Monday Update – October 15, 2018

Welcome to your weekly Title III update for October 15, 2018. This week very little has happened in or outside the Title III cases.

On Tuesday, October 9, 2018, Judge Swain granted the Commonwealth a certification to allow it to appeal her decision about the complaint it filed against the Board pertaining to the budget. That case, 18-AP-80, was not dismissed as was the one filed by the Puerto Rico Legislature. Since the decision on the Commonwealth case was not a final decision, a certification of appealability is required by PROMESA section 306(e)(3), which states:

The court of appeals for the circuit in which a case under this title has venue pursuant to section 307 of this title shall have jurisdiction to hear appeals of interlocutory orders or decrees if—

(A) the district court on its own motion or on the request of a party to the order or decree certifies that—

(i) the order or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States, or involves a matter of public importance;

(ii) the order or decree involves a question of law requiring the resolution of conflicting decisions; or

(iii) an immediate appeal from the order or decree may materially advance the progress of the case or proceeding in which the appeal is taken; and

(B) the court of appeals authorizes the direct appeal of the order or decree.

Judge Swain determined as follows:

Because the question of law for which Plaintiffs seek certification is not one that the Court addressed in its Opinion and Order, the Court denies Plaintiffs’ Motion. However, having found that issues addressed in the Court’s disposition of certain counts in the Opinion and Order involve related questions of law as to which there is no controlling authority, that those aspects of the Opinion and Order involve issues of public importance, and that immediate appeal of those aspects of the Opinion and Order may materially advance the progress of this adversary proceeding and the Title III cases, the Court on its own motion certifies for interlocutory appeal the Opinion and Order to the extent that it dismisses pursuant to Federal Rule of Civil Procedure 12(b)(6) Paragraphs 78 and 79 of Count I of Plaintiffs’ Complaint and Paragraphs 88 and 91 of Count II of Plaintiffs’ Complaint. (See Op. and Ord. at 29-37.)

This is the first step for the Commonwealth to join other appellants questioning Judge Swain’s ruling on the budget. Although the First Circuit still has to give its consent, given the importance of the case and the discussion of the issue in the Legislature’s appeal, it is likely it will be given.

What is amazing to me is the way the media reported the certification of the order. They made it seem as if Judge Swain was requesting an opinion from the First Circuit rather than a routine procedure akin to that of 28 U.S.C. § 1292(b). Seems that the press in the island needs to take a little course on federal jurisdiction and venue.

The second decision was the denial of remand of a case that was removed from state court. Plaintiffs had filed a complaint in state court challenging Governor Rosselló’s Executive Order on PREPA’s retirement fund. It is important to note, that they are seeking a declaration that the utility’s retirement fund is a separate entity from the Commonwealth. The Board removed the case and plaintiffs requested its remand to state court. Judge Swain determined that the dispute over the nature of the retirement fund could affect the Title III of the Commonwealth and PREPA and hence would be decided by the Federal Court rather than the state court. Hence, she retained jurisdiction over the case.

Upon review of the remaining adversary proceedings and other contested matters, there is still much to be resolved in the remaining Title III cases. Judge Swain has dismissed without prejudice a couple of cases dealing with whether certain bondholders have a lien; Judge Dein has recommended that certain claims as to dischargeablity be dismissed until the Plan of Adjustment; and the issues in a couple of the Utier cases are still pending. In addition, there are thousands of cases that were stayed by the Title III filings and are pending discovery, pretrial and trial. The Board mentioned that some discovery and then mediation may be used. All this takes time, hence, the resolution of the Title III cases, except for COFINA, will probably go well into 2021.

Finally, there is a rumor going around that GO’s have reached a deal with the Board for 83% recovery. Technically more that COFINA but seniors are getting 93%. But as I said, it is only rumors, so 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 – October 9, 2018

Welcome to your weekly Title III update for October 9, 2018. Although not much happened, what did happen is very important.

On October 3, 2018, National, Assured and Syncora, insurers of PREPA bonds, filed a renewed request for the lifting of the stay in order to seek the appointment of a receiver as per Puerto Rico law and the 1974 Bond Agreement. The insurers claim they possess 27% of the outstanding bond debt of PREPA. The motion came out swinging and says:

PREPA remains today, as it has been for decades, a dysfunctional entity. It serves only the political forces that control it, at the expense of everybody else. And PREPA’s perceived invulnerability to reform efforts fuels its worst practices. Since the denial of the Chief Transformation Officer motion filed by the Financial Oversight and Management Board (the “FOMB”), the pace of mismanagement and bad decision-making at PREPA has only increased, and it is rapidly approaching escape velocity. The wrong turns PREPA is taking today will harm its creditors and the people of Puerto Rico long after this Title III case is finished. Now, more than ever, PREPA needs a receiver for the benefit of all stakeholders. The long history of mismanagement at PREPA is well-documented. PREPA was run not by business people with knowledge of public utilities, but by bands of political loyalists that shifted with each new election. It began expensive projects and then abandoned them when political winds changed direction. As of 2014, it had failed to collect receivables adding up to some $1.75 billion. A movement to reform PREPA briefly held sway from 2014 to 2017—with the creation of an independent regulator, an agreement with bondholders, and laws requiring independence and professionalism. But reform succumbed once again to improper political interference after only one election cycle. PREPA’s Title III case followed.

Since the Title III petition, PREPA’s problems have grown even worse. PREPA tragically bungled the response to the hurricanes, exacerbating and prolonging a humanitarian crisis. PREPA’s systems have not been properly managed, hardened, or maintained for future hurricanes. It has churned through five different leaders in the past year. All its independent directors were forced to resign in July 2018 under intense pressure from Governor Rosselló, leaving PREPA’s Board of Directors (the “Board”) without a lawful quorum. Its collection efforts remain abysmal. As of June 2018, PREPA reports uncollected accounts receivable of almost $3.4 billion. It obstructs its independent regulator at every turn, foiling efforts to develop reliable and low-cost electricity service. And its political entanglements have left it rife with conflicts of interest. Among others: the new chairman of the PREPA Board also serves as Executive President of the Puerto Rico Aqueduct and Sewer Authority (“PRASA”), and PREPA’s latest executive director was formerly PRASA’s Chief Executive Officer. Meanwhile, PRASA owes PREPA millions of dollars. Instead of collecting that money, PREPA now has an initiative (presumably at the Governor’s behest) to transfer assets to PRASA on secret terms. Indeed, PREPA’s lack of transparency continues in spite of its debtor status.

In footnote 5, the motion also states that the, “$3.7 billion figure includes roughly $1.1 billion in “General clients” accounts receivable and another $2.6 billion in Government accounts receivable.” In other words, the Commonwealth and Municipalities owe PREPA almost a third of the utility’s bond debt.

The motion continues stating later on:

PREPA currently fails to collect enormous sums owed for electricity it provides—particularly by government customers that have come to take free power for granted.30 PREPA’s failure to collect its bills is an egregious outlier in the industry. Indeed, even before Hurricane Maria, PREPA’s reported accounts receivables equaled nearly 100% of its revenues from sales for an entire year—a figure that dwarfed the industry average, in which accounts receivable typically equaled only about 6 to 15% of annual sales.31 Moreover, rather than be transparent about its financial condition, PREPA hides behind vague excuses about its massive accounts receivable balances. Further, instead of taking any meaningful steps recommended by its advisers to improve collections, PREPA has ceased efforts to collect on inactive and severely past due accounts, and it no longer reports the extent to which it cancels service on delinquent accounts. By forgoing industry standard collection practices, PREPA is effectively giving its customers interest-free loans of indefinite duration. . .

PREPA’s workforce also is overstaffed at the administrative level, yet understaffed and under-skilled in key areas such as transmission and distribution.38 At the same time, PREPA’s employees are constantly turning over due to PREPA’s politicized management, and there appear to be no effective succession or training plans in place to staunch the perpetual loss of experience and skills.39 PREPA also has deficient policies and practices in customer service, outage management, bidding, and accounting—all to the severe detriment of the people of Puerto Rico and to PREPA’s bottom line.40 PREPA’s “disorganized and ineffective” customer service costs too much and delivers too little.

Predictably, PREPA’s bad management leads to bad outcomes. PREPA experiences outages with 12 times greater frequency than the mainland U.S. average and takes much longer to fully restore power after an outage begins. This problem is exacerbated by the fact that PREPA does not attempt to proactively address the potential for failures—for instance by shoring up the system during periods of low demand—but simply reacts to failures as they occur, and is thus constantly “fire-fighting.” Likewise, PREPA’s practices with respect to bidding and accounting fall below industry standards. Taken together, PREPA’s many failures managing its business and operations have caused it to incur unnecessary expenses and lost revenue.

The insurer’s motion discusses the failed attempt to obtain $1.3 billion in interim financing and the subsidies PREPA gives municipalities via Contribution in Liu of Taxes. It also discusses PREPA’s less than stellar performance after Hurricane Maria:

Even before the hurricanes struck Puerto Rico, PREPA failed to follow well-established industry practices in hurricane preparedness when it did not activate mutual aid assistance to secure necessary resources, as any responsible electric utility would do.61 Moreover, in the wake of the disaster, rather than do the logistical work expected of any utility, PREPA entered into a $300 million contract with a two-person, two-year-old Montana company called Whitefish Energy Holdings, LLC (“Whitefish”) that had no experience with major utility repairs. The Whitefish contract, plainly the result of a deficient selection process,  created an enormous bottleneck at PREPA, starving the utility of the people needed to repair the system efficiently. Public utilities that wanted to help PREPA were told to go through Whitefish, which created major delay in aid. As a result, PREPA fell far behind in its repair efforts, widening the “trust deficit” between PREPA’s stakeholders, including the citizens of Puerto Rico, and its management.65 On top of that, the Whitefish contract charged PREPA exorbitant rates and provided that its profit and compensation provisions could not be audited by any governmental entity, including FEMA. The current Governor and his legal advisors continued to defend the Whitefish contract through October 2017. . . Most egregiously, there were allegations of serious malfeasance, bribery, and corruption in the recovery. “PREPA officials were reportedly paid $5,000 and provided free entry tickets, valued at $1,000 apiece, to restore power to San Juan area exotic dance clubs ahead of the scheduled restoration timeline.” There were also allegations that PREPA officials restored power out of sequence and to their own homes before restoring power to critical locations.

Next, the motion takes on the transformation of PREPA:

According to the government’s January 2018 announcement, the process would take at least eighteen months. That estimate was not remotely realistic. The latest PREPA Fiscal Plan states that: “[t]he ultimate form of the transformation will be informed by many elements currently unknown and beyond PREPA’s control including market appetite for the transaction and legislative action. PREPA, therefore, expects to amend and modify this Fiscal Plan to reflect the inputs received from the transformation process.” The Fiscal Plan shows various changes related to the transformation continuing through at least FY2023. Other officials have admitted that this complex process could take four to seven years. The transformation process contemplated under the fiscal plan is likely to take several years and as many as ten or more years to accomplish.

Related to this, PREPA informed the Energy Bureau that it would not have the Integrated Resources Plan ready for this month as it was required. The submittal to the Bureau did not specify when the document will be completed. In addition, as required by the law for the sale of PREPA,  the Legislature will present the regulatory framework and Public Policy for the energy grid this month.It will be interesting to see if my belief—that politicians really do not want to sell PREPA—will be reflected there.

The insurers’ motion is supported by declarations of experts and a myriad of documents. Obviously, AAFAF announced that it would oppose the motion and Judge Swain ordered that all briefing be submitted by December 12. Movants had requested a hearing on December 19, but the Judge has yet to rule on it.

Interestingly, the next day this motion was filed, the governor announced a 3-4 cent reduction in the electricity rates, allegedly due to administrative economies. That night, the Board sent the governor a letter questioning the reduction, seeking the basis for this reduction and asking whether it violates Puerto R law that establishes that the Energy Bureau, not the Puerto Rican government, as the one who establishes electricity rates. Moreover, not long ago, the same insurers who filed this complaint asked the Board for help appointing management for PREPA. The Board quickly rejected this request but as of this writing, it has remained silent as to the request. Wonder what the Board will decide to do.

On Wednesday, October 3, the Court was to hear arguments as to the UCC’s motion to be named representative of the Title III debtors in the GDB restructuring. On that day, the parties announced that they were close to getting to an agreement and asked for a hearing on Friday, October 5. When that day came along, the agreement was announced. The important parts are:

  1. On the Closing Date, the Government Development Bank for Puerto Rico (“GDB”) shall transfer $20 million in cash (the “Fixed Settlement Cash”) to the Public Entity Trust (as defined in the GDB Restructuring Act).
  1. In addition, GDB shall transfer to the Public Entity Trust any cash retained by GDB on the Closing Date that remains after satisfaction of the obligations pursuant to the Cash Adjustments for which such cash was retained (such excess, if any, “Excess Adjustment Cash”), in an aggregate amount up to $10 million (such Excess Adjustment Cash so transferred, the “Contingent Settlement Cash” and together with the Fixed Settlement Cash and the Excess Litigation Cash (as defined below), the “Settlement Cash”). The Public Entity Trust shall be entitled to receive the first identifiable Excess Adjustment Cash amounts, and the GDB Debt Recovery Authority shall not receive any such Excess Adjustment Cash until the Public Entity Trust receives Contingent Settlement Cash in the amount of $10 million
  1. The Designated Deposit (as defined in the GDB Restructuring Act) of (i) the Puerto Rico Electric Power Authority (“PREPA”) in the amount of $114,108,631 (the “PREPA Designated Deposit”) and (ii) the Employees Retirement System of the Government of the Commonwealth of Puerto Rico (“ERS”) in the amount of $32,948,612 (the “ERS Designated Deposit” and, together with the PREPA Designated Deposit, the “Title III Debtor Designated Deposits”) shall be allowed claims against the Public Entity Trust. The Title III Debtor Designated Deposits shall be transferred to the Public Entity Trust, in accordance with the GDB Restructuring Act, and the Public Entity Deed of Trust shall provide that the Title III Debtor Designated Deposits shall be
  1. with respect to the Settlement Cash, first priority claims, senior to all other Designated Deposits;
  1. with respect to all other assets of the Public Entity Trust, pari passu (but for the avoidance of doubt, not including any federal funds) with all other Designated Deposits, provided that the Title III Debtor Designated Deposits shall be reduced on account of the Settlement Cash received.
  1. Any distributions from the Public Entity Trust to the Title III Debtor or other Government Entity made hereunder shall be distributed and used in accordance with applicable law, including, but not limited to, the Law to Guarantee Payment to Our Pensioners and Establish a New Plan for Defined Contributions for Public Servants, Act No. 106 (2017).2
  1. For the avoidance of doubt, the Title III Debtor Designated Deposits shall not be subject to any additional claims for setoff, netting, recoupment, or reduction, including in respect of any causes of action for preferential transfers, asserted by GDB, which shall be deemed settled as of the Closing Date.
  1. GDB acknowledges and affirms that the Legal Claims (as defined herein) are property of the applicable Title III Debtor or other Government Entity (other than GDB).
  1. Regardless of whether the affirmation in Paragraph 6 hereof is accurate, to the extent GDB has any property interest in the Legal Claims, such interest shall be transferred as of the Closing Date to the applicable Title III Debtor or other Government Entity (the “Transferee”).
  1. Legal Claims” shall mean all legal rights, claims, and causes of action, including contingent or unknown causes of action, in law or in equity, that GDB may assert or be a party to, in its capacity as fiscal agent or financial advisor, or such other representative capacity to a Title III Debtor (or the entity that became a Title III Debtor) or other Government Entity other than GDB (including claims relating to the issuance of bonds by the Title III Debtors or Government Entities other than GDB), and for which the intended or actual primary economic beneficiary of the transaction or series of transactions giving rise to the cause of action was a Title III Debtor (or the entity that became a Title III Debtor) or other Government Entity other than GDB, but shall exclude (i) any legal right, claim or cause of action relating to the issuance of any bond by GDB (or any of its subsidiaries or successors, including the GDB Debt Recovery Authority) and (ii) any legal right, claim or cause of action released or to be released under the GDB Restructuring Act (as in effect on the date hereof, and reflecting the modifications set forth in the Informative Motion Regarding Releases Under Article 702 of the GDB Restructuring Act [Docket No. 151 in Case No. 18-1561 (LTS)]).
  1. To the extent a Legal Claim is asserted and any defendant(s) to such claim asserts an indemnification claim against GDB on account of such transferred Legal Claims, the Transferee shall assume such indemnification obligations, but only to the extent of GDB’s interest, if any, in the transferred Legal Claims. To the extent a Transferee assumes any indemnification obligations of GDB, it shall control the defense of any indemnification claims asserted on account of such obligations.
  1. GDB shall be required to provide reasonable cooperation to the Transferee in connection with the Transferee’s prosecution of the Legal Claims and, as applicable, the defense of any indemnification claims, including, but not limited to, reasonable cooperation in responding to any Transferee discovery efforts; provided, however, nothing herein shall obligate GDB to provide any privileged information to any Transferee; provided further, that the applicable Transferee shall be responsible for all costs associated with GDB’s reasonable cooperation.
  1. The Title III Court shall have jurisdiction over any dispute with respect to the allocation of the Legal Claims among the Title III Debtors. The rights of the Oversight Board and AAFAF under PROMESA, including under section 305, with respect to such issues are expressly preserved.
  1. Nothing herein gives the UCC or its constituents any rights or standing with respect to the Legal Claims or any of the rights of any Transferee under this Stipulation. For the avoidance of doubt, nothing herein shall be interpreted to grant the UCC authority to prosecute the Legal Claims; provided, however, that nothing herein shall preclude the UCC from seeking derivative standing in the Title III Cases to bring such claims on behalf of the Title III Debtor; provided further, nothing herein shall prevent AAFAF or the Oversight Board from objecting to such relief.
  1. The indebtedness owed by the Commonwealth to GDB that is to be transferred to the Public Entity Trust pursuant to the GDB Restructuring Act shall, as of the Closing Date, be reduced by the amount of the federal funds on deposit at GDB restored by the Commonwealth (which is, approximately, $312 million). The claims of GDB against the Commonwealth in respect of such indebtedness shall remain subject to allowance in the Commonwealth’s Title III Case, provided that such claim may not be allowed in an amount greater than $578 million.
  1. In exchange, GDB shall transfer to the Public Entity Trust the first cash or cash equivalents that constitute net proceeds of Causes of Action that remain after, or are received by GDB after, in GDB’s sole determination, all contingent and unliquidated claims against GDB arising on or before the Closing Date have been satisfied, up until ERS and PREPA obtain net proceeds totaling 55 cents on the dollar of the Title III Debtor Designated Deposits (without reduction for payments from the Fixed Settlement Cash or the Contingent Settlement Cash) (such excess, if any, the “Excess Litigation Cash”). For the avoidance of doubt (i) GDB shall have the sole authority and absolute discretion to commence, prosecute, settle, offset against claims against GDB, or release any such Cause of Action and (ii) the UCC shall not have the right to, and shall not have or seek standing to, directly, indirectly or derivatively, commence, direct, compel the prosecution of, settle, resolve, sell, transfer or dispose of any such Cause of Action or any litigation, other enforcement action or resolution thereof. For the avoidance of doubt, the causes of action described in this Paragraph 14 are Causes of Action other than the Legal Claims.

In exchange for this agreement, the UCC dismisses with prejudice its objections to the GDB restructuring, including its adversary proceeding, appeal, etc. While this may not seem like much, both AAFAF and the Board questioned the UCC’s standing to raise objections to the deal and there is money being transferred to the Public Entity Trust to pay the Title III creditors. Also, PREPA and ERS claims against the Public Entity Trust are being allowed. Not a homerun, but at least a double.

This settlement leaves only Siemens and a couple of non-profits as objecting parties to the restructuring. I do not include, Cooperativa de Ahorro y Credito Abraham Rosa, et al. v. Commonwealth of P.R., et al., Adversary Proceeding 18-0028, since this party did not file an objection in case 18-1561, as it should. It will be interesting to see if Judge Swain dismisses this case or simply considers that since it was filed before the qualifying modification, it should be considered as an objection. Don’t think she will, though. The Cooperativa should have filed an objection.

In the COFINA deal, the Board filed a motion for establishing the schedule for the approval of the disclosure statement, plan of adjustment and the Rule 9019 settlement:

The Commonwealth of Puerto Rico (the “Commonwealth”), the Puerto Rico Sales Tax Financing Corporation (“COFINA”), the Puerto Rico Highways and Transportation Authority (“HTA”), the Employees Retirement System of the Government of the Commonwealth of Puerto Rico (“ERS”), and the Puerto Rico Electric Power Authority (“PREPA,” and together with the Commonwealth, COFINA, HTA, and ERS the “Debtors,” and each individually a “Debtor”), as Title III debtors, by and through the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), as the Debtors’ representative pursuant to section 315(b) of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), respectfully submit this urgent motion (the “Urgent Motion”), for entry of an order, substantially in the form attached hereto as Exhibit A (the “Proposed Order”), scheduling a hearing (i) to determine the adequacy of information in the COFINA disclosure statement for November 20, 2018, at 10:30 a.m. AST (9:30 a.m. ET) in New York, New York, and (ii) to (A) approve the Rule 9019 settlement of the Commonwealth-COFINA dispute in the Commonwealth title III case, and (B) confirm the COFINA plan of adjustment, for January 16, 2018, at 9:30 a.m. AST (8:30 a.m. ET) in San Juan, Puerto Rico, and continued, if necessary, on January 17, 2018 at 9:30 a.m. AST (8:30 a.m. ET) in San Juan, Puerto Rico.

This means that by early next year, PR may have settled over $21 billion of its debt. Not bad for the Board, AAFAF and its lawyers. Finally, the Board and AAFAF are soliciting feedback from the parties to the Amended and Restated Plan Support Agreement for COFINA with respect to consideration of an alternative securities design based on the same available cash flows. It will be interesting to see the feedback on this.

And talking about the deal, Antonio Weiss, one of the architects of PROMESA in the US Treasury, criticized in Bloomberg the COFINA deal. Mr. Weiss states:

The COFINA restructuring doesn’t go nearly far enough.  It saddles Puerto Rico with escalating debt payments for the next 20 years, even though the economy has been in a decade-long slump.  It also sets a dangerous precedent.  If Puerto Rico’s government and the oversight board created by Congress agree to similar terms with creditors who hold General Obligation bonds,  it will be just a question of time before the commonwealth is forced to default yet again or curtail public pension payments upon which more than 325,000 workers depend.

Mr. Weiss continues saying:

The implications of the proposed COFINA deal for restructuring the remainder of the island’s debt obligations are also a concern. The old COFINA bonds were a fast path to deep insolvency, with debt service rising from $0.7 billion to $1.8 billion over the next 25 years. The new bonds offer some relief, with debt service starting at $0.45 billion and reaching $1 billion. The restructured bonds also offer the junior COFINA bonds enhanced security in exchange for the fall in debt service, and the new bonds will be harder to restructure in the future. And by the end of the 2020s, the proposed payments on the COFINA bonds alone would push Puerto Rico’s debt burden — assessed using the standard municipal bond metric of debt service against the entity’s own revenues — over that of an average U.S. state.  

With Puerto Rico’s limited ability to repay, generosity to one set of bondholders necessarily reduces what the commonwealth can reasonably offer to other bondholders and claimants.  The sustainability of Puerto Rico’s debt restructuring needs to be assessed comprehensively, not by looking narrowly at each piece of the bigger puzzle.

Mr. Weiss seems to forget he no longer calls the shots in PROMESA. In addition, he pontificates and assumes, without saying, that Judge Swain can in fact eliminate with one stroke the COFINA debt or at least convert its bondholders into non-secured creditors. The reality is that COFINA could be declared unconstitutional (as is my opinion) and hence the debt be unsecured; or it could be constitutional and the whole debt be owed to secured creditors. A settlement takes care of this uncertainty. In addition, at the beginning of the negotiations, before the Title III commenced, the Board in a cavalier fashion was pushing for over 70% haircut of the debt but got nowhere in settlement. Once it began upping the ante, we have the COFINA and GDB deals, probably PREPA and PRASA also. So much for Mr. Weiss rhetoric.

Having said that, Mr. Weiss, without knowing it, has put his finger on the real issue: the way the settlement on presumptively secured debts have been going, over 70% on average, there will not be much left to pay unsecured creditors. Moreover, in a Plan of Adjustment, unsecured creditors vote and could reject the plan. But that is something we will leave for another time.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Monday Update – October 1, 2018

Welcome to your weekly Title III update for October 1, 2018. Not much has happened this week but come Wednesday, things are getting interesting.

Utier, PREPA’s principal and most combative union, won a major victory in its battle against the Board. Judge Swain dismissed, as she has done in other cases, but without prejudice, claims that the Fiscal Plan and other actions by the Puerto Rican goverment and the Board constitute a taking without just compensation. Again, Judge Swain ruled that the claims have not matured and that Utier must wait for the Plan of Adjustment to raise this challenge. Judge Swain, however, did not dismiss the claims that the government’s actions were a violation of the impairment of contractual obligations. The Court did dismiss Utier’s claims arguing that the Fiscal Plan was not based on the Constitution. This decision may force PREPA and the Board to negotiate a solution to the impairment of contractual obligations, or not. Let’s see what happens.

In other developments, the UCC filed its reply to the Board, AAFAF and GDB in opposition to the GDB Title VI restructuring and its request for derivative standing. As usual, the UCC came out swinging:

Fundamentally, the GDB Restructuring is an attempt by hopelessly conflicted actors to liquidate GDB and extinguish rights and claims of the Title III Debtors against GDB in a manner that could never be accomplished pursuant to a Title III plan of adjustment or a lawful application of Title VI, which are the only two means of restructuring permitted by PROMESA. The GDB Restructuring could never be accomplished pursuant to Title III or a lawful application of Title VI because, among other things, all of GDB’s most valuable assets are being transferred to certain favored unsecured creditors while leaving the Title III Debtors holding a potentially empty bag. Even the proceeds of GDB’s claims against third parties such as the investment banks that facilitated and profited from the debt offerings orchestrated for the Title III Debtors by GDB are being excluded from what the Title III Debtors are receiving under the GDB Restructuring.

This absurdly lopsided asset allocation scheme is the antithesis of the “fair and equitable” treatment of creditors required by Title III and the pooling requirements of Title VI. While it is true that the Qualifying Modification for which GDB is seeking approval meets certain of the Title VI’s pooling requirements, this is only because the Qualifying Modification leaves the Title III Debtors’ claims against GDB completely out of the Title VI process. Had the Title III Debtors’ claims against GDB been included as part of the Qualifying Modification, they would have to have been included in the same pool as GDB’s favored unsecured creditors and their claims treated “fairly and equitably” as part of that same pool.

If the unfairness and inequity of the GDB Restructuring were not enough, the GDB Restructuring Act purports to deprive the Title III Debtors of any authority or standing to challenge the restructuring or any related transactions (which a Commonwealth law cannot do). Thus, the Committee is now all that stands in the way of this unlawful liquidation of GDB. Indeed, if the Committee is denied standing and the GDB Restructuring is approved, it will long be remembered as a notorious case in which, right under everyone’s noses, an insolvent entity was unlawfully liquidated pursuant to a territory law, all of its most valuable assets were used to pay a favored subset of unsecured creditors, rights and claims of potentially enormous value were released without any prior investigation, disfavored creditors were rendered powerless to do anything about it, and the parties ultimately harmed were not allowed to come forward and be heard. (Footnotes omitted, bold added)

The motion also discusses, in detail, the different causes of action the Commonwealth is abandoning against the GDB and how the balance cannot favor the latter. Moreover, the UCC points out shady dealings by the GDB. At pages 14-15 of its motion, the UCC states:

Among other things, as detailed in the Oversight Board’s investigator report, GDB abused its position as a lender to the Title III Debtors by increasing their debt load in a way that benefitted GDB as a creditor of the Commonwealth relative to other Commonwealth creditors. Around half of the entire proceeds from the 2014 GO Bond offering (approximately $1.6 billion) were earmarked to repay  Commonwealth and PBA lines of credit with GDB (and for PBA working capital). These repayments were ostensibly motivated by the GDB board members’ concerns over their own personal and criminal liability if GDB were insolvent. Indeed, accepting deposits while insolvent gives rise to criminal liability under Puerto Rico law.38 In short, the 2014 GO Bond offering was designed, in large part, to improve GDB’s balance sheet (for the benefit of GDB’s directors and officers) by hindering or delaying (if not defrauding) other Commonwealth creditors. (Bold in the original)

This allegation clearly raises a lot of questions. Did the García Padilla administration actually violate the law? Should Melva Acosta be indicted by the Puerto Rican government? The problem is that if the Commonwealth were to indict these officials, it would not be able to continue with the Title VI in the fashion it has done. Then, why is the Commonwealth, with the complicity of the Board, changing the GDB bondholders from non-secured to secured creditors? One answer could be that in this fashion it strengthens the bottom line of the credit unions–stated in Adversary Proceeding 18-0028, Cooperativa de Ahorro y Credito Abraham Rosa, et al. v. Commonwealth of P.R., et al.:

The Commonwealth of Puerto Rico and codefendants COSSEC, GDB and FAFAA were aware of Plaintiffs’ sound operations and safe financial conditions even in times of financial crisis. Maliciously, in a calculated way and under false pretenses, Defendants offered and sold to Plaintiffs unsound Puerto Rico Debt Securities availing themselves (Defendants) of the Cooperatives’ assets. This resulted in an undue concentration of bonds in the cooperatives’ portfolios and created a systemic risk for the Cooperatives.

The governmental entities with legal and fiduciary obligations to ensure the financial health of the cooperative system ignored their obligations and induced the offer and sale of the unsound debt securities. These entities incurred in the reckless disregard of the systemic risks to cooperatives and failed to comply with statutory mandates, and ministerial and fiduciary duties. As a consequence, Plaintiffs suffered material damages, which are claimed herein. Such actions preclude the discharge of Plaintiff’s claims under the regulations of the Bankruptcy Code.

The Adversary Proceeding claims monetary damages and rescission of the bond contracts but the Cooperativa has not filed an objection to the GDB restructuring, which would make any claim against the Commonwealth very difficult. Obviously, I am not their counsel.

Judge Swain stated in its denial of a declaration that the GDB Title VI restructuring that the UCC had standing but stopped short of determining it had prudential standing, I assume to leave it for this controversy. The Oral Argument hearing is to be held on October 3, 2018 with a possible continuation during the October 15 Omnibus. I doubt the Judge will rule on Wednesday but she usually gives us an idea of where she is going. I will try to attend the San Juan transmission of the hearing, which will be held in New York.

Since we are talking about the GDB restructuring,  National Public Finance Guarantee Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Ambac Assurance Corporation, which had filed notices of objections to the GDB restructuring, filed a notice of stipulation withdrawing said objections, essentially leaving the UCC as the only objector to the GDB restructuring. Another factor to consider when Judge Swain weighs the UCC’s request.

Finally, the director of the Commonwealth Office of Budget and Management could not say if the Government would have enough money to pay the Christmas bonuses and the payroll for the rest of the fiscal year. Board Chairman Carrión said earlier last month that if the Government paid the bonuses, it would not have enough money to pay the payroll. Seems he was right. Since the payment of the Christmas bonus is a political issue, I am sure Governor Rosselló will do everything in his power to pay them and not furlough or fire any employees. Will be interesting to 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.

Monday Update – September 24, 2018

Welcome to your weekly Title III update for September 24, 2018. Important things have happened this week, in and out of litigation.

On September 18, 2018, representatives of Kobre and Kim, together with Oversight Board members Arthur González, Ana Matosantos and David Skeel, presented their findings to the public, which was essentially the press. In a rehash of the report, which does not make any findings of who is responsible, Arthur González made it clear that attributing responsibility was not important to the Board. Although this was an overview of the report, a few important things came out. During the discussion, David Skeel made it clear that the purpose of the report was not to find causes of action, which is totally contrary to the representations made by the Board attorneys to Judge Swain. Also, after the presentation, a panel of “experts” (myself included) commented on the report. Most of us insisted that the Board had to assert causes of action against some, if not all, the entities mentioned in the report who may be liable to the government. One of the panelists, Alvin Velázquez, who represents a union that sits in the UCC, was adamant on this point. I, on the other hand, insisted on amendments to the Puerto Rico Constitution to prevent what has occurred in the past 50 years. Finally, Ana Matosantos, during the presentation and during the press conference, stated that the Board was going to take a look at the $3.5 billion 2014 GO issue. I would not be surprised to see the Board suing to declare it illegally issued, which would make it an unsecured, non-priority claim. In any event, I doubt the Board will exercise all the options it may have and will leave little time for the UCC to deal with them before May 2019. This is especially important for the unsecured creditors who are seeing the pot shrink with all the deals being made with bondholders.

Judge Swain denied the UCC’s claim that the GDB restructuring violated the automatic stay. The Court seemed to find that the UCC had standing but—in clear violation of First Circuit precedent (standing goes to the Court’s jurisdiction, hence must be dealt with first)—abandoned the complete discussion on the issue and went to the merits of the claim, essentially dismissing all arguments. The Court determined:

Respectively, these provisions preserve the authority of territories to exercise “political or governmental powers,” 48 U.S.C. § 2163, provide that the provisions of Title III do not prevent holders of claims from consenting to modifications under Title VI, 48 U.S.C. § 2164(i), and prohibit the Court from interfering with Title III debtors’ property and political or governmental powers, 48 U.S.C. § 2165. Here, the Oversight Board, acting pursuant to its powers under PROMESA (which include review of Commonwealth legislation, certification of Title VI restructurings, and representation of the Title III debtors), has consented, by virtue of its certification of the Restructuring Support Agreement, to the GDB Restructuring. The Commonwealth’s legislature considered and enacted the GDB Restructuring Act, which creates new entities, authorizes asset transfers, and curtails certain causes of action of the Commonwealth and the instrumentality debtors. The GDB Restructuring, although subject to Court approval, is a vehicle to effectuate a transaction by, not against, the Debtors and is not subject to the strictures of the automatic stay. Thus, the Committee’s argument that Section 362(a) precludes the GDB Restructuring absent relief from the automatic stay fails on its merits.

The Judge also dispatched what I thought was the UCC’s strongest argument:

The Committee’s argument that the debtor-representation responsibilities that Congress placed on the Oversight Board create conflicts of interest, and that historical ties of the Oversight Board members, and other personnel involved with the restructuring, with certain institutions exacerbate such conflicts, is immaterial to the issue of the statutory reach of the automatic stay and thus will not be further addressed here.

Clearly the Court is not saying it will not consider these arguments in the GDB restructuring case, which is not part of the Title III proceedings, but it does not abode well for the argument. The issue of standing is crucial to the UCC since both the Board and the GDB have filed motions to dismiss its adversary proceedings essentially based on the issue of standing. I would not be surprised if Judge Swain denies the UCC standing, which would also doom its objection to the GDB restructuring, since it relies heavily on the Board’s real conflicts of interest.

Other creditors have filed objections to the GDB restructuring. The Rafael Hernández Colón and Sila Calderón foundations filed objections claiming that the GDB has money assigned to them. Also, two sureties, Fidelity and Deposit Company of Maryland and Zurich American Insurance Company filed objections stating that their claims are ignored in the Qualifying Modification and they will not be resolved in this manner. No idea what the Court will do with that.

In addition, National Public Finance Guarantee Corporation, Ambac Assurance Corporation, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., requested leave to file their objections by September 25, 2018. It is even possible they are negotiating with the Board to get some change to the Qualifying Modification. We will know more on during the October 3 Hearing.

These objections are important for the Board so it notified the Court about the GDB bondholders’ votes:

Eligible Voters of over 74.8% of the aggregate principal amount of the Participating Bond Claims in the GDB Bond Claims Pool voted, and that, of those that voted in such pool, over 97.4% of the Participating Bond Claims voted to approve the Qualifying Modification, reflecting over 72.9% of the aggregate principal amount. In addition, 100% of the aggregate principal amount of the Participating Bond Claims in the Guaranteed Bond Claims Pool voted to approve the Qualifying Modification.

In the Commonwealth case, both AAFAF and the Board opposed the UCC’s request to be given derivative standing to represent all Title III debtors in the GDB restructuring based on the clear conflicts of interest they have. This will also be discussed on October 3, but I doubt Judge Swain will disqualify the Board on this issue.

Also of great importance is the announcement by the Board of an Amended COFINA Plan Support Agreement. The Amended agreement includes the Puerto Rico Government, COFINA, the monoline insurers, Senior and Junior ad hoc groups, Bonistas del Patio, Aurelius Capital Master Ltd and Six PRC Investments, LLC.—both  holders of GO bonds. Hence, the COFINA deal has the blessing of the GO bondholders, which means they are either willing to take cuts on their bonds or the Board has made them an offer they can’t refuse. This idea is bolstered by the fact that Aurelius and Six will dismiss their claims in the Lex Claims litigation. Finally, Seniors retain their 93% payment and Juniors 56.399%. Also, all the parties to the settlement agree that even if the Aurelius Constitutional challenge to the Board appointment is successful, this agreement will be valid.

Since COFINA makes up about 24% of the debt, this settlement is of great importance to the Board and AAFAF. Unless the Junior bondholders object to the distribution, the only thing that could prevent its approval is the warning of the UCC that the numbers in the June Commonwealth Fiscal Plan are not enough to pay COFINA. Since the Board will certify a new Fiscal Plan by September 30, it is possible that even that objection may be withdrawn.

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 – September 17, 2018

Welcome to your weekly Title III update for September 17, 2018. Very little happened this week.

On Wednesday, September 13, Judge Swain held the Omnibus hearing. Apart from reports by the Board and AAFAF, the hearing focused on the UCC”s motion asking for a declaration that the GDB agreement and settlement law violated the automatic stay.

The Board began by announcing that the settlement in the Title III of the Commonwealth and the Disclosure statement for COFINA would be filed on or before October 15, and that it expected to wind up the Plan of Adjustment by December 2018. Ambitious timetable indeed.

The Board also mentioned that on Tuesday, September 18, there would be a discussion on the Investigator’s report. The Board mentioned that it will be concentrating on the causes of action that will bring value to the bankruptcy, rather than prioritizing one debtor over another. Judge Swain brought up the issue of recommendations for criminal prosecution, which the Board picked up, although obviously the federal and local Department of Justices can deal with this. The Judge also wanted to know if the Board knew more than the Kobre report states. The answer was not clear.

As to Investigator’s report, I must advise that the Board has invited me to be part of a panel to discuss the policy recommendations of the Report. I accepted and will then report what happened.

As to PREPA, the Board reported that it does not need any new financing and it continues to discuss a settlement with its insured bondholders. The Board also informed there was significant interest in the purchase of generation and that the P3 agency had retained counsel (that’s all we need, more ultra-expensive U.S. counsel).

The Board boasted that with the agreements to date, it was close to restructuring 40% of the bond debt (COFINA $17.6, PREPA $8.3 and GDB $4 billion). Mr. Bienestock then intimated that the Board was discussing a settlement with the GO’s and that their value was $18 billion plus $5 billion extra for pledges (presumably PBA bonds). Not only is this a significantly larger amount than originally thought, but if the Board gets to an agreement similar to the previous one, that would mean $53 billion of the $72 billion in bond debt. If done this year and all else goes according to plan, the Title III cases could be wound up by 2020. Not bad,

The UCC renewed their fear that the COFINA deal cannot go through with the present Commonwealth Fiscal Plan. AAFAF, Bettina Whyte, and the Senior COFINA bondholders, however, countered saying the agreement was not based on any of the fiscal plans. More on this latter. The Retiree’s Committee joined in and said COFINA was now unaffordable and if it goes through, there will not be enough money to fund services and pensions.

The Board reported that the Commonwealth, COFINA, and UPR Fiscal Plans would be done by the end of the month and the remaining plans would be done by October. I assume we will know more on the Committee’s objections at that time.

AAFAF reported that the GDB deal was voted by 70% of those eligible and that 95% were in agreement. Also, it reported that 26 of the 30 municipalities with excess CAE were on board with the deal.

Judge Swain informed AAFAF that it wanted to know exactly what she has been asked to approve and what she was not been asked to approve.

Mr. Bienestock stated that the Board believed that the GDB agreement was a good thing for the Title III debtor, the Municipalities, and the GDB and that the restructuring was consistent with PROMESA.

When it came to the UCC to argue its objections, one thing was clear: Judge Swain is not buying. From her questions she is not sure the UCC has standing to object to the agreement and she believes that the Government of Puerto Rico can decide to give all the releases and accept the settlements—especially when the Board agrees. It is likely Judge Swain will deny the UCC any standing, which will also mean the dismissal of its Adversary Proceeding to stop the GDB deal. If this happens, it is more likely than not that the UCC will appeal. More uncertainty.

Finally, Minority Leader Pelosi said last week that the decision of selling PREPA should be left to Puerto Rico, which I am afraid will mean no sale at all. Wonder what Mr. Walker at the DOE thinks about this.

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 – September 10, 2018

Welcome to your weekly Title III update for September 10, 2018. Important things came about in the case, almost all related to the UCC.

The UCC came out swinging in its reply to the Board and AAFAF’s opposition to their stay motion. It argued:

As discussed below, the GDB Restructuring does not involve the exercise of the “governmental and political powers” reserved to the Commonwealth under section 303 or protected from Court interference under section 305. Moreover, it is impossible for an order enforcing the automatic stay to “interfere” within the meaning of section 305 of PROMESA because such an order merely recognizes the application of a stay that is already in force, having arisen either “automatically” by act of Congress or consensually by prior order of this Court (in the case of the Stay Order).

The Oversight Board’s remaining arguments also fail. Contrary to the Oversight Board’s assertion that the Title III Debtors consented to the GDB Restructuring, the Title III Debtors cannot consent to annul the automatic stay. Further, the Oversight Board’s assertion that the Title III Debtors lack net claims against GDB is irrelevant, unsupported, and shows only that the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the Title III Debtors. . .

Debtors cannot consent to annul the automatic stay. Further, the Oversight Board’s assertion that the Title III Debtors lack net claims against GDB is irrelevant, unsupported, and shows only that the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the Title III Debtors. (Bold added)

The motion does not stop there. It claims:

More fundamentally, the actions taken by GDB pursuant to the GDB Restructuring consist of more than just the use, sale, or lease of property as described in section 363; they are actions specifically designed to enforce the GDB’s claims against the Title III Debtors and to disallow the claims of the Title III Debtors against the GDB, including by handing out releases to the GDB Releasees.

At the end of the motion, the UCC further abounds on the issue of the Oversight Board’s fiduciary duty:

Indeed, the Oversight Board’s premature conclusion that the Title III Debtors have no net claims against the GDB is profoundly troubling given the Oversight Board’s role in the Title III cases. The Oversight Board is the Title III Debtors’ trustee and representative, a fiduciary charged with maximizing the Title III Debtors’ assets. Yet, without any analysis, it is eager to abandon potential claims against GDB in order to facilitate the GDB Restructuring.

This is particularly troubling given that the Oversight Board’s own investigator has produced a report that discusses, among other things, how GDB officials directed the Commonwealth to borrow additional debt even as they were plotting for a restructuring by hiring restructuring counsel and restructuring financial advisors before the issuance of the $3.5 billion GO bond offering in March 2014 (which they failed to disclose to the general market). These same GDB officials controlled the 2014 GO offering, as they did for all of the Puerto Rico bond offerings, utilizing proceeds of such offering to repay the GDB, so that GDB and its directors and officers would be off the hook from any liability—all of this at a time when both the Commonwealth and the GDB appeared to be at least undercapitalized, if not insolvent.

Want more? At footnote 68, the UCC says:

The Oversight Board has argued elsewhere that section 315(b) of PROMESA simply makes the Oversight Board the representative of the Debtor in a title III but does not make the Oversight Board a fiduciary. See Motion of the Financial Oversight and Management Board for Puerto Rico to Dismiss Plaintiffs’ First Amended Adversary Complaint Pursuant to Fed R. Civ. P. 12(B)(1) and 12(B)(6), at 30 n. 15, Pinto Lugo v. United States [Docket No. 36 in Adv Proc. No. 18-041-LTS]. The Supreme Court has recognized that a “trustee for a debtor out of possession” owes fiduciary obligations to creditors and shareholders.

This motion is not all the news. The UCC also filed an Informative Motion Regarding the Investigator’s Final Report, essentially saying the investigator’s work is not up to par. At the conclusion, the UCC states:

The Committee wishes to reiterate that it is not dismissive of the work performed by the Investigator. Moreover, the Committee continues to study the Final Report, and, while attempting to minimize costs, will likely file another motion (or amend the Committee’s prior Rule 2004 Motion) to the extent necessary to do so to cover areas of inquiry that were either completely ignored or partially covered by the Final Report. However, the Committee makes this filing only to highlight for the Court and the various parties that the Final Report is not the end of the matter, that its findings remain subject to question, and that—as the Final Report acknowledges—much more work remains necessary to obtain full transparency in these Title III cases.

On Thursday, September 6, 2018, the UCC filed an adversary proceeding against the Commonwealth, AAFAF, the GDB and the Board seeking to stop the bank’s Title VI proceeding. The complaint states:

As a result of the fiscal crisis, GDB was operationally wound down and ceased operations more than a year ago, but former GDB insiders remain involved in all aspects of Puerto Rico’s restructuring efforts. Indeed, current and former GDB insiders are now (i) members of the Oversight and Management Board for Puerto Rico (the “Oversight Board”), (ii) officers of the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”), (iii) managing directors of AAFAF’s financial advisor, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called “Bonistas Del Patio”).

These individuals would prefer that this Court “bury” GDB before the Committee and other interested parties have the opportunity to perform the autopsy. To that end, they are attempting to do what PROMESA does not allow—restructure all of GDB’s debts and liquidate all of its assets outside of Title III pursuant to a “home-baked” chapter 7 equivalent known as the Government Development Bank of Puerto Rico Debt Restructuring Act (the “GDB Restructuring Act”), which was enacted specifically to effectuate the restructuring of GDB and all related transactions (collectively, the “GDB Restructuring”).

The complaint’s requests for relief are:

  • On the First Cause of Action, declaring that the GDB Restructuring Act is invalid and unenforceable because it amounts to a de facto bankruptcy law that is inconsistent with Title III of PROMESA;
  • On the Second Cause of Action, declaring that the GDB Restructuring Act is inconsistent with Section 601(m)(2) of PROMESA and therefore preempted pursuant to Section 4 of PROMESA insofar as it purports to release rights and claims of the Title III Debtors unrelated to any Bond affected by the purported Qualifying Modification, including any claims against the GDB Releasees;
  • On the Third Cause of Action, declaring that the GDB Restructuring Act is inconsistent with the automatic stay and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it purports to release the Title III Debtors’ rights and claims against the GDB Releasees;
  • On the Fourth Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it would deprive creditors of the Title III Debtors of their right under Section 926(a) of Bankruptcy Code to seek appointment of a trustee to pursue Avoidance Claims;
  • On the Fifth Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA Section 601(n)(2) and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it purports to deprive the Title III Debtors of standing they would otherwise have under PROMESA to challenge the unlawful application of Title VI;
  • On the Sixth Cause of Action, declaring that the GDB Restructuring Act is invalid and unenforceable insofar it purports to deprive the Title III Debtors of standing they would otherwise have in federal court;
  • On the Seventh Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA and therefore invalid and unenforceable in accordance with Section 4 of PROMESA because a core purpose of the GDB Restructuring is to ensure compliance with a Fiscal Plan that is not in compliance with PROMESA Section 201(b)(1)(M).
  • On the Eighth Cause of Action, that the GDB Restructuring Act is invalid and unenforceable insofar as it violates Section 303 of PROMESA;

As if this were not enough, the UCC filed a motion to be appointed the representative of the Title III debtors, claiming, with good reason, conflicts of interest in AAFAF, the Board, the GDB and GDB Bondholders (i.e. Bonistas del Patio). The UCC requests from the Court the following:

This Court should exercise its broad equitable powers and grant the Committee derivative standing to act on behalf of the Title III Debtors with respect to the GDB Restructuring for the limited purpose of maintaining the status quo and preserving their rights and claims. This Court should also confirm that, in addition to having derivative standing to act on behalf of the Title III Debtors, the Committee separately has the ability to appear in the Title VI case for the limited purpose of arguing that it has direct standing to be heard in that case on behalf of the Title III Debtors’ unsecured creditors.

The motion minces no words in describing the different conflicts of interest involved in the GDB restructuring:

GDB and AAFAF share the same officers, several of whom were GDB officers prior to the creation of AAFAF in 2016. GDB and AAFAF also share the same counsel, and the same financial and restructuring advisor.

Among the financial advisor personnel advising GDB and AAFAF are (i) a senior managing director who was president of GDB from 2011 to 2012 and Senior Vice President and Director of Investment Banking at Santander Securities Corporation, which advised GDB on numerous government debt offerings, and (ii) a senior managing director who was Executive Vice President-Financing and Treasury of GDB from 2009 to 2011 and then CEO and vice chairman of Santander Securities LLC. The financial advisor engagement team also includes a managing director who served as a senior vice president and special advisor to the president of GDB from 2013 to 2016. All would get a release for their prior GDB role pursuant to the GDB Restructuring.

Furthermore, at the time the GDB Restructuring was being orchestrated, the executive director of AAFAF was a former vice president of investment banking at Santander Securities LLC, which acted as an underwriter in numerous Puerto Rico debt offerings, all of which were controlled by GDB.

The Oversight Board, which certified the relevant terms of the RSA as a “Qualifying Modification,” is also conflicted, as is its counsel. The Oversight Board is conflicted because two of its members are former GDB presidents (who both would get a release pursuant to the GDB Restructuring) and because it is the statutory representative of the Title III Debtors. And counsel to the Oversight Board was engaged by GDB starting in January 2014 “to provide specialized legal services with respect to the evaluation of potential liability management transactions as may be requested by the [GDB].” These “liability management transactions” (i.e., restructuring and/or bankruptcy services) included drafting the Puerto Rico Corporation Debt Enforcement and Recovery Act30—the Commonwealth bankruptcy statute that was ultimately struck down by the U.S. Supreme Court. Such engagement, which was signed prior to the Commonwealth’s $3.5 billion general obligation bond offering in 2014, was never disclosed to the general market.

Even the GDB Bondholders that are signatories of the RSA are tainted by conflict. The executive director of Bonistas del Patio (the bondholder advocacy group that represented bondholders in the restructuring negotiations) was president of GDB from 2007 to 2008, and therefore would be getting a release pursuant to the GDB Restructuring. He was also an executive director at Morgan Stanley, which played an instrumental role several Puerto Rico bond offerings with which he was directly involved. Moreover, the board of directors of the Corporacion Publica para Supervision y Seguro de Cooperativas (“COSSEC”), which regulates and supervises the Cooperatives, authorized and encouraged them to buy GDB bonds in 2009 and then authorized them to buy more in 2012. COSSEC’s board of directors includes representatives of GDB and previously included two of the former GDB officers who have been advising GDB and AAFAF as financial advisors.

If the purported Qualifying Modification is approved, the very people who orchestrated the GDB Restructuring will have succeeded in releasing themselves, GDB, and others of any liability to the Title III Debtors relating to GDB’s role in Puerto Rico’s financial crisis, including any liability based on “unknown” facts. (Bold in the original)

Finally, the UCC and Bettina Whyte filed a motion requesting an extension until October 3 for holding in abeyance any motions on their case on COFINA. The UCC mentions its motion where it states that the numbers in the Commonwealth Fiscal Plan cannot cover COFINA payments. However,given that a new Fiscal Plan will be certified in September, it is willing to wait. The question is what happens if the new Fiscal Plan does not pass the UCC’s muster?

Paraphrasing Walter Donovan in Indiana Jones and the Last Crusade, “the UCC has declared war on AAFAF and the Board.” I don’t know what Judge Swain will think or do about these motions but they are important and the factual allegations are well supported.

We will probably know more on September 13 during the Omnibus hearing—although I am sure Judge Swain will want a full briefing before the oral arguments, which may delay the Title VI procedure. During the hearing, Judge Swain will hear arguments on the UCC’s motion on the stay request on the Title VI, which is opposed both by AAFAF and the Board. Her decision may give us some idea of which way she leans, or not. Stay tuned.

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 – September 4, 2018

Welcome to your weekly Title III update for September 4, 2018. Important things came about inside and outside the cases.

I will start with the cases before the First Circuit Court of Appeals. In case 18-1214, where Congressman Bishop filed a brief of amicus curiae, Congressman Grijalva and Congresswoman Velázquez filed their own brief of amicus curiae, essentially denying all of Chairman Bishop’s statements and saying that Congress wanted Puerto Rico to file for Title III. Sounds as if the brief had been written by Antonio Weiss of the Obama Treasury. Oh, well.

Previously, I had mentioned an oral argument in the Aurelius case for September 10, but I was mistaken. There is no date for the oral argument, but Aurelius filed its brief that the Board has until September 21 to file its own and October 5 for a reply. The Court is not inclined to give extensions. I assume oral argument will be sometime in October/November and a decision by December/January, which gives time for a writ of certiorari to the Supreme Court and a decision by June 30, 2019. Or not. We shall see what happens.

Speaking of the Aurelius case, the Popular Democratic Party filed a brief of amicus curiae in that case arguing that Judge Swain’s opinion is incorrect inasmuch as “Congress renounced the power to annul the laws of Puerto Rico (brief at page 12).” This is nothing more than the old Luis Muñoz Marín theory of the ELA as a consensual pact that cannot be changed unilaterally, discredited by PROMESA. The PDP did not ask to intervene in the Aurelius case nor filed this brief there. It is hoping against hope for some favorable statement by the First Circuit (or the SCOTUS) in favor of its theory. The problem with the theory is that if Congress cannot annul the laws of Puerto Rico, then Title I and Title II of PROMESA are invalid and then pursuant to section 3(a) of PROMESA, Title III would be deemed invalid. Small problem. In any event, this is simply another intrusion of the Byzantine party politics of Puerto Rico in a case.

In response to the UCC’s motion as to the GDB brought reaction from both AAFAF and the Board. Both motions are very similar and claim that the UCC cannot challenge the Governmental and Political Judgments about the use of their property, specifying that (1) The Title III debtors do not have a net positive claim against the GDB, (2) That the UCC does have not authority to Object to the GDB restructuring,  (3) That the UCC lacks standing; (4) That the automatic stay does not apply to the Title VI case; and (5) That sections 303 and 305 of PROMESA protects the Title VI restructuring. The Board, at page 10-11 of its brief states:

The UCC does not represent GDB creditors because GDB is not a Title III debtor. To attempt to get a seat in the GDB Title VI case, the UCC contends the GDB restructuring eliminates the Debtors’ claims against GDB and its current and former insiders. Motion ¶ 19. As shown above, the Debtors do not have net positive claims against GDB in the first place. But even if they did, it is beyond credulity that the Commonwealth, HTA, and PREPA can have meritorious claims against the governmental entity that loaned them money and kept them afloat at the request of the Puerto Rico government. But, even if they do, in the absence of the applicability of Bankruptcy Code § 363, and in light of PROMESA § 303’s protection of governmental and political powers over GDB’s assets and revenues, the Commonwealth and other Title III debtors are entitled to use their property to facilitate repayment of bondholders in their discretion. (Bold added)

Therein lies the conundrum. Two members of the Board are former Presidents of the GDB and one of them issued large amounts of COFINA debt, which is still outstanding. And they both worked at Santander Securities who helped to issue said bonds. If they violated any fiduciary duty, it would be unseemly for the Board to pursue this theory or allow for it to be pursued. Hence, it wants to shut down any possibility of a cause of action by the Government against the GDB, even if the Kobre and Kim report intimates that the GDB acted negligently.

Separate from the UCC objections and AAFAF and the Board’s opposition to said objections, last week the Municipality of San Juan filed a notice of intent to object to the GDB restructuring. In the objection, the Municipality states:

First, San Juan enjoys a lien over the monies held in trust by GDB pursuant to P.R. Act 64-1996 and the Trust Agreement between San Juan and GDB, yet San Juan is not being provided a separate voting pool, as required by PROMESA. See San Juan v. GDB, et al., Case No. 3:17-cv-2009-LTS-JGD (D. PR.), ECF No. 109, at 38-39.

Second, while PROMESA provides the sole and exclusive means for the GDB to effectuate a restructuring of its assets and liabilities, the GDB is nonetheless relying upon P.R. Act 109-2017, as amended, to effectuate a restructuring of San Juan’s Excess CAE trust funds.

This brings us to another mystery. The Board in its opposition included a GDB RSA of over 130 pages but the Municipality of San Juan’s motion makes reference to a 42 page RSA. Which is the correct one? Only the Board knows.

Talking about RSA’s, the one for COFINA is out and it is well over 100 pages. The agreement includes the Board, COFINA, AAFAF, Senior COFINA holders of bond claims, Ambac, National, Junior COFINA holders of bond claims, Assured and Bonistas del Patio.  With AAFAF involved, it means that the Commonwealth is in agreement. The document also mentions that it is the result of participating in the mediation process. “In the event that any disputes arise in connection with the preparation of the Plan and Disclosure Statement, each of the Parties consent to such matters being referred to mediation for the resolution thereof; provided, however, that no Party is limited to having any such dispute finally determined by mediation.” In other words, mediate first and if you don’t like the result, then go to Judge Swain.

The RSA states that the Disclosure statement (required by the Plan of Adjustment) in COFINA and the settlement documents in the Commonwealth Title III case will be filed on or before October 15, 2018, which means that by early 2019 the Plan of Adjustment may be approved.

As to the Covenants (duties) of Bonistas del Patio, a local group purportedly representing only locals, must:

Bonistas shall (i) actively encourage support by “on island” bondholders for the agreement set forth in the Term Sheet, (ii) post a statement of support for the Term Sheet and the Plan on the Bonistas’ website, (iii) make Bonistas available to “on island,’ bondholders to answer questions regarding the Term Sheet, the Plan, Disclosure Statement, Confirmation Order and other Definitive Documents, and (iv) support legislation that may be necessary or appropriate to implement the transactions contemplated by the Term Sheet.

Those parties who are part of the Aurelius challenge may continue in the case but:

hereby covenants and agrees that, no matter the determination and the entry of a Final Order in connection with the Appointments Related Litigation, with such determination and Final Order being entered either prior to consideration of approval of the Settlement Motion or confirmation of the Plan by the Title ITI Court or subsequent to entry of an order approving the Settlement Motion and confirmation of the Plan, such Party (i) shall not urge or argue that such determination and Final Order reverses, affects, or otherwise modifies the transactions contemplated herein, in the Term Sheet, in the Settlement Motion and in the Plan and (ii) in the event that such determination and Pinal Order (y) occurs prior to approval of the Settlement Motion and confirmation of the Plan and (z) causes or requires the reconstitution or reappointment of the Oversight Board, such Patty shall urge and request that such reconstituted or reappointed board ratify the terms and conditions of this Agreement and the Term Sheet and promptly seek approval of the Settlement Motion and confirmation of the Plan by the Title III Court.

Pursuant to section 7.5, the agreement is governed by New York law, and jurisdiction is set for the Title III Court. This agreement is throughout the GDB, COFINA and PREPA agreements. In other words, these agreements are far removed from Puerto Rico’s legal institutions. Guess that is what happens when you hire New York law firms. As part of the agreement:

The Commonwealth-COFINA Dispute shall be compromised and settled pursuant to the Settlement Motion in the Commonwealth PROMESA Proceeding, on the one hand, and pursuant to the COFINA Plan of Adjustment, as defined below, on the other hand, with (i) COFINA being granted an ownership interest of the COFINA Portion, as defined below, and (ii) the Commonwealth being granted an ownership interest of the Commonwealth Portion (Underlining added)

In addition, in a section entitled COFINA Plan of Adjustment, it is further clarified:

Contemporaneously with the filing of the Settlement Motion, the Oversight Board, on behalf of COFlNA, will file the COFINA Plan of Adjustment and disclosure statement related thereto. The COFINA Plan of Adjustment shall provide, among other things, (i) that, as of the COFINA Effective Date, COFINA will be the sole and exclusive owner of the present and future revenues and collections generated by the five and one-half percent (5.5%) of the sales and use taxes imposed by the Commonwealth (the “COFlNA Pledged Taxes”) up to the COFINA Portion (Underlining added)

What is important is that the Commonwealth surrenders its claim that its power to tax cannot be surrendered as per Article VI, section 2 of the Puerto Rico Constitution. One can argue that the Puerto Rico Constitution is not applicable as per the agreement but this does not apply to non-parties. In addition, what would prevent future governments from claiming that the agreement is contrary to the PR Constitution and therefore null ab initio? We must remember that section 314(b)(3) requires that “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” If the plan requires the surrender of the taxing power, is that legal? We must remember that the UCC in the COFINA litigation claimed that the taxing power could not be surrendered as per the Constitution. Who is right? Questions, questions.

Although originally all of the money deposited with New York Mellon bank up until July 1, 2018 was to be distributed to COFINA, now $78,355,837.63 will be distributed otherwise, with $33,355,837.63 going to the Commonwealth. Complicated.

The breakdown of the settlement is that Senior COFINA bondholders will receive 93% of their bond (although some analyst state this could be as high as 96%) and Junior COFINA bondholders will receive 53.399%. A very good deal for COFINA seniors and not so good deal for COFINA Juniors, originally purchased by local elites.

The Plan of Adjustment for COFINA will have the following classes (although the Board reserved the right to alter this):

Class 1: Senior COFINA Bond Claims

Class 2: Senior COPINA Bond Claims (Ambac Insured)

Class 3: Senior COFINA Bond Claims (National Insured)

Class 4: Senior COFINA Bond Claims (Taxable Election)

Class 5: Junior COFINA Bond Claims

Class 6: Junior COFINA Bond Claims (Assured Insured)

Class 7: Junior COFINA Bond Claims (Taxable Election)

Class 8: GS Derivative Claim

Class 9: General Unsecured Claims

Interestingly, Class 9 will not “receive a distribution pursuant to the COFINA Plan of Adjustment; provided, however, that, notwithstanding the foregoing, in the event that Class 9 votes to accept the COFINA Plan of Adjustment, each holder of a COFINA General Unsecured Claim shall be entitled to receive its pro rata share of One Hundred Thousand Dollars.” Since the Plan of Adjustment must be approved by all classes, does the Board actually want this class to say no, so it can force a cramdown via section 314(c)?

Bonds to be paid by the insurers have different rules so it is important to review this carefully. In addition, the agreement calls for actions by the Legislature:

Legislation and Documentation: On or prior to the COFINA Effective Date, legislation shall be enacted to amend (or repeal and replace) the existing COFINA legislation to, among other things, (i) establish the independent COFINA board of directors referred to in Section II (L) above, (ii) permit the sales and use tax, tax exemption, substitution of collateral and non-impairment provisions referred to herein and ( iii) grant such other authorizations, if any, which may be required to implement the transactions contemplated herein, including, without limitation, (a) a determination that COFINA is the owner of the COFINA Portion under applicable law, (b) a grant of a statutory lien on the COFlNA Portion to secure the payment obligations with respect to the COFINA Bonds and COFINA Parity Bonds, in whole or in part, or otherwise in accordance with the ABT, (c) enhanced financial reporting, (d) events of default and imposition of certain measures upon an event of default (e) submission to the jurisdiction of the Title Ill Court, and (f) other customary terms, conditions, and covenants for similarly structured and supported municipal bonds that are acceptable to the PSA Parties. To the extent applicable, the foregoing terms and such other terms as may be agreed upon shall be included in the new bond resolution authorized by COFINA. (Underlining added)

With the clear war that Senate President has waged with Governor Rosselló, will he dare to say no to surrendering the Constitutional power over COFINA taxes? Will the Legislature continue to defy the Board? No idea at this time.

Nor do we have an idea at this time if the General Obligation bondholders will object to this agreement. They filed motions for summary judgment in the COFINA litigation and the stay on the determination of all motions in the case is fast approaching. Will the creation of a new GO group, allegedly more willing to compromise according to the Wall Street Journal, change the dynamics of this deal? The GO’s blocking of the COFINA deal will depend on whether they are offered a similar or better deal. If they don’t block the COFINA deal, they will lose much of their bargaining power to get a similar or better settlement. We shall soon find out.

In other news, the Board informed the Commonwealth that its new fiscal plan is also non-compliant. It requires the Commonwealth to provide more information how Act 154 revenues increment in $5.9 billion; a reduction in payroll expenditures (possible firings as per Ms. Jaresko’s statements to the press?); either eliminate the Christmas bonus or increase savings somewhere else (and Mr. Carrión has made it clear that the Commonwealth cannot take money from one part of the budget to pay this without Board consent), reflect payments to PREPA, and payroll freeze language should eliminate “if continued.”

Moreover, the Boards position on pensions remains (10% reduction to be implemented in 2019) and the Commonwealth is informed that its plan “cannot budget to pay Social Security contribution costs of its employees; rather, the budget only provides for the employer contributions.” Finally, the numerous references to the need for statehood must be eliminated. Although I am a staunch statehood-er, I concur with this assessment.

The Board also noticed the Commonwealth that the UPR fiscal plan was deficient. It wants increases to the graduate students tuition and exemptions to tuition. In addition, the Board warns on the need of elimination of positions being vacated, saying “[f]ailure to achieve savings required in the June Certified Fiscal Plan through voluntary attrition may require intentional headcount reduction.” OUCH! Finally, the UPR is given the same warnings on Christmas bonuses and pensions.

Last week the Southern States Energy Board made an announcement “Strategizing an Electric Energy Policy & Regulatory Framework in Puerto Rico” as to its role in Puerto Rico and also announced the membership of its “Blue Ribbon Task Force—a force with the assignment to make recommendations regarding the functions of a Puerto Rico regulatory agency with responsibilities for ensuring a safe, reliable, and resilient electric grid that provides a strategic energy plan for the future.” Although Bruce Walker had said that the SSEB was in charge of the development of a policy and legal framework to provide a regulatory regime for a potential privatization of the PREPA electric system, now it seems that is not the case. In the Frequently Asked Questions of the website, it states:

Does SSEB have a role in the reformation and privatization of PREPA and its regulation?

No. SSEB is not an advisor in efforts to reform and privatize PREPA. SSEB will not be making or influencing decisions related to PREPA’s privatization or how it is ultimately regulated. That decision resides with the Government of Puerto Rico. However, SSEB will examine the current state of the privatization effort to inform the drafting of appropriate regulatory models for consideration by the Government of Puerto Rico.

This is extremely confusing. The website confirms that the Department of Energy is funding this effort and my recollection is that Mr. Walker of the DOE stated that it was giving the SSEB $1.3 million to deal with the sale. If now it is not dealing with it but will only examine the effort, what is the money for? Is the DOE aware and in agreement with this? In any event, this seems to make any idea of DOE involvement with PREPA nothing more than wishful thinking on our part.

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 – August 27, 2018

Welcome to your weekly Title III update for August 27, 2018. Important things came about inside and outside the case.

Unbeknownst to most of us, the GDB and AAFAF filed case, 18-1561, on August 10, 2018 for the approval of its RSA on the agency’s debts. The case was not filed in the PROMESA docket but rather in the Puerto Rico Federal District Court and was assigned to Judge Swain. What is surprising is the number of entities that notified the Court their intention of objecting to the agreement. The Federal Government, Siemens Transportation, Fundación Biblioteca Rafael Hernández Colón, Bank of New York Mellon, Fidelity & Deposit Co. of Maryland, Zurich American Insurance Company, National Public Finance Guarantee Corporations, Adsuar, Muñoz, Goyco, Seda & Pérez-Ochoa and the Unsecured Creditors Committee, all filed a notice of intent to object to the agreement. In addition, Ambac reserved its rights to file a notice as well.

The UCC took it up a notch and filed in the Commonwealth Title III case an Urgent Motion Of Official Committee Of Unsecured Creditors, Pursuant To Bankruptcy Code Sections 105(A) And 362, For Entry Of Order Enforcing Automatic Stay And Court’s June 29, 2017 Order Confirming Application Of Automatic Stay With Respect To GDB Restructuring.” In this motion, the UCC argues, with good reason, the following:

Indeed, current and former GDB insiders are now (i) board members of the Oversight Board, (ii) officers of AAFAF, (iii) managing directors of AAFAF’s financial advisor, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called “Bonistas Del Patio”)

These individuals would prefer that this Court “bury” GDB before the Committee and other interested parties have the opportunity to perform the autopsy. To that end, GDB commenced a judicial proceeding that is premised on multiple violations of the Title III automatic stay. That judicial proceeding – the GDB Restructuring – proposes, among other things, to (a) offset the public funds deposited with GDB by the Title III Debtors against GDB’s alleged outstanding loans to the Title III Debtors, (b) transfer all of the valuable assets at GDB (much of which consists of deposits of public funds held in trust or in a fiduciary capacity) to the Recovery Authority (as defined below) for the exclusive benefit of GDB’s bondholders, (c) release GDB and its current and former directors, officers and other representatives from any claims that could be brought against them by the Title III Debtors, and (d) burden the Commonwealth with the obligation to repay hundreds of millions of dollars on account of federal funds deposited with GDB.

The UCC believes the Title III debtors may have causes of action against the GDB and that other third parties may have claims against it as well. Moreover, the Kobre report seems to support this idea. In essence, the motion requests:

[T]he entry of the Proposed Order, substantially in the form attached hereto, pursuant to sections 105(a) and 362(a), enforcing the automatic stay against GDB and AAFAF by declaring that (a) the GDB Restructuring violates the automatic stay under section 362 of the Bankruptcy Code and the Stay Order, (b) any limitations on claims that have been or may be asserted by the Title III Debtors against GDB or related third-parties are void, and (c) any transfer or “shielding” of assets pursuant to the GDB Restructuring that could have been used, prior to the implementation of the GDB Restructuring, to satisfy claims of the Title III Debtors by GDB, is void.

Given that so many parties have notified their intent to object to the Title VI agreement, including the UCC and the Federal Government, the hearing may not be on November 7 after all. If this Title VI agreement does not garner sufficient votes or if the Court were to agree with some of the objections, the GDB may join other Title III agencies. Hard to tell at this stage. In any event, the UCC, in concurrence with AAFAF and the Board, asked for an order that any objections be filed by August 29 and reply by September 6. This would leave the issue ripe for adjudication during the September 13 Omnibus.

On Monday, the Board presented the Independent Investigator’s Final Investigative Report, consisting only of 608 pages. Coincidently, I was trying a case last week that ended in a favorable jury verdict for my clients on Thursday. Coincidently, the trial was a fraud claim against a pair of swindlers involving several contracts. On Friday, I read the Executive Summary and the 97 page “Overview of Potential Causes of Action,” many having to do with the claim of fraud. Aside from the fact that this report says everything went wrong but no one is at fault, I was appalled at the incorrect statements of the law in the report. For example, at page 494 of the Report, it states, “Both Puerto Rico and New York impose statutes of limitation on intentional fraud and misrepresentation claims. In Puerto Rico, the applicable statute of limitations is one year from when the plaintiff becomes aware of the injury and the party that caused it.” Footnote 117 states, “Ocaso, S.A., Compania De Seguros Y Reaseguros v. Puerto Rico Mar. Shipping Auth., 915 F. Supp. 1244, 1258 (D.P.R. 1996) (statute of limitations for fraudulent misrepresentation same as tort—one year).” That, however, is not what the case states. At page 1258, the case states:

All actions which result in injuries arise from two categories of conduct: (1) the failure to abide by a pact or (2) an activity separate from any previous legal relationship between the wrongdoer and the victim. Ricardo de Angel Yágüez, La Responsabilidad Civil 21 (1988). In the first instance, the duty to indemnify arises from another duty, the duty to comply with obligations engendered by a contract which has been infringed upon, that is, a contractual responsibility. Id. at 22. In the second scenario, the obligation to indemnify arises by the mere fact of having caused damages because the wrongdoer has infringed upon the general norms of respect towards others imposed by society, i.e. civil responsibility. Id.

In contract infringement cases a previously existing relationship between the parties is present whereas in torts, the duty to plaintiff commences at the time of the injury. Jaime Santos-Briz, Derecho de Daños 13-14 (1963).

Consonant with this line of reasoning, we conclude that the conduct charged in the FIRST CAUSE OF ACTION of the complaint must fall within the torts ambit since any liability arising from the alleged misrepresentation is not premised on any contractual obligations the contract had not yet materialized but on a general obligation to negotiate in good faith. IV-II José Ramón Vélez Torres, Curso de Derecho Civil 61-67. The obligation to negotiate in good faith is based on a general duty pervading in society whereas objective responsibility is limited to those situations expressly identified in a statute. 64-65.

Moreover, fraud or deceit as the Puerto Rico Civil Code calls it in English, may occur at the onset of the obligation or during the performance of the obligation, see, Pérez Rosa v. Morales Rosado, 172 D.P.R. 216, 229 (2007). Moreover, if we are dealing with bonds, the Puerto Rico Uniform Securities law has a two-year statute of limitations, not one year, nor fifteen years as for other contractual obligations in the Civil Code, see, Olivella Zalduondo v. Seguros de Servicios de Salud de Puerto Rico, Inc., 2013 TSPR 2 and PaineWebber, Inc. v. First Boston, Inc., 136 D.P.R. 541 (1994). Moreover, in cases of malpractice, although there may be a contract between the parties, the statute of limitations is one year, see, Colon v. Geigel, 115 D.P.R. 232 (1984)(legal malpractice).

Although the document clearly says not to rely on its legal assessment, it is obvious the Investigator did not do its job and relied instead on only reading the notes of federal cases, not the actual Puerto Rico Supreme Court cases. In any event, it is to be seen what actions, if any, the Board will take with respect to the report. Finally, at page 27, the Report states:

In keeping with the structure and spirit of the Investigative Subpoenas Resolution, we attempted first to interview all witnesses voluntarily, with the aim of seeking testimony under oath only if voluntary interviews were refused, or if any specific circumstances warranted testimony under oath. Further, in consultation with the Special Investigation Committee, we determined that it would be sufficient for the specific purposes and goals of the investigation, as outlined in PROMESA, for us to formulate our conclusions and recommendations on statements made by witnesses substantiated, wherever possible, by documentary evidence. For those reasons, and because the Independent Investigator conducted a voluntary interview with each individual and entity witness for which an interview was sought, we did not take testimony under oath, nor were the interviews transcribed.

In other words, the Board told the Investigator that if the witnesses came voluntarily, they would not be under oath and therefore they could lie to their hearts content. Moreover, if there is no transcript of the interview, unless they were recorded, it becomes you said/he said. UNBELIEVABLE!

In other news, the Board sent its favorite whipping boy, the Legislature, a letter requiring the following:

 (1) A point of contact for all relevant matters at the Legislative Assembly;

(2) A monthly cash and liquidity report;

(3) A monthly budget to actual report;

(4) A monthly report of employee attendance;

(5) A monthly reconciliation of bank account balances.

Both Thomas Rivera Schatz and Johnny Méndez roared that they would not obey. How dare the Board request that they show their attendance record (which the Board did not require). The Board said it would do everything in its powers to obtain the information. Again a legal confrontation that will be paid by the Puerto Rico taxpayers.

In addition, Mr. Christian Sobrino from AAFAF said the Commonwealth would not provide the information the Board requested on the tax agreements since 2017. Probably another confrontation paid by taxpayers. And, speaking of legal confrontations, the Commonwealth and the Board informed the Court they were close to an agreement which would allow the Commonwealth to dismiss the rest of its case over the Fiscal Plan so there could be a final judgment and it could appeal Judge Swain’s decision. Important that the Board stated it would otherwise oppose any interlocutory appeal.

The Board also sent the Commonwealth a letter requiring that a new Fiscal Plan for COFINA be presented, all in preparation to the possible filing of the corporation’s Plan of Adjustment. Moreover, the Government filed a new Fiscal Plan for the Commonwealth, reducing the amount of money available for debt service, although its share of the SUT will increase. Who understands the Government’s logic?

Finally, the Board recommended to the Commonwealth that it rescind the Executive Order Governor Rosselló issued increasing the minimum wage for workers in the construction industry from $7.25 to $15. Although the Board quoted that the median construction wage in the US was $8.69 and gave the Governor 90-days to answer, he immediately rejected the recommendation. Another legal confrontation that will be paid by the Puerto Rico taxpayers.

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 – August 20, 2018

Welcome to your weekly Title III update for August 20, 2018. Some important things came about inside and outside the case.

Previously, I discussed the UCC motion on the COFINA deal, which has not been answered by the Board as of Sunday, August 19. To that we must add that El Vocero reported on August 18 that due to demographic changes that seem to increase the number of inhabitants in the island, the Board requested that the Commonwealth amend its Fiscal Plan. El Vocero adds that there will be a greater need for medical services and hence less money for debt service. Given the Board’s alleged new deals of around 75% payment of bond debt, it behooves the mind that now these numbers may be reduced because the population will not decrease as much as expected. Constant changes in the Fiscal Plans do not make it credible and will undermine any plan of adjustment based on it. Seesaw on the Fiscal Plan helps no one.

The Board sent the Commonwealth a friendly reminder of the new perceived power schemes. Its letter says:

Pursuant to Section 204(b)(2), the Oversight Board established the rule, regulation, administrative order, and executive order review policy (the “Policy”) to require prior Oversight Board approval of certain rules, regulations, administrative orders, and executive orders proposed to be issued by the Governor (or the head of any department or agency) to assure that they “are not inconsistent with the approved fiscal plan.”

As relevant here, the Policy applies to any proposed rule, regulation, administrative order, or executive order in connection with (i) the establishment, governance, management, or operation of the Office of the CFO, and (ii) rightsizing of the Commonwealth or related to procurement, contracting policy, or employee compensation or benefits. The Policy states that any rule, regulation, administrative order, or executive order must be sent in English before issuance to the Oversight Board at [email protected] with an explanation of how the particular rule, regulation, administrative order, or executive order is consistent with the approved Fiscal Plan.

On August 13, 2018, the Department of Treasury submitted three letters in Spanish on Administrative Orders, without an explanation of how or whether the Administrative Orders were consistent with the applicable Fiscal Plan, that had been issued prior to the date of adoption of the Policy, and which the Oversight Board had not requested to review. Accordingly, no review or approval by the Oversight Board is required at this time. However, going forward, please abide by the Policy, including by submitting any rule, regulation, administrative order, or executive order in English, prior to adoption, and with an explanation of how it is consistent with the applicable Fiscal Plan.

Why the public reminder of what the governor must do? Simply because the governor said he was not going to comply with this “request.” This way, there can be no doubt the Board is bending over backwards to resolve any controversies with the governor in an “amicable” fashion while at the same time, publicly chastising him for not obeying. A very bad situation in my opinion.

The Board also sent the Commonwealth a letter requesting the submission “by the Department of Treasury of all the contracts, whether in the form of Tax Incentive Decrees or otherwise, that confer tax abatement or tax relief on a taxpayer, entered into since July 1, 2017 and henceforth.” As to each contract, the following information, inter alia, has to be provided:

Budget Questions:

a)Are the funds for the contract included in the budget? i) If yes, in which allotment? Please specify (A) the line item(s) in the budget that this contract will be funded from and (B) what other expenses have been committed or planned for that budget item.

b)Does the existing budget fully cover the cost of the contract? If multiple line items, please specify the amount against each budget line. i) If not covered in the budget, which allotments need to be reprogrammed?

c)If the contract extends past the current fiscal year, does the current budget line item include the full cost of the contract or only the portion applicable to the current budget time period? i) If only the portion applicable to the current budget, how much will be funded from the future budget? Are the budget line items the same and are there sufficient funds within those? Please provide supporting evidence.

Fiscal Plan Questions

a)Is the contract consistent with the applicable Fiscal Plan? Please provide some commentary on why or why not.

b)Does the contract constitute separate and additional disaster aid spending?

i)Will the contract be partially or fully federally funded?

  1. ii) RFP information

(1) Name:

(2) Issue date:

(3) Due date:

(4) Award date:

(5) Applicable RFP rules and regulations:

(6) Amendments (Yes or No):

(7) Description of efforts undertaken to advertise the RFP

Although this is clearly important information for the Fiscal Plan and budget, tax policy, tax assessment and tax abatement is one of the most important powers any government can wield. Although the information will probably be provided, what if the Board disallows any of these contracts? Will Governor Rosselló again mount Rosinante and attack the windmills of the Board? Questions, questions.

Also, at the end of the attachment to the letter, the Board requests a certification stating the following for each contract:

1.[Name of Agency], its officials and employees have complied with all applicable conflicts of interest laws, rules, regulations and policies in connection with the procurement and negotiation of the contract2.

2.To the best knowledge of the signatory (after due investigation), no person has unduly intervened in the procurement, negotiation or execution of the contract, in contravention of applicable law.

3.To the best knowledge of the signatory (after due investigation), no person has: (i) offered, paid, or promised to pay money to; (ii) offered, given, or promised to give anything of value to; or (iii)otherwise influenced any public official or employee with the purpose of securing any advantages, privileges or favors for the benefit of such person in connection with the contract.

4.To the best knowledge of the signatory (after due investigation), neither the contractor, nor any of its owners3, directors, officials or employees, or its representatives or sub-contractors, has required, directly or indirectly, from third persons to take any action with the purpose of influencing any public official or employee in connection with the procurement, negotiation or execution of the contract.

The above certification shall be signed by the head or general counsel of the agency submitting the contract for review.

In the event that the agency is not able to provide any of the above certifications, it shall provide a written statement setting forth the reasons therefor.

This smacks of the Board investigating whether these contracts are nothing more than favors to political contributors or obtained through fraudulent means. Again, this is a very reasonable request but will the governor comply? We will soon find out.

The GDB filed its “Solicitation Statement” for the Title VI it is attempting. The 300 plus document has this interesting tidbit:

In addition, the New Bonds are complex financial instruments with unique characteristics that are unlike many similarly named instruments. Because of the unique nature of the New Bonds, substantial uncertainty and risk exist with respect to the New Bonds that may not exist with respect to other debt instruments. For example, the Issuer is a newly formed statutory public trust and governmental instrumentality with no existing operations, and the New Bonds will be secured by, and payable solely from, Collections on certain assets of GDB that will be transferred by GDB to the Issuer on or after the Closing Date. Holders of New Bonds should not expect to receive payment in full in cash of principal and interest due on the New Bonds. While there are scenarios that may result in full payment of principal and interest on the New Bonds in accordance with their terms, there is considerable uncertainty as to whether the Restructuring Property will provide sufficient cash flow to pay interest in cash on the New Bonds and amortize the principal amount (and any PIK Amounts) thereof completely. In addition, if the Qualifying Modification is consummated and the Participating Bond Claims are mandatorily exchanged for the New Bonds, rights and remedies under the New Bonds will be dramatically different, and may be less favorable to holders of the New Bonds, than the rights and remedies holders of Participating Bond Claims currently have. For additional information on the New Bonds, see the Offering Memorandum attached hereto. At the same time, there is substantial uncertainty regarding the value of the Participating Bond Claims if the Requisite Approvals are not obtained or the Qualifying Modification is otherwise not consummated. GDB is insolvent and has operationally wound-down and substantially terminated its operations, other than the completion of the Qualifying Modification and the management of certain assets thereafter; the outcome of its liquidation or other resolution is highly uncertain. A holder of Participating Bond Claims could realize more or less value on its Participating Bond Claims in such a liquidation or resolution than in the Qualifying Modification.

In other words, if you vote for the Title VI qualifying modification, you may not be paid but if you don’t vote, we may go into Title III. Since the only asset that the GDB has is loans to public corporations and municipalities, the minute these stop paying, the GDB will not pay its bonds and there will be no recourse since that is the only source of payment. I have always said that this Title VI, if approved, would end in Title III. Might as well do it now with full value of your bonds than later when you have a 45% haircut.

On the litigation side, Judge Swain sided, once again, with the Board and decided that certain ERS bonds did not have a lien because the liens were not properly recorded. Although the Judge may very well be right, this case will be appealed and Judge Swain is 0-3 on appeals at this time.

In Assured v. Board, defendants had requested a stay of proceedings while the Ambac appeal (where Congressman Duffy filed his brie of Amicus Curiae) is decided. Judge Swain, unsurprisingly sided with the Board saying:

The issues on appeal in Ambac are sufficiently related to the issues presented by Plaintiffs’ complaint to warrant a limited stay of these proceedings. Through their complaint in this proceeding, Plaintiffs claim that the April 19, 2018 Fiscal Plan for Puerto Rico violates PROMESA §§ 201(b)(1)(B), 201(b)(1)(M), 201(b)(1)(N), and 407 and § 928 of the Bankruptcy Code; that the Fiscal Plan Compliance Law (Act No. 262017) violates PROMESA §§ 201(b)(1)(N), 201(b)(1)(M), and 201(b)(1)(B); and that the April 19, 2018 Fiscal Plan does not meet the definitions prescribed by PROMESA §§ 5(10) and 5(22). Plaintiffs contend that they are entitled to an order declaring that no plan of adjustment under PROMESA Title III can be confirmed based on the April 19, 2018 Fiscal Plan; that no confirmation hearing will be held on that plan; that a series of moratorium laws enacted by the Commonwealth and corresponding moratorium orders (“Moratorium Laws” and “Moratorium Orders”), the April 19, 2018 Fiscal Plan, and the Fiscal Plan Compliance Law violate the Contracts Clause, Takings Clause, and Due Process Clauses of the U.S. Constitution; that the Moratorium Laws, Moratorium Orders, Fiscal Plan Compliance Law, and the April 19, 2018 Fiscal Plan are preempted by PROMESA §§ 303(1)(3); and that if this Court determines that PROMESA bars review of the April 19, 2018 Fiscal Plan, Plaintiffs are entitled to a ruling that PROMESA violates the Due Process Clause of the United States Constitution and is an unconstitutional delegation of legislative power. See Dkt. No. 1.

In Ambac, Ambac Asssurance Corporation also questioned the legality of the Moratorium Laws, Moratorium Orders, the Fiscal Plan Compliance Law, and an earlier version of the Fiscal Plan for Puerto Rico. See Amended Adversary Complaint (Dkt. No. 35 in 17AP159). On appeal, Ambac Assurance Corporation presents eleven issues for the First Circuit to consider including, inter alia; whether the District Court erred in holding that the Moratorium Laws, Moratorium Orders, and the earlier Fiscal Plan do not qualify as laws preempted by PROMESA § 303(1); whether the District Court erred in interpreting the Contracts Clause and Takings Clause of the United States Constitution; whether the District Court erred in issuing an opinion on PROMESA § 106(e); and whether the District Court erred in interpreting PROMESA § 106(e) to preclude judicial review of the Fiscal Plan for compliance with the requirements of PROMESA § 201(b).

While this Court appreciates the distinctions and clear differences between Plaintiffs’ complaint here, and the claims brought in Ambac, many of the questions presented on appeal in Ambac either directly overlap with or significantly bear on the determinations this Court will have to make in deciding any dispositive briefing in this proceeding.

If there are “distinctions and clear differences between Plaintiffs’ complaint here, and the claims brought in Ambac” why grant the motion? For Judge Swain clearly states that is not the norm, especially when there are issues that will have to be decided in this case irrespective of what the First Circuit decides. My opinion, however, is of no importance. Judge Swain’s opinion is what counts.

On the Utier challenge to the Board’s appointment, essentially the same argument that Aurelius made, unsurprisingly Judge Swain dismissed the complaint. The next day, Utier filed their notice of appeal. I am sure the union’s counsel will hustle to see if it can join the Aurelius oral argument presently set for September 10, 2018. Irrespective, that is going to be an epic argument. Wish I were there.

In the Pinto Lugo v. USA, a hodgepodge of legal claims, the USA filed a motion to dismiss challenging standing and the actual causes of action, saying among other things that “[t]here Is No Private Right of Action under the Declaration of Independence.” I expect this complaint to be dismissed as it is another attempt by those who refuse to understand or accept Congressional power over Puerto Rico.

As expected the Legislature filed a notice of appeal from the dismissal of their complaint. Once this was done, Governor Rosselló, who is at odds with Senate President Thomas Rivera Schatz, vowed he would also appeal. As of August 19, 2018, he had not, nor requested leave to do so.

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.

The COFINA Deal… on the Verge of Collapsing?

The Commonwealth Agent in the Commonwealth v. COFINA adversary proceeding – the Unsecured Creditors Committee (UCC) –filed an informative motion on Monday on the Oversight Board’s agreement with COFINA bondholders and monolines.

The motion states that the UCC-COFINA Agent deal was done with the May 2018 certified Fiscal Plan, meaning that the deal was feasible based on the numbers projected in that plan. On June 29, 2018, a new Fiscal Plan was certified with entirely different numbers and economic calculations. Instead of using those new numbers, the Board used the May 2018 to reach the COFINA deal.

The UCC claims a $28 billion cash flow deficit as a result of the deal.

Furthermore, the UCC claims in footnote 4 of their motion the following:

The Commonwealth Agent was not included in the negotiations between the Oversight Board, the COFINA bondholders, and monoline insurers regarding the terms of a COFINA plan of adjustment. In fact, the Commonwealth Agent only received a copy of the COFINA Plan Presentation when it was made public.

Right there, you know something is wrong.

The UCC negotiated the first agreement in principle but wasn’t included in the most recent COFINA deal orchestrated by the Board. Although the Board is obviously the one who deals with the Plan of Adjustment – where the payment of the debt is outlined – not having the Commonwealth Agent involved raises suspicions and with good reason.

Revisiting Conflicts of Interest

Moreover, if it is such a good deal for COFINA, it raises the significant, but dormant issue of potential conflicts of interest of the Board members.

To recap the potential conflicts of interest for new readers of the Control Board Watch, here they are. First, José Carrión’s relationship with Banco Popular, which had significant involvement with COFINA. Second, Carlos M. García, a former Santander executive and GDB President who issued a huge chunk of COFINA debt under former Governor Fortuño. Third, Ana Matosantos’s company, Matosantos Commercial Corporation, has a Banco Popular executive on its Board of Directors. And finally, José Ramón González, another Santander executive deeply involved with COFINA.

Is there a conflict of interest?

The motion continues stating:

The Oversight Board’s June 29, 2018 certified fiscal plan materially revised certain of the underlying assumptions that formed the basis of the May 30, 2018 certified fiscal plan, which was in effect when the Agents entered into the Agreement in Principle on June 5, 2018 and on which the Commonwealth Agent relied when entering into the Agreement in Principle.

In stark contrast to the cash flow projections in the May 30, 2018 certified fiscal plan, the revised assumptions in the June 29, 2018 certified fiscal plan result in a significant cash flow deficit (when including the COFINA debt service payments under the contemplated settlement) in the aggregate amount of approximately $28 billion (in nominal dollars), even assuming that the fiscal plan contemplated making no plan distributions to Commonwealth creditors. Obviously, assuming that there would be no payments to any Commonwealth creditors is unrealistic and would lead to an unconfirmable plan of adjustment for the Commonwealth.

Given that the Commonwealth Agent must consider the interests of the Commonwealth itself, the Commonwealth Agent does not believe that a settlement can be executed and/or consummated which would lead to a significant cash flow deficit (and thus the Commonwealth’s inability to pay current expenses) of approximately $28 billion (in nominal dollars). The Commonwealth Agent believes that this Commonwealth feasibility issue needs to be resolved prior to execution and/or consummation of a settlement agreement. It also does not appear that this issue was addressed in the COFINA Plan Presentation.

The UCC is warning that Puerto Rico cannot pay the COFINA deal with the currently certified Fiscal Plan. Of course, the Board has not answered this motion and may not do so since it is an informative motion, but it probably will.

In addition, the Board  may amend the current Fiscal Plan to conform it to this and future deals. As a matter of fact, the Board has already stated they may do so. If the Board does amend the Fiscal Plan, and does so in a manner that allows the COFINA deal to comply, is the Board greenlighting a sweetheart deal for COFINA for the benefit of certain interests, and possibly the conflicted Puerto Rican Board members?  Let’s see.

Nevertheless, the UCC’s warning is dire. The UCC is not only the Commonwealth agent in the aforementioned litigation but is also the official committee representing all non-secured creditors, who want to be paid. It cannot abide by a deal that will give all monies to one or more secured creditors and leave none for the non-secured creditors. To this effect, the motion also states:

Furthermore, under paragraph 4(i) of the Stipulation, any settlement requires the consent of at least one of the two Commonwealth Creditor Representatives. At the time of execution of the Agreement in Principle, only the Official Committee of Retirees (the “Retiree Committee”), which is one of the Commonwealth Creditor Representatives, had advised the Commonwealth Agent that it supported the Agreement in Principle. In connection with the negotiation of settlement documentation, the Retiree Committee has advised the Commonwealth Agent that it also views the resolution of the Commonwealth feasibility issue as a pre-condition to execution and/or consummation of a settlement agreement.

The Commonwealth Agent remains dedicated to attempt to resolve this issue to allow for a settlement to proceed, although it recognizes that the formulation and certification of a revised fiscal plan is completely outside of its control. Nevertheless, the Commonwealth Agent will proceed with its discussions of this issue with parties in interest and continue its collaborative process with the COFINA Agent in order to reach agreement on a settlement agreement that conditions consummation thereof on the Oversight Board having certified a fiscal plan that projects Commonwealth net cash flows (after measures) over the next 40 years in an amount not materially less than the net cash flows (after measures) projected in the May 30, 2018 certified fiscal plan.

The Commonwealth agent is saying that for the deal to go through, the Board and COFINA bondholders need either the UCC’s support or that of the Retirees’ Committee (who are owed over $52 billion and are non-secured creditors). Although the Retiree’s Committee is closer to supporting the deal, the UCC makes it clear that they still don’t have their support. Could it be that one of the two important deals the Board has achieved is slipping away?

Options for the GO’s

This development brings us to the another question, what will the GO’s do? Undoubtedly, the GO’s will want a good deal, better than that of COFINA. Question is, will the Board provide one? If the GO’s cannot get a deal, what can they do? There are many avenues. The Commonwealth v. COFINA litigation is stayed until September 13. With the UCC’s motion, it is obvious the deal is in peril. The GO’s were allowed to intervene in the Commonwealth v. COFINA litigation and filed dispositive motions expounding their views on the validity of these bonds. The GO’s may request that the Court decide on their arguments. If denied, they can file an adversary proceeding. Moreover, the GO’s may object to any COFINA Plan of Adjustment and we must remember that Judge Swain has said that at that stage she will be able to review the Fiscal Plan since the Plan of Adjustment must conform to the Fiscal Plan. If she decides that the UCC is right or that COFINA is not constitutional, she may deny the confirmation of the Plan of Adjustment. In addition, even if the GO’s are not allowed to object to the COFINA Plan of Adjustment, as part of the stipulation, the COFINA settlement must be approved in the Commonwealth Title III case, where undoubtedly the GO’s will have a say.

The UCC’s motion has thrown a monkey wrench into the COFINA deal, one which unless carefully explained by the Board could well derail it. Much more is to come. Stay tuned.