the fiscal plan, the cases remain dormant.

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.