Monday Update – December 10, 2018

Welcome to your weekly Title III update for December 10, 2018.  First things first; two important things happened today, in 1898 the Treaty of Paris was signed transferring Puerto Rico to the USA. But more importantly, it’s my birthday, LOL.  Back to business.

Lehman Brothers Holdings, Inc., filed a response to the Board’s request to reject its executory contract. Lehman said it had no objection but that did not include the contract it had with the Trustee. It also reserved rights to amend its proof of claims.

AsI reported last week, the UCC filed a motion to conduct limited discovery on possible fraudulent transfers, something it claims the Kobre & Kim report does not go into. On Sunday, AAFAF filed a motion saying it does not oppose said request. AAFAF, however, clarified as follows:

Nevertheless, and considering the scale of the information being requested, the Debtors, through AAFAF, are engaged in productive discussions with the Unsecured Creditors’ Committee to attempt to reach an agreement over the appropriate scope of the information and documents to be produced, as well as to establish a reasonable timeline for the production. Thus, AAFAF reserves all rights and objections as to the scope and extent of such production requested in the Motion, in the event that no agreement on such production is ultimately reached with the Unsecured Creditors Committee.

I don’t know what will happen but I doubt this is the end of the controversy.

Also, Judge Swain approved a stipulation between the bondholders seeking a receiver for PREPA, the Board and AAFAF. The Judge will hold a hearing on March 12,2019. Somehow, I believe some type of accommodation will be achieved before that date. I still think movants are striving for a better settlement and a reusing the receiver motion as leverage. Another possible scenario, however, is the Board joining the motion for a receiver, which given the conflicts with Governor Rosselló, would not be surprising. Also, the UCC will be allowed into the discovery in the case. Finally, the motion was referred to Magistrate JudgeDein by Judge Swain. Let’s see what happens.

The COFINA-Commonwealth settlement was approved on November 9, 2018. Around November 15, several unions objected to the settlement. On December 7, 2018, the Board filed an Omnibus reply to these objections. I will not bore you with the technicalities but I think this part sums it all:

In essence, the Union Objections assert that the Motion can be approved only if the Settlement is the best possible settlement of the Commonwealth-COFINA Dispute for the Commonwealth.See SEIU/UAW Objection ¶¶ 51-53; PROSOL-UTIER Objection ¶¶ 32-34. In other words, the Union Objections argue that a settlement must give the Commonwealth all, or the vast majority, of the disputed sales and use tax revenue in order to be approved by the Court. The Union Objections ignore the requirement that the Court should carefully and analytically assess the risks attendant to a litigation and the fact that the Agreement in Principle was heavily negotiated between independent representatives of both the Commonwealth and COFINA with the benefit of the Court-appointed mediation team. As such, the Union Objections fail to recognize that, not only is this a settlement, but also, in the opinion of the Commonwealth Agent, as supported by the Oversight Board, the Settlement is the best possible resolution for the Commonwealth.

In fact, the “law governing settlement under Bankruptcy Rule 9019 is well settled,” and the proponent of the settlement need only satisfy the standard “that the proposed compromise falls above the lowest point in the range of reasonableness.” The cases are clear that “the Court will defer to the trustee’s judgment and approve the compromise, provided the trustee demonstrates that the proposed compromise falls within the ‘range of reasonableness’ and thus is not an abuse of his or her discretion.” (Foot notes omitted)

Again, I believe Judge Swain will overrule the aforementioned objections.

On December 5, 2018, at 5 pm, the window for companies’ to submit qualifications for the PREPA Transmission and Distribution RFQ was closed. The next day, we were informed that five companies expressed an interest. In keeping with its tradition of full transparency, the Commonwealth said it would withhold the identity until it corroborated who actually qualified. Typical.

Meanwhile, the Board sent the office of Management and Budget a letter that says, inter alia:

At this time, the Oversight Board has 40 budget reapportionment requests pending. To facilitate an expeditious and thorough review, the Oversight Board would like to develop a collaborative process with the Government and outline several key requirements of the Oversight Board’s reapportionment review process, which if followed,will enable swift decision making and implementation.

First, reapportionments should not request to utilize funding from previous year General Fund (“GF”) appropriations, including budgetary reserves, which conflicts with section 5 of the Budget Joint Resolution from June 30, 2018.Second, reapportionments should not change the target and intentions of the rightsizing efforts, which would conflict with the New Fiscal Plan. Third, reapportionments within the General Fund should not request additional funding that would change the aggregate amount of Government spending and be in conflict with the certified Budget. Fourth, all SRF unfreeze requests from prior years should include supporting documentation of the revenue source.Fifth, all SRF budgetary increases based on updated other source revenues should include adequate supporting documentation of the revenue source and be consistent with rightsizing targets and efforts. Sixth, reapportionments should not be made from the Fiscal Plan Emergency Reserve, Cost Sharing Match Custody Account, or Unallocated Capital Expenditures, unless consistent with the purposes of those appropriations.Seventh, all Federal Fund increase requests should include copies of the notices of awards.

This is clearly a response to the petty dispute the governor has had with the Board over the paying of the Christmas bonuses. When Governor Rosselló announced he had paid the Christmas bonus, Executive Director Jaresko reminded him that he had to save in other areas the same amount he was paying or risk running out of money for payroll at the end of the Fiscal Year. The governor responded by telling the Board to stop getting its nose in his business and to work on all the reapportionment requests he had made. Same old, same old.

On this same vein, if the First Circuit were to reverse Judge Swain in the Aurelius challenge to the Board’s appointment, then the FOMB would be unable to do this to the Commonwealth. On the other hand, anew Board, appointed by President Trump, would probably not be as forgiving as this Board has been. We will 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.

Aurelius Oral Arguments Update – December 5, 2018

Yesterday, Judges Torruella, Kayatta and Thompson heard oral arguments on Aurelius’ appeal on the Board’s appointment. In terms of prior issue exposure, Torruella and Thompson heard oral arguments on two other appeals on November 5 and Judge Kayatta actually authored a couple of PROMESA opinions.

Former Solicitor General Ted Olson argued for Aurelius. Judge Torruella inquired about the appointment of the DC Board and Olson said that they were minor officials, unlike the PR Board members. Judge Kayatta asked if it would be a problem if Congress gave the Governor of PR the power to put the island into bankruptcy. Olson explained that it would. Olson explained that the issue was not so much where the power came from, but what type of power was exercised: state or federal.

In regards to PROMESA stating that the Board is a local entity, Olson stressed that it was not important. Torruella then asked about what the Judges should look at to determine if the Board was a state or federal entity. Olson kind of skirted the answer but Aurelius’ brief discusses the factors and he cited all the pertinent Supreme Court tests.

When Utier, who also claims the Board’s appointment was unconstitutional, began its argument, it was obvious it was arguing for the reversal of the insular cases, to the extent that Judge Torruella reminded the lead counsel that the First Circuit did not have the power to do so, and Judge Thompson joined in this point. Clearly, Utier’s arguments had no impact on the Judges.

Former Solicitor General Verrilli argued for the Board. Torruella quickly challenged him on the argument that governors of the territories are appointed without Congressional approval, saying the statute was clear that this was temporary. Verrilli’s theme was that Congress’ actions showed it was not concerned with the Appointments Clause or the separation of powers. Torruella, who has written extensively on the Constitutional history of PR, challenged him again on the appointment of federal officials in PR before 1917. Clearly, Judge Torruella is not buying the argument that Congress was never concerned about the Appointments Clause in the territories.

Judge Kayatta mentioned that the appointment of the Board and their removal was under federal, not PR law. It is important to note that during the Federal Government’s oral argument, Judge Kayatta told Mr. Wall that if a person is elected, he can be removed by the electors. However, if he is appointed by the President, he can only be removed by him. More on this later.

Judge Torruella asked Mr. Verrilli if DC is covered by the same constitutional provisions (it is not) as PR. Verrilli said they are different but Congress’ power is the same. Torruella then discussed the appointment of territorial judges, which prompted Judge Kayatta to mention that territorial judges for the most part interpret territorial law, but here federal law is involved. Judge Thompson chimed in mentioning that this is bankruptcy law, not territorial law.

Torruella then asked an important question, whether the Governors of Guam and Virgin Islands were appointments. Verrilli made a point to say yes to bolster his argument of inapplicability of the Appointments Clause to the territories.

Judge Torruella then asked whether Altair was the test for a federal/territorial Board and Verrilli said no, but Judge Torruella insisted. Verrilli answered that he had to ignore Altair. Kayatta asked Verrilli whether his argument was that Congress’ compliance with the Appointments Clause in certain territorial cases meant it had to be followed in all cases for the territories? Verrilli answered yes. It is important to note that at the end of Mr. Verrilli’s argument, he became more strident in his argument. More on this later.

Mr. Jeffrey Wall, Principal Deputy Solicitor General of the United States (shows you that the Administration put a lot of effort in this case) argued that the separation of powers does not apply to the territories in the same way as other parts of the Constitution (same old argument). Mr. Wall emphasized, as he did during his entire argument, that otherwise, home rule (electing governors and legislators) would be unconstitutional. Argument clearly intended to scare the Judges.

Judge Torruella then threw in the clincher, asking whether elections were different. This has been Aurelius’ argument from the beginning to forestall the home rule issue. Wall skirted the issue but Judge Thompson came back to it asking the same question. Wall then argued that elections did not change governor’s duties. Judge Kayatta interjected a different but related statement, by stating that Congress says elections are pursuant to state law but the finances are dealt with by our guys. He also mentioned the elections exemption. Very telling. Mr. Wall said that nothing in the cases made such a distinction. This begs the question, why not make the distinction here?

Mr. Wall continued his argument citing Sánchez Valle, which prompted Torruella to comment that the Supreme Court said the case was about double jeopardy. Wall said no, it was about a lot more. Torruella jokingly said, “I read a different case.”

Judge Thompson interjected a loaded question, “could Congress appoint the Board?” Judge Kayatta joined the question. Wall meekly said that would bring other complicated questions. Mr. Wall, hit from several sides with negative comments on his arguments, did what we all do, quoted cases, essentially telling the Judges their view were wrong. He then went into an impassioned plea that there be a stay of the Board’s mandate if the case is reversed, that the Board’s work cannot stop and that bondholders were poised to take the money the Federal Government had earmarked for PR and that (not legally possible in my opinion, rhetoric more than anything else)  they did not care about funding essential services (he did not mention that neither the Board nor PR Government have defined what those are). The end of his argument sounded desperate. Judge Thompson then asked: in the case that the Appointment’s clause had been violated, what authority would the Board have to act? Very important question. Wall insisted that before that is done, further briefing would be needed.

As previously mentioned, Judge Kayatta also asked whether Congress could appoint the Board, saying that Congress had come very close to actually doing so. Wall discussed other instances where the President would appoint from a list from Congress. Judge Torruella then asked whether the separation of powers applied or not to the cases in territories, Wall had to admit no. He also insisted on Altair not being applicable.

Judge Kayatta again discussed that one thing is the power of Congress and quite another how it can exercise that power in the territories. Kayatta said the question pivots on substance v. procedure.

Then came the PDP, represented by Hernández-Mayoral, who stated the party had no position as to the constitutionality of the Board (his party had passed a resolution on Sunday against the Board, go figure), even when Judge Thompson asked the question. He was there to tell them that SCOTUS and First Circuit had stated that Congress had relinquished its power over the internal affairs of PR and any statement to the contrary would be wrong. No use to the case, though.

The PPD legislature, however, by voice of Mr. Martínez Luciano, joined the voices that said that the Board was unconstitutionally appointed. He did a good job. Judge Thompson asked whether Congress could repeal the PR home rule. Martínez Luciano skirted by saying that if that happened, the officials would be federal officials.

Olson had reserved 5 minutes for rebuttal and was asked by Judge Kayatta whether USVI and Guam would survive a ruling using Aurelius’ standard of whether the Board was federal. Olson said that the answer to that was elections exemption. Kayatta was not comforted by the answer—there had been no mention of elections exemption up to that point. Judge Torruella asked about the Federal Government’s argument of chaos if they decided in Aurelius’ favor. Olson mentioned that a stay could be implemented and the Board could act but knowing that the new Board would review all of its decisions.

From my experience in the First Circuit, the questions posed by the Judges and the answers to the questions, I would say that Aurelius has a good chance of having Judge Swain reversed, although of course I may be mistaken. This would result in grinding halt of the Title III proceedings and the Board’s authority over the PR Government, who actually would be the only winner since no action could be enforced against it. Given that President Trump is not happy with PR and that the Senate controlled by the Republicans would have to confirm the new Board, there is a chance of not having the same members again. What would be the result is anyone’s guess.

Having said that, the Board’s actions yesterday confirm my suspicion. The oral argument went from 3-4 pm PR time, and at 5:19 pm, I received an alert of a letter from the Board to PR saying it had not been complying with the requirement of sending an impact report on the dozens of laws it had passed in the last few months. Shortly thereafter, it sent a tweet saying that it expected the First Circuit to confirm the well-reasoned opinion by Judge Swain. The Board had never sent a tweet on the previous appeals. Seems to me the Board’s lawyers saw the same thing I saw, a likelihood of reversal and are preparing for it.

It’s all quite ironic though, because before yesterday’s oral arguments, the FOMB counsel must have been feeling pretty confident about the enforcement of Judge Swain’s decision.  Au contraire, Mr. Bienenstock. He and his team might be in for a rude awakening. I am sure the Board’s lobbyists are working hard in the Senate and federal government at this time. Good luck. Again, I may be wrong, Verrilli and Wall did a good job but it was clear at the end of their arguments that they knew the Judges were not buying their claims.

Irrespective of this, the loser in the case will immediately request certiorari from SCOTUS, who sees less than 1% of the requests. With a judgment by January, it is totally possible to have briefing, oral arguments and a decision no later than June 30. 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 – December 3, 2018

Welcome to your weekly Title III update for December 3, 2018. Given that the only news for the week before was the approval of the disclosure statement, I decided not to publish it. This week, however, a few things have transpired.

Last Monday, the Board filed the second amended COFINA Plan of Adjustment with a few modifications. The Board also filed a proposed order approving the forms, both in English and Spanish, of the Omnibus objections to proofs of claim. Judge Swain later approved the order.

On Tuesday, the Board filed a motion to reject COFINA’s contract with Lehman Brothers Special Financing Inc. for the servicing of the debt. The rationale is that the bond exchange changes everything. In any event, it will probably be granted by the Judge.

The Court not only approved the COFINA disclosure statement but also fixed the voting record date for the plan, the Confirmation Hearing Notice, the contents of the solicitation package, solicitation of votes, etc. Two dates are very important; by January 2, 2019, objections to the COFINA Plan of Adjustment must be filed and by January 8, 2019, votes on the Plan of Adjustment must have been delivered.

As to the objections to the Fiscal Plan, none have been filed. Unions in the Puerto Rico government and utilities filed objections to the COFINA/Commonwealth settlement, albeit after the cut-off date, but no objections to the Plan of Adjustment. Moreover, since the unions are not creditors or bondholders of COFINA, it is questionable if they have standing pursuant to 11 U.S.C. § 1109(a), much less when considering Article III of the Constitution. Let’s see if they file objections.

On Tuesday, the Official Committee of Unsecured Creditors of all Puerto Rico Title III debtors filed a motion requesting “the production of documents concerning potential avoidance actions that may be prosecuted by the Debtors or by a trustee appointed by the Court pursuant to section 926 of title 11 of the United States Code.” The UCC motion also states as to the Kobre and Kim report:

The Final Report did not even address the question of whether any Avoidance Actions could be maintained by any of the Debtors. Indeed, these issues were carved out of the investigation, with the Investigator noting that it did not seek or obtain “comprehensive discovery” relating to prepetition transfers because “[w]e have not been tasked” with this analysis and the Investigator lacked a “solvency analysis.”

The UCC knows that the Board was in the process of hiring a law firm to find causes of action against potential defendants so it decided to put its foot forward into what the Final Report ignored—the transfer of monies from the Commonwealth defendants. The UCC also knows that the Board is unlikely to pursue all of the causes of action in the Kobre and Kim report and it will undoubtedly seek authorization to do so. This motion is a good start. I must point out that 11 U.S.C. § 926(a) gives any creditor the chance to be appointed to prosecute causes of action that a debtor will not. This includes unions, but I doubt if they will vie to do so. We will soon find out since the statute of limitations runs out between May and July, depending on the Title III debtor.

The Board announced on Thursday that it had hired the law firm of Brown Rudnick, LLP, at $790 an hour, to determine and prosecute causes of action on behalf of the Title III debtors. I found it ironic that the firm’s paralegals will bill at $270 an hour, which is more than what most lawyers in Puerto Rico bill. Oh well.

During a hearing in the U.S. Senate, FEMA stated that it had no confidence the PR electric grid could survive a hurricane today. Not only FEMA, but all Puertorricans doubt this. Of course, the Governor immediately differed from this opinion. Some things never change.

Today, Judges Torruella, Kayatta and Thompson are hearing at 2 pm the Aurelius appeal on the Board’s appointment. Torruella and Thompson heard oral arguments on two other appeals on November 5 and Judge Kayatta has actually authored a couple of PROMESA opinions. Given that the Aurelius challenge may impact the status of Puerto Rico, which Judge Torruella absolutely hates, he is the wild card on the argument. I hope to have some analysis by Tuesday.

Finally, the government and some of the municipalities have started to pay the Christmas bonus notwithstanding the Boards warnings that the Commonwealth would run out of money. Wonder what would happen if it actually did run out of money. Will the Board request control of the Commonwealth’s bank accounts? Who knows?

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.