Monday Update – October 29, 2018

Welcome to your weekly Title III update for October 29, 2018. Not much has happened in the case, but outside in the greater PROMESA world, it is in turmoil.

On October 23, 2018, the Board discussed and approved the new Fiscal Plans for the Commonwealth and the UPR. Although not much was new in the Commonwealth’s Fiscal Plan, the Puerto Rican government is once again decrying the “austerity” the Board is imposing and Governor Rosselló even vowed to appeal the plan in Boston (meaning the First Circuit). This is hard to do if you have not questioned the Fiscal Plan before Judge Swain. Of course, the Commonwealth got Judge Swain’s certification to appeal her decision as to the previous Fiscal Plan, and in fact, the notice of appeal was filed and docketed but the First Circuit has not ruled yet on whether it will allow it. However, given the other appeals, I doubt it will be denied.

As mentioned before, the new Fiscal Plans have new numbers as to migration and income but retained the need to reduce by millions of dollars “personnel savings,” including the Departments of Health, Education, Corrections and Police (more on this last one later). It also retains the cuts in pensions and does not provide for the payments of the Christmas bonus. Of course, the governor refuses to obey these decisions—traditionally the bonus is paid around the 15th of November, just in time for Black Friday. We will soon find out whether it will happen. Since I know that many parents in the government use this money to pay for their kids’ presents, it would be very sad if it does not happen.

The UPR Fiscal Plan is also very similar to the previous one, with increases in tuition and consolidation of campuses. Christmas bonuses are eliminated and pensions reduced. During the meeting, various university related groups and individuals voiced their concerns and displeasure with the Fiscal Plan—all done in an orderly and peaceful manner. Kudos to them.

One last thought as to the UPR pensions’ in Bayrón Toro v. UPR, 119 D.P.R. 605 (1987), the Puerto Rico Supreme Court held that persons who were receiving pension payments had a constitutional right under the Commonwealth’s constitution to receive said pension. Now in the Detroit and Stockton cases, the Court determined that state constitutional guarantees to pensioners do not trump federal bankruptcy law. The UPR, however, is not in Title III and hence I am not sure that the Board may alter Puerto Rico’s constitutional law with the stroke of a pen. Again, let’s see what happens.

Cathy Kunkel, an energy analyst at the Institute for Energy Economics and Financial Analysis published a column in The Hill titled, “Puerto Rico energy bill: A step toward renewables or another scandal waiting to happen?” The piece praises some parts of it but also argues strongly against it:

The design and negotiation of contracts will instead take place through a non-transparent process controlled by PREPA, the Puerto Rico Public-Private Partnerships Authority, and the Puerto Rico Fiscal Agency and Financial Advisory Authority, all effectively under the control of the governor. Given PREPA’s and Puerto Rico’s long history of politically-driven contracting scandals, this structure promises more of the same.

In short, the proposed new energy law appears to be setting in motion a process whereby the short-term push for natural gas and politically-driven contracts will come into conflict with the longer-term goals for renewable energy and energy efficiency. As a result, essential goals to reduce the fuel budget will not be achieved and the natural gas path will lead to costly litigation on energy planning and contracting that will likely take years to resolve.

A different approach is needed. Rosselló’s privatization model should be scrapped and replaced with a commitment to professional energy planning that prioritizes renewable energy, particularly distributed resources.

I agree that the privatization process is anything but transparent but I believe it is because politicians do not want to sell PREPA and are just going through the motions. Again, we will soon find out.

Many of you may not know but the Puerto Rico Police Department, as many other U.S. police departments, are under a consent decree with the U.S. Department of Justice since 2012. The reforms have been slow to be enacted, mostly due to a lack of funding. Federal Judge Gustavo Gelpí is in charge of the case and his patience finally ran out on October 25 and issued the following order:

The Court is aware that representatives of the Commonwealth and its Fiscal Board, USDOJ and Monitor will meet tomorrow to discuss the Reform budget. However, the scope of said meeting should go beyond said specific line item budget. A fully financed PRPB Reform Office, in and of itself, alone cannot achieve the goal the Commonwealth and United States governments agreed to, when in 2013 the Court approved the Police Reform Agreement.

In order for the Commonwealth police force to come into full constitutional compliance, as per the terms of the Agreement, the Commonwealth (Fiscal Board included) must adequately fund the PRPB, and not just the PRPB Reform Office.

Without law and order, no government within the United States — including that of a territory currently being subject to the plenary power of Congress — can function, even less reconstruct itself as contemplated under PROMESA.

This Court has an unflagging duty under Article III of the U.S. Constitution to guarantee the citizens of this jurisdiction a fully functional police department, as intended by the parties in the Agreement. As such, the Court will zealously overlook all fiscal matters that impact the Agreement itself, both directly and indirectly. The Commonwealth’s ability to adequately establish law and order in the form of constitutional policing cannot be impaired by a fiscal board, as long as this Reform Agreement is in place.

If the Commonwealth and its Fiscal Board stand in impasse as to this matter, the Court will not hesitate to entertain a request for any appropriate remedy from any of the above named entities, monitor excluded. (Bold added)

Judge Gelpí is openly saying that the Commonwealth and the Board have to come up with the money for the police reform or he will entertain motions by the parties, i.e., the Commonwealth or the DOJ. Judge Gelpí, who knows his business, knows that Section 7 and 204(d) prohibit PROMESA from interfering with federal programs dealing with safety or interfering with court issued consent decree. And knowing Judge Gelpí, he will not hesitate to act.

After the aforementioned meeting, the Board stated it was in full agreement with the police reforms but added that when it hammered the Fiscal Plan, it was given a higher number of police officers in the force and therefore, the Commonwealth had the money to fund the reform. The government is yet to put forward its position.

On October 25, the Board made public a letter calling for proposals for the following:

The Oversight Board has created a Special Claims Committee (the “Committee”) to further consider potential claims that might arise from the conduct described in the Report and is seeking submissions from interested parties to be retained to assist the Committee (“Claims Counsel”). The scope of the work should include (i) review and assessment of the Report and the factual materials that form the basis of the Report, (ii) legal research as necessary to advise the Committee regarding potential causes of action and (iii) initiation of any litigation arising from the conduct described and/or referrals to prosecutorial or regulatory bodies.

The Commonwealth Title III case was filed on May of 2017, hence, the statute of limitations to bring any actions against those causes of action mentioned above expires in May of 2019. To seek counsel to evaluate the myriad of documents Kobre & Kim needs to review and then file causes of action before May 2019 behooves the mind. The UCC has been chomping at the bit to do this job, it is willing and able and time is running out. This letter to me is incomprehensible.

In the Court scenario, the Retirees Committee filed a motion in the COFINA litigation stating:

The Retiree Committee requests that the Court change the Settlement Objection Deadline from November 16, 2018 at 5:00 p.m. (Atlantic Standard Time) to the same date and time as the deadline to be set by the Court with respect to the filing of any objections to the COFINA Plan of Adjustment, or alternatively, assuming the Court maintains the January 16, 2019 hearing date to consider confirmation of the COFINA Plan of Adjustment, December 31, 2018 at 4:00 p.m. (Atlantic Standard Time), in accordance with the Case Management Procedures, to provide parties in interest a sufficient and appropriate opportunity to respond to the Settlement Motion.

We must remember that the UCC filed a motion saying the COFINA settlement could not be funded with the June Commonwealth fiscal plan and mentioned that the Retirees’ Committee agreed. Seems they need time to analyze whether the settlement is feasible. We will see.

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.

ICYMI: Caribbean Business: Fundamental Changes Puerto Rico Needs

Welcome to a special edition of Control Board Watch. This week, my column in Caribbean Business highlights the need for a Constitutional Assembly to overhaul the Puerto Rican Constitution.

Key highlights from the piece include:

“One of the most important changes we need is to amend our Constitution. It was written by politicians who believed future politicians would respect it and hence, were not 100 percent clear on what it meant.”

“We need a Constitutional Assembly via Article VII, section 2, through which the complete Constitution is overhauled.”

And one of the amendments I recommend for the Constitution is:

“Article VI, section 8, payment of public debt: Since the García Padilla administration claimed the Constitution meant public services had to be paid before public debt, we must make it clear that public debt goes first, BEFORE ANY OTHER GOVERNMENT EXPENDITURE. Violations should be a felony punishable by 10 years in prison, with no probation and no statute of limitations.”

The full text of my column can be found here.

Monday Update – October 22, 2018

Welcome to your weekly Title III update for October 22, 2018. Not much happened last week but this time a lot has happened and most of it of great importance. On October 19, the Board filed the COFINA Plan of Adjustment (96 pages), Disclosure Statement (621 pages) and the Motion for Title III settlement pursuant to Rule 9019 of Bankruptcy Procedure (98 pages).

I will not discuss the Disclosure Statement much or go into much detail on the other motions. I will, however, discuss the salient parts of the settlement and the Plan of Adjustment (“Plan”).

The Disclosure Statement divides creditors:

Claims are classified as follows:

(a) Class 1: Senior COFINA Bond Claims

(b) Class 2: Senior COFINA Bond Claims (Ambac)

(c) Class 3: Senior COFINA Bond Claims (National)

(d) Class 4: Senior COFINA Bond Claims (Taxable Election)

(e) Class 5: Junior COFINA Bond Claims

(f) Class 6: Junior COFINA Bond Claims (Assured)

(g) Class 7: Junior COFINA Bond Claims (Taxable Election)

(h) Class 8: GS Derivative Claim

(i) Class 9: General Unsecured Claims

(j) Class 10: Section 510(b) Subordinated Claims

Section 23.2 defines impaired classes, which are:

Impaired Classes to Vote: The Claims in Classes 1 through 9 are impaired and receiving distributions pursuant to the Plan, and are therefore entitled to vote to accept or reject the Plan; provided, however, that, based upon the elections made on the Ballot/Election Form, Classes 4 and 7 are deemed to have accepted the Plan. The Claims in Class 10 are impaired and not receiving a distribution pursuant to the Plan and, therefore, Class 10 is deemed to have rejected the Plan.

Hence, only classes 1-3, 5, 6, 8, and 9 get to vote on the Plan of Adjustment but it seems there is one class that will not vote in favor of the Plan. If one class does not vote in favor of the Plan of Adjustment, the Plan is not approved unless Judge Swain does a cram down, which seems to be the strategy here. What are 510(b) claims?

Section 510(b) Subordinated Claim: Any Claim, to the extent determined

pursuant to a Final Order, against COFINA or its Assets arising from or relating to (a) rescission of a purchase or sale of an Existing Security, (b) purchase, sale or retention of such a security, or (c) reimbursement, indemnification or contribution allowed under section 502 of the Bankruptcy Code on account of such Claim.

In PROMESA a cramdown may occur pursuant to section 314(c) if:

(c) CONFIRMATION FOR DEBTORS WITH A SINGLE CLASS OF CLAIMS.—If all of the requirements of section 314(b) of this title and section 1129(a) of title 11, United States Code, incorporated into this title by section 301 other than sections 1129(a)(8) and 1129(a)(10) are met with respect to a plan—

(1) with respect to which all claims are substantially similar under section 301(e) of this title;

(2) that includes only one class of claims, which claims are impaired claims; and

(3) that was not accepted by such impaired class, the court shall confirm the plan notwithstanding the requirements of such sections 1129(a)(8) and 1129(a)(10) of title 11, United States Code if the plan is fair and equitable and does not discriminate unfairly with respect to such impaired class.

The Plan of Adjustment has also something interesting as to conditions precedent:



25.1 Conditions Precedent to the Effective Date. The occurrence of the Effective Date and the substantial consummation of the Plan are subject to satisfaction of the following conditions precedent:

(a) Satisfaction of Certain Settlement Agreement Conditions: The

satisfaction of the “Conditions to Effective Date” set forth in Section 4 of the Settlement Agreement.

(b) Fiscal Plan Certification: The Oversight Board shall have determined

that the Plan is consistent with COFINA Fiscal Plan and shall have certified the submission of the Plan, and any modifications to the Plan through the Confirmation Date, in accordance with Sections 104(j) and 313 of PROMESA.

(c) Entry of the Confirmation Order: The Clerk of the Title III Court shall

have entered the Confirmation Order in accordance with Section 314 of PROMESA and section 1129 of the Bankruptcy Code, made applicable to the Title III Case pursuant to Section 301 of PROMESA, which shall be in form and substance reasonably acceptable to the Oversight Board, AAFAF, COFINA, the PSA Creditors and Bonistas, and the Confirmation Order shall provide for the following:

(i) Authorize COFINA and Reorganized COFINA, as the case may be, to

take all actions necessary to enter into, implement, and consummate the contracts, instruments, releases, leases, indentures, and other agreements or documents created in connection with the Plan;

(ii) Decree that the provisions of the Confirmation Order and the Plan are

nonseverable and mutually dependent;

(iii) Authorize COFINA and Reorganized COFINA, as the case may be, to (1) make all distributions and issuances as required under the Plan and (2) enter into any agreements and transactions, as set forth in the Plan Supplement;

(iv) Authorize the implementation of the Plan in accordance with its terms.

(v) The COFINA Bonds and the covenants by COFINA Reorganized COFINA and the Commonwealth, as applicable, for the benefit of the holders of the COFINA Bonds and COFINA Parity Bonds (including the Sales Tax, non-impairment, substitution of collateral and tax-exemption covenants set forth in Article XVI hereof), as provided in the New Bond Legislation and the New Bond Indenture, constitute valid, binding, legal and enforceable obligations of COFINA, Reorganized COFINA and the

Commonwealth, as applicable, under Puerto Rico and federal law, and the COFINA Portion (and any substitution of New Collateral on the terms and conditions provided for herein) is the property of Reorganized COFINA, free and clear of all liens, claims, encumbrances, and other interests of creditors of COFINA, Reorganized COFINA, the Commonwealth, or any instrumentality of the Commonwealth, other than liens and claims afforded to holders of COFINA Bonds under the Plan and the Confirmation Order

and shall not be “available resources” or “available revenues” of the Government of Puerto Rico, as used in Section 8 of Article VI of the Puerto Rico Constitution or as otherwise used in the Puerto Rico Constitution (whether construed pursuant to the Spanish or English version of the Puerto Rico Constitution);

(vi) Pursuant to the New Bond Legislation, the COFINA Bonds and COFINA Parity Bonds have been granted and are secured by a statutory first lien as described in Section 16.2 hereof, which Lien shall remain in full force and effect until the COFINA Bonds and COFINA Parity Bonds have been paid or satisfied in full in accordance with their terms;

(vii) The statutory lien on, and pledges of, COFINA Pledged Taxes as provided in the New Bond Legislation and the New Bond Indenture, as applicable, and all other provisions made to pay or secure payment of the COFINA Bonds and COFINA Parity Bonds are valid, binding, legal, and enforceable; including, without limitation, covenants not to impair such property, maintain available tax exemption and provide for the conditions regarding substitution of New Collateral as adequate protection for the

property rights conferred under the Plan and the Confirmation Order;

(viii) New Bond Legislation has been enacted to amend (or repeal and replace) the existing COFINA legislation to, among other things, (i) establish the independent COFINA board of directors referred to in Section 28.3 hereof, (ii) permit the Sales Tax, tax exemption, substitution of New Collateral and non-impairment provisions referred to herein and (iii) grant such other authorizations, if any, which may be required to implement the transactions contemplated herein, including, without limitation, (a) a

determination that COFINA is the owner of the COFINA Portion under applicable law,  with respect to the COFINA Bonds and COFINA Parity Bonds, in whole or in part, or otherwise in accordance with the Additional Bonds Test, (c) enhanced financial reporting, (d) events of default and imposition of certain measures upon an event of default, (e) submission of any disputes under the New Bond Indenture to the jurisdiction of the Title III Court, and (f) other customary terms, conditions, and covenants for

similarly structured and supported municipal bonds that are acceptable to the PSA Creditors. To the extent applicable, the foregoing terms and such other terms as may be agreed upon shall be included in the New Bond Indenture;

(ix) The transfer of the COFINA Portion (and any substitution of New

Collateral on the terms and conditions provided for herein) pursuant to the Plan is appropriate and binding and specifically enforceable against Reorganized COFINA and the Commonwealth, their respective creditors and all parties in interest in accordance with the Plan, including, without limitation, because the transfer of the COFINA Portion created in Reorganized COFINA an ownership interest in such property (and any

substitution of New Collateral on the terms and conditions provided for herein) and is a valid provision made to pay or secure payment of the COFINA Bonds;

(x) The deemed acceleration of the Existing Securities on the Effective Date

(i) in connection with the treatment of Junior COFINA Bond Claims (Assured) and (ii) if requested by Ambac and/or National prior to the commencement of the Disclosure Statement Hearing, in connection with the Senior COFINA Bond Claims (Ambac) and the National Election, respectively; provided, however, that, such deemed acceleration shall not affect, nor shall it be construed to affect, any issues regarding the existence of a “default” or an “event of default” with respect to the Existing Securities which were pending prior to the Effective Date;

(xi) The Confirmation Order is full, final, complete, conclusive and binding

upon and shall not be subject to collateral attack or other challenge in any court or other forum by (1) COFINA, (2) Reorganized COFINA, (3) the Commonwealth, (4) each Person or Entity asserting claims or other rights against COFINA, the Commonwealth or any of its other instrumentalities, including each holder of a Bond Claim and each holder of a beneficial interest (directly or indirectly, as principal, agent, counterpart, subrogee,

insurer or otherwise) in respect of bonds issued by COFINA, the Commonwealth, or any of its other instrumentalities or with respect to any trustee, any collateral agent, any indenture trustee, any fiscal agent, and any bank that receives or holds funds related to such bonds,  whether or not such claim or other rights of such person or entity are impaired pursuant to the Plan and, if impaired, whether or not such person or entity accepted the Plan, (5) any other Person or Entity, and (6) each of the foregoing’s respective heirs, successors, assigns, trustees, executors, administrators, officers, directors, agents, representative, attorneys, beneficiaries or guardians; and (xii) The Plan is consistent with the COFINA Fiscal Plan and satisfied Section 314(b)(7) of PROMESA.

This section raises several questions. The Plan states that the Commonwealth cannot question the existence of COFINA again. However, what if ten years from now, the new government wants to use all of the COFINA funds and claims that the deal violates the Puerto Rico Constitution? Most specifically, Article VI, section 2, which was invoked by the UCC in its claim that COFINA is unconstitutional? What if in the future Picture Rico issues GO’s, it defaults, and then its bondholders claim that COFINA is unconstitutional for it violates Article VI, section 2, arguing that the sales tax is an available resource within the meaning of Article VI, section 8 of the Puerto Rico Constitution? These claims were made in the Commonwealth v. COFINA litigation and can be raised again.

Moreover, the Legislature needs to legislate certain laws in order for this Plan to work. With the Puerto Rico Legislature fighting both with the Board and the governor, will that happen? Will it refuse to surrender its power to tax, giving COFINA property rights to its portion of the SUT?

My point is that the Plan of Adjustment does not in and of itself bury claims against COFINA forever. There would be a judgment as to its validity but it is not a judgment by the Puerto Rico Supreme Court or even by the First Circuit, hence it is open to attack in the future. And this is only what I can think of. I am sure that many other ideas can be devised to question the decision if it so benefits lawyers’ clients.

In addition, on Wednesday October 17, the UCC filed an Urgent Motion Of Commonwealth Agent Requesting Entry Of Order Establishing Hearing Date And A Briefing Schedule For Motion To Enforce Stipulation And Order Approving Procedure To Resolve Commonwealth-Cofina Dispute In Title Iii CASE OF COMMONWEALTH OF PUERTO RICO. The UCC avers:

As the Commonwealth Agent repeatedly advised the Court and parties-in-interest over the last few months,4 the Agreement in Principle was approved by the Commonwealth Agent in reliance upon the May 30, 2018 certified fiscal plan. The Oversight Board revised the May 30 fiscal plan’s long-term projections materially downward in connection with its certification of the June 29, 2018 fiscal plan, thus rendering, in the opinion of the Commonwealth Agent, a settlement along the lines of the Agreement in Principle neither feasible nor desirable.

Indeed, after taking into account the COFINA debt service under the COFINA Settlement, the projected cash flows under the June 29, 2018 certified fiscal plan would reflect an approximate $28 billion (in nominal dollars) deficit for the Commonwealth and that deficit amount assumes that no Commonwealth creditor would receive a plan distribution. To add another point of reference, the June 29 certified fiscal plan reduced the 40-year cash flow as presented in the May 30 certified fiscal plan by an amount that is several billions of dollars more than the total proceeds to be received by the Commonwealth under the Agreement in Principle. The Commonwealth Agent, when determining the appropriate action with respect to the Commonwealth-COFINA dispute may “consider what result, through litigation, negotiation and mediation, will render [the Commonwealth” best able to achieve fiscal responsibility and access to capital markets, in the judgment of the [Commonwealth] Agent. Stipulation, ¶ 4g. Accordingly, the Commonwealth Agent believes that as long as the current fiscal plan is in effect (or a fiscal plan which suffers from the same deficiencies), neither a COFINA settlement based upon the Agreement in Principle nor the COFINA Settlement can be executed and/or consummated. . .

As set forth below, because the Oversight Board has no authority to proceed with the Rule 9019 Motion absent the Commonwealth Agent’s agreement to a settlement under the Stipulation, the issue of the Oversight Board’s violation of the Stipulation should be heard prior to the merits of the Rule 9019 Motion. . .

The Oversight Board does not have the authority to seek approval of a COFINA settlement in the Commonwealth’s Title III Case unless (1) the Oversight Board does so as part of confirmation of a Commonwealth plan of adjustment that incorporates such settlement, see Stipulation, ¶ 4.n, or (2) the settlement in question was negotiated by the Agents. See id. ¶ 4.j. Because the Oversight Board is not seeking confirmation of a Commonwealth plan of adjustment nor approval of a settlement negotiated by the Agents, the Rule 9019 Motion does not comply with the Stipulation.

Undeterred by the UCC’s motion, the Board filed a Motion Pursuant To Bankruptcy Rule 9019 For Order Approving Settlement Between Commonwealth Of Puerto Rico And Puerto Rico Sales Tax Financing Corporation. At footnote 2, it comes out swinging and says:

A debtor under PROMESA Title III is not required to seek court approval of settlements pursuant to Bankruptcy Rule 9019, and by filing this Motion, the Commonwealth does not waive any argument as to whether any other

settlement or compromise entered into by the Commonwealth is subject to the requirements of Bankruptcy Rule 9019. See In re City of Stockton, 486 B.R. 194, 195-200 (Bankr. E.D. Cal. 2013) (“11 U.S.C. § 904 gives a chapter 9 debtor freedom to decide whether to ignore or to follow the Rule 9019 compromise-approval procedure . . . .”); PROMESA § 305 (incorporating similar provisions as 11 U.S.C. § 904); see also In re City of Detroit, 524 B.R. 147, 198-99 (Bankr. E.D. Mich. 2014) (recognizing that “the City exercised its right under § 904 not to request Court approval of this memorandum of understanding.” (citing In re City of Stockton, 486 B.R. 194, 199 (Bankr. E.D. Cal. 2013)). The Commonwealth has elected to file this Motion to approve the Settlement as part of the orderly administration of the Commonwealth’s Title III Case, as a condition of the Settlement Agreement, and in conjunction with the Amended and Restated Plan Support Agreement for COFINA, dated as of September 20, 2018, where the Commonwealth agreed to seek approval of the Settlement Agreement contemporaneously with the confirmation of COFINA’s plan of adjustment.

I don’t think even the Board believes this one. This is the first settlement and it needs the Court’s imprimatur even if it is for appearances purposes. Further in the motion, the Board states:

On August 13, 2018, the Commonwealth Agent filed an informative motion indicating that it was not prepared to enter into a definitive agreement for the Agreement in Principle because the Oversight Board’s most recent certified Fiscal Plan for the Commonwealth was dramatically different than when the Agreement in Principle had been reached. Adversary Proceeding, ECF No. 540.

Based upon conversations with the COFINA Agent, the Oversight Board, as representative of the Commonwealth in its Title III Case pursuant to section 315(b) of PROMESA, pursuant to the Oversight Board’s authority to negotiate and mediate with creditor to achieve a Authority, Act 2-2017, negotiated and executed the Settlement Agreement with the COFINA Agent. settlement of the Commonwealth-COFINA Dispute pursuant to Paragraph 4(n) of the Procedures Order, together with AAFAF, as the entity authorized to act on behalf of the Commonwealth under the authority granted to it under the Enabling Act of the Fiscal Agency and Financial Advisory Authority, Act 2-2017, negotiated and executed the Settlement Agreement with the COFINA Agent.

In other words, the Board ignores the UCC motion and tells the Court, “I can settle this on my own.” Again we see the Board and the UCC butting heads. Of course, all this may be moot. On Tuesday October 23, the Board will certify a new Fiscal Plan for the Commonwealth and the UPR which could allay any fears the UCC may have had, but the tone of the motion negates this idea. In any event, we will know more on Tuesday. Given the importance of this first big settlement, I am sure the Board will fight tooth and nail to have it approved.

In addition, both COFINA and all other debtors in Title III filed a Motion for Entry of an Order (a) Approving limited Omnibus Objection Procedures, (b) Waiving the Requirement of Bankruptcy Rule 3007(e)(6), and (c) Granting Related Relief. The motion is very detailed and any creditor who filed a proof of claim in the cases MUST read it carefully. Prime Clerk received 165,333 claims and the Board is preparing the procedure to object to some (probably the majority) of those claims. Two things must be noted, however. Each Omnibus will include objections for 500 claims and if objections are not countered within 30 days, the objection may, and probably will, be granted by the Court. This procedure will probably be approved by the Court and one must look at it carefully.

Finally, there will be an Omnibus hearing on October 25, 2018. I will be there and if anything important transpires, will try to have a new posting.

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

Monday Update – October 15, 2018

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

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

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

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

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

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

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

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

Judge Swain determined as follows:

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

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

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

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

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

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

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

Weekly Update – October 9, 2018

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

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

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

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

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

The motion continues stating later on:

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

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

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

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

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

Next, the motion takes on the transformation of PREPA:

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

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

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

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

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

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

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

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

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

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

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

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

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

Mr. Weiss continues saying:

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

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

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

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

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

Monday Update – October 1, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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