Welcome to your weekly Title III update for January 28, 2019.  This has been another week dominated by Court filings.

As I reported last week, the COFINA Ad Hoc Group and the Board filed revised findings of fact and law in an attempt to comply with the Court’s order and assuage any misgivings Judge Swain may have had about “rewriting the PR Constitution.” It was not to be. The next day,on January 22, 2019, Judge Swain issued an order for a supplemental brief to be filed no later than January 24:

The Supplemental Brief must address (a) the legal basis for the proposed findings regarding the valid establishment of Reorganized COFINA2 and Reorganized COFINA’s status as a separate independent public corporation and instrumentality (see Docket Entry No. 523 in Case No. 17-3284, the “Hearing Transcript” at 183:7-11; 139:17-140:2); (b) factual support for the proposed finding that the documents contained in the Plan Supplement constitute valid legal documents and contain valid provisions that are enforceable in accordance with their terms (Hr’g Tr. at 133-36); and (c) the legal and factual bases for the proponents’ assertions that the Court has authority to determine and declare the substantive validity of the New Bond Legislation and to resolve,based on the proposed settlement of the Commonwealth-COFINA dispute, the constitutional and other legal challenges to the COFINA structure raised under the Constitution of the Commonwealth of Puerto Rico in the manner set forth in the proposed findings and conclusions (Hr’g Tr. at 140:4-7).

Then, on January 23, 2019, the PDP senate minority members filed a brief of amicus curiae, essentially telling the Court that the COFINA settlement could not rewrite the PR Constitution or preclude the legislature from amending the COFINA statute in the future. Judge Swain had rejected all previous amicus briefs, but in a surprise move, she granted the request, while denying another brief by a part time resident of PR. Obviously, her interest was piqued.

The Board and COFINA Ad Hoc Group filed the requested supplemental briefs. The Board also objected to the PDP’s brief. In addition, National filed a brief in support of the agreement, as did Ambac. The Board’s brief, which included translated cases of the PR Supreme Court, tells Judge Swain that she can approve the COFINA deal. Page 22, paragraph 29 of the motion summarizes the arguments:

The foundation of the Commonwealth-COFINA Dispute Settlement—from its inception with the Agreement in Principle to its embodiment in the Plan—is the antecedent question of which Debtor is the owner of the sales taxes purported to be transferred to COFINA by Act 91-2006, as amended, for purposes of these Title III Cases. As the forum with exclusive jurisdiction over the property of each Debtor, see PROMESA § 306(b), this Court has been asked to approve the Settlement to resolve that issue. Upon entry of the Settlement Order, the Court will have determined that COFINA is the sole owner of 53.65% of the PSTBA (among other assets). See Notice of Filing of Revised Proposed Order Approving Settlement between Commonwealth of Puerto Rico and Puerto Rico Sales Tax Financing Corporation (Case No. 17- bk-3283, ECF No.4816-1, Ex. A at ¶ 3); see also Plan § 2.1(a). Indeed, the Settlement Order itself provides that the compromise and settlement embodied in the Settlement Agreement is approved in all respects and all objections not otherwise withdrawn are overruled in their entirety. (Bold added)

In essence, the Board is telling the Court that it must resolve the issue of who is the owner of COFINA. If the decision is not favorable to the plan then the deal is off. But if Judge Swain has to decide this issue, why settle instead of letting the litigation come to its conclusion with a Court Opinion and Order? The ownership of COFINA is an issue that has been thoroughly briefed and is ripe for adjudication. Rather than have the Court rule on the issue, the Board wants it to specifically rule that COFINA is owner of the part of the SUT that is apportioned in this settlement. I have repeatedly stated that in my opinion, COFINA is unconstitutional—but, that is not the issue. The issue is Judge Swain’s take on this.

Judge Swain could validate COFINA as the Board wants or she could determine that she cannot approve the Plan of Adjustment for it is in violation of both applicable bankruptcy law and PROMESA. Section 1129(a)(3) of the Bankruptcy Code requires that the Plan of Adjustment be proposed in good faith “and not by any means forbidden by law.” PROMESA section 314(b)(3) requires that the Plan can be approved if “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” If the COFINA structure is not consistent with the PR Constitution, and I think that is what Judge Swain is worried about, does the Plan of Adjustment comply with these two sections? Questions, questions.

On the other hand, some observers believe that if Judge Swain were to somehow invalidate COFINA, PR would not be able to go back to the markets. Undoubtedly, this is true for a few years, but as Detroit, Ecuador and the Latin American debt crisis of the 1980’s have shown, markets and investors have very short memories. On the other hand, such a ruling would make the Rosselló administration very happy. Let’s see what happens.

Paul Hastings law firm, attorneys for the UCC, filed an Urgent Motion, Pursuant To Promesa Sections 316 And 317, Bankruptcy Code Section 105(A), Paul Hastings’ August 10, 2017 Retention Order, And June 6, 2018 Interim Compensation Order, To Compel Debtors To Comply With June 6, 2018 Interim Compensation Order. Seems to be that the Government of PR indicated that it would not pay the full amount owed to Paul Hastings for fees and expenses incurred in October and November 2018 until after Hacienda has determined whether such fees should be subject to a 29% withholding tax as a result of Public Law No. 257-2018 enacted on December 10, 2018. This withholding includes work done outside of PR. The motion requests:

For all these reasons, Paul Hastings respectfully requests entry of an order directing the Debtors (including Hacienda) to comply with their obligations under the Interim Compensation Order and to pay to Paul Hastings, on or before January 31, 2019,7 the amounts due under its October and November fee statements, without any tax withholding, in accordance with the Interim Compensation Order.

This is not the first time the UCC lawyers have had to ask the Court for payment. Seems that PR is not fond of its work. Moreover, from personal experience I can tell you that Hacienda can take its own sweet time to decide issues such as these, especially to retain payment. In any event, the 29% retention is outrageous and Martin Bienestock, attorney for the Board, cautioned the Court that stateside attorneys would have to review their fees if this is done to them. Food for thought.

Judge Swain had given GO bondholders until Friday, January 25, to file any objections to the proceedings motion by the Board to deal with its objection to the 2012 and 2014 GO offerings. The Ad Hoc Group of Constitutional Debtholders, the Commonwealth Bondholder Group, Assured Guaranty Corp. and Assured Guaranty Municipal Corp. filed a joint objection to the proceedings motion. In addition, Oppenheimer Funds also filed an objection. In essence, they believe that the parties should meet and confer to determine how to deal with this procedure. It is also very telling that the motions mention that very soon there will be mediation for the GO’s, begging the question of whether the objection filed by the Board and UCC is real or simply a negotiation ploy. In any event, the GO group’s objection also mentions that the Board effectively wants to bar individual bondholders from joining the fray. It states at page 7:

Apart from the legal deficiencies of such notice (discussed below), it is obvious from the face of such a proposal that the Movants have a very specific agenda in mind: to narrowly tailor their opposition and to avoid litigating against smaller (and more sympathetic) bondholders.Contrary to the Proposed Procedures, no individual bondholder may be singled out and forced to litigate on behalf of other holders, and all holders, large and small, must be given a fair and equal opportunity to be heard in the defense of their claims.(Bold added)

If the COFINA Plan of Adjustment litigation has shown us anything, it is that individual bondholders resented not being present during mediation. Imagine not being able to participate in this litigation. From my experience with PR bondholders, they are slow to react to developments and the very short timetable the Board has set will make it very difficult for them to organize. To me, it makes sense to have a longer period for bondholders to decide whether they will participate in this litigation. All this will be discussed in the January 30, 2019 Omnibus which has now been moved to NY. In any event, I will be in San Juan to see what develops in the hearing.

In a surprising move, the parties to the bondholders request for a receiver for PREPA filed another stipulation to extend the deadlines in the case. The motion states that the parties “will file proposed revised schedule(s) for the Court’s consideration, either through stipulation or separate proposals, on or before January 31, 2019.” This again postpones the time the Board would have to tell the Court whether it would oppose the motion for the lifting of the stay to appoint the receiver. Again, it is my impression that the parties are negotiating the haircut the PREPA monolines are willing to take. It could be however, that part of the negotiations is the Board’s willingness to agree to the lifting of the stay. As a resident of Puerto Rico, I hope the Board agrees to the lifting of the stay and follows through with the appointment of competent management for PREPA. Hopefully we will soon find out.

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

Welcome to your weekly Title III update for January 22, 2019.  Due to the Martin Luther King holiday and developments below, I decided to do the update on Tuesday. This week Judge Swain presided over the COFINA confirmation hearing during January 16-17. There were surprises galore during the hearing.  

Before the drama of the COFINA hearing, on Monday January 14, the Board and the UCC filed an objection to three GO issuances of the PR Government. The issuances include two 2012 bonds and one 2014 bond. The objectors argue that the PBA bonds should be counted as part of the Article VI,section 2 of the PR Constitution, which would mean that these emissions exceeded the constitutional debt limit.  In the objection, they call for the nullification of the debt and for no debt payments to be made. They also claim the 2014 issuance is illegal even if the PBA bonds are not to be added to the calculation, since PR reserved $425 million to pay interests. The complaint avers this should have been added but it was not.  In addition, the UCC (the Board does not aver it but reserved the right to do so) claims that the 2014 issue was illegal since it violated the balanced budget requirement of Article VI, section 7 of the Puerto Rico Constitution.

This is a well-written complaint that depends on the facts of the PBA bonds and the debt service calculation. If one examines the complaint, however, one notices that this objection depends exclusively on the Court’s interpretation of the Commonwealth’s Constitution.

But I fail to see the federal issues in this challenge. Moreover, I disagree with the claim that PR would not have to pay a penny if the 2012 and 2014 were illegally issued. Article 1247 of the Puerto Rico Civil Code, sec. 3496, which I believe is applicable here, states the parties have to give back what they received in the transaction, but the debt would not be bond debt pursuant to Article VI, section 8 of the PR Constitution. Procedures for this objection will be discussed during the January 30, 2019 Omnibus hearing.  One final point, the motion says that this is a gating issue for the Commonwealth Plan of Adjustment. Ominous words indeed.

On the 16^th, Judge Swain started the hearing by saying that she could reach “no decision that can reconcile the peoples’ concern.” First, the 9019 objections were discussed and the UAI argued against the approval, as did PROSOL-Utier. UAI exhorted the Judge to reject the plan, give the parties clear instructions on what type of deal to arrange and presto, it would be done. As if COFINA bondholders were willing to lose more money on what they consider a secure credit. After that, Judge Swain asked the persons selected at random from the public to speak. In general, they did a good job arguing overwhelmingly against the deal. Judge Swain then asked if there was an agreement as to PROSOL-Utier and others alleged lack of standing.

After lunch, when it was obvious that no agreement could be reached, Judge Swain decided PROSOL-Utier and the other unions were not COFINA creditors so they had no prudential standing to object the Plan of Adjustment. Nothing new on this, but Judge Swain also decided not to consider the declaration of Dr. Alameda, PROSOL-Utier’s expert, because it did not conclude that COFINA wouldn’t receive 5.5% of SUT, irrespective of the Commonwealth’s situation. For Swain, this did not match with the feasibility of the Plan. Hence, the unions were not allowed to cross-examine witnesses or present evidence. The Board, in a clever move, said it would not object to the unions arguing against the plan.

That left the GMS Group, Mr. Hein, Mr. Dvoras and Mr. Emmet to cross-examine the witnesses since the declarations would be considered as direct examination. After some negotiations, it was decided that no cross-examination would be done except for Mr. Rodrigue.

I will not bore you with the back and forth. Suffice it to say that the objectors, all subordinate COFINA holders, gave good reasons for not approving the deal but I doubt it will do them any good. Judge Swain did not ask them any questions, a bad sign in this case. Moreover, after the presentations were done and she started asking questions to the Board and the COFINA Ad Hoc group, none were about the numbers of the COFINA deal. Surprisingly, her questions were directed on the Supremacy Clause and her power to rewrite the PR Constitution.

In the Plan of Adjustment and the ensuing order, what the COFINA bondholders want from Judge Swain is for her to federalize several documents that in essence would mean that forever and ever, the SUT would not be “available resources” as per Article VI, section 8 of the Puerto Rico Constitution. Because Judge Swain reads everything, she realized that the COFINA deal requires her to make that determination, effectively rewriting the PR Constitution. I have no doubt that Congress has the power to rewrite the PR Constitution, but I see nowhere in PROMESA where it gives this authority to the Board or the Court. Not even section 108(a)(2) of PROMESA, that states that PR cannot “enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board.” But here there is no such claim. On the contrary, both section 201(b)(1)(N) and 314(b)(6) and (7) seem to require compliance with PR law as to lawful priorities and lawful liens as may be applicable in the constitution or laws of the territory.

Due to this, I believe, the GO bondholders informed Judge Swain that they did not believe that she had to reach 314(b)(6)(review if creditors could get better recovery outside PROMESA) in order to approve the COFINA deal. This issue will be very important in the Commonwealth Plan of Adjustment.

The issue of the Judge’s power over the PR Constitution is important for two reasons. Five years from now, the new PR government administration could go to court and claim that the settlement is illegal since constitutionally (Article VI, section 2) it could not surrender its power to tax by surrendering part of the SUT to COFINA. This argument was made by the UCC in the COFINA litigation, but there was no judgment on the issue. Also, if in the future GO’s bonds are issued by PR, they could claim that COFINA is available resources for payment of said bonds.

Judge Swain gave the COFINA Ad Hoc Group and the Board until Monday January 21 to revise the Findings of Fact and Law they had submitted. Before 4 pm on Monday, the Board filed said documents, with red-line of the changes. In the [Proposed] Findings Of Fact And Conclusions Of Law Regarding Confirmation Of The Third Amended Title Iii Plan Of Adjustment Of Puerto Rico Sales Tax Financing Corporation the changes are interesting. At page 63 of the red-line, it states:

As a separate debtor with its own Title III case, its own certified fiscal plan, and its own plan of adjustment, COFINA is a separate covered territorial instrumentality that is legally distinct from the Commonwealth. See 13 L.P.R.A.§ 11a(a) (“A public corporation and instrumentality of the Commonwealth of Puerto Rico, is hereby created, which constitutes a corporate and political entity independent and separate from the Commonwealth of Puerto Rico to be known as the Corporacion del Fondo de Interes Apremiante de Puerto Rico(‘COFINA’), Spanish acronym), whose name in English shall be Puerto Rico Sales Tax Financing Corporation.”); New Bond Legislation art. 2.1 (providing that Reorganized COFINA “shall be recognized for all purposes as an independent and separate legal entity from the Government of Puerto Rico and any other Government Entity.”). The Court has previously held, in connection with the Commonwealth-COFINA Dispute, that the nature of each debtor’s interest in the Pledged Sales Taxes, for purposes of PROMESA, is a mixed question of federal and Commonwealth law.The Plan, however, provides for an agreed upon allocation of the Pledged Sales Taxes premised upon this Court’s approval of the Settlement and confirmation of the Plan, and, upon such approval, the COFINA Revenues shall be the sole and exclusive property of COFINA, and shall not be property of the Commonwealth or available to the Commonwealth. The Settlement and the allocation of the Pledged Sales Taxes are necessary for the implementation of the Plan, and, pursuant to Bankruptcy Code section 1123(a)(5), made applicable to COFINA’s Title III Case pursuant to PROMESA section 301(a), are self-executing and preemptive notwithstanding otherwise applicable non bankruptcy law, including otherwise applicable Commonwealth law. See 11U.S.C. § 1123(a)(5) (“Notwithstanding any otherwise applicable non bankruptcy law, a plan shall . . . provide adequate means for the plan’s implementation,such as (A) retention by the debtor of all or any part of the property of the estate . . . .”); PROMESA § 301(c)(5) (“The term ‘property of the estate’, when used in a section of title 11, United States Code, made applicable in a case under this title by subsection (a), means property of the debtor.”); see also In re Irving Tanning Co., 496 B.R. 644, 664 (B.A.P. 1st Cir. 2013) (“[O]nly those means may preempt state law that are sufficient for the implementation of the plan: they must be sufficient to implement the plan, equal to what is required, but also not more than is required.”). Furthermore, pursuant to the Settlement Order and the Plan, and subject to the terms of the plan, claims of COFINA’s creditors are released as against the Commonwealth and the Commonwealth itself shall not be liable for the repayment of the COFINA Bonds,nor will the COFINA Bonds have any recourse to any property of the Commonwealth.See New Bond Legislation art. 3.1(c).

Pursuant to PROMESA, including 171. section 4 there of, as well as sections 944 and 1123 of the Bankruptcy Code, and in accordance with the Confirmation Order, the Settlement, the Plan,and Act 241, the Court determines that the COFINA Bonds are legal, valid, binding and enforceable obligations of Reorganized COFINA benefitting from the following protections, each of which are is legal, valid, binding, legal, and enforceable against Reorganized COFINA, the Commonwealth, and other persons and entities, as applicable, under Puerto Rico and federal law.

Later at pages 75-76:

Pursuant to Bankruptcy Code sections 1123(a), 1123(b), and 944(a) as well as genera principles of federal supremacy, the provisions of this Confirmation Order, and the Plan, and related documents or any amendments and modifications thereto shall apply and be enforceable notwithstanding any otherwise applicable non-bankruptcy law. The documents contained in the Amended Plan Supplement (as such documents may be further modified and filed with the Court prior to the Effective Date), including, without limitation, Reorganized COFINA By-Laws, the COFINA Bonds, the New Bond Indenture, the Instructions Agreement, the Ambac Trust Agreement, the National Trust Agreement, the Standard Terms to National Trust Agreement, the Remarketing Agreement, and the Continuing Disclosure Agreement provide adequate means for implementation of the Plan pursuant to Section 1123(a)(5) of the Bankruptcy Code, and, as of the occurrence of the Effective Date, shall constitute valid legal obligations of COFINA and the Commonwealth, as applicable, and valid provisions to pay or secure payment of the COFINA Bonds pursuant to section 944(b)(3) of the Bankruptcy Code, and be enforceable in accordance with their terms.

In addition, footnotes 4 and 5 were added. Footnote 4 states:

Adversary Proceeding. ECF No. 483, Decision and Order, dated May 24, 2018, at 5-6,Exhibit DX-TT (“the Court must decide what the relevant property rights are within the context of these Title III proceedings, under PROMESA and federal bankruptcy law provisions that Congress has incorporated into PROMESA . . . .[T]he Commonwealth-COFINA Dispute presents a mixed question of federal and Puerto Rico law”). See also Abboud v. Ground Round, Inc. (In re Ground Round,Inc.), 482 F.3d 15, 17 (1st Cir. 2007) (“The label … that state law affixes to a particular interest in certain contexts is not always dispositive.” (citingIn re Nejberger, 934 F.2d 1300, 1302 (3d Cir. 1991)).

Footnote 5 states:

Section944(b)(3) requires the Court, as a condition to providing a discharge, to determine the validity of obligations imposed under a plan of the debtor and of any provision made to pay or secure payment of such obligations. 11 U.S.C. §944(b)(3). See generally In re City of Stockton, 526 B.R. 35, (Bankr. E.D. Cal.2015) (“The structure of the federal-state relationship . . . regarding restructuring of municipal debt is dictated by the U.S. Constitution. . . .[T]he Supremacy Clause operates to cause federal bankruptcy law to trump state laws, including state constitutional provisions, that are inconsistent with the exercise by Congress of its exclusive power to enact uniform bankruptcy laws”(citing Ass’n of Retired Employees of the City of Stockton v. City of Stockton(In re City of Stockton, CA), 478 B.R. 8, 14–16 (Bankr. E.D. Cal. 2012); U.S.CONST. art. VI, cl. 2; Int’l Bhd. of Elec. Workers, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262, 268–70 (E.D. Cal. 2010), aff’g403 B.R. 72, 76–77 (Bankr. E.D. Cal. 2009) (additional citations omitted)). As set forth in the leading bankruptcy treatise: “The requirement of a court determination of validity is extra assurance for those who might be skittish about the nature of the bonds being issued . . . . It has the added feature of removing any doubt concerning the matter, because the determination of the court on that issue should be binding in the future.” 6 COLLIER ON BANKRUPTCY §944.03[1][b] ((16th ed. 2013). See, e.g., Order Confirming Third Amended Plan for the Adjustment of Debts of the City of San Bernadino, California, as Modified by the Court, dated February 7, 2017, ¶ 22 (“In accordance with Section 944(a) and notwithstanding any otherwise applicable law, upon the occurrence of the Effective Date, the terms of the Plan and this Confirmation Order shall be binding upon . . .”); Order Confirming Eighth Amended Plan for the Adjustment of Debts of the City of Detroit, dated November 12, 2014, ¶ 86(“ in accordance with section 944(a) of the Bankruptcy Code and notwithstanding any otherwise applicable law, upon the occurrence of the Effective Date, the terms of the Plan and this Order shall be binding upon, and inure to the benefit of . . .”); Findings of Fact, Conclusions of Law, Order Confirming the Chapter 9 Plan of Adjustment for Jefferson County, Alabama, dated November 6,2013, ¶ 37, (“Pursuant to Bankruptcy Code sections 1123(a), 1123(b), and 944(a), as well as general principles of federal supremacy, the provisions of this Confirmation Order, the Plan, and related documents or any amendments or modifications thereto shall apply and be enforceable notwithstanding any otherwise applicable nonbankruptcy law”).

In essence, the COFINA bondholders and the Board are legalizing the COFINA bond issues, the COFINA ownership of part of the SUT and changing the Constitution by making this portion not available resources pursuant to Article VI, section 8 of the PR Constitution. Judge Swain saw this and as a former bankruptcy judge, is well aware of the case law cited by them.Moreover, the problem I see with this attempt is that there has been no actual adjudication of a case or controversy as to COFINA. Rather, it is all done via settlement. Furthermore, the U.S. Supreme Court in Raleigh v. Illinois Dept of Revenue, 530 U.S. 15, 20 (2000), held that “[t]he basic ‘federal rule’ in bankruptcy is that state law governs the substance of claims, Congress having ‘generally left the determination of the property rights in the assets of bankrupts estate to state law.’” Will Judge Swain refuse to sign the agreement because she cannot change PR’s Constitution or will just shrug and do it? If she does not sign it,what will the Board and COFINA Ad Hoc bondholder do? Judge Swain cannot change the Plan of Adjustment but she does not have to approve it either. The alternative is dismissal via 11 U.S.C. § 930. I have no idea what Judge Swain will do but this is something to ponder.

Also of interest is proposed Order And Judgment Confirming The Third Amended Title Iii Plan Of Adjustment Of Puerto Rico Sales Tax Financing Corporation, which states at pages 27-28:

Releases by COFINA  and Reorganized COFINA. Except as otherwise expressly provided in the Plan, this Order, or the Settlement Agreement, on the Effective Date, and for good and valuable consideration, each of COFINA and Reorganized COFINA, the Disbursing Agent and each of COFINA’s and Reorganized COFINA’s Related Persons (other than any former elected or appointed officials, directors, or officers of any of the Government Parties and the Commonwealth, in each case acting in his or her capacity as such prior to January 1, 2017)3 shall be deemed to have and hereby does irrevocably and unconditionally, fully, finally and forever waive, release, acquit, and discharge the Released Parties from any and all Claims or Causes of Action that COFINA, Reorganized COFINA, and the Disbursing Agent, or any of them, or anyone claiming through them, on their behalf or for their benefit, have or may have or claim to have, now or in the future, against any Released Party (other than any former elected or appointed officials, directors, or officers of any of the Government Parties and the Commonwealth, in each case acting in his or her capacity as such prior to January 1, 2017) that are Released Claims or otherwise are based upon, relate to, or arise out of or in connection with, in whole or in part, any act, omission, transaction, event or other circumstance relating to COFINA taking place or existing on or prior to the Effective Date, and/or any Claim, act, fact, transaction, occurrence,statement, or omission in connection with or alleged or that could have been alleged in the Actions, the Related Actions, including, without limitation, any such Claim, demand, right, liability, or cause of action for indemnification,contribution, or any other basis in law or equity for damages, costs or fees; provided, however, that, notwithstanding anything contained in the Plan to the contrary, “Related Persons” shall not include any financial advisors, investment bankers, underwriters, attorneys, accountants, agents and professionals of the Commonwealth and COFINA, solely to the extent of services provided in connection with the issuance of the Existing Securities; and,provided, further, that the plaintiffs in that certain adversary proceeding before the Title III Court, captioned Cooperativa de Ahorro y Credito AbrahamRosa, et al. v. Commonwealth of Puerto Rico, et al., Adv. Proc. No. 18-00028,shall be entitled to continue pursuit of such litigation against all parties other than COFINA and Reorganized COFINA, subject to all available rights and defenses with respect to claims and causes of action asserted therein.

This is interesting because Judge Swain questioned during the hearing why she had to give officials a waiver. The Board and AAFAF changed it and they are now NOT immune. Interesting. Also, the Cooperativas mentioned above had objected to the COFINA deal because it affected their case. Now, it will not affect it, especially since the Board has already filed a motion to dismiss. Let’s see what happens. 

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

Welcome to your weekly Title III update for January 14, 2019.  This week all eyes are on the COFINA confirmation hearing on January 16 and 17. The future of the COFINA settlement and the COFINA Title III, hang on the balance.

The Board has the burden of proof as to the Plan of Adjustment. Confirmation of the plan is not regulated by the Bankruptcy Code but rather by section 314(b) of PROMESA, which states:

CONFIRMATION.—The court shall confirm the plan if—

(1) the plan complies with the provisions of title 11 of the United States Code, made applicable to a case under this title by section 301 of this Act;

(2) the plan complies with the provisions of this title;

(3) the debtor is not prohibited by law from taking any action necessary to carry out the plan;

(4) except to the extent that the holder of a particular claim has agreed to a different treatment of such claim,the plan provides that on the effective date of the plan each holder of a claim of a kind specified in 507(a)(2) of title 11, United States Code, will receive on account of such claim cash equal to the allowed amount of such claim;

(5) any legislative, regulatory, or electoral approval necessary under applicable law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval;

(6) the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan; and

(7) the plan is consistent with the applicable Fiscal Plan certified by the Oversight Board under title II.

These requirements mirror those of 11 U.S.C. sec. 943(b) except for 6 and 7.

PROMESA, however, adds a twist to this. The feasibility of the plan, which usually is limited to whether the municipality may fund the changes it has made, added a twist not found in the bankruptcy law, to wit, “whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” The Board’s position has been that the Court has only to look at said law—not give it any weight—but it has not put forward any precedent or legislative history to back this up. If one were to interpret it as written, the Court would have to consider whether creditors would be better off going to the state and federal courts instead of a bankruptcy like procedure.

In addition, the plan must comply with 11 U.S.C. sections 1129(b)(1), 1129(b)(2(A) and 1129(b)(2)(B), which state:

(1) Notwithstanding section 510(a)of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

(2)For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

(A)With respect to a class of secured claims, the plan provides—

(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and

(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;

(ii) for the sale, subject to section 363(k)of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or

(iii) for the realization by such holders of the indubitable equivalent of such claims.

(B) With respect to a class of unsecured claims—

(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan,equal to the allowed amount of such claim; or

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.

Not only are these requirements difficult to achieve, but section 1129(a)(3) requires that the Plan of Adjustment be filed in “good faith and not by any means forbidden by law.” The case law on this is extensive and contradictory and cannot be discussed in this brief analysis. The same can be said of the requirement that the Plan of Adjustment be fair and equitable.

To date,there are 9 objectors to the Plan of Adjustment and they will be given a chance to argue their objections. In addition, the Board filed a motion stating that it will cross examine Dr. Alameda, Utier’s expert witness. On Saturday, the Board filed declarations by Ms. Jaresko and Mr. Brownstein from Citi. Objectors have until Monday to notice whether they are going to cross examine them. I don’t know what they will do but I would definitely do it. I must note that Mr.Brownstein’s declaration states as to the objection that subordinate bondholders were not present during mediation:

I understand that Assured, an insurer of approximately $274 million in “First Subordinate”Existing Securities, is aligned with the economic interest of the holders of“First Subordinate” Existing Securities and has no exposure, either through insurance coverage or beneficial ownership, to “Senior” Existing Securities. I am aware that Assured participated fully in litigation from the perspective of“First Subordinate” Existing Securities. Assured participated in Plan mediation and was a party to the A&R Plan Support Agreement.12 Additionally, retail COFINA bondholders were represented throughout the process by retail or mutual funds, representing the interests of mainland and “on-island” bondholders, and Bonistas, advocating for the interests of Puerto Rico resident bondholders, all signatories to the A&R Plan Support Agreement that included terms for the treatment of the holders of “Senior” and “First Subordinate” Existing Securities to settle the issues of the relative rights between such holders. This settlement was also subsequently incorporated into the Plan.

Although by no means is the Plan of Adjustment approved, it is clearly a done deal. Judge Swain already ordered the following:

In connection with the hearing to consider approval of the Third Amended Title III Plan of Adjustment of Puerto Rico Sales Tax Financing Corporation (Docket Entry No.4652 in Case No. 17-3283, and as may be further amended), counsel to the Financial Oversight and Management Board for Puerto Rico is hereby directed to file the form of proposed order, findings of fact and conclusions of law by Monday, January 14 at 3:00 p.m. (Atlantic Standard Time).

Enough said.

With the COFINA Plan of adjustment approved, it will make all other deals much easier to accomplish. Moreover, the Board filed an Omnibus answer to all objections, just 84 pages, where it provides Judge Swain with sufficient legal cover to approve the deal. I don’t agree with some of the Board’s arguments but without a doubt they are “plausible.” Also, the alternative to confirming the plan is the dismissal of the Title III via 11 U.S.C. § 930. Food for thought.

WARNING: Anyone thinking of appealing said approval of the COFINA Plan of Adjustment should be very familiar with the doctrine of Equitable Mootness.

As I mentioned last week, on January 7, 2019, at 9:30 am, the First Circuit held oral arguments on Altair Global Credit Opportunities Fund (A), LLC, et al. v. The Employees Retirement System as to liens. I listened to the oral argument and it seems Altair has the advantage, but not by much. If there is a reversal, it will be with specific instructions for findings. As to the Aurelius decision, it has not been announced yet, but the First Circuit states in its website that the Federal Court system has enough money to operate regularly until January 18, 2019. Hopefully, the decision will come out before that date but we don’t know. It would be stunning if it came out before the January 16^th hearing, especially if it reverses Judge Swain and there is a stay of proceedings. The waiting continues.

In the PREPA Title III, the Puerto Rico Central Recovery and Reconstruction Office and the Puerto Rico Public Private Partnership Authority retained Cleary Gottlieb Steen & Hamilton, LLP (the previous Governor’s law firm) “to provide legal representation in connection with the above-captioned case now pending before the United States District Court for the District of Puerto Rico.” Does this mean that the PREPA sale will accelerate?

After Mr. Bienestock dropped the bomb that the Commonwealth Plan of Adjustment would probably be handled as a “cram down,” I decided to do some research on Board members publications and found that David Skeel has published Reflections on Two years of P.R.O.M.E.S.A.,87 Revista Jurídica de la Universidad de Puerto Rico 862-883, num 3 (2018). At page 880, he states: “[w]e are hopeful we can propose Plans of Adjustment for the Commonwealth and P.R.E.P.A. by early 2019, though we cannot yet tell if that is realistic.” Given the possibility of the First Circuit reversing Judge Swain in Aurelius and the expiration of the appointment of the current Board members, it seems they want to leave these two major plans in place before they leave. We will see.

In addition, the Board sent a letter to the Commonwealth and stated:

The Oversight Board is deeply concerned about the continued delays in the Commonwealth of Puerto Rico’s completion of its audited Basic Financial Statements and Required Supplementary Information.

On April 30, 2018, the Oversight Board asked that you provide a timetable for the issuance of the audited financial statements for FY2015, FY2016, and FY2017,respectively. On May 7, 2018, you provided the following estimated dates for completion of the audited financial statements: FY2015 by June 8, 2018; FY2016 by August 17, 2018; and FY2017 by December 31, 2018. While the FY2015 audit was completed in June 2018, both the FY2016 and FY2017 audit remain outstanding,despite your May 7, 2018 letter projecting that both would be completed by now.

Accordingly,pursuant to Section 104(c)(2) of PROMESA, please provide the following information by January 18, 2019:

an explanation for thedelays in issuing the 2016 and 2017 audits;

a detailed description of the pending items for completion of the 2016 audit;

updated estimated dates for completion of the 2016 and 2017 audits; and

an estimated date for completion of the 2018 audit

The Commonwealth has flaunted the Board’s deadlines on this issue before. What will happen if it does again? The Board has shown great reluctance in forcing the Commonwealth to do anything. In fact, the Commonwealth has been much more willing to take the Board to Court than the other way around. This year the pensions have to be reduced and that promises to be another big fight between the Board and the Commonwealth. Let’s see who takes who to Court first.

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

Welcome to your weekly Title III update for January 7, 2019.  After a two-week hiatus to give my readers a respite during the holidays, unfortunately we must now face the realities of PROMESA, Title III and the Board.

On December 19, 2018, Judge Swain granted the Board’s motion to reject the Debt Service Deposit Agreement with Lehman Brothers Special Financing Inc., which was to be expected. In addition to the Omnibus objections to duplicative proofs of claim, the Board started to file individual objections to specific proofs of claim. Important to remember that those specific objections must be answered quickly.

On December 21, 2018, the parties in the PREPA bondholders’ request for lifting of the stay to allow for the appointment of a receiver again amended the schedule of the case in the following manner:

The Revised Scheduling Order is amended to revise existing deadlines as follows:

a. January 7, 2019: Parties to exchange preliminary will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

b. January 29, 2019:Respondents to file opposition brief and supporting declarations;

c. February 20, 2019:Parties to exchange final will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

d. February 25, 2019:Movants to file reply brief and supporting declarations;

e. March 1, 2019:Parties to complete expert discovery and depositions;

f. March 5, 2019:Parties to file exhibit lists;

g. March 5, 2019:Parties to designate deposition testimony; and

h. March 8, 2019: Parties to cross-designate deposition testimony.

In addition, the Court will hold a hearing on the motion on March13, 2019, at 2 pm to be continued on March 14, in San Juan. Seems to me that the requested extensions pertain more to negotiations to end this issue as well as to bringing the monolines to the prospective settlement of the PREPA claims,which may include the Boards agreement to the lifting of the stay for said appointment. In addition to this, on December 21, 2018, the Board issued a new directive that states, inter alia:

This FOMB Policy (the “Policy”) is established pursuant to Section 204(b)(4) of PROMESA to require prior FOMB approval of certain rules, regulations, administrative orders, and executive orders proposed to be issued by the Governor (or the head of any department or agency) to assure that they “are not inconsistent with the approved fiscal plan.” This Policy shall also apply as provided in Section 204(b)(5). . .

Any rule,regulation, administrative order, or executive order that is issued in connection with the PREPA Transaction, whether by the Public-Private Partnership Authority or the Partnership Committee, as contemplated by Act No.120-2018.

Seems that the Board is very concerned about governance in PREPA and a receiver upon which they would have input, could be of use. It must be remembered, however, that any receiver appointed by the Court would substitute both PREPA’s governing Board and its Executive Director, but would still be subject to the Board’s directives. Balancing this, the receiver would still respond to the Judge that appoints him. Interesting turn of events if it were to happen.

On December 21, 2018, the Service International Union filed an objection to the COFINA Plan of Adjustment that simply says they adopt the objection they made to the settlement in COFINA. Since this objection does not deal with PROMESA sec. 314 of Bankruptcy section 1129, it is unlikely it will have any impact.

On December 21, 2018, the Board and the UCC filed an adversary proceeding challenging the PBA bonds as invalid. It argues:

PBA is an instrumentality of the Commonwealth created to issue bonds (the “PBA Bonds”) to finance the acquisition, construction and/or improvement of office space and other facilities (collectively, the “PBA Facilities”) used by departments,agencies, instrumentalities, authorities, public corporations, and municipalities of the Commonwealth (the “Public Occupants”) for government operations and providing essential services to the public. Currently, more than $4 billion in aggregate principal amount of PBA Bonds remain outstanding. PBA also enters into purported leases (the “Leases”), pursuant to which it ostensibly leases the PBA Facilities to the Public Occupants (the “Lessees”). In reality, however, the Leases are not arm’s length rental transactions designed to grant the Public Occupants temporary use of the PBA Facilities; rather, the sole purpose of the Leases is to provide a vehicle for the Commonwealth to repay the PBA Bonds through the Lessees’ purported “rent” payments. . .

Consistent with the economic reality of the Leases, this adversary proceeding seeks a declaratory judgment that the Leases are not “true leases,” but, rather, disguised financing transactions. As a result, PBA has no right under PROMESA or the Bankruptcy Code to receive post-petition rent payments from the Debtors or administrative claims against the Debtors. In addition, this adversary proceeding seeks a declaratory judgment that certain of the Leases do not give rise to administrative claims against the Debtors because the Lessees are non debtor entities.

As I have said many times, the audit of Puerto Rico’s debt is being done in federal court, not a kangaroo commission as the island’s left favors.

On December 26, 2018, the GMS Group, LLC, who had objected to the COFINA Plan of Adjustment and had latter withdrawn it, filed an amended objection. It claims the Plan of Adjustment violates the takings clause, that the plan has not been proposed in good faith, the plan improperly releases non-debtors, and that the plan is unfair and inequitable and thus fails to comply with section 1129. With one exception, this objection has little chance of succeeding. More on this latter.

 The Department of Justice requested an extension to file objections to the COFINA deal but the Court only gave it until January 4, 2019. No objection was filed.

On December 27, 2018, Luskin, Stern & Eisler LLP, the law firm selected by the Board to investigate McKinsey & Company, Inc., filed a motion informing the Court of the following:

At the November 7, 2018 omnibus hearing, LS&E informed the Court that the FOMB had retained LS&E to (i) investigate certain allegations concerning potential conflicts of interest of McKinsey & Company, Inc., Washington D.C. (“McKinsey”) and(ii) issue a written report detailing its findings. At the hearing, LS&E stated it would attempt to complete its investigation and to issue its written report by December 31, 2018. LS&E has determined that it will not be able to complete the investigation by that date and submits this informative motion to provide the Court an update on the status of its investigation.

Since the November 7,2018 hearing, LS&E has completed its initial round of interviews and its initial review of documents and has begun to draft its report. However, based on information obtained to date, LS&E has determined that follow-up(additional document requests and additional witness interviews) will be necessary, and its investigation will, therefore, continue into January 2019.

LS&E will provide an update to the Court in advance of the January 30, 2019 omnibus hearing.

In other words, we will know nothing on McKinsey’s conflicts of interest but it continues advising the Board. Makes no sense to me but I just report the facts, I don’t make policy.

On December 28, 2018, Peter C. Hein, who claims to own COFINA bonds, wrote a very cogent pro se objection to the plan of adjustment. He claims the Plan of Adjustment discriminates against non-Puerto Rican residents, that the plan cannot be confirmed unless the issue of the validity of COFINA is decided (not very likely), that there is no justification to give subordinate COFINA bondholders less than seniors, that it violates the contracts (it does not), that it violates the takings clause (maybe), violates due process, equal protection and immunities clauses of the US Constitution, and that the objection process violates due process and fairness, etc. Good job for someone who says is not a lawyer.

On December 31, 2018, the Board filed supplemental documents for COFINA, but the date for objections remained the same. Interesting.

On January 2, 2019, PRO SOL-Utier, filed an objection to the COFINA Plan of Adjustment, and included an expert report by a doctor in economics who is a professor in UPR at Mayagüez. Well done by Utier. The only problem is that I don’t think the union has standing. However, as their attorney Mr. Rolando Emmanuelli told me, the Board did not raise standing when it replied to the objection filed to the COFINA deal. Irrespective of the objection, this means that the Board will have to sit its own experts to say the deal is a good idea.

On January 2, 2019, Mark Elliot, individually and D/B/A/ Elliot Asset Management, claiming to be a COFINA bondholder also filed an objection pro se. He claims that the plan ignores the threshold question of what is available resources, that there are better remedies for creditors pursuant to 314(b)(6)(important in my opinion), the plan deprives Jr. bondholders of important rights without compensation, Jrs. and Seniors are treated differently although there is money to pay both, the Senior COFINA mediating team that allegedly mediated for Jrs. was conflicted (maybe), and that the plan will have bad consequences for the muni market, etc.

Lawrence B. Dvores also filed a pro se objection (so many people do not want to hire a lawyer). His objection basically says that the settlement is grossly unfair to Jr. bondholders and repeats the issue of preferential treatment to locals and that Jrs were not involved in negotiations. Except for the discrimination claim, it will not go far.

Cooperativa de Ahorro y Crédito de Rincón, Cooperativa de Ahorro y Crédito Dr. Manuel Zeno Gandía, Cooperativa de Ahorro y Crédito del Valenciano and Cooperativa de Ahorro y Crédito de Juana Díaz also filed an objection. This group has an adversary proceeding which includes COFINA as a defendant and they complain that the Plan of Adjustment does not mention their complaint. Of course it does not, they are getting nothing. Again, very unlikely this will succeed.

Puerto Rico Representative Natal, who has left the PDP, joined forces with several groups and unions requesting that the COFINA plan hearing be postponed or that the approval be rejected. Their claim is that Mr. Natal was not given a chance to debate one of the measures in the House and therefore it is unconstitutional as per the case filed in the island’s courts. Also, they claim COFINA is unconstitutional. Not very likely this claim will have any impact.

Given the fact that by the time of the January 16, 2019 hearing on the Plan of Adjustment we will have the vote tally and it very likely be in favor, there are a couple of objections that I think have merit. As long as COFINA is valid, all bondholders have a lien on the SUT. Undoubtedly, you can alter a lien if the lienholders agree, but doubt it can be done if the decision is not unanimous. A couple of the objections claim this. Also, there are claims that the Plan of Adjustment discriminates between Puerto Rico and US bondholders, hence violating the Equal Protection clause of the US Constitution. These two are difficult to circumvent, although I am sure the Board has thought of an answer. In addition, PROMESA 314(b)(6) states that the Court must find, in order to approve it, that “the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” Although the Board claims that the Court only needs to look at the available resources, not consider them, I think otherwise. In any event, I am sure Judge Swain will bend over backwards to approve the plan of adjustment since otherwise the Title III would have to be dismissed as per 11 U.S.C. § 930. Which by the way, those in the left in Puerto Rico have not explained what will be done if the Title III is dismissed. Food for thought.

Also, the Court issued an order where individuals may request time to be heard and up to 24 persons, selected by the Judge, will be given supposedly 5 minutes, to voice their frustration. It is great for venting these frustrations but that will lengthen the hearing. Oh well. This could mean that the hearing may extend over to January 17 and it is unlikely Judge Swain will immediately rule on the plan and may take a few days to write the opinion. We will see.

In other news, on December 27, 2018, the Board essentially put on hold the new PR Tax law by requesting more information that had to be provided by January 4, 2019. Hopefully this week we will know if this tax law will be put into effect or not.

Governor Rosselló now claims he wants new Board members, which he will get either sooner (Aurelius appeal reverses Judge Swain) or later when the three year period expires. In any of the two events, it is unlikely he will get what he wants. As to the Aurelius appeal, we are still waiting for a decision, which may come next week since the website for the First Circuit states they will continue working until January 11, 2019. Finally, on January 7, 2019, at 9:30 am, the First Circuit will hold oral arguments on Altair Global Credit Opportunities Fund (A), LLC, et al. v. The Employees Retirement System as to liens. Let’s see what comes out.

The new Democratic majority in the House is making noises that it will make changes to PROMESA, just like Congressman Bishop did for two years. Doubt much will be done but there will be hearings upon hearings filled with hot air. Oh well.

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.