Weekly Update – May 29, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Board & Commonwealth Must Hand Over Fiscal Plan Data

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

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

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

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

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

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

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

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

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

All of this is going to be very interesting.

Monday Update – May 21, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday Update – May 14, 2018

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

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

“A proposed settlement of the Commonwealth

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

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

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

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

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

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

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

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

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

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

Senator Murkowski from the start asked very important questions:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The report recommended the following:

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

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

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

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

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

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

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

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

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

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

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

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

Monday Update – May 7, 2018

Welcome to your weekly Title III update for May 7, 2018. We have news from the Court, as well as outside the Court.

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

Now that we are discussing PREPA, Bloomberg interviewed Mr. Walter Higgins, who said some interesting things. He said that PREPA would decide in 18 months how the sale would occur and the request for proposals will be done in 12-18 months. The leasing of the transmission will take up to two years, or at least that is what Higgins said. Interesting, since the legislature said it wanted a public private partnership, but has yet to actually approve the legislation. Moreover, El Vocero reports that the legislators dealing with the bill to sell PREPA are not clear on what mechanism Governor Rosselló will use. Seems politicians have no intention of selling the utility.

Continuing with the Congressional drama, Rob Bishop, Chairman of the House Energy Committee, arrived in Puerto Rico and was met by Resident Commissioner Jenniffer González. Governor Rosselló, however, said his agenda was too full to meet with Chairman Bishop. Local press later reported that Governor Rosselló was paddle boarding. Great way to make friends in Congress. Also of interest is that Chairman Bishop stated that Representative Don Young’s bill on the sale of PREPA “is there. It’s one of the things we have to look at.” Further clarification would be nice. In another interview https://www.facebook.com/wkaq580/videos/1891588024249988/ Congressman Bishop stated “[o]bviously any efforts you can [take] to reinsure creditors that they will be paid, and in a timely manner, will not only calm down past concerns but reinsure future investment.”

On Friday May 4, the Commonwealth handed the Board its proposed budget as was required. The budget, since it does not conform to the haircuts in pensions and other areas required by the certified fiscal plan, will be declared non-confirming and sent back. Due to this, included with the budget is a letter that must be carefully examined:

“PROMESA section 202(a), titled “Reasonable schedule for development of budgets,” requires the FOMB to “consult with the Governor and Legislature in establishing a schedule.” 48 U.S.C.A. § 2142(a) (emphasis added). To my knowledge, the FOMB did not consult with the Governor or Puerto Rico’s legislature in devising the schedule. The FOMB’s proposed schedule is too compressed for the many tasks necessary to complete the budget. We are nevertheless submitting with this letter a General Fund budget draft that may require revisions, in view of the obstacles described below, and we reserve the right to submit amended and supplemented versions of the budget as we work through additional issues.

The Commonwealth’s annual budget process takes months to complete and involves revising approximately 130 different individual department, agency, and instrumentality budgets to arrive at a consolidated budget. We have been working on this process since last year, and the Board is now asking us to substantially revise months’ worth of work in only eight days. This is not sufficient time for the task.

Furthermore, the FOMB has imposed additional procedural requirements that complicate the Government’s effort to revise its budget. On May 1, 2018, the FOMB requested that the Government use new reporting templates that are inconsistent with the Commonwealth’s past practices. The following day, the FOMB asked the Government to meet additional requirements that must now be incorporated into the Government’s budget submission. These new requirements differ materially from the Government’s historic practices. As a result, OMB’s systems cannot provide the requested information in many instances, at least in the format that the FOMB has requested. For these reasons, the elected Government’s budget submission today is consistent with its historic practices.

In light of these facts, the proposed schedule is so unrealistic that it suggests this timeline was designed to set up the Government for failure so that the FOMB can swiftly impose its own budget on the Commonwealth. The Government nevertheless has done its best to meet the FOMB’s deadline and reserves the right to continue to revise and supplement this budget to meet these critical goals.”

This is nothing more than the Commonwealth trying to document the Board’s “arbitrary and capricious” actions for the moment of confrontation before Judge Swain. Moreover, the Board required the Commonwealth’s legislature to approve the labor reform by May 31, 2018. Since the legislature has already said it will not, sometime in June, the Board will start by reducing the Commonwealth’s budget to force it to comply. When the Commonwealth continues to refuse, the Board will have to go to Judge Swain for an order.

The interesting thing about all these news is their interconnectivity. Seems to me that Governor Rosselló is putting roadblocks on the execution of the certified fiscal plan on purpose to prevent the Plan of Adjustment based on the fiscal plan from being seriously discussed. It seems Governor Rosselló believes that Congress will turn Democrat in November and that he will receive control of the Title III process. Even if Democrats win  Congress, any PROMESA amendment will need the signature of President Trump, who has not been inclined to change this legislation. Hence, his tactics will only prolong the Title III process and increase its cost.

Last week, David Skeel was at the University of Puerto Rico Law School on May 3, 2018 as part of a panel “Viability of PROMESA: Restructuring of the Debt and Economic Revitalization” and was asked about the allegations of Ana Matosantos’ conflict of interest concerning PREPA. He said

“…We look into them carefully, we have our lawyers look at them and we fully investigate them. Our lawyers have done that with Ana Matosantos and have concluded that there are not conflicts for the purposes of the decisions that we are making, again we take those concerns seriously and if new information would arise that would be problematic, we would look into it carefully. Our lawyers have looked into it and they have concluded that the concerns, they are not problems.”

Again, this raises more questions than answers. What allegations have been investigated? Who investigated them, Mr. El Koury and other Board retainers or independent counsel? What conclusions did they reach? Did these “attorneys” write reports (knowing lawyers, they did)? Was any branch of the federal Executive or Congress copied on these reports? All these questions need answering. The Board’s continued assurance that the conflicts do not exist smack of the old saying “Trust me, I am from the Government, I am here to help.” Transparency and good faith require the release of those ethics reports.

The Matonsantos controversy, being one of transparency, becomes even more important given a recent setback suffered by the Board. On May 4, 2018, Judge Jay García of the Federal District Court for the District of Puerto Rico, in the case of Centro de Periodismo Investigativo v. Financial Oversight Board, 17-1743, issued an important Opinion and Order. Plaintiff is seeking several documents pursuant to the PR Constitution and at page 4 of his opinion, Judge García stated:

“The Board argues that dismissal is warranted based on two grounds. First, it argues that this Court lacks subject matter jurisdiction under the Eleventh Amendment. Docket No. 22 at 10. Second, even if this Court has jurisdiction, the Board argues that the right to access public documents pursuant to Puerto Rico’s Constitution is preempted by PROMESA. Id. at 14. For the reasons stated below, the Court holds that: (1) Congress waived the Board’s sovereign immunity; (2) in the alternative, the Board’s sovereign immunity was abrogated by Section 106(a) of PROMESA; and (3) the right to inspect public documents pursuant to Puerto Rico’s Constitution is not preempted by PROMESA.”

Judge García continued at page 22:

“Here, Section 4 does not preempt Puerto Rico disclosure law. Similar to the Bates case, where the federal statute expressly prohibited state law imposing labeling and packaging requirements that are “in addition to or different from” FIFRA, Section 4 of PROMESA supersedes Puerto Rico laws only if they are inconsistent with the Act. As PROMESA was enacted to restructure Puerto Rico’s debt, and not to dictate the way Puerto Rico’s government discloses information to the public, Puerto Rico law requiring disclosure of public information cannot be said to be inconsistent with PROMESA.

Congress could have added language specifically preempting Puerto Rico law on disclosure, but opted not to do so. However, Congress did use clear preemptive language in other sections of PROMESA. For example, PROMESA § 303(3) preempts the Commonwealth government from enacting restructuring laws or issuing “unlawful executive orders that alter, amend, or modify the rights of holders of any debt of the territory or territorial instrumentality, or that divert funds from one territorial instrumentality to another or to the territory.” Similarly, Section 504 preempts Puerto Rico laws or regulations concerning the approval process for critical infrastructure projects. Id. § 504(b), (e). Congress, however, did not include specific preemptive language referring to disclosure of information.”

At page 24, Judge García continued his analysis:

“First, the right to access and inspect public documents in Puerto Rico is not an area where the federal government has played a large role. Field preemption is reserved for areas of the law and public administration where the federal government has traditionally held exclusive authority like, for example, immigration, foreign policy, or bankruptcy. Accord Hines v. Davidowitz, 312 U.S. 52, 74 (1941) (immigration); Am. Ins. Ass’n v. Garamendi, 539 U.S. 396, 420 (2003) (foreign policy); Franklin Cal. Tax-Free Tr., 136 S. Ct. at 1947 (bankruptcy).

In contrast, access to public information has been traditionally a local affair. See Bhatia-Gautier v. Rosello-Nevares, 2017 TSPR 173, 2017 WL 4975587 at *10 (P.R. 2017) (“Bhatia”).17 Thus, as an area that normally is reserved to the states, and in this case, the territory of Puerto Rico, the Court shall not assume that a federal statute has supplanted Puerto Rico law in this matter unless Congress makes such an intention “clear and manifest.” N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995) (quoting Rice, 331 U.S. at 230) (internal quotation marks omitted). The Board has not shown this to be the case here. Congress has not expressed a desire, neither in PROMESA nor in its legislative history, to have federal law be exclusive in the area of disclosures by the Board. As stated above, PROMESA’s purpose is to help Puerto Rico achieve fiscal responsibility and access to capital markets. To achieve this, Congress created the Board, but did not choose to shield it from all local laws.” (footnotes omitted)

At page 28, Judge García opined:

“The Court finds no conflict between Puerto Rico’s law on disclosure of public documents and PROMESA. It is possible for the Board to comply with both sets of law. The Board assumes PROMESA’s disclosure provisions dictate the only way that the Board can publicly disclose information. However, Puerto Rico law can supplement the Board’s disclosure requirements. While PROMESA requires certain documents and meetings to be publicly disclosed, it does not prevent additional disclosures by the Board.”

Continuing at page 31:

“The fact that it may be somewhat costly or inconvenient to comply with the disclosure requirements does not make the Board’s task to enforce PROMESA impossible. The Board is an entity of the Commonwealth paid for by the Puerto Rican people and, as such, must comply with Puerto Rico law that is not inconsistent with its mandate. PROMESA § 4. Congress, pursuant to its plenary powers, could have drafted PROMESA in many ways. However, it chose to create the Board as an entity within the Commonwealth and, therefore, it must be treated accordingly.

Finally, a citizen’s right to access public documents goes hand in hand with PROMESA’s purpose. When enacting the Act, Congress expressed concern with Puerto Rico’s lack of transparency and unaudited financial information. PROMESA’s provisions and its legislative history are evidence of this concern. See PROMESA §§ 204(b)(3), 405(m)(1); see also H.R Comm. on Natural Resources, Puerto Rico Oversight, Management, and Economic Stability Act, H.R. Rep. No. 114-602, at 40-46 (2016) (finding that PROMESA was a necessary legislation “[d]ue to the realities facing the island, and the inability of its local politicians to bring order and transparency.”). Thus, Puerto Rico disclosure law actually helps PROMESA’s legislative purpose by shining light into the Board’s dealings with the government of Puerto Rico. After all, “[s]unlight is said to be the best of disinfectants.” L. Brandeis, Other People’s Money 62 (1933).” (footnotes omitted)

Given the above, there is no doubt in my mind that if a citizen, either private or the press, may seek the information on Ms. Matosantos’ conflict of interest. Of course, the Board may “deny access to others explaining the basis for the denial pursuant to applicable privilege and confidentiality laws. . .  If unsatisfied with the Board’s reasoning for denying the requested documents, the requesting party may seek judicial review.” Page 29 of the opinion. Given PR and Federal Court’s rulings on access to public records and the need to be transparent, it would be a good idea for the Board to release the Matosantos documents forthwith. A protracted fight over them would bring about the shadow of “traqueteos” (shenanigans) being conducted behind closed doors.

For the third straight year, Puerto Rico failed to comply with the disclosure of its Comprehensive Annual Financial Report (CAFR). It has now accumulated three fiscal years without providing accurate information on the state of the Treasury, its debt levels and the condition of its assets. This is probably a breach of 17 CFR 240.15c2-12-Municipal securities disclosure of the SEC, as reflected in a notice filed last Wednesday by AAFAF before the Municipal Securities Regulatory Board.

On the legal front, Judge Swain will hear the oral argument on the COFINA motion to certify the Commonwealth v. COFINA question to the Puerto Rico Supreme Court. Each party will have 45 minutes to argue. Unfortunately, I have previous appointments and will not be able to attend.

Also, on May 21, Judge Dein will hear the oral argument on GO’s and others request for an order for production of documents pursuant to February 26, 2018 order. I expect an order soon for the production of most, if not all, of the requested documents.

On June 5, the First Circuit will hear oral arguments on the Ad Hoc PREPA bondholder’s appeal from Judge Swain’s denial of their motion to appoint a receiver for the utility. Not sure if I will be able to attend.

Siemens Transportation Partnership Puerto Rico, S.E.’S filed a Motion “To Preserve Funds Held In Escrow And Request For Discovery In Aid Of Any Hearing Deemed Necessary By The Court last week. The complaint “seeks the release of funds held in a GDB escrow account established for Siemens‘ benefit in connection with a Settlement Agreement between Siemens and HTA.” Plaintiff claims that under applicable law, the Escrow Account and the Escrowed Funds are Siemens property. Clearly, the Board and the Commonwealth will oppose the request.

In 2017, Altair and others sued the United States of America in the Federal Claims Court arguing that PROMESA constituted a taking without just compensation. Of course, the U.S. moved to dismiss the amended complaint and the briefing has been completed. We now await the Court’s decision. If the case is not dismissed, this could completely change the course of the PROMESA Title III since I doubt Congress believed the U.S. could be held liable for bondholder’s losses. 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.