Welcome to your weekly Title III update for April 30, 2018. This week, we do have news from the Court, as well as outside the Court.

On Monday April 23, 2018, Judge Swain cancelled the April 25 Omnibus hearing after the COFINA agent made the request on Sunday evening. The Court ordered the Board to submit on that date a report on the status of the case. Interestingly, on the subject of mediation, the Board stated “[m]ediation efforts continue and are currently focused on resolution of the Commonwealth-COFINA dispute regarding ownership of sales and use taxes.” The COFINA agents said that they wished to concentrate on mediation. Does this means there would be some sort of settlement in COFINA? Who knows?

Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corporation, the Ad Hoc Group of PREPA Bondholders, Syncora Guarantee Inc., and U.S. Bank National Association, in its capacity as PREPA Bond Trustee, joined the Motion to Compel Compliance with February 26, 2018 Order and For Entry of a Protective Order of Ad Hoc Group Of General Obligation Bondholders, Ambac Assurance Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., the Mutual Fund Group, and National Public Finance Guarantee Corporation to compel production of documents. This is an important issue, especially since on April 24, 2018, Judge Swain partly reversed Magistrate-Judge Dein’s decision on discovery. Judge Swain stated:

“The memoranda of law did not treat the deliberative process issues in any great detail, and included only conclusory arguments regarding the effect of the involvement of consultants and different government entities in communications and document preparation. Much of the argumentation focused on whether Respondents should be required to produce a categorical log of materials withheld on the basis of the privilege, should they be permitted to assert the privilege in the first instance. There was no particularized argumentation regarding procedures for determination of the applicability of the privilege and Bhatia-Gautier v. Roselló-Nevares, 2017 TSPR 173, 2017 WL 4975587 (P.R. 2017) (“Bhatia-Gautier I”), the September 2017 decision of the Supreme Court of Puerto Rico concerning access to public documents under the constitution and laws of Puerto Rico that is cited extensively in the Objection, was not mentioned in any of the January 2018 submissions.

The February 26 Order, like the parties’ submissions, treats the deliberative process privilege issues in conceptual rather than specific terms, directs the preparation of a categorical privilege log, and contemplates particularized scrutiny of privilege claims in connection with objections to privilege log entries. . .

Given that Judge Dein does not appear to have been asked to address the status of factual elements of Pre-Decisional Fiscal Plan Documents and did not have the benefit of the extensive briefing that the parties have submitted to this Court, the Court remands this matter for further consideration by Judge Dein in the first instance and any necessary clarification of the February 26 Order. . .

Again, it does not appear that the parties made anything more than conclusory arguments concerning the questions of whether communications among Commonwealth Entities and between the Oversight Board and such entities can be protected by the deliberative process privilege, and whether the involvement of Respondents’ professional advisors in the preparation or review of Pre-Decisional Fiscal Plan Documents renders the privilege inapplicable. Bhatia-Gautier I decision, which features prominently in Objectors’ procedural and substantive arguments to this Court, was not even mentioned in the briefing to Judge Dein, and Bhatia-Gautier II postdates the February 26 Order. The Court concludes that, since the able Magistrate Judge did not have the opportunity to address the legal and factual particulars of the issues that are now being argued to this Court, the record is insufficient to enable this Court to apply appropriately the review standards. On remand, Judge Dein may determine in the first instance whether additional or different procedures and proceedings should be undertaken in light of the Bhatia-Gautier decisions and the particular roles and responsibilities of the Commonwealth Entities, the Oversight Board and their respective professionals in developing positions and taking actions on behalf of the Commonwealth under PROMESA in determining whether the deliberative process privilege should be analyzed on an entity by entity or other basis in this context. . .

The February 26 Order is silent in this respect and does not explicitly apply a balancing test, perhaps because the two-stage procedure it contemplates provides opportunities for narrowing of controversies and further input prior to final disclosure decisions. On remand, the Court may consider when, and in what manner, the balancing test is to be applied.”

Given Judge Swain’s courteous and respectful style, the order is clearly sending a message to Magistrate-Judge Dein to closely look at what the Commonwealth Courts have done with the invoked privileges. Although Magistrate-Judge Dein will have to take a fresh look at these issues, the Commonwealth Court decisions were much in favor of transparency and against the invoked privileges. Magistrate-Judge Dein moved quickly on the issue and ordered:

“At the conclusion of the hearing on the Motion to Compel (Dkt. No. 2865) currently scheduled for May 21, 2018 at 1:30 p.m. in Boston, Massachusetts, the parties to the Renewed 2004 Motion should be prepared to discuss a process and schedule for addressing any challenges to claims of deliberative process privilege. Towards this end, the parties shall submit a joint status report, not to exceed 5 pages, addressing these issues by Monday, May 14, 2018.”

I think we can expect a Report and Recommendation that will further open the information floodgates. This will bring much needed transparency to the case.

In a similar issue of Rule 2004 discovery, the American Federation of State, County and Municipal Employees International Union, AFL-CIO, American Federation of Teachers, AFL-CIO, and Service Employees International Union have been negotiating with the Board and AAFAF and are close to coming to an agreement. No later than May 16, 2018, the parties will let the Court know the status of any such agreement and there will be a hearing before Magistrate-Judge Dein on June 22, 2018.

On April 24, 2018, a local attorney, Rene Pinto Lugo (former president of the Puerto Rico Civil Rights Commission), unions and non-profits, filed an adversary proceeding, 18-0041 against the government of the United States of America, the Board for Puerto Rico and the Governor. The law suit seeks the following:

“The present action seeks injunctive and declaratory relief, including the determination that certain provisions of PROMESA, 48 USC 201 et.seq., are unconstitutional because they violate Plaintiffs’ fundamental rights as protected by the First, Fifth, and Fourteenth Amendments of the Constitution of the United States of America, hereinafter USA, the Declaration of Independence of the USA and other statutes and international covenants that bind de USA. Plaintiffs represent a wide and inclusive cross section of individual residents of Puerto Rico, and other legal representative entities that have been, are being, and will continue to be directly and dramatically affected by the implementation or lack of implementation of certain provisions of PROMESA in the jurisdiction of Puerto Rico and abroad. In particular, the constitutionality of the establishment of a Financial Oversight Management Board, hereinafter FOMB or the Board, with executive and legislative powers over the Government of the Commonwealth of Puerto Rico, its democratically elected officials, and the residents of Puerto Rico is contested. As an additional claim and/or in the alternative, it is contended that the conflict of interests of various of the members of the FOMB renders them unqualified to remain in the Board, and it prevents any and all attempts to pursue the objectives of PROMESA and further constitutes a violation of the constitutional right to due process of law of the Plaintiffs and the People of Puerto Rico. Moreover, even the appearance of conflict of interest in the acts or omissions of those members of the FOMB can render any and or all acts of the Board null and void. Furthermore, we argue that the unique and novel nature of PROMESA does not render it exempt from constitutional and fiscal scrutiny and as such cannot be construed to preclude this Court from considering and resolving the constitutional matters presented by Plaintiffs, particularly so after the economic and social devastation caused by hurricanes Irma and María in Puerto Rico and the way the Government of Puerto Rico has mishandled the socioeconomic and health crisis that arose afterwards.

We also petition an order to perform an urgent integral, legal, and forensic audit of the public debt which is fundamental to transparency and constitutes an essential fiduciary and statutory duty of the FOMB and the Government of Puerto Rico. We affirm that further delaying the audit will only aggravate the socio-economic crisis of Puerto Rico and impede the fair and equitable fiscal reorganization and equitable and sustainable development and quality of life of the Plaintiffs and the People of Puerto Rico, which is, at least in paper, an integral part of the legislative intent of PROMESA.

The evident unwillingness and failure to perform an integral and forensic audit (as defined hereinafter) by the FOMB and the Government of Puerto Rico to deconstruct all the details of an illegal, damaging, and unprecedented issuance of public debt, requires a judicially ordered mandate to pursue it. The failure is more evident and suspicious given the decision not to perform the public audit after the existing Government of Puerto Rico set aside in the year 2017 the Commission created by statute4 in the year 2015 to undertake the audit. The Commission created by law 97 had issued two preliminary reports that revealed violations of law in borrowing practices by the Government of Puerto Rico and private parties and entities. Such forensic and legal audit is further needed to account for the extent of the potential wrongdoings, fraud, and corruption over the public debt of the Government of Puerto Rico, and to specifically identify wrongdoers (persons and legal entities) that should be held liable for the issuance of the debt. The lack of action in performing the audit will impede the compliance with the ultimate goal of a bankruptcy process which is supposed to provide a “fresh start”, “rehabilitation,” and sustainable development of the “debtor”. In the absence of the aforementioned audit, it is inappropriate and premature to consider, prepare, and adopt any fiscal plans for Puerto Rico within the scope of the PROMESA Act to move forward and to adopt measures for an equitable, sustainable development, and improved quality of life for the Plaintiffs and the people residing in Puerto Rico. Furthermore, it would operate against the ultimate purpose of any bankruptcy procedure, including PROMESA Title III proceedings, in which the present and the future of the Petitioners and the People of Puerto Rico is at stake.

This action is also pursued because of the existing and untenable state of control and submission in the socioeconomic and political relationship to which the Government of the USA has subjected the Plaintiffs and the People of Puerto Rico, relationship that is supposed to adhere to the democratic principles and rights that peoples and individuals of the world are entitled to as fundamental human rights. The neglect of those duties by the USA require to be confronted immediately and affirmatively rectified “with all deliberate speed”.”

Moreover, as part of its remedies, the complaint states:

“To include the government of the USA as a party to this case to not only assume a position with respect to the constitutional claims made by the Plaintiffs, but also to answer the allegations of the complaint, and to assume any and all constitutional and legal liabilities it should be compelled to assume over the public debt of the government of Puerto Rico and the illegal and unconstitutional imposition of the FOMB over the Plaintiffs, Puerto Rico, and its residents.”

With all due respect to the parties and attorneys, this is nothing more than a wishful thinking attempt to do things the way they think is right. None of these causes of action have much of a chance of succeeding and the last one ignores 48 U.S.C. § 795, which states:

“All expenses that may be incurred on account of the government of Puerto Rico for salaries of officials and the conduct of their offices and departments, and all expenses and obligations contracted for the internal improvement or development of the island, not, however, including defenses, barracks, harbors, lighthouses, buoys, and other works undertaken by the United States, shall, except as otherwise specifically provided by the Congress, be paid by the treasurer of Puerto Rico out of the revenue in his custody.”

But if one of these causes of action does prosper, it could change the whole Title III case and the US-PR power relationship.

In another adversary proceeding, the Commonwealth removed a case that was filed by the PREPA Retirement Board against the Governor where he ordered that it provide certain information in order to finalize the Commonwealth audited financial statements. Hence, until this issue is resolved, we can forget about the audited financial statements. We will probably see the Plan of Adjustment before we see the audited financial statements of the Commonwealth.

Finally, Mr. José Carrión was interviewed by Jay Fonseca and they had the following exchange:

“Jay Fonseca: But you draw a line. You say that states pay between 4 and 9%, with Connecticut being the highest, and you are saying that you are not going to pay more or less than 1% of this range—8% perhaps. Here, we would be talking about a 90% cut of the debt or between 85 and 90%–from $100 billion to $20 billion. Is this the number you are talking about?

José B. Carrión: Jay, I congratulate you for having read the fiscal plan, there are not many of them. The reality is that I can’t express anything else in addition to what you just said.”

Is the Board actually trying to cut the PR debt by between 85%-90%? Will it succeed? The answer is complicated.

While undoubtedly the Board is negotiating with bondholders, it is unlikely they would willingly accept such deep cuts. If they do, fine and dandy; if they don’t, we will have to wait to the Plan of Adjustment, which is to be filed sometime this year after the May 29 bar date. The Plan of Adjustment, which is filed by the Board, not Puerto Rico, divides creditors in classes and states what the impairment, if any, of its claims will be. The classes that are impaired then get to vote and if a majority does not approve it, the only other way it can be approved by the Court is through a cramdown. Section 314(b)(6) of PROMESA, however, requires in a cramdown that “the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” Not likely in a scenario where secured creditors such as bondholders receive a bigger haircut than non-secured creditors, i.e., pensioners receive no cuts or only a 10% haircut.

More importantly, if the Plan of Adjustment cannot be approved, the Title III case must be dismissed pursuant to 11 U.S.C. § 930, adopted in PROMESA by section 301. Of course, Judge Swain may ask the parties to go back to negotiating and come up with a new Plan of Adjustment as was done in San Bernardino, which took four years and an equal number of Plans of Adjustment to end that case. In that scenario, as Mr. Carrión has suggested, pensions could be further cut.

As you can see, many things have to occur in order for Mr. Carrión’s scenario to actually happen. Also, it will take months before the Plan of Adjustment is either approved or rejected. Many things remain to be decided and mediation has yet to achieve a single success, although the GDB and PRSA may eventually end in Title VI. 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.

Welcome to your weekly Title III update for April 23, 2018. Once again, not much happened in the cases but outside matters have really burgeoned.

Last week, the Board had two days of meetings to discuss the fiscal plans it was going to certify; but before I start explaining what transpired, there is a recurring theme that I must mention. During the hearings of the 19^th, during the comment period, there was this important exchange on the questions swirling around Ana Matosantos’s ethics, which garnered an interesting response from the Board’s general counsel, Jamie El Koury:

 “This issue has come up at least three times now. It came up before my time, when Ana was vetted for her appointment at the board, both by the Treasury and the White House. They found that she was complying with the requirements of PROMESA and therefore that the President should go ahead with the appointment. This was in August in 2016. Again, this was reviewed in the summer of 2017 when the issue again came up. We at the board, both the ethics advisor, myself [and] our outside council reviewed the financial disclosures by Ms. Matosantos and we reviewed the conflict of interest requirements under PROMESA, which refer you to federal law section 208—the basis of which is financial interest. Again, the determination was made that there was no conflict of interest and that the financial disclosures had been complied with. Again, the issue came up one more time in March of this year. Again the ethics advisor, myself as general counsel and [the] outside council reviewed the situation and [the] determination was the same. That the disclosures were made, that the conflict of interest rules were complied with, and that therefore there was no impediment for Ms. Matosantos to engage in the proceedings. The fourth time came up recently with letters that were sent by two groups—one was an open letter sent to the Attorney General Sessions and the other was sent to chairman Bishop and to Speaker Ryan. Again, outside council, ethics advisor and myself looked at this situation and made the same determination that the financial disclosures [were complied with] and that no conflict of interest had risen. Just to make [it] clear, of course, whenever pieces of information such as this come up, I hope it’s by now established that we take them seriously, that we do have procedures at the board to take a look, [to] consider those matters and that a full consideration is made of those concerns. Thank you.”

The problem with this exchange is that it leaves many questions unanswered. When Andrew Scurria of The Wall Street Journal commented on Twitter on El Koury’s statement, I mentioned that his statement was a bit perfunctory and Andrew answered, “He offered no substantive explanation of his determination.”  If each time there was an ethics complaint, Mr. Koury, General Counsel for the Board, and Andrea Bonime-Blanc, the Board’s Ethics Advisor carefully reviewed each and rejected them, they each had to write a report with lots of references to statutes and case law. Where are these reports? Where the reports sent to the United States Office of Government Ethics? Where they sent to the Department of Justice, to Congress, to the Oval office?

Recently, the National Legal and Policy Center sent a complaint on Matonsantos’s alleged conflicts of interest to the Justice Department, which declined to comment. If there is no validity to these ethical challenges, why are the internal Board reports not made public? After all, the People of Puerto Rico are paying for these reports. As Justice Louis D. Brandeis once said: “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” There are other questions that will become clearer as the saga of the fiscal plans unfolds.

Continuing with the drama, the Board released its own fiscal plans on April 18^th, and early on the 19^th, Governor Rosselló said he would not execute those parts of the fiscal plan with which he did not agree. The meetings business started with Gerardo Portela from AAAFAF presenting the Commonwealth’s fiscal plan. During his presentation he said three times Puerto Rico was undergoing a “humanitarian crisis.” I had to look twice to make sure it was Gerardo Portela speaking and not Alejandro García Padilla or Antonio Weiss. During his presentation, it was obvious the Board members were not paying attention and Portela made clear that the Commonwealth would execute that which was in their fiscal plan but not that with which it did not agree or thought the Board was invading public policy. After the presentation, Board members asked questions of the AAFAF staff, which looked ill at ease when asked what where their projections on economic growth after the federal relief funds were spent. After oohing and awing, the confessed to a .5% to 1% yearly growth, truly anemic in my opinion. Another interesting question was how does AAFAF believe it will reduce payroll and the answer was by providing incentives for retirement? When asked what happened if the employees do not retire, AAFAF had no answer.

After the questions to AAFAF, Ms. Jaresko spoke as to the Board’s fiscal plan and she was questioned by the Board. There was a period of public questions and the Archbishop of San Juan, who insisted that bondholder claims be cut, but not pensions or employees. This same character has closed Catholic schools, fired hundreds of employees and suspended payment of the teachers’ pension plan. Total hypocrisy.

At one point, I was able to ask about page 16 (23 of the PDF) of the Board’s fiscal plan. There is a detail of the surplus post measures SR/s which is detailed until 2023 and totals $6.697 billion. In the Commonwealth Fiscal Plan of April 5^th, at page 50, the surplus post measures totals $6.333 billion. I asked if that was the money for debt service minus any discounts mentioned in the plans. Ms. Jaresko answered quite plainly and said that debt service would be negotiated with each creditor but that was the amount available for service. Ms. Jaresko also cautioned that these were economic estimates that could vary with time, etc. So it is likely that little less than $1 billion per year for debt service would be available, which is slightly higher than the $787 million allocated in the March 13, 2017 Fiscal Plan, but for less than the approximately $3.3 billion per year the Commonwealth owes. Problem with Ms. Jaresko’s qualification as to the economic estimates is that a Plan of Adjustment has to specify the treatment of each class of creditors and it cannot be a plus or minus, UNLESS, the Board will not commit to a specific amount but simply offer to exchange claims for growth bonds. That is something not likely to be accepted by creditors.

After the period of public comments, the Board went directly to the voting and Matosantos had a surprise statement, saying she would not vote for any of the fiscal plans and that the Board’s was too austere. This is the first time that publicly the Board members have had a non-unanimous vote on something. The only other non-unanimous vote was on the PREPA RSA, and we still don’t not know the composition of that vote. Could it be that the claims of conflict of interest have forced her to decide to do dissent? Since the workings of the Board anything but transparent, we can only speculate. After her statement and that of others, the Board’s finally tally was 6-1 in favor of certifying its own fiscal plan for the Commonwealth, which I predicted it would since the end of November of 2017.

Before getting into the differences of each fiscal plan, I must point out that both fiscal plans for the Commonwealth are 90% in agreement and Ms. Jaresko emphasized how collegiate had been the effort to prepare said plans. There are however, fundamental differences. The Commonwealth rejected the 10% reduction in pensions mandated by the Board, refuses to furlough or fire any public employees (even though its fiscal plan mentioned rightsizing the Department of Education and the Department of Health) or enacting the Labor Reform requested (although the Governor had originally filed the bill with the Legislature but withdrew it when the Board put conditions on an increase of the minimum wage and the elimination of the Christmas bonus). The certified fiscal plan requires the enactment of this Labor Reform that will apply to all employees by May 31, 2018, although the Legislature has already claimed it won’t obey this part of the fiscal plan.

There was a similar procedure with PRASA and again AAFAF said that the Commonwealth would not put into effect that which it did not agree with. This time the main bone of contention is the pensions, which again must be reduced by an average of 10%, which AAFAF refuses to undertake. These fiscal plans, different from the others, have very little differences, except the pension reduction and the assertion by Ms. Jaresko that PRASA would need an $80 million loan from the Commonwealth on or before September. Interestingly, Ms. Jaresko said it was probable that PRASA would get a consensual restricting from its creditors. Interesting, but based on the information I revealed last Tuesday, any CDL loan to a public corporation requires that it be in Title III. We will see that happens.

The last fiscal plan certified on the 19^th was PREPA’s. Again, Mr. Portela objected to the possible reduction of pensions and that the Board should not lead in the Integrated Resources Plan (IRP) and did not agree with the Board as to keeping the rates below 20 cents per kilowatt-hour, operational directives or transactions requirements. Nor can the Board interfere with the Commonwealth’s public policy according to Portela.

During the public comments section, I asked about the N.Y. State Smart Grid Consortium announcement of a contract with PREPA to assist in the long-term grid planning efforts and Undersecretary Walker’s testimony. In essence, who is in charge of the IRP and the sale of PREPA. Ms. Jaresko was quick to say that PREPA was in charge of both and that the IRP had to be consistent with the fiscal plan. Also, Mr. Sobrino stated that the PREPA sale law would pass this week, something I find extremely unlikely. As with the Commonwealth Fiscal Plan, there are substantial agreements but again, the Board certified its own fiscal plan for PREPA.

The next day, the fiscal plans for HTA, GDB, COSSEC and UPR were presented. Again, Mr. Portela objected to the HTA pension reduction, 15% payroll reduction, as well as the toll increase required by the Board. Again, the Board certified its own fiscal plan with pension reductions and toll increases.

The GDB fiscal plan presented by the Commonwealth, with a likely Title VI qualified modification was certified by the Board, the only one not authored by the supervisory agency.

The President of the UPR Governing Board, Walter Alomar, objected to any pension reductions, further reduction of appropriations, the Board increase of cost per credit. He reiterated that the UPR Governing Board would deal with the pensions. During the discussions, Mr. Alomar explained the campus consolidation that entails that there will be a review of courses to see what will be kept and that there would be reduction in deans, and other personnel, but no reduction of the workforce. Sounds like business as usual to me. Again, the Board certified its own fiscal plan.

As to COSSEC, the Government agency that regulates the credit unions (called Cooperativas in Puerto Rico) and guarantees deposits up to $250,000, the Board insists that it must be independent of any stakeholder. The COSSEC leaders explained that they were dealing with the Legislature as to this. They also explained the stress testing made and assured the Board that COSSEC can handle a run on the cooperativas of between 5%-25%. After some further discussion, Ms. Jaresko recommended that the fiscal plan approval be postponed until further testing can be done. Seems to me that Ms. Jaresko is not quite sure what was done was quite correct and mentioned some new help was coming in. Not very encouraging for depositors.

The Governor, then, had only 1 fiscal plan certified out of 6, for an anemic 17% batting average. But the Fiscal Plan certification was about control, not what is best for Puerto Rico or creditors.

The Commonwealth objects to the reduction of pensions and further reduction of employees as a violation of their right to make public policy. It also claims that pensions cannot be reduced since some have property rights over them. But the Commonwealth is wrong. I have mentioned that section 201 of PROMESA gives the Board power to certify fiscal plans that must include how to “improve fiscal governance, accountability, and internal controls“ and “enable the achievement of fiscal targets.” Moreover, Board certifications cannot be reviewed by Judge Swain, who has already ruled she lacks jurisdiction to review them. Also, anyone who has dealt with any aspect of fiscal policy knows that expenses are driven by what is the entities public policy. Hence, you cannot separate one from the other. As to any constitutional protection of pensions, those entities such as ERS, the Commonwealth and PREPA, I have no doubt may be impaired as was done in Detroit, where the Michigan constitution prohibited the impairment of pensions (in Puerto Rico pensioners are jurisprudentially protected). That, however, is not the case of PRASA and UPR, who are not in Title III. One would have to make the leap to believe that PROMESA endowed the Board with the power to ignore Puerto Rico’s laws and constitution outside Title III and Judge Swain’s ruling in the Zamot PREPA affair makes that unlikely. On the other hand, section 108(a) of PROMESA states the following:

“Neither the Governor nor the Legislature

may—

(1) exercise any control, supervision, oversight, or review over the Oversight Board or its activities; or

(2) enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board.” (emphasis added)

Does this mean that if the Legislature does not pass the Labor Reform, the Board may ask Judge Swain to declare Law 80 invalid and unenforceable? Possible, but the end result would be colonialism in the raw. In addition, although the Legislature and the Governor have both expressed willingness to go to jail in disobedience of the Board, that would hardly be necessary. The Board only has to ask Judge Swain for control over the Commonwealth’s accounts and an order to banks not to honor Government checks not issued by the Board.

Finally, although Mr. Portela insisted that the Board file the Plan of Adjustment forthwith, this difference in the fiscal plans will make that difficult. The Plan of Adjustment, as per section 314 of PROMESA, has to be consistent with the fiscal plan but if the Commonwealth will not comply as to pensions, tolls, payroll, etc., how can it be approved by creditors, much less by the Court?

In the legal arena, not much happened except that some of the Unions agreed to a protective order as to their request for Rule 2004 discovery with the Commonwealth. Sooner or later, this information will come out and we will know more about. In addition, on April 25^th, Judge Swain will hold an Omnibus Hearing where the issue of certifying the COFINA issues before her to the Puerto Rico Supreme Court. Given that she already said no to a previous attempt by COFINA bondholders and that she held oral arguments on the Commonwealth v. COFINA adversary proceeding, it is unlikely she will grant it. I will be listening in (I am outside the jurisdictions of Puerto Rico and New York) and will report on what transpires.

In parting, I must mention something that transpired in Twitter between Mr. Andrew Biggs, Board member, and Andrew Scurria, from The Wall Street Journal. Mr. Biggs, who will engage anyone who treats him with respect, told Mr. Scurria that PROMESA did not require that the Board define essential services. Moreover, Mr. Carrión has said that the Board would not define them. Although that may be grammatically true, section 201(b)(1)(B) states that the fiscal plan must “ensure the funding of essential public services,” not government services. How can you fund essential services if you do not know what they are? To me, this is a major flaw in the Board’s endeavors since it has been allowing the Commonwealth to fund all the government, irrespective of what is essential. Are the State Elections Commission an essential service outside election year? Is WIPR, the Government radio and TV station an essential service? I can go on and on.

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 April 10, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.

The purported clash of titans between the Board and PR continues. The Senate, in a Tarzan-like chest pounding, unanimously passed a resolution instructing the PR Treasury Department not to send money to the Board. The Governor was understandably hesitant to support this and sent out a press release essentially saying he had to comply with section 107(b) of PROMESA, which empowers the Board to use its control over the PR budget to assure itself of the necessary funds. Also, no funds to the Board means no funds for Title III. Populistic posturing by the PR legislature.

In any event, on April 5, 2018, the Governor sent the Board the Fiscal Plans for the Commonwealth, PREPA, PRASA, UPR and HTS, without any adjustment of pensions and many of the other requirements. The Board has said it hopes to certify the plans by April 20. More likely than not, the Board will certify its own fiscal plan which will include the pension reduction and other measures anathema to the Governor, who has vowed not to implement them. If he does not, the Board will file motions with the Court pursuant to section 104(k) of PROMESA and again Judge Swain will have a clash of Board v. Commonwealth.

I will briefly discuss the Commonwealth and PREPA fiscal plans, which are the most pressing since these are the main Title III debtors. The Commonwealth fiscal plan was expanded by 80 pages adding more information and complying with some, but not all of the Board’s requirements. At page 50, you can see a surplus of billions if debt is not paid and deficit if debt is paid. The message is clear, PR cannot pay debt service, but can pay $2.25 billion in pensions. There is an increase in government payroll (page 53) although there is population decrease (page 65-66) and a $6.33 billion surplus by 2023 (page 54 and 69), all without debt payment. Moreover, the Title III litigation is expected to cost $1.46 billion by 2023 (page 54 and 185).

The Commonwealth Fiscal Plan predicts PR growing from 2019 on, although there is a projected population decrease (page 66). Page 71 is equivalent to page 55 of the March 2018 Fiscal Plan and the surplus is increased as well as other numbers changed. Makes one wonder what actually changed in 13 days?

Also, although the Governor said further labor reform was withdrawn, the plan states that it will “[i]ncrease productivity and competitiveness by revamping labor laws.” (page 130) The plan includes the rightsizing of the Department of Education continues (page 82) as well as the Health Department (page 94), but whether that means actual firings we do not know. Tax reform starts at page 133 but frankly, I can’t see how you can decrease taxes as dramatically as the fiscal plan calls for and get an increase in revenue. It can work in the US but not here in PR where tax evasion is a way of life.

During the Governor’s address to PR as to PREPA on January 22, 2018, we were told that the process would take 18 months to complete. Now, the fiscal plan states at page 142:

“The transformation process is expected to formally run from the date of certification of PREPA’s revised fiscal plan until confirmation of a plan of adjustment and completion of the necessary concession and sale transactions (Transformation Period). The Transformation Period is expected to last 12-18 months, during which:

A new, independent regulator for the energy sector will be established through legislation). The New Regulator may be the Energy Bureau within the Public Service Commission (PSC).

5 energy commissioners who serve staggered terms to remain insulated from political interference

Advisory and advocacy staff and functions strictly separated for fairness and due process reasons

A ratepayer advocate exists separately from the regulator

Appointments made from a list of persons with specified technical credentials identified through an externally led process.

Supported by expert utility staff.

Decisions will comply with traditional administrative procedures”

Now the Transformation Period will be longer and the Regulator, contrary to what the Board wants, will be part of the Public Service Commission. So much for a politician’s promises.

Finally, the fiscal plan of the Commonwealth is overly optimistic in its estimates and the possibility of using technology. Take the Property Registry of PR for example. Ever since the Acevedo Vilá Administration, the PR government has come with one scheme after another to modernize the process of registering property rights in the island and all have failed with millions of dollars wasted. Why are we to believe it will be any different this time?

The PREPA fiscal plan, contrary to the Commonwealth’s, shrank from 139 pages to 104. Although Governor Rosselló ordered the PREPA Board of Directors to justify Mr. Higgins, the new Executive Director, salary, it seems that he is here to stay since at page 11 the fiscal plans mentions him and his experience. Again, politicians.

Page 14-15 details the PREPA transformation plan of 18 months, which the Commonwealth fiscal plan mentions and is quite ambitious. As the Commonwealth Fiscal Plan, PREPA’s states that it cannot pay debt service except by increasing the cost of kilowatt/hour by 5 cents (pages 25, 27, 46-47, 83).  To be expected from the Government that claimed it would pay bondholders and that Title III was not necessary. Again, politicians.

Page 26 explains that the PREPA pension fund is only 28% funded and is $3.6 billion underfunded. Big problem. The Plan includes reduction of overtime payment from 2x to 1.5x, reduction of contribution to the medical plan and pension “reform” (page 36 and 68-69). I am sure PREPA’s unions will accept it without any complaint. Continuing with the issue of employees, the Plan states that “[a]pproximately 10% of PREPA workforce has submitted paperwork to retire with the Retirement System. If all ~600 retire and are not replaced, PREPA will realize employee costs savings of ~$45 million.” But on pages 23 and 65 of the plan, PREPA complains that since 2012 it has lost 30% of its workforce and that has constrained its ability to respond to challenges. But again at page 44 it mentions rightsizing. Totally contradictory but at page 66 it makes clear that there will be recruiting for skilled workers. Question is, if you are going to hire employees, what about the 600 not replaced workers and the $45 million in savings. Totally contradictory.

The transformation is not the only thing with a timetable. The Integrated Resource Plan (IRP) is being revised and should be completed by September 2018 (page 50). Given how much space is devoted to the IRP (pages 50-53) seems doubtful everything will be completed by September. It includes a differentiated rate system (want better service? You pay more, page 53) and this dozy: “Given the complexities of the IRP process and its range of regulatory approaches, it is not possible, nor credible at this juncture to quantitatively modify the current PREPA Fiscal Plan with the IRP objective function targets.”(page 53) Then why have the fiscal plan at all? Totally contradictory. Again, contrary to what politicians have said, the fiscal plan seems to include the selling of the PREPA monopoly, page 93. Seems PR politicians speak with a forked tongue.

Moreover, last week PR Treasury Secretary Raul Maldonado said that by summer PREPA and PRASA are expected to need a loan from the Commonwealth General Fund.  Let’s take a moment to refresh ourselves with recent comments from Martin Bienenstock, legal representative of the Board, whom have filed several motions on PREPA’s liquidity:

“The undisputed evidence shows PREPA is running out of money and that without an injection of liquidity in the near term there will be insufficient cash to continue to provide power to Puerto Rico.”

“Even with $300 million of postpetition financing PREPA will only be able to continue operation in the ordinary course until late March 2018”

“As explained at the February 15, 2018 hearing, PREPA’s cash availability is at such a low level that PREPA’s operations are in jeopardy. After the hearing, PREPA began to implement plans to ramp down PREPA’s power production and shut down certain generating units in order to conserve its limited cash resources. This exacerbated the risk to an already fragile system and leaves it vulnerable to outages and resulting in brownouts on the island. Unless PREPA obtains access to additional liquidity by mid-next week, PREPA will be forced to further reduce its load and reduce personnel.”

“Movants anticipate submitting a further request for approval of a larger financing within two to four weeks because the instant proposed financing is projected to be consumed before the end of March 2018.”

However, in subsequent hearings and filings, Mr. Bienenstock changed his tune, saying that it was possible, not probable that PREPA would have to borrow money.

“PREPA’s budget reporting since the closing of the post petition 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.”

This is nothing but a desperate attempt by the Board and the Commonwealth to spend money so the General Fund  goes below $1.1 billion so they can attain the CDL from the Federal Government. The cash reports of the Commonwealth, however, show that it will be difficult for instead of being reduced, it has grown. Moreover, it will grow larger now that April 17, tax day, approaches.

Some municipalities, however, are going to receive CDL loans since the Treasury decided it can lend them individually and not through the Commonwealth. Twelve municipalities will receive a total of $53 million in loans with another 65 in the process of requesting them. Since the loan cannot exceed $5 million per municipality, the bulk of the $4.6 billion available to PR remain intact and will probably will never be received given the Commonwealth’s finances. That is what happens when you don’t pay debt service.

The issues of Matosantos’s financial disclosures continues to be subject of debate, including by myself. I was informed that her financial disclosure forms do no list her direct interest in Euro-Caribe.  Initially, that did not appear to be a problem because she list her director role with Matosantos Commercial Corporation.  However, a careful review of the corporate documents for Euro-Caribe show that Matosantos was a director as of April 16, 2017 and as of March 5, 2016, she wasn’t. This means that between these two dates she appears to have been appointed as a director.  Matosantos was appointed to the Oversight Board on August 31, 2016.  If Matosantos became a director at EuroCaribe between March 5, 2016 and August 22, 2016, it was not declared on her initial financial disclosure forms. If Matosantos became a director between August 23, 2016 and December 31, 2016; she took on the position during her tenure on the Oversight Board and should have disclosed it in her December 2016 disclosure. If Matosantos became a director between January 1, 2017 and April 16, 2017, she will have to disclose it in her next filing.  It appears that Matosantos took on the director role at Euro-Caribe while she was on the Oversight Board, and further, it’s likely, based on this information that Matosantos signed these disclosures “as of” months beforehand.  There appears to be possible backdating.

As I said from the beginning, adhering to federal conflicts of interests disclosures is required under PROMESA. The possibility that Ana Matosantos violated federal law is clear. This could have a far-reaching impact on current Title III proceedings, and I wouldn’t be surprised to see a complaint before Judge Swain in the near future.

Finally, later today, Judge Swain will have a summary judgment hearing on the COFINA-Commonwealth case, which will determine whether the SUT belongs to the Commonwealth or COFINA. Unfortunately, due to prior engagements in other cases, I will not be able to attend but in any event is its highly unlikely Judge Swain will rule today. There is another hearing at the end of April addressing additional COFINA issues. Right after the Aurelius constitutional challenge that was argued almost three months ago, the COFINA controversy is the most important controversy in case. I expect a decision sometime this year.

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 April 2, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.

On March 27, 2018, Judge Swain heard arguments as to the injunction presented by PREC. The regulator had “requested an order providing that ‘the [Oversight Board] is directed to refrain from mandating or authorizing PREPA to take substantive electricity actions that are within [PREC’s] jurisdiction but not authorized by [PREC], and [that] PREPA is directed to refrain from taking substantive electricity actions mandated by [the Oversight Board] if such actions are within [PREC’s] jurisdiction but not authorized by [PREC].””

But the day of the hearing, PREC changed its tune and instead said it was requesting “abandoned its focus on the fiscal plan process. At oral argument, PREC reformulated its request as one for a declaration that a sphere of ‘substantive’ energy-related decisions remains under PREC’s exclusive control, and that the Oversight Board’s area of authority is limited to ‘fiscal’ matters.”

Not surprisingly, Judge Swain denied the request for an injunction and said:

PREC has not identified a specific mandate or authorization from the Oversight Board that PREC believes invades PREC’s alleged sphere of control over substantive energy policy. In fact, PREC candidly acknowledged that its reformulated request is instead one that seeks to obtain advice on the spheres of control of the relevant parties in advance of action by the Oversight Board related to such substantive matters. PREC thus seeks premature advice from the Court so as to avoid concrete disputes in the future. The Court lacks jurisdiction to render a declaratory judgment embodying such advice, as it would constitute an advisory opinion. In that PREC’s request for injunctive relief is premised on the rendition of such an opinion, it necessarily fails.

There was little probability that the original petition would be granted and probably for that reason the remedy requested was changed, although it obviously was a request for an advisory opinion. The fact that the attorneys for PREC, the Board, AFFAF and the UCC are all paid by the PR taxpayers was not wasted on the Judge. At the end of the hearing, Judge Swain took the issue under advisement but her distress was clear. She said PR needs to find a way forward using the resources it had. She encouraged increased lines of communication and to work collaboratively to the advantage of the investors and other stakeholders in order to lower transaction costs. Maybe the Judge will be much stricter in approving fees at the next hearings or start sanctioning complaints similar to PREC’s.

In an important parallel decision not mentioned by the press, Judge Swain denied the remand of cases that PREPA had removed from the Commonwealth Courts’ involving orders from PREC that the utility claimed put it at odds with its fiscal plan. The Judge stated:

“PREPA contends that the specific procedural requirements of the Rate Order that PREC issued place obligations on PREPA that conflict with PREPA’s obligations and the authority of the PROMESA-created Oversight Board in connection with the development and certification of a PROMESA-mandated fiscal plan for PREPA. ICSE contends that the same Rate Order has been invalidated or mooted by PROMESA. Determinations of these issues will affect the manner in which PREPA engages with the PROMESA fiscal plan process, as well as the force and scope of the Rate Order.”

Obviously Judge Swain is concerned about PREC’s orders conflicting with the Fiscal Plan and if so, given her previous decisions, it is likely she will invalidate them.

Last week, I discussed the Commonwealth and PREPA’s fiscal plans that were submitted by Governor Rosselló. On March 28, 2018, the Board sent letters to the Governor notifying of objections to the fiscal plans of PREPA, PRASA and the Commonwealth. The Board objected to the increase of the minimum wage and placed impossible restrictions on them. It also insisted in elimination of the county structure and the $100 million county support fund. In addition, it required that PREC not be made part of Public Service Commission and the continued existence of the Institute of Statistics. Finally, it again required the reduction of pensions above a combined SS/pensions of $1,000. This requirement was included in the PREPA and PRASA notices. The Board gave the Commonwealth until April 5 to provide the revisions and plans to have them certified by April 25.

The Governor wasted no time in saying he was not going to comply with the requirements of the Board and that if that Fiscal Plan is certified, he will not execute it. On Sunday, April 1, 2018, a letter dated April 2 was released where the Governor detailed his position as to the Board’s “requests.”

At page 2 of the letter, the Governor stated that “[t]he Board may not use the fiscal planning process to usurp or impair the Government’s own exercise-through legislation, expenditures, or otherwise-of its political, governmental and operational powers.” The quote ends with footnote 5 which cites section 303 of PROMESA which makes clear that with the exception of Titles I and II, the Court may not “impair the power of the Commonwealth to control, through legislation or otherwise, the territory . . .”

Finally, the Governor will send the Board a fiscal plan without any of the “requests” by the Board. The letter ends with this warning:

“Simply put, as Governor, I will not allow the Board to again seek the exercise of powers it does not have. Should the Board decide to certify a fiscal plan that exhibits an overreach of its powers, know that the elected Government will exercise its discretion when implementing those measures it considers proper and in the public well-being. We suggest the Board refrain from taking actions that will cause more detriment to the task the Board was mandated to execute.”

Governor Rosselló contends that the Board’s instructions are public policy and it cannot do that since that belongs to the Government.  Given the above, the Board will certify its own Fiscal Plan and then a new confrontation between the Board and the Commonwealth will reach Judge Swain’s desk . . . again.

Is the Governor’s complaint valid? Sure the Board is stablishing its own version of public policy for the Commonwealth, but I believe it can. Section 201(b)(1) states:

“A Fiscal Plan developed under this section shall, with respect to the territorial government or covered territorial instrumentality, provide a method to achieve fiscal responsibility and access to the capital markets.”

Most specifically, 201(b)(1)(F-G) state that the Fiscal Plan will include ways to “improve fiscal governance, accountability, and internal control” and “enable the achievement of fiscal targets.” Also, Section 405(m)(1) of PROMESA states

“Congress finds the following:

A combination of severe economic decline, and, at times, accumulated operating deficits, lack of financial transparency, management inefficiencies, and excessive borrowing has created a fiscal emergency in Puerto Rico,”

Subsection 4 also states:

“A comprehensive approach to fiscal, management, and structural problems and adjustments that exempts no part of the Government of Puerto Rico is necessary, involving independent oversight and a Federal statutory authority for the Government of Puerto Rico to restructure debts in a fair and orderly process.”

To me, it is clear that Congress intended the Board to establish public policy for the Commonwealth given its “management inefficiencies.” Section 303 does not protect the Government since section 201 is in Title II which is an exception to Governmental action. Moreover, Judge Swain could determine that PROMESA has preempted state law and given the Board part of Congress’ power. Hence, it is likely Judge Swain will side with the Board on the Commonwealth’s refusal to comply with the fiscal plan. How will this play out? There are several scenarios, and I detail just a few to start the conversation.

If Judge Swain sides with the Board and orders the Commonwealth to comply with the Fiscal Plan, Governor Rosselló will refuse and claim he would rather go to jail. The Board is unlikely to follow that avenue but could ask the Court for control of all of the Commonwealth’s bank accounts and order banks not to honor checks that do not have the FOMB’s imprimatur. The Board’s takeover of the PR government would thus be complete. Although in Downes v. Bidwell, 182 U.S. 244. 289-290 (1901) the Supreme Court said that Congress could “give to the inhabitants as respects the local governments such degree of representation as may be conducive to the public wellbeing, to deprive such territory of representative government if it is considered just to do so, and to change such local governments at discretion,” this would be a decidedly undemocratic result, reminiscent of the most egregious colonialism.

Obviously, Governor Rosselló knows the Court will probably side with the Board and that everything in the case will be put in hold until Judge Swain decides the issue and the controversy is appealed and the First Circuit decides. It is likely that the controversy will not be decided by the First Circuit until after November. By that time the House or the whole Congress could flip and Democrats would rule. Governor Rosselló has sworn to campaign against those who voted against PR in the recent federal tax reform and he has been hobnobbing with Democrats for a while. It seems he is hoping that a Congress dominated by Democrats will give him control of the Title III proceedings and dissolve or severely limit the Board. It is possible, but President Trump has not shown any inclination to substitute its members and is likely to veto any changes.

If Judge Swain sides with the Commonwealth, things would get even more interesting. It would mean that the Board could not determine any changes to the PR Government or pensions or the public corporations that were not approved by Governor Rosselló. This would simply not work since both Governor Rosselló and the Board want to be in total control of PR. Irrespective of this, no cuts to the government’s payroll or pensions would likely result in a plan of adjustment that would not be approved by creditors or crammed down by Judge Swain which would force the dismissal of the Title III petition as per 11 U.S.C. § 930.

Moreover, the Board could determine that it could not accomplish its job under PROMESA and dismiss the Title III. This would leave the Governor without a § 362 stay and would be sued for not paying debt for over two years. Of course, the Governor could sit down with bondholders and negotiate payment, but would he have enough money left over to pay all employees and pensioners? What if bondholders are not in the mood to negotiate and want their pound of flesh after PR’s shenanigans?

Another possible scenario is another type of Congressional action. Rob Bishop sent a letter to the Board and Governor Rosselló where he complains against the former’s lack of Title VI agreements with bondholders and the latter’s defiance. Congressman Bishop has complained in the past of the Board’s actions as to PREPA and he could spearhead an amendment to PROMESA removing its jurisdiction over the utility and establishing a federal trustee to handle its operation and sale.

Finally, I must mention Ana Matosantos. El Vocero reported on her possible conflicts of interest with regard to PREPA, and I wrote a [column on the issue]. If they existed at the time of the Board’s rejection of the PREPA RSA and they were not reported, not only could she be criminally prosecuted but the Board’s decisions on PREPA could be challenged. I would not be surprised if sometime soon PREPA bondholders request leave to conduct discovery pursuant to Rule 2004 of the Bankruptcy Rules as to Ms. Matosantos finances, especially if more information comes forward.

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.