Welcome to your weekly Title III update for March 26, 2018. Again, not much happened in the cases, but other things have come up.

Continuing with the Board’s statement on the March 7, 2018 Omnibus hearing, it filed an update on PREPA’s need for financing and said:

“PREPA’s budget reporting since the closing of the postpetition facility has indicated materially better actual liquidity than originally forecasted. Barring unforeseen circumstances, PREPA does not currently anticipate a need for supplemental postpetition financing before May 15, 2018, and possibly not until several weeks after that. PREPA therefore expects any motion for approval of supplemental or replacement postpetition financing would be filed on or after April 23, 2018.”

It is interesting that the Board continues to push PREPA’s alleged need for financing when its numbers belie the need for any financing. It seems like the Board does not want to look more foolish than it did when no disaster struck the Puerto Rico Government or PREPA in spite of Mr. Jaresko or Mr.  Bienenstock’s dire warnings. In any event, I doubt PREPA will be asking for another loan any time soon.

Why does this matter?  It goes directly to the heart of a looming question:  How and when will Puerto Rico get access to the Community Disaster Loan (CDL)?  The General Fund balance is now just above $1.4 billion, and they will not have access to the facility unless the cash balance drops below $1.1 billion.  This raises two important questions: 1) How does the Puerto Rico Government spend over $300 million to drop the cash balance? And 2) will the Federal Government just turn over hundreds of millions of dollars, just because the governor and the Oversight Board purposefully depleted the General Fund.  It all seems a bit fishy.

Also, this past week many parties filed requests for interim compensation which will be discussed on the next omnibus hearing. Millions of dollars are being spent in the PR Title III proceedings and many more will be spent. I wonder if the money spent will bring any actual benefit for PR.

There were several motions pending for the rejection or acceptance of executory contracts and their discussion was postponed several times and Judge Swain apparently got tired and dismissed them without prejudice of them being filed again. The Judge has too many things on her plate to be dealing with motions that the parties do not seem to want resolved.

The UCC, PREPA and Whitefish came to a stipulation which was accepted by the Court for the former to conduct discovery on the latter’s contract. It will be interesting to see if the Committee finds any impropriety that will result in another adversary proceeding.

Many of the filings this past week were related to the March 27, 2018 hearing on the PR Energy Commission request for an injunction, which I discussed last week. The U.S. Bank National Association, solely in its capacity as Trustee under the terms of that certain Trust Agreement with the Puerto Rico Electric Power Authority filed a motion to intervene in the same capacity as some PREPA bondholders and the request was granted by the Court. The Energy Commission filed its reply and the case is ripe for argument and adjudication on Tuesday, March 27. I will be there.

On an unexpected development, six credit unions filed an adversary complaint against the Commonwealth, AAFAF, the GDB, COSSEC, and members of the Board. The basis of the complaint is that the Government forced them to buy bad bonds and that fraud was involved. The credit unions averred that bond counsel, underwriters and others involved in the bond sale, identified as John Doe, are also liable to them. Moreover, they claim that pursuant to Section 105 of the Bankruptcy Code these debts are not dischargeable but given that Section 523 of the Bankruptcy Code was not adopted in PROMESA, I don’t see Judge Swain granting that. The complaint, however, is the harbinger of other complaints that will be filed if COFINA is deemed invalid or unconstitutional. Let’s see what happens.

Around midnight of March 23-24, 2018, AAFAF made public the PREPA fiscal plan filed on March 21, 2018, obviously to prevent the press from discussing it until Monday of the Holy Week. The PR Government is into transparency. It is important to note that in February AAFAF provided the Board with another fiscal plan but never made it public. This means that the previous one was also found wanting by the Board. In addition, AAFAF also made public a March 21 Commonwealth fiscal plan. I will discuss the highlights.

The PREPA fiscal plan has the usual caveats and reservations, including that the information does not come from audited financial statements. Allegedly, the Board ordered the financial statements to be completed by December 2017. Seems that everyone forgot. At page 14, we see the mention of the appointment of Mr. Higgins as executive director. If AAFAF knew of this, then the governor had to know, including about information regarding Mr. Higgins’ salary.

Why then did the governor order the PREPA Board to explain? At page 22, discussing the historical challenges, it mentions above-market benefits in collective bargaining agreements with evergreen provisions, underfunded pension obligations (over $3.6BB), significant losses of experienced personnel. This is a recurring theme in the fiscal plan. The fiscal plan continues stating that if PREPA were to cover all its liabilities (obviously including the $8.3 billion debt bond debt) the cost of the kilowatt hour would be 30 cents, pages 28-30.

PREPA is aiming to reduce the cost of its medical plan (page 38) and will present a new Integrated Resources Plan (page 54). The fiscal plan complains bitterly about the Energy Board and its interference with PREPA, complaining about it asserting jurisdiction over budgets approved by the FOMB and at page 97 wants to revamp it with new legislation. Let’s see if the FOMB allows it.

PREPA’s unions are also criticized by the fiscal plan;

“All union contracts are arguably in effect continuing under a questionable evergreen clause; PREPA Management believes work rules and CBA articles hinder efficiency.

The union contracts include narrow work rules that, among other things, prevent PREPA management from efficiently deploying and supplementing human resources in an efficient manner

PREPA is understaffed in certain high skilled functions, partially due to a wave of retirements in 2017 (which is spilling over into 2018)(page 74)”

Certain areas of PREPA, including customer service and legal, are earmarked for reengineering and outsourcing (page 75). PREPA will start discussions with the unions on efficiency optimization and if successful, they will be implemented, if not, it will then “develop a restructuring plan under Title III and begin the process to implement the plan” (page 76). What this means is that if the union does not play along, PREPA and the Board will establish the new Rules. The SCOTUS in a case called NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1985), decided that even before the union contracts, which are executory contracts, were rejected by the debtor, it could start modifying the collective bargaining agreement. In reaction to this case, Congress enacted section 1113 of the Bankruptcy Code, but this section was not adopted in Chapter 9 nor in PROMESA. Moreover, the Court in In re City of Vallejo, 403 B.R. 72, 78–79 (Bankr. E.D. Cal. 2009) stated that Bildisco applied to the Chapter 9 case.

As to what will happen with the pensions, at page 78, the Fiscal Plan establishes a timetable and states it must “[d]etermine long-term impact of the following options: reducing benefits for active employees, reducing benefits for active employees, reducing benefits for retirees, increasing contributions, increasing investment return.” You may notice that there is no mention of PREPA making up for the $3.6 billion deficiency. It is all bad for the union members.

Pages 87-91 detail the actual sale and lease of PREPA’s property. Transmission and Delivery will be leased to one entity for maybe 25 years. The generation may be sold to several entities and AES and Ecoeléctrica’s contracts renegotiated. There is a caveat, however, that “[t]ransformation structures are illustrative in nature and subject to change based on market input and other considerations.” These private partners (page 93) must, however, show the following:

“Demonstrate experience with best-in-class utility operations, including efficient execution of operations and maintenance and ability to integrate new technologies quickly and cost-effectively to benefit the transformed system, e.g. smart grid solutions

Demonstrate ability to anticipate and address future challenges to current and transformed operating model, including increased distributed energy resources; variable energy resource integration, and changing customer demands for dynamic pricing and innovative services

Transmission and Distribution –Provide expertise and access to sufficient low cost private capital to achieve and maintain over the entire concession term a modern and transformed energy grid infrastructure, including appropriate smart grid technologies.”

These factors seem to disqualify any energy coops that may develop in PR, much to the chagrin of Senators López and Bhatia who were touting them as the solution to PREPA’s problem. The clincher to all this, however, is that “[g]iven the context of Puerto Rico’s energy sector transformation and its importance to the Puerto Rican economy, maximizing the proceeds from the sale of PREPA’s generation assets will only be one factor in determining the best bid(s)” (page 93). In other words, neither the Government nor the Board care if the sale will not produce enough money to pay creditors, including bondholders.

All this transformation will cost the tidy sum of $13.7 billion. Really pocket change for the people of PR. I assume the governor assumes this will be paid by the Federal Government. Oh, well.

The Commonwealth fiscal plan also starts with similar disclaimers, making a mockery of the Board’s reliability on its information. At page 22, the fiscal plan insists on a $94.4 billion rescue from the federal government and complains in the next page that is only getting $49.1 billion. Pages 37-39 detail the entities covered by the fiscal plan and those not covered by any fiscal plan. At pages 41, 45 and 55 it touts a $6 billion surplus in 2023 but not a penny dedicated to debt service. Also, there is no mention in the fiscal plan of the $7.1 billion “discovered” by AAFAF in the over 800 accounts.

At page 60, the fiscal plan details an “expedited” procedure in the Legislature for approval of changes in the Government. I am sure Senate President Tomás Rivera Schatz will be very accommodating. The fiscal plan mentions “right sizing” of the Department of Education (page 62) and the Department of Health (pages 81-82) with many Mi Salud recipients having reduced coverage. Policemen will receive the $1,500 a year (page 69) salary increase which will barely cover their new SS payments but there is no mention of a similar raise for teachers. “All other agencies transformation will focus on achieving savings by consolidation or externalization of functions or services” (page 70). Pages 113-114 detail the new labor reform, which means that if the plan is certified, PR will have to comply, the governor’s reticence notwithstanding. Finally, page 120 acknowledges that the office of the Chief Financial Officer will be created.

The governor’s representative to the Board once loudly proclaimed in a meeting that there would not be any furlough of employees and that you could take it to the bank. Seems he was right, but instead employees will be forced into retirement or face dismissal. Governor Rosselló accepted this reality in an interview with El Nuevo Día that came out Saturday.  Unfortunately, this is a natural consequence of the socialist experiment PR has undergone since the 1940’s.

Last week, the Board announced it was going to discuss the fiscal plans on Monday, March 26 and I filed the customary request to be allowed to attend. On Friday, this meeting was cancelled. I surmise that since there is no mention of pensions in the Commonwealth fiscal plan, contrary to the PREPA fiscal plan, the governor does not want to accept pension reductions. If no agreement is reached, I am afraid the Board will certify its own fiscal plan, no later than March 30, since Ms. Jaresko made it clear in an interview in El Nuevo Día on Saturday that pensions would be reduced. 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.

Monday Update – March 19, 2018

Welcome to your weekly Title III update for March 19, 2018. The PR Energy Commission’s request for an injunction dominated the filings.

As I reported last week, the UCC filed an intervention and it was granted. The UCC joined the Board’s motion in opposition to the injunction. In addition, AFFAF filed a motion to intervene and also filed an opposition to the PRAC injunction. Also, AFFAF removed a case PREC filed in the Commonwealth Court ordering PREPA to hand in the fiscal plan it gave the FOMB which, by the way, has not been made public.

In addition, National Public Finance Guarantee Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Syncora Guarantee, Inc., and Identified Members of the Ad Hoc Group of PREPA Bondholders also requested leave to intervene on the side of PREC, which was partially opposed by the Board. Magistrate Judge Swain decided the issue and ordered:

“Movants shall have the right to file briefs stating their positions, restricted to those issues already raised by the parties in connection with the preliminary injunction proceedings. Movants may be heard at the preliminary injunction hearing concerning issues raised by the existing parties, subject to any restrictions by the hearing Court.

Movants are not entitled to present evidence either as attachments to their brief or at the hearing on the preliminary injunction motion.

Counsel for PREC shall use reasonable and good faith efforts to confer with counsel for Movants in advance of the preliminary injunction hearing to discuss any concerns of the Movants.”

I agree with the FOMB, AFFAF and the UCC that this injunction by PREC is nothing more than a power grab to write the PREPA fiscal plan. The injunction hearing will be heard on March 27, 2018 in New York. I will be listening in San Juan to see what happens.

Judge Swain issued the order on the PBA funds that was stipulated by the parties where the rents will be escrowed and paid as an administrative expense if valid. More litigation in the horizon.

The FOMB filed a request to amend the Case Management Order but nothing of great import. Just cosmetic changes.

This week the PR Senate will begin public hearings on the bill for PREPA’s sale. Seems that the bill will be substantially amended. Hopefully, transparency requirements will be injected into the bill, since it badly needs them.

Last Friday, the PR press reported that Commonwealth Court ordered Governor Rosselló to hand to Senator Bhatia a copy of the fiscal plan provided to the FOMB on April 30, 2017. Since no fiscal plan was due that day and, in fact, the fiscal plan had been certified on March 13, 2017, I read the opinion. The lawsuit dealt with budget but it seems Judge Aracelis Roque confused the documents. I agree that the budget that the Governor gave the FOMB should be made public but confusing one with the other does nothing to the prestige of Puerto Rico’s judges. In any event, the decision, when amended, will be appealed and it will be sometime before we will be able to see the budget, if at all.

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.

Welcome to your weekly Title III update for March 12, 2018. Judge Swain held an Omnibus Hearing on March 7, which was the highlight of the week.

While giving the report from the Board, its attorney, Martin Bienenstock stated that there was not an impending need for a new loan for PREPA. His statement was that instead of a probability, it was only a possibility that PREPA would need to seek a new loan due to increased collection of its bills. Given that the Board first asked for $1.3 billion, then $1 billion and when it was only given a $300 million loan, it asserted that in 2-4 weeks it would seek more, two things are clear.

First, Judge Swain knows her numbers and the Board and PR are not transparent in their financial information. This brings us to another point. It was reported in the news that fuel expenses for PREPA increased but the Governor refused to increase rates (via de fuel adjustment clause).  Rather, he believes he can force President Trump and the Federal Government to provide the Community Disaster Loan to make up the difference.  That is an interesting political calculation.  This is another example of why PREPA has problems; political decisions (increasing rates will be electorally unpopular) that undermine the continuity of services. PREPA was totally unprepared for the hurricanes in part due to its lack of funds. Less than 90 days from the next hurricane season, it seems it will be as unprepared.

Also this week, the Governor revealed the legislation for the sale of PREPA. If one examines it, as I carefully did, although it allows for the sale of assets, one can see that it favors Public Private Partnerships (3P) over the sale and that has bee echoed by some legislators and the Governor. The Board on the other hand, has been clear that it wants it sold. Who will prevail? I think the Fiscal Plan will resolve the issue. If the PREPA Fiscal Plan, the new version which has not been released by the Governor, includes the outright sale of the utility, the FOMB’s view will prevail. Section 305 of PROMESA, which precludes the Court from interfering with the Commonwealth’s use of its property, has an exception, “[s]ubject to the limitations set forth in titles I and II of this Act.” The Fiscal Plan is in Title II of PROMESA. Hence, if the sale is in the fiscal plan, it is likely PREPA will be sold.

Last Monday, Judge Swain issued an order scheduling Omnibus hearings for different dates up to April of 2019. This coupled with hear statement during the March 7 hearing that the “PROMESA cases were in their infancy,” makes us believe the earliest the Commonwealth Title III gets resolved is May of 2019. Moreover, if the GDB and PRASA are added to the Title III, we could have these cases drag until late 2020.

Judge Swain approved the fee examiner’s report and most of the requested fees, totaling around $50 million. For the most part, these amounts had already been paid and date from before the start of the case until September of 2017. A number of the requested fees were left for the April Omni. Clearly, this bankruptcy is costing PR tax payers a pretty penny.

In addition, the parties to the PBA motion for payment of certain leases was “settled” by providing claimants with an administrative expense status for the rents, but with a caveat:

“Unless and to the extent the PBA Leases are subsequently adjudged not to be leases for purposes of Bankruptcy Code section 365(d)(3) and subject to paragraph 3 below, the PBA shall have allowed administrative priority claims against the Debtors with respect to unpaid rent accruing under any leases of nonresidential real property from and after each Debtors’ respective petition date, pursuant to Bankruptcy Code 365(d)(3), 503(b), and 507(a)(2) (including, for the avoidance of doubt, any amounts due from the Commonwealth’s agencies and departments) arising under PBA Leases currently due and owing to the PBA, which shall continue to accrue, but not require payment absent further court order, until each such PBA Lease is either assumed or rejected by the applicable Debtor (collectively, the “Administrative Rent Claims”).”

Section 3 of the settlement states:

“Any and all Administrative Rent Claims and their allowance or disallowance shall remain subject to all rights, claims, defenses, and setoffs available to each Debtor, as applicable, and the Debtors and the Official Committee of Unsecured Creditors retain all rights to assert objections or defenses to the Administrative Rent Claims, provided, however, the Debtors shall not be entitled to assert that any of the Administrative Rent Claims have been waived as not timely asserted. For the avoidance of doubt, the issues of whether the PBA Leases are “true leases” entitled to treatment under section 365(d)(3) of the Bankruptcy Code, the validity or enforceability of the PBA bonds or PBA guarantees, and whether a debtor-guarantor who is not the tenant under the subject lease is subject to the performance obligations of section 365(d)(3), are expressly preserved.”

Since the UCC had filed a motion that intimated that the leases were not real leases and that it was investigating whether the bonds were issued illegally, we can expect some time in the future and adversary proceeding by the UCC against the PBA bondholders.

In addition, the unions and the Commonwealth came to an agreement for arbitration and grievances to continue. If the Board feels that any procedure would affect the Fiscal Plan, it will notify the unions and the issue will be brought before Judge Swain. Good settlement for all involved.

Judge Swain has set the hearing on the injunction requested by the PR Energy Board against the FOMB for March 27. The UCC filed a request for intervention stating the following:

“Plaintiff in this Adversary Proceeding claims that “whenever a proposed PREPA Fiscal Plan would impact substantive electric industry matters, [Plaintiff’s] timely assessment and approval is a prerequisite for [Oversight Board]’s certification of such Fiscal Plan.” See Compl. at 50 [Docket No. 1]. In other words, Plaintiff contends that it has the right to review any Fiscal Plan PREPA intends to propose, and either to approve or reject its contents, before the Oversight Board can consider the Fiscal Plan. Thus, PREPA cannot propose, and the Oversight Board would be unable to entertain, any strategies for reorganization except for those that Plaintiff has already blessed. This would do violence to the scheme Congress adopted and sharply curtail the approaches to reorganization the Oversight Board might adopt.

The Committee has a significant interest in this case because the relief that Plaintiff seeks would destabilize Congress’s statutory scheme for title III cases and would undermine the Committee’s efforts to adequately represent the many unsecured creditors in this case. By inserting itself into PROMESA’s statutory scheme, Plaintiff’s involvement in this case would needlessly protract the process of getting PREPA on the path to fiscal responsibility. In addition, the Committee has a vital interest in the issues raised in Plaintiff’s Complaint as they pertain to PREPA’s revenues and expenses, and therefore the funds PREPA will have available to satisfy its general unsecured creditors—the constituency the Committee was appointed to protect. If Plaintiff prevails, the resources available to satisfy the claims of general unsecured creditors would be directly affected. Perhaps most importantly, the Committee has a substantial interest in a just and speedy resolution of this case. Plaintiff’s claim that it must preapprove any Fiscal Plan submitted to the Oversight Board necessarily affects these issues; therefore, the Committee should be allowed limited intervention in this Adversary Proceeding.”

I believe this question sums the issue in this litigation; who certifies the fiscal plan, the FOMB or the PR Energy Commission? Seems to me that for good or for bad, PROMESA is clear that it is the FOMB. Judge Swain has already ruled on this and is likely to rule in a similar fashion.

Lastly, last week I mentioned the GO motion for summary judgment of only 1,399 on COFINA. One of its exhibits has a very interesting discussion, which deserves closer examination. The email is from Lawrence Bauer of Sidley Austin to Jorge Irizarry of the GDB in 2007:

“The sales tax is a tax imposed by and collected by the Commonwealth Dept. of the Treasury not by the Corporation and not “on behalf of” the Corporation, which has no taxing power. As such, the tax revenues are “property” of the Commonwealth until such time as they are transferred to the Corporation (even if it’s only a under a minute until the moneys are transferred to the Corporation). Therefore, during that (admittedly short) period from the time the taxis collected by the Commonwealth until it is transferred to the Corporation, Ithink a court would have a hard time concluding just on the basis of the legislature saying so that the sales tax revenues are not “available” to the Commonwealth should it need the money to pay G.O. debt. Ultimately, the legislation may be upheld (courts uphold conclusions that are reached by incredible legislative gymnastics over a more simple and straightforward analysis – just look at the “separate but equal” nonsense that the U S. Supreme Court upheld and the decades it took to reverse it in Brown v. Board of Education), but the mere fact that I’m having this discussion with you about its validity is the reason you have to disclose that this conclusion isn’t a slam dunk. After all, why – for Constitutional availability purposes – is a sales tax on gasoline any different from a sales tax on men’s flip flops? If the answer is “because the legislature said so.”, then from a disclosure standpoint of giving investors the complete “information mix” they need in order to make an informed investment decision as the U.S. Supreme Court has mandated, you have to disclose this distinction. That is, you have to make reference to the other sales taxes in Puerto Rico that are treated as available and explain why this sales tax is different. Then you have to say: but we’re not sure the P.R. Supreme Court would agree with that view, because under our system of laws, whenever the question is “what does the Constitution mean?” the final answer can only be given by the highest court in the jurisdiction – in this case the P.R. Supreme Court, and just because the legislature or the working group on the sales tax bonds wants it to be another body (i.e., itself) doesn’t change that. Remember, the question of whether an item needs to be disclosed is whether a reasonable investor would have liked to have known of the information while pondering whether to buy the bonds. Do you think this is not important information to a potential bondholder? If you think not, then don’t disclose it and see what happens. If you think it is important, then you have your answer: you have to tell him/her. Think about what information you would like to have before you made a decision to buy (or not to buy) these sales tax bonds.”

The discovery of these emails, and the contents of the exchanges between parties, cannot be overstated.  They directly speak to whether the SUT is an available resource to PR, and will certainly be used to argue against COFINAs constitutionality. I have also said many a time and I repeat it now, if the Court were to side with the UCC and others that the SUT cannot be assigned to COFINA and it is available resources, all those bondholders will be left with claims against a corporation that has no income. They will file dozens of fraud claims against the Government of PR which must be adjudicated in order to have a vote on the Plan of Adjustment. Hence, the Title III case may take well beyond May of 2019.

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.

Welcome to your weekly Title III update for March 5, 2018. Judge Swain has decided important issues this time in favor of the Board.

In the Ambac adversary proceeding, Judge Swain dismissed the insurer’s claims for different reasons. She dismissed claims on liens and takings claims as premature, I assume hoping they will be solved in mediation or in the case of taking without just compensation, that it be considered moot once the Plan of Adjustment is presented. As predicted, Judge Swain rejected the challenge to the certified fiscal plans (except for possible Constitutional deficiencies) and said:

“Section 201(b) of PROMESA identifies fourteen specific objectives and requirements that a fiscal plan, whose development is overseen by the Oversight Board, must satisfy. The Oversight Board, pursuant to Section 201(c)(3) of PROMESA, is specifically tasked with reviewing and approving proposed fiscal plans and is granted “sole discretion” to determine in connection with such certification whether such fiscal plans satisfy the Section 201(b) requirements. PROMESA not only grants the Oversight Board exclusive authority to certify fiscal plans, but it also insulates the Oversight Board’s certification determinations, which necessarily rest on determinations that the Section 201(b) requirements have been met, from challenge by denying all federal district courts jurisdiction to review such challenges. See PROMESA § 106(e). To be meaningful, denial of jurisdiction to review the certification of the Fiscal Plan thus must be understood preclude the review of claims that particular aspects of the Fiscal Plan are noncompliant with Section 201(b) requirements.

The First, Second, and Fourth Claims for Relief of the Amended Complaint expressly seek invalidation of the Oversight Board’s certification of the Fiscal Plan and injunctive relief prohibiting Defendants from taking or causing to be taken any action pursuant to the Fiscal Plan. (Am. Compl. ¶¶ 215, 218, 223, 226, 236, 239.) To the extent these claims rest on contentions that the Fiscal Plan violates Section 201(b) specifications, such as the requirement that a fiscal plan respect lawful priorities or lawful liens under territorial law, this requested relief necessarily implicates review of the Fiscal Plan’s certification and therefore the Court lacks subject matter jurisdiction to consider the merits of the claims. Congress has entrusted the ultimate decision to certify a fiscal plan to the sole discretion of the Oversight Board. See PROMESA § 201(c)(3). PROMESA creates a statutory structure that is protective of the Oversight Board’s authority under Section 312(a) of PROMESA, which grants the Oversight Board the exclusive right to propose a Title III plan of adjustment that must be consistent with the applicable certified Fiscal Plan to be eligible for confirmation. Together, these provisions underscore the central, discretionary role that Congress has assigned to the Oversight Board in the Title III debt adjustment process. See PROMESA § 314(b)(7). Under PROMESA’s statutory framework, it is only at the plan confirmation stage that the Court determines whether a proposed plan of adjustment complies with, among other things, the provisions of Title 11 of the United States Code which have been made applicable to these cases by Section 301 of PROMESA and the relevant provisions of PROMESA.” (Bold added)

I have long held the view that it is only at the time of the Plan of Adjustment that Judge Swain may, if so inclined, rule on anything pertaining to the Fiscal Plan. By that I mean it must be determined whether the Plan of Adjustment is confirmable even if the Fiscal Plan does not respect the lawful priorities or lawful liens. It seems that this is the Judge Swain’s view also. In addition to the above, Judge Swain dismissed the claims for violation of the contracts clause, section 407 of PROMESA and the claim of violation of Section 303 of PROMESA by the Moratorium Act. Judge Besosa had also dismissed a similar claim of violation of Section 303 in another case. Judge Swain decided in a similar fashion as she did in the Assured litigation as to sections 922 and 928 of the Bankruptcy Code.

In the Commonwealth v. COFINA litigation, the COFINA representative filed a surprising motion requesting that the question on COFINA be certified to the Supreme Court of Puerto Rico, which was quickly and vigorously opposed by the Board. The COFINA bondholders had attempted the same thing and were rebuked by Judge Swain by stating the question was a mixed one of federal and state law and that the District Court would decide. Judge Swain denied the motion to expedite the discussion of the matter but will hear arguments on the April 25 Omnibus hearing. Seems all COFINA defenders believe the Puerto Rican Supreme Court will be more willing to declare it valid than the District Court. We shall see.

Last week the Board filed a quixotic acceptance to lifting the stay in labor grievance cases and the unions filed a motion pointing out that contrary to what it said, the Board was not acting as if the stay was lifted. We’ll see what the Judge decides.

As I reported last week, the UCC filed summary judgment stating that COFINA was in violation of the Puerto Rico Constitution as to limits on debt issuance pursuant to Article VI, section 2 of the Puerto Rico Constitution. I had not noticed, however that they were investigating whether some of the PBA bonds were also issued in excess of the constitutional limit. Interesting indeed. We shall see what the UCC concludes and how it will handle the issue if it believes the constitutional limit was indeed exceeded. Again, an important constitutional issue for Puerto Rico is to be decided in federal court. In any event, as the GO Bondholder’s reservation of rights points out, the issues presented require a full evidentiary hearing. Hence, it may or may not be resolved on Wednesday’s Omnibus hearing.

Echoing other creditors’ cries for more information from Puerto Rico and the Board, “the American Federation of State, County and Municipal Employees International Union, AFL-CIO (“AFSCME”), American Federation of Teachers, AFL-CIO (“AFT”), International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, AFL-CIO (UAW) (“UAW”), and Service Employees International Union (“SEIU”)” filed a motion requesting leave to conduct discovery via Bankruptcy Rule 2004. Judge Swain quickly sent it to Magistrate Judge Dein. The Unions are seeking the following from the Board, from the Commonwealth and from AFFAF:

“[D]ocuments responsive to the requests listed on Schedule A; (2) compelling the depositions of (i) Oversight Board Executive Director Natalie Jaresko and Chairman José B. Carrión III, and (ii) AAFAF Executive Director Gerardo Portela and Chairman Christian Sobrino; and (3) compelling the Commonwealth to designate for deposition a witness or witnesses knowledgeable about the topics described on Schedule A.”

The Unions justify their request in the following manner:

“The Unions require information from the Oversight Board, AAFAF, and the Commonwealth (collectively, the “Government Parties”) necessary for the Unions to understand whether and how the Commonwealth and AAFAF, with the implicit blessing of the Oversight Board, have violated the rights of tens of thousands of Commonwealth employees by taking money through employee contributions deducted directly and involuntarily from their wages without, it appears, depositing those funds immediately into individual employee accounts controlled and investable by the employees as required by law. Notably, the draft fiscal plan submitted by the Commonwealth and AAFAF to the Oversight Board on February 12, 2018 (the “February 2018 Draft Fiscal Plan”) fails to make any disclosure concerning the status, location, segregation, investment, and management of ongoing mandatory public employee contributions to their individual retirement accounts. This Motion therefore seeks information necessary to determine whether there has been post-petition wrongdoing with respect to public employees’ property and to protect their rights.

It is simply offensive to the Commonwealth’s public servants—many of whom have since 2000 suffered mandatory deductions from their pay which were supposed to be contributed to individual retirement accounts (without any matching employer contribution)—that in July 2017 the Government Parties admitted that those funds were not, in fact, deposited into the employees’ segregated accounts, as they should have been, but instead were spent to satisfy other obligations.

It adds insult to injury that, even after the subsequent passage of a Commonwealth pension reform statute, Law 106, on August 23, 2017, and numerous commitments that ongoing employee contributions would be properly segregated into individual 401(k)-style accounts, the Commonwealth (through AAFAF) publically released a report of its 2017 end-of-year bank account balances on January 19, 2018 (the “2017 EOY Bank Account Balances”) which states (at pp. 8-9) that approximately $133 million in “employees/participants withholdings . . . for defined contribution retirement accounts” are being commingled with other “Pension Related” assets in a single government account, rather than individual employee retirement accounts as is required by Law 106.”

Given this scenario, I think Judge Dein will be hard pressed not to grant this relief and if it is granted, another adversary proceeding challenging this conduct is almost assured.

On Sunday, at 9:44 pm, the Puerto Rico Energy Commission filed an adversary proceeding for injunctive relief seeking the following:

“A Declaration that FOMB may not mandate or authorize substantive electricity actions that are within the Commission’s jurisdiction but that the Commission has not approved, including but not limited to the following: actions affecting resource mix; asset ownership, operations, maintenance and retirement; market structure; integrated resource planning; and rates (including but not limited to revenue requirement, revenue allocation, cost allocation and rate design).

A Declaration that when FOMB exercises its fiscal powers over PREPA, it shall do so consistently with Commission actions, orders and regulations on substantive electricity matters, and on fiscal matters unless inconsistency is unavoidable.

A Declaration that whenever a proposed PREPA Fiscal Plan would impact substantive electric industry matters, the Commission’s timely assessment and approval is a prerequisite for FOMB’s certification of such Fiscal Plan.

Preliminary and permanent injunctions against FOMB, prohibiting FOMB from mandating or authorizing PREPA to take substantive electricity actions if those actions are jurisdictional to the Commission but not authorized by the Commission.

Preliminary and permanent injunctions against PREPA, prohibiting PREPA from taking substantive electricity actions mandated or authorized by the FOMB, if those actions are jurisdictional to the Commission but not authorized by the Commission.”

This sounds suspiciously like the Energy Board is challenging the PREPA Fiscal Plan and given Judge Swain’s previous ruling, that will not fly. Let’s see what happens.

In other news, Andrew Scurria from The Wall Street Journal tweeted out that Governor Rosselló was to meet the Board last Friday to discuss the fiscal plan. Given the Board’s insistence on furloughs and pension reduction that culminated in a law suit last year, it is possible the Board will give the Commonwealth one last chance to amend the fiscal plan before it imposes its own at the end of the month. That will mean another major clash of the Board with the Commonwealth, but given Judge Swain’s ruling on the fiscal plan certification, it is unlikely the latter will prevail. Food for thought.

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.