Monday Update – November 19, 2018

Welcome to your weekly Title III update for the November 19, 2018. Last week’s developments all lead up to Tuesday’s hearing on the COFINA disclosure statement.

There were only five objections to the COFINA disclosure statement, two from individuals, one from the Bank of New York Mellon, one from Lehman Brothers Holdings and one from four local credit unions, albeit this one was filed a day late. The Board filed its answer to said objections, including the credit unions objection, essentially saying that the disclosure statement filed on Friday, November 16, gave the requested information that objectors found lacking. As to the objections of individuals, the Board swept them away, not surprising since they were rather scatterbrained and filed pro se. It remains to be seen what Judge Swain will say tomorrow but I doubt she will reject the disclosure statement. At most, she may require more information.

The rest of the week not much happened. Judge Swain ordered debtor to provide a report “regarding the anticipated filing of any omnibus objections to the proofs of claim filed against the Puerto Rico Sales Tax Financing Corporation (“COFINA”). Specifically, Debtors’ counsel must address the anticipated timing of the filing of any omnibus objections, the estimated number of claims that will be the subject of such omnibus objections and the anticipated impact, if any, of the filing of such omnibus objection(s) on the solicitation and tabulation of votes.”

The American Federation of Teachers and the American Federation of State, County and Municipal Employees International Union, AFL-CIO, filed an adversary complaint against the Board, governor and Banco Popular de Puerto Rico, claiming that pursuant to Law 106-2017, the government was to segregate the retirement contributions of employees and they would have control of how they would invest it. The complaint avers that the money is deposited with Banco Popular and there is no interest paid on it. Interesting complaint if the facts alleged are true.

In addition, the Unión de Empleados de Oficina y Profesionales de la Autoridad de Edificios Públicos, Unión Insular de Trabajadores Industriales y Construcciones Eléctricas Inc., Unión Independiente de Empleados of the Puerto Rico Water and Sewer Authority, Unión de Empleados de Oficina Comercio y Ramas Anexas, Puertos, Unión de Empleados del Banco de la Vivienda, Unión de Empleados Profesionales Independientes, Unión Nacional de Educadores y Trabajadores de la Educación, Asociación de Inspectores de Juegos de Azar, Asociación de Jubilados de la Autoridad de Energía Eléctrica, and VAMOS, Movimiento de Concertación Ciudadana Inc., filed an objection to the Commonwealth-COFINA settlement. In a separate motion, Service Employees International Union (“SEIU”) and International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) filed another objection to the same settlement. PROSOL-Utier also filed an objection and the Federación de Maestros joined the objection. The Official Committee of Retired Employees of the Commonwealth of Puerto Rico filed a limited objection to the aforesaid settlement.

The objections to the settlement rest on the idea that Puerto Rico will pay too much in the COFINA settlement. Three problems with this idea. One, the objections are not accompanied by any economic analysis/expert report evidencing this deficit and two, if Puerto Rico cannot pay the COFINA settlement, what can it pay for debt? The third problem is that this settlement was, I stated in last week’s report, approved by Judge Swain on November 9. The motivations for filing these objections this late in the game are unclear to me, but I doubt they will sway Judge Swain from reconsidering her decision on the issue.

In addition, the Board requested until December 31, 2018 to oppose Peaje’s request for certiorari from the SCOTUS. Interesting, since statistically petitions where an opposition is filed have a higher granting of cert than those that are not opposed. In any event, the likelihood of it being granted is very low since the SCOTUS grants around 80 certs of the over 10,000 petitions it receives. Let’s see what happens.

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

Monday Update – November 12, 2018

Welcome to your weekly Title III update for November 12, 2018. Since I have already provided an update on some of the developments last Monday and Tuesday, I will concentrate on what occurred from Wednesday onwards.

On November 7, 2018, Judge Swain held the November Omnibus Hearing. The first order of business was the Board report by Mr. Bienestock. He explained that the Court wanted an update on the McKinsey issue (whether it holds or had held PR bonds while working for the Board) and explained that Proskauer represented this company so the Board hired an outside counsel. This counsel reported from NY that he was beginning his investigation and hoped to have a public report in a couple of months and that he had no substance to report. He then said that he hoped to have a report by the end of the year. So, either at the end of the year or two months from now we will have a report on this issue. Hopefully.

PREPA is doing well and does not need to borrow to cover its expenses. Mr. Bienestock made a distinction from operating expenses to the need to make further repairs. He also reported that PREPA was examining the answers to the request for proposals for the distribution of electricity. Later next year, those companies deemed eligible will be able to bid for a P3. He also mentioned that as to the generation, there was a need for companies to know how much of the debt they would have to carry, how much they would have to pay for the right to generate and the mix of the fuels. I would add that they need to know if they have to accept the union contracts.

Bienestock also said that on that same day there was mediation with the PREPA ad hoc group of uninsured  bondholders and one of the monolines was going to join. He hoped to continue discussions with other monolines. This adds to my theory that the monolines request for a receiver was an attempt to get better treatment in the RSA. On the other hand, PREPA bondholders have a real need to have responsible management and the government has shown time and again it is incapable of providing it.

The Board was very confusing when discussing when other Plans of Adjustment would be filed. Mr. Bienestock said that it was possible that another one could be filed in the summer (ERS?) but was not emphatic. He also mentioned the possibility of other Title III cases being filed, mentioning PRASA and the UPR, but making clear that the latter was more likely to be a Title VI. My view is that these two may go into Title III next year due to two issues: Union contracts and pensions. It is very doubtful that the PR Legislature would change these contracts or even would have the power to do so. Moreover, under in Bayron Toro v. Serra, 119 D.P.R. 605 (1987), the PR Supreme Court has stated that those pensioners who are receiving pension payments have a constitutional right to it. It behooves my mind that the Board can force said changes outside Title III. If it insists in those changes, Title III is the only recourse.

Mr. Bienestock also mentioned that he had information that the Legislature was about to approve a 29% retention of payment to all US lawyers that did work in the case outside PR. He made it clear that if faced with this, his firm would have to increase its fees, and obviously all others would. Judge Swain was dismayed and it was very telling that counsel for AAFAF had no information as to this according to Mr. Bienestock. Very bad news indeed. Let’s see what happens.

The Omnibus objections to proofs of claim was discussed and these will be the ones having to do with double filing of bond claims and others that did not belong in one case or the other. This should start at the end of the year. The UCC mentioned that it had been discussing the way in which the proofs of claims of unsecured creditors would be resolved. Mr. Despin mentioned mediation and a short discovery and hearings. Although a good idea, we need more information as to how this will work.

The rest of the week not much happened. Judge Swain approved the settlement between the Commonwealth and COFINA in the Commonwealth Title III case. Also, the Legislature passed the COFINA bill required by the agreement. Many PPD politicians and radio analysts objected to the deal but none had filed any objection, not even an amicus brief. Moreover, they did not offer any alternative to the deal. Those type of objections are easy to do, but no Court will pay them any heed.

In an interesting development in the Assured, et al request for lifting stay for the naming of receiver for PREPA, the parties further extended the deadlines in that issue. Instead of having to oppose the request by December 3, the schedule states:

  1. November 21, 2018: Parties to complete rolling document productions;

  2. December 21, 2018: Parties to exchange preliminary will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

  3. January 4, 2019: Parties to file opposition brief and supporting declarations;

  4. January 14, 2019: Parties to exchange final will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

  5. January 24, 2019: Movants to file reply brief and supporting declarations;

  6. January 30, 2019: Parties to complete expert discovery and depositions;

  7. January 30, 2019: Parties to file exhibit lists;

  8. January 31, 2019: Parties to designate deposition testimony; and

  9. February 2, 2019: Parties to cross-designate deposition testimony.

The Parties further propose that a hearing on this Motion take place on February 5, 2019 in New York, or on February 6, 2019 either in New York or San Juan.

What this shows is that the Board does not have to make public whether it will oppose the request until January 4, 2019, a full month’s extension. Since there are persistent rumors the Board is considering joining the Assured request, this will give it more time to ponder the issue. In addition, since I think this motion is a ploy of the monolines to obtain better treatment in the PREPA RSA, this will give the parties time to negotiate. We will see.

Talking about PREPA, the Board, PREPA and AAFAF filed a Joint Informative Motion of a Request for Qualifications for the Transmission and Distribution System. The Request for Qualifications has 38 pages and no newspaper reported it. I will not go through it all here, but I highly recommend its reading for anyone interested in this issue. For starters, this is a P3 proceeding, where the ownership of the transmission and distributions system remains with PREPA. The procedure is as follows:

October 31, 2018 – Date of issuance and first publication of public notice of RFQ by the Authority.

November 14, 2018 – Deadline for submission of Requests for Clarification with respect to this RFQ by prospective Respondents (“RFC”).

November 20, 2018 – Deadline for the Authority to release responses to RFCs.

December 5, 2018 – Deadline for submission of SOQs (no later than 5:00 pm AST).

January 16, 2019 – Estimated date for notification of Qualified Respondents.

All SOQs must be submitted by no later than December 5, 2018 at 5:00 pm AST (the “Submission Deadline”) in the manner set forth in Section 4 of this RFQ.

Other highlights are:

This RFQ is being issued to identify those Respondents that meet the minimum requirements necessary to carry out the Project in compliance with Act 120 and the PPP Act, in particular those Respondents that demonstrate:

experience operating a large electric utility;

financial strength and capital resources, with significant access to the capital markets; and

strong technical expertise, with a track record of high-quality operations.

These requirements eliminates the possibility of the much touted energy cooperatives in PR, of which there are none, to compete, unless they partner with large stateside groups. In fact, this requirement eliminates any locals, except if they partnership with outside companies. Other highlights are:

As currently envisioned, a single Private Partner will assume all rights and responsibilities related to the operation, maintenance and management of the T&D system. These rights and responsibilities are expected to include, among other things:

operation and maintenance of the T&D assets and system, including street lights and meters;

control center operations, including generation scheduling and economic system dispatch;

integration of renewable generation and distributed energy resources;

power procurement;

end customer metering, service and support (including billing and collections);

new service requests for secondary and primary connected customers;

outage management and restoration;

coordination of emergency planning and storm restoration and recovery;

interfacing with regulators, including with respect to environmental compliance;

general system planning, including sourcing, designing and implementing system growth and improvement;

acting as a servicer in connection with any charges imposed in respect of legacy obligations; and

ongoing public reporting.

First thing to note is that as Mr. Bienestock told Judge Swain, the issue of how much of the PREPA debt will be taken over by the buyers or lessees of PREPA is still an open question. In addition, the monopoly will continue, at least in regards to the transmission and distribution, since a single company will be in charge of buying power and billing customers. This entity will probably be the most important entity in the whole system but we still do not have the Energy Policy bill or PREPA’s Integrated Resources Plan. Hence, I see it difficult for the new entity and the P3 Government agency to comply with the timetable. 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.

Monday Special Update on Appellate Oral Arguments –November 5, 2018

Welcome to a special edition of the Monday update on the two oral arguments today before the First Circuit.

Today, two different decisions by Judge Swain were argued on appeal before Judges Torruella, Howard and Thompson of the First Circuit. In the first case, Aurelius appealed the dismissal of its request for a declaratory judgment that it had a lien. Right at the start of the GO group’s oral argument, Judge Torruella asked whether this issue was not better left for the Plan of Adjustment. Judge Thompson then joined Torruella in her question. Mr. Robbins, arguing for GO’s, said it was not and that Bankruptcy Rule 7001 allowed it to be done that way. Later, Judge Torruella asked whether the Judge was in the best position to determine when to litigate this issue. Robbins tried to wiggle out of the discretionary function of the question by pointing out that Judge Swain had ruled she was constrained by Article III of the Constitution requirement of a case or controversy and had not even discussed discretion. Judge Thompson followed up by asking whether Judge Swain had said discretion and Robbins had to say yes—but that if that were the issue, appellants would detail why the discretion would require a declaratory judgment. Judge Howard then asked whether the declaration would affect the behavior of the parties. He was told yes since the declaration would not force the Commonwealth to act but would tell it what the law was. Judge Torruella then said a declaratory judgment could change behavior. Robbins quoted the PREPA case to which Judge Howard, who sat in that panel, distinguished the case. When the Board came to argue, the Judges only asked one question and it was at the end. When the Retirees Committee argued, there were no questions.

Based solely on the questions posed by the panel, it is unlikely Judge Swain will be reversed on the merits. She could be reversed by a decision in which the Circuit states that the declaratory judgment was not barred by Article III but with instructions to determine in her discretion whether to grant said declaratory judgment. Given Judge Swain’s inclinations, it is likely she will decline to decide at this juncture.

The second case was Assured Guarantee v. Commonwealth, a case involving sections 922 and 928 of the Bankruptcy Code. Judge Swain decided that section 922 did not require payment of a revenue bond but simply allowed the debtor to pay if it felt like it. This ruling has put fear into the muni world and from the start, I thought Assured had a good argument. A few minutes into Mr. Allenberg’s argument for Assured, Judge Howard asked whether 922 was not an option. After Mr. Allenberg explained his point, Judge Howard said, “You have not said anything to the contrary.” OUCH!!!

Mark Harris argued for the Board and the only question was from Judge Howard who asked to be provided with citations to some cases. Luc Despin argued for the UCC and got no questions.

Again, the questions were quite hostile to appellants but I think they have a good argument. If appellants lose, it is conceivable that due to the importance of the ruling, they may try for a certiorari from the SCOTUS. Let’s see what happens.

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

Monday Update – November 5, 2018

Welcome to your weekly Title III update for November 5, 2018. Interesting developments and more to come this week.

Last week the Retirees Committee filed a motion in the COFINA litigation requesting an extension to the time to object the settlement and Plan of Adjustment. The UCC joined the motion but Judge Swain denied the request. Any doubt that the Judge will bend over backwards to advance this settlement? What no one is talking about is the fact that the COFINA Plan of Adjustment requires the Puerto Rico Legislature to pass certain laws. Although the administration presented the bill, there has been no movement except it being sent to the different commissions. Even more importantly, the last day of the legislative session is next Thursday, meaning that it must be approved by that date. Unless the governor calls for an extraordinary session, the Legislature comes back on January 8, 2019, only 9 days before the hearing for the approval of the Plan of Adjustment.

Given that the Board informed the governor and the Legislature that the much announced tax reform is contrary to the Fiscal Plan, the following question arises: Will Senate President Thomas Rivera Schatz simply ignore the COFINA bill to pressure the Board to approve the tax reform? Your guess is as good as mine, but if the Legislature scuttles the COFINA deal, Judge Swain will not be amused. Since the only thing Puerto Rico’s politicians care about is reelection—and not what is best for the island—it is a distinct possibility.

In addition, the UCC—who had informed the Court that it did not believe the COFINA deal was feasible with the June Fiscal Plan—requested  an extension to continue negotiations with the Board, AAFAF and COFINA agent on whether it would object to the settlement it negotiated. The extension was granted and ends today. Weird, weird, weird but then again, this is Puerto Rico.

The Board also sent a letter to the Puerto Rico Government as to the use of tax credits:

Based on financial reporting provided to the Oversight Board, it appears the Government authorized a large amount of tax credit agreements to private companies in May, August, and September despite the Government’s continued tenuous fiscal position. The issuance of tax credits at this volume is concerning and, if continued, expenditures at this level would further exacerbate the fiscal challenges already faced by Puerto Rico’s economy. Indeed, I remind you that the Commonwealth is currently not paying most of its debt service and that the Government’s fiscal situation would be materially worse if there was not a stay on litigation in place from the Title III court. Moreover, there continues to be insufficient public disclosure and justification on the total amount of tax credits authorized and no disclosure of the return on investment from the tax credits being issued.

The amount of the credits from March-September of this year is a whopping $521 million! No wonder the Board wrote this letter. The governor responded by saying the Board members were “Excel technocrats.”

Also, today is the Aurelius appeal, not on the constitutionality of the Board but on certain liens. The constitutionality case will be heard on December 3, 2018 in Boston. Will be interesting. In addition, on Tuesday, November 6, there will be a GDB hearing and on November 7, the Omnibus.

Finally, some analysts and other persons are theorizing that the Board may not oppose the PREPA bondholders’ request for a receiver and may even join them! I have mentioned here the absolute silence of the Board as to this issue. The Board acquiesce would be an almost automatic lifting of the stay and would be a major blow to the Rosselló administration. It could mean responsible management at PREPA. Any opposition to the request for lift of the stay for the appointment has to be filed no later than December 3, 2018. Let’s wait and 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.