Monday Update – February 25, 2019

Welcome to your weekly Title III update for February 25, 2019. This week’s news in PROMESA is still dominated by the First Circuit’s reversal of Judge Swain’s opinion in the Aurelius-Utier litigation and I discuss further implications and developments in a separate posting. Outside Aurelius, however, several things happened.

On February 18, 2019, the Board posted the Final Investigative Report-McKinsey & Company, Inc., issued by Luskin, Stern & Eisler LLP. The report, as expected, totally exonerated McKinsey of any wrongdoing although one of its subsidiaries owned Puerto Rican bonds. It seems the Board and its cronies can do no wrong. We shall see.

The notices of appeal continued to be filed in the COFINA plan of adjustment issue but it will likely run into the doctrine of equitable mootness. The Third Circuit explained what it is in In re Tribune Media Co., 799 F.3d 272, 278 (3d Cir. 2015), cert. denied sub nom. Aurelius Capital Mgmt., L.P. v. Tribune Media Co., 136 S. Ct. 1459, 194 L.Ed.2d 575 (2016)

“Equitable mootness” is a narrow doctrine by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when to grant the relief requested will undermine the finality and reliability of consummated plans of reorganization. The party seeking to invoke the doctrine bears the burden of overcoming the strong presumption that appeals from confirmation orders of reorganization plans—even those not only approved by confirmation but implemented thereafter (called “substantial consummation” or simply “consummation”)—need to be decided.

The doctrine may be narrow but no one has requested a stay of the execution of the plan of adjustment and by the time the case is briefed, it may be too late for an appeal. We will have to follow this one.

Certain ERS bondholders filed an important motion on February 19. It states, inter alia:

The ERS Bondholders respectfully ask this Court to appoint them trustees under 11 U.S.C. § 926 to pursue avoidance claims against the Commonwealth under 11 U.S.C. §§ 549 and 544. Such relief is necessary because the Financial Oversight and Management Board (“Oversight Board” or “Board”) has refused to litigate those claims. That is unsurprising, because the claims arise from Commonwealth legislation, enacted after the commencement of ERS’s Title III case and at the Oversight Board’s behest, purporting to dismantle ERS and transfer all of ERS’s assets, including its revenues and its right to receive revenues, to the Commonwealth. And despite the fact that ERS was a debtor in its own Title III case and was an independent entity to which the Commonwealth owed statutory financial obligations, neither the Board’s fiduciary duty to ERS nor ERS’s fiduciary duty to its creditors appears to have been recognized or to have played any role in the Board’s decision making. Section 926 was designed for just such circumstances, in which a conflict of interest has disabled a debtor or its representatives from pursuing claims in the debtor’s own best interest or that of its creditors.

Here you see the recurring theme of a Board “conflict of interest.” Board Member Carlos García with COFINA, Chairman Carrión with Banco Popular Puerto Rico, to name a couple of others. Curious is it not? In any event, this motion, valid as it is, will probably be denied by Judge Swain since the Board is sure to oppose it. What will happen in the First Circuit is quite another issue.

The ERS bondholders also filed a motion to have their request for lifting of the stay for adequate protection considered in an expedited fashion. Although the Board opposed the motion, it also requested that if granted, certain dates be changed. Let’s see what happens.

On February 22, 2019, the First Circuit gave Judge Swain her first win, affirming her dismissal of the Legislature’s complaint against the Board. The Court said:

The plaintiffs, the Speaker of Puerto Rico’s House of Representatives, Carlos Méndez-Núñez, and the President of its Senate, Thomas Rivera-Schatz, in their official capacities and on behalf of the Legislative Assembly, sued the Board, its members, and its executive director after the Board developed and certified a Fiscal Plan and a Territory Budget for Fiscal Year 2019. The complaint alleged that the Board had made several erroneous certification decisions and had exceeded its power under PROMESA during the Fiscal Plan and Territory Budget development and certification processes. It sought declaratory and injunctive relief. The district court dismissed the complaint, in part for lack of subject matter jurisdiction and in part for failure to state a claim. See Rivera-Schatz v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 327 F. Supp. 3d 364 (D.P.R. 2018). We affirm the dismissal on the same grounds.

Judge Lynch, as did Judge Swain, called out the Legislature for presenting incorrect facts, again, and again. The oral argument, as I explained when it came out, was embarrassing for plaintiffs. All paid by the People of Puerto Rico. No wonder we have a Board.

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.

Special Update: The Board Desperately Clings to Power

One week after the expected but seemingly surprising (for the Board) Aurelius decision, it is already jockeying to main power in Puerto Rico. Last Friday, Board Member David Skeel made it abundantly clear when he gave a speech to the Puerto Rico Chamber of Commerce essentially saying that the Board would seek certiorari review from the Supreme Court of the United States (SCOTUS) and hinted the U.S. Government would do the same. Mr. Skeel also hinted that the Board would seek a stay of the 90-day stay granted by the First Circuit. He insisted that the case is constitutionally very important and that he was confident the Supreme Court would reverse the decision by next fall. These are surprisingly precise predictions, perhaps suggesting he knows the outcome from the Robert’s Court from an important Board member, but they must be examined closely.

If in less than 90-days, the Board seeks certiorari review and requests that the SCOTUS issue a stay of the mandate until the case is decided or the cert is denied. This way it could circumvent the May 16, 2019 deadline to wield power. If the Supreme Court grants the certiorari, this could happen, but as I have explained many times, the likelihood of the grating of a cert is less than 1%. Also, while the SCOTUS reviews the petition, it occasionally grants stays even if it later denies the petition. Also, the issue of the Appointments Clause is constitutionally important, but that is not the litmus test for the granting of a petition for certiorari. SCOTUS watchers and Mr. Skeel has written amicus briefs to the Supreme Court, know that conflicts between the Circuits is the best way to have a certiorari granted. Another useful way is for the United States to seek the certiorari and then the odds increase to around 25%, which are still very bad. Even if granted, the Board risks having the Supreme Court reverse the First Circuit and decide all its work is for naught and invalidate the Title III’s. As to Mr. Skeel’s opinion on likelihood of success, let’s just say he filed a brief of amicus curiae supporting the Commonwealth’s Recovery Act. It didn’t work.

Moreover, Mr. Skeel said that the Court could decide this by fall. That is very strange since the Supreme Court term ends on June 30 and the next term starts on the first Monday in October. Even if the case is argued in October, usually decisions do not start coming in until late November or December. Additionally, just last term, June 21, 2018, the Supreme Court decided Lucia v. SEC, 138 S. Ct. 2044 (2018), a case having to do with the Appointments Clause, which albeit important, is an arcane part of Constitutional lore. Hence, there is no real need to discuss this again.

Why then risk this in a long shot cert? Why not accept the First Circuit judgment and wait to see if President Trump will nominate him? My sources tell me the Board has been lobbying in DC for their reappointment. Is it as Lord Acton said, “Power tends to corrupt, and absolute power corrupts absolutely”?  Seems the Board wants to continue wielding power far beyond its time by stretching the request for cert as much as it possibly can in order to impose on creditors (including my clients, who are unsecured creditors) a plan of adjustment in the Commonwealth case. It is almost thumbing its nose at the Constitution. Not exactly what one would expect from a group of principal United States Officers, or from a leading member of the Federalist Society.

Mr. Skeel also repeated what he has said in the University of Puerto Rico Law Review and what Martin Bienestock told judge Swain this past November; the Board plans on filing a plan of adjustment for the Commonwealth this year.  As to the plan of adjustment, there are a couple of things that must be pointed out. The Board has said that it will certify a new Fiscal Plan by April 22. Since the plan of adjustment must be consistent with the Fiscal Plan, it must be in place before the plan of adjustment may be filed. In addition, the Board and the UCC have stated that it is a threshold issue for the Court to decide the GO objection it filed before the plan of adjustment. Given the complexities of the issues involved and the notices to the different parties, I can’t see Judge Swain solving the issues before the end of the year. We will see.

And finally, Mr. Skeel writes in today’s Wall Street Journal a rather alarming claim:

Puerto Rico would collapse into chaos if the [Aurelius] ruling took immediate effect. The hedge fund that is the principal plaintiff in the case asked the court to dismiss the bankruptcy-like proceedings the oversight board began in May 2017. That would cause a mad scramble as creditors used every legal and political lever available to force Puerto Rico to pay. 

Nothing is further from the truth. Although Aurelius in its complaint requested the dismissal of the Title III proceedings as ultra vires actions, which they are, during oral arguments at the district court and appellate level, it stipulated it would accept a stay of proceedings until the new Board was installed and decided what it would do with the previous board’s decisions. What Mr. Skeel does not tell you is that Utier, the union who filed the first complaint claiming the unconstitutionality of the appointments, has not offered such stipulation and continues to argue that not only is the Title III illegal and should be dismissed, but all Board actions are illegal in toto.

In addition, dismissal of the Title III would not create a mad scramble. There are several cases right now dealing with bondholder and non-secured creditor claims. Others are on appeal. The mad scramble already exists precisely because of the Board’s Title III and other actions. Most creditors would have no federal jurisdiction since GO claims have to be litigated in state court (even the 2014 claims may be litigated there) and Commonwealth law prohibits any embargo of governmental accounts. The First Circuit already has ruled that ERS bondholders hold a lien and even though the Board seems to deny payment, they are secured creditors under bankruptcy law and entitled to payment to the full extension of the lien. PREPA bondholders had a deal in place without the benefit of PROMESA and as of now, the Board has an RSA, which is not very different from the previous one. The monolines are still holdovers but that may change, even after a dismissal of the Title III. The COFINA deal is already done and very unlikely to become undone even with no Board. PRASA and the UPR have been paying its debts, as well as the Municipalities.

In sum, Mr. Skeel’s various public comments are intended to portray the situation as one as business as usual and that the Board will continue its “important” work. Let’s face it, the situation is NOT normal, an Appellate Court has just determined that its members were unconstitutionally appointed and hence have no power.  To attempt to file a plan of adjustment right in the middle of a certiorari petition is desperate, to say the least.

What would change substantially with the Aurelius ruling is that this particular Board would probably be replaced, which seems to strike fear in Mr. Skeel. But the Board is not this superhero group, no League of Justice, without which would perish. After 2 years of continuous bickerings with local politicians, it seems to me that it would be best if PROMESA, including Title III, is dismissed and the local politicians left to do all the changes and schemes necessary to straighten our existence. There was no humanitarian crisis in 2016 and there is none now, only the lack of will and profiles in courage to act.

On the local front, the governor says the White House has refused to meet with him to discuss the reconstruction funds. The White House said it had not received the request for a meeting but Mr. Mercader, who is very serious public servant, countered saying that as executive director of the Puerto Rico Federal Affairs Administration he wrote White House Director of Intergovernmental Affairs, Douglas Hoelscher, on January 17 to request a meeting with Trump for Rosselló

This public conflict does not help the governor . . . or does it? If the Board is not reappointed by May 16, barring any SCOTUS extension, its power ceases to exist since it never was properly appointed. This means that any delay in the appointment of the Board members means that the Governor cannot not restrained by anyone. He can make whatever budget it wants, reassign any funds it wants, even if the Board imposes a budget before May 16 because no one can take him to Court. Governor Rosselló is already claiming his fiscal team achieved the COFINA deal. If we add to this that the PDP is clamoring for Puerto Rico to have control of the Title III, we have the perfect storm for local politicians; a recovering economy and no Board to tell them what to do.

The only problem with this scenario is that eventually a Board will be appointed which will not look at these actions with pleasure. In addition, 11 U.S.C. § 930(a)(1) and 930(a)(2) complicate the issues. It states:

(a) After notice and a hearing, the court may dismiss a case under this chapter for cause, including-

(1) want of prosecution;

(2) unreasonable delay by the debtor that is prejudicial to creditors;

Hence, if after a couple of months without action in the case, the creditors, including unsecured creditors, may seek dismissal of the Title III. Will the governor risk the Title III for power? Difficult to say for he will not get a chance for control over the Title III until 2021, if the Democrats win the White House and Senate. In the meantime, no one looks out for the well-being of the People of Puerto Rico.

Monday Update – February 18, 2019

Welcome to your weekly Title III update for February 18, 2019. This week’s news in PROMESA is dominated by the First Circuit’s reversal of Judge Swain’s opinion in the Aurelius-Utier litigation, which I discuss in a separate posting. Outside Aurelius, however, several things happened.   

On February 11, 2019, AAFAF filed a motion in the COFINA cases informing the Court of the following:

Bonistas del Patio, Inc. (“Bonistas”), is party to the Plan Support Agreement and has represented to AAFAF that it has incurred expenses in the aggregate amount of $7,000,000.00 for professional services rendered in connection with the development, negotiation, confirmation, and consummation of the Plan and the compromise and settlement of the Commonwealth-COFINA Dispute (such expenses, the “Bonistas Expenses”);

WHEREAS, Bonistas is not a Consummation Cost Party and is not a recipient of Consummation Costs under the Plan;

WHEREAS, Section 15.2 of the Plan provides that “all expenses . . . incurred . . . in connection with the development, negotiation, confirmation and consummation of the Plan and the compromise and settlement of the Commonwealth-COFINA Dispute shall be paid to the extent available from the funds distributable to the Commonwealth in accordance with the provisions of Sections 2.1 and 15.1 hereof and otherwise by the Commonwealth”;

WHEREAS, AAFAF wishes to stipulate and agree that the Bonistas Expenses are “expenses” within the meaning of Section 15.2 of the Plan and are payable by the Commonwealth on the Effective Date

Bonistas del Patio is local non-profit allegedly representing local jr. COFINA bondholders. This was the first time anyone heard of this agreement and the UCC quickly moved to oppose this “settlement,” requesting that the Court stop the stipulation pending the answer of the following questions:

 Is Bonistas contractually obligated to pay $7 million to its professionals?

 Has Bonistas made any payments to its professionals? If so, how much?

 What is the basis for the Commonwealth’s proposed $7 million payment to Bonistas?

 What consideration is the Commonwealth receiving (or has received) in exchange for making the proposed $7 million payment to Bonistas?

 Who are the ultimate recipients of the proposed $7 million payment?

 When did the Commonwealth agree to take on the obligation to pay $7 million to Bonistas?

 If such an agreement was made before February 11, 2019, why was this agreement not disclosed sooner?

Judge Swain ordered AAFAF NOT to pay the $7 million and to answer the UCC’s motion. AAFAF filed a response with a declaration by Bonistas’ attorney but did not answer the UCC’s questions, which prompted the Court to order the Committee to file a reply, which states, inter alia:

By and large, the AAFAF Response and the Declaration speak only in generalities,7 often fail to specify whether the work at issue was even connected to COFINA (or the Commonwealth-COFINA Dispute), or make other uninformative statements. Even the bullet point list in paragraph 9 of the Declaration falls short of justifying $7 million in fees and expenses—instead, again, resorting to vague and generalized descriptions of services purported provided by Bonistas and its professionals. In that regard, the claim that Bonistas needed to engage in solicitation efforts is particularly dubious given that the Commonwealth already incurred more than $25 million as a “Solicitation Fee” to certain dealer managers for their efforts in soliciting votes of COFINA bondholders. Moreover, the Committee strenuously disputes statements contained in the Declaration to the effect that Bonistas or its professionals were involved for hundreds of hours in the settlement of the Commonwealth-COFINA Dispute (which dispute dealt with the issue of which entity, as between the Commonwealth and COFINA, owned the Sales Tax). These settlement negotiations were handled by the Commonwealth Agent and the COFINA Agent, and not even the Oversight Board was involved. (Footnotes omitted)

The UCC motion also makes alarming allegations against Bonistas’ principals:

The Committee also takes issue with the entire narrative that Bonistas is a “notfor-profit” entity devoting itself pro bono for the good of the small island bondholders. While Bonistas may be, as a technical matter, a non-for-profit corporation, the two main principals of Bonistas, Mr. Rafael Rojo (President of Bonistas) and Mr. Jorge Irizzary (Executive Director of Bonistas), are not mere by-standers in these cases. Mr. Irizzary is a former president of the Government Development Bank for Puerto Rico (“GDB”) and a holder of Puerto Rico bonds. Furthermore, Mr. Rafael Rojo, also a holder of Puerto Rico bonds, has had dealings with the Government of Puerto Rico during these Title III cases. According to a published report (which quotes Mr. Rojo),  in November 2018, Mr. Rojo purchased, through one of his investment vehicles, a 90-acre property (known as the Río Bayamón Community) for $12 million from GDB—a property that, as recently as 2017, had been appraised at $19.6 million. This transaction closed on November 16, 2018, i.e., only a few days after this Court approved GDB’s Qualifying Modification. It is therefore clear that, while he was purportedly negotiating a resolution of the COFINA issues on behalf of on-island bondholders, he was also negotiating with GDB to close a transaction for his own pecuniary gain. What is not clear is what other involvements these two gentlemen may have in these Title III cases.

Unless this is properly explained, these allegations are serious and the UCC should be commended for bringing forth this information. And as the UCC pointed out in its February 12 motion, Bonistas has not complied with Bankruptcy Rule 2019 which requires the disclosure of the following:

(c) Information Required. The verified statement shall include:

(1) the pertinent facts and circumstances concerning:

(A) with respect to a group or committee, other than a committee appointed under § 1102 or § 1114 of the Code, the formation of the group or committee, including the name of each entity at whose instance the group or committee was formed or for whom the group or committee has agreed to act; or

(B) with respect to an entity, the employment of the entity, including the name of each creditor or equity security holder at whose instance the employment was arranged;

(2) if not disclosed under subdivision (c)(1), with respect to an entity, and with respect to each member of a group or committee:

(A) name and address;

(B) the nature and amount of each disclosable economic interest held in relation to the debtor as of the date the entity was employed or the group or committee was formed; and

(C) with respect to each member of a group or committee that claims to represent any entity in addition to the members of the group or committee, other than a committee appointed under § 1102 or § 1114 of the Code, the date of acquisition by quarter and year of each disclosable economic interest, unless acquired more than one year before the petition was filed;

(3) if not disclosed under subdivision (c)(1) or (c)(2), with respect to each creditor or equity security holder represented by an entity, group, or committee, other than a committee appointed under § 1102 or § 1114 of the Code:

(A) name and address; and

(B) the nature and amount of each disclosable economic interest held in relation to the debtor as of the date of the statement; and

(4) a copy of the instrument, if any, authorizing the entity, group, or committee to act on behalf of creditors or equity security holders.

Now that the Board has only 90 days to exist as presently formed, can Bonistas provide this information in such a time?

After the UCC filing, Judge Swain issued an order stating:

The Official Committee of Unsecured Creditors (the “UCC”) and AAFAF are hereby directed to meet and confer and to file a joint status report by February 21, 2019 at 5:00 p.m. (Atlantic Standard Time). Unless the UCC’s objections have been resolved, the joint status report must address whether both parties consent to the proposed March 13, 2019 hearing date, as well as the parties’ positions as to the requests for discovery and an appropriate timetable for any discovery. AAFAF shall also file a further separate brief by the same deadline regarding its positions on the contracting issues raised by the UCC if those issues have not been resolved consensually.

It is obvious from the order that Judge Swain understands there is prima facie validity to the UCC’s objections and is warning of this becoming a contested matter to be discussed during the March 13 hearing. We must stay tuned to this one.

The Board filed an adversary proceeding against the Senate to obtain information on its bank accounts. It attempted to do it via letter, but  President Rivera Schatz flatly refused the request by saying the Board was exceeding its bounds. The status of this proceeding is somewhat in the air due to the Aurelius decision.

Last week I reported that the Board was seeking discovery on certain information held by the monolines having to do, inter alia, with its reserves of funds due to the PREPA Title III. Assured and others filed an opposition saying the information is protected by privilege, including Bank Examiner Privilege and Confidentiality Statues. I believe this is protected and there will be a hearing before Magistrate Judge Dein on February 26. Will try to attend.

Finally, Judge Swain approved the Urgent Motion of (i) Financial Oversight and Management Board, Acting Through its Special Claims Committee, and (ii) Official Committee of Unsecured Creditors for Entry of Order, Under Sections 105(a) and 502 of the Bankruptcy Code, Bankruptcy Rule 3007, and Sections 301(a) and 310 of PROMESA, Establishing Procedures with Respect to Omnibus Objection to Claims Filed or Asserted by Holders of Certain Commonwealth General Obligation Bonds and Requesting Related Relief, having to do with the notice to GO bondholders. It is very detailed and not a bad order. Now with the Aurelius decision, the Special Claims Committee of the Board, comprised of Mr. Skeel, Ms. Matosantos and former Judge González is compromised and can only operate for 90 days. Moreover, the statute of limitations for filing claims such as the GO’s challenge expires in May 2019. Will there be enough time to do everything that needs to be done? Questions, questions.

As to the GO and PBA controversy, I strongly urge bondholders to retain counsel for this may end your right to payment. Remember what happened in COFINA. Band together and fight for your rights.

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 Decision Finally Comes Down

On Friday February 15, 2019, the First Circuit finally came down with its decision on the Aurelius-Utier challenge to the Board appointments. As predicted, the Circuit reversed Judge Swain for the fifth straight time. The 55 page decision examined PROMESA carefully, going through the Board’s powers and the Governor and Legislature’s inability to exercise power over the “territorial entity.”The Circuit summarized some of the Board’s arguments which have great importance to the relationship between Congress and Puerto Rico and said at page 18:

The Board further argued that, in any event, the Appointments Clause did not apply even if the individual members were federal officers, because they exercised authority in Puerto Rico, an unincorporated territory where the Territorial Clause endows Congress with plenary powers. This, according to the Board, exempted Congress from complying with the Appointments Clause when legislating in relation to Puerto Rico.

The Circuit further explained what the District Court’s reasoning was, at pages 20-22:

The district court based its ruling on the premise that “the Supreme Court has long held that Congress’s power under [the Territorial Clause] is both ‘general and plenary.'” Such a plenary authority is what, according to the district court, allows Congress to “establish governmental institutions for territories that are not only distinct from federal government entities but include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States.” The district court further pronounced that Congress “has exercised [its plenary] power with respect to Puerto Rico over the course of nearly 120 years, including the delegation to the people of Puerto Rico elements of its . . . Article IV authority by authorizing a significant degree of local self-governance.” . . .

Turning to the relationship between Congress and Puerto Rico, the district court noted that “Congress has long exercised its Article IV plenary power to structure and define governmental entities for the island,” in reference to the litany of congressional acts that have shaped Puerto Rico’s local government since 1898, including the Treaty of Paris of 1898, the Foraker Act of 1900, the Jones-Shafroth Act of 1917, and Public Law 600 of 1950. Furthermore, with regards to PROMESA and its Board, the district court afforded “substantial deference” to “Congress’s determination that it was acting pursuant to its Article IV territorial powers in creating the . . . Board as an entity of the government of Puerto Rico.” The district court then proceeded to consider whether Congress can create an entity that is not inherently federal. It concluded in the affirmative, because finding otherwise would “ignore[] both the plenary nature of congressional power under Article IV and the well-rooted jurisprudence . . . establish[ing] that any powers of self-governance exercised by territorial governments are exercised by virtue of congressional delegation rather than inherent locals sovereignty.” Accordingly, the district court found that the”creation of an entity such as the . . . Board through popular election would not change the . . . Board’s ultimate source of authority from a constitutional perspective.”

Judge Torruella, author of the opinion and a scholar on Puerto Rico’s relationship with the Supreme Court, quickly dispelled these findings at pages 24-25:

However much Article IV may broaden the reach of Congress’s powers over a territory as compared to its power within a state, this case presents no claim that the substance of PROMESA’s numerous rules and regulations exceed that reach. Instead, appellants challenge the way the federal government has chosen the individuals who will implement those rules and regulations. This challenge trains our focus on the power of Congress vis-à-vis the other branches of the federal government. Specifically, the Board claims that Article IV effectively allows Congress to assume what is otherwise a power of the President, and to share within the two bodies of Congress a power only assigned to the Senate.

We reject this notion that Article IV enhances Congress’s capabilities in the intramural competitions established by our divided system of government. First, the Board seems to forget — and the district court failed to recognize and honor — the ancient canon of interpretation that we believe is a helpful guide to disentangle the interface between the Appointments Clause and the Territorial Clause: generalia specialibus non derogant (the “specific governs the general”). . .

The Territorial Clause is one of general application authorizing Congress to engage in rulemaking for the temporary governance of territories. See Reid v. Covert, 354 U.S. 1, 14 (1957) (plurality opinion). But such a general empowerment does not extend to areas where the Constitution explicitly contemplates a particular subject, such as the appointment of federal officers. Nowhere does the Territorial Clause reference the subject matter of federal appointments or the process to effectuate them. On the other hand, federal officer appointment is, of course, the raison d’etre of the Appointments Clause. It cannot be clearer or more unequivocal that the Appointments Clause mandates that it be applied to “all . . . Officers of the United States.” U.S. Const. art II, § 2, cl. 2 (emphasis added).

Judge Torruella, who is an acerbic critic of the Insular cases, made it clear that they did not support the Board at pages 33-34:

Finally, nothing about the “Insular Cases” casts doubt over our foregoing analysis. This discredited lineage of cases, which ushered the unincorporated territories doctrine, hovers like a dark cloud over this case. To our knowledge there is no case even intimating that if Congress acts pursuant to its authority under the Territorial Clause it is excused from conforming with the Appointments Clause, whether this be by virtue of the “Insular Cases” or otherwise. Nor could there be, for it would amount to the emasculation from the Constitution of one of its most important structural pillars. We thus have no trouble in concluding that the Constitution’s structural provisions are not limited by geography and follow the United States into its unincorporated territories.

Judge Torruella also announced the Circuit’s position as to the insular cases and said “[t]he only course, therefore, which we are allowed in light of Reid is to no further expand the reach of the “Insular Cases.”(Page 36, bold added) Is this a harbinger of the Circuit’s treatment to the series of cases by Judge Gelpí on SSI and Medicaid? We can only hope.

There is an interesting finding by the Court at page 38 where it said:

The Board Members’ federal authority includes the power to veto, rescind, or revise Commonwealth laws and regulations that it deems inconsistent with the provisions of PROMESA or the fiscal plans developed pursuant to it. See 48 U.S.C. § 2144 (“Review of activities to ensure compliance with fiscal plan.”).

Although I have insisted that the Board has this power, its members have been very reluctant to put it into effect. Based on this, the Board will be hard pressed to justify allowing the Commonwealth to have thousands of publicity contracts while not paying debt. So the next 90 days will be interesting to see what the Board does and will they cram down anything against the PR Government, the Legislature or the creditors? A new Board could take a different view.  Also relevant to the new adversary proceeding against the Senate seeking information on its bank accounts and which Mr. Rivera Schatz insists it exceeds the Board’s authority. At page 39, it states “Board Members’ investigatory and enforcement powers, as carried out collectively by way of the Board, exceed or are at least equal to those of the judicial officers the Supreme Court found to be ‘Officers of the United States.’” Seems Judge Swain will have little leeway to agree with Mr. Rivera Schatz. As to the role of the Board, Judge Torruella, ever the historian, said at page 40 “[t]he Board Members are, in short, more like Roman proconsuls picked in Rome to enforce Roman law and oversee territorial leaders than they are like the locally selected leaders that Rome allowed to continue exercising some authority.” A quote for the ages.

Judge Torruella also discussed the difference of Board members with PR elected officials and said at page 45:

The Board’s basic point (and the United States’ basic point as well) is this: If we find that the Board Members must be selected by presidential nomination and Senate confirmation, then that would mean that, for example, all elected territorial governors and legislators have been selected in an unconstitutional manner.

We disagree. The elected officials to which the Board and the United States point — even at the highest levels – are not federal officers. They do not “exercise significant authority pursuant to the laws of the United States.” See Lucia, 138 S. Ct. at 2051; Freytag, 501 U.S. at 881; Buckley, 424 U.S. at 126; see also United States v. Germaine, 99 U.S. 508, 511-12 (1878). Rather, they exercise authority pursuant to the laws of the territory. Thus, in Puerto Rico for example, the Governor is elected by the citizens of Puerto Rico, his position and power are products of the Commonwealth’s Constitution, see Puerto Rico Const. art. IV, and he takes an oath similar to that taken by the governor of a state, id.

It is true that the Commonwealth laws are themselves the product of authority Congress has delegated by statute. See Puerto Rico v. Sánchez Valle, 136 S. Ct.1863, 1875 (2016). So the elected Governor’s power ultimately depends on the continuation of a federal grant.But that fact alone does not make the laws of Puerto Rico the laws of the United States, else every claim brought under Puerto Rico’s laws would pose a federal question.(Bold added)

The statement on Governor’s power is telling. In other words, the Governor’s power and the whole apparatus of the PR Government depends on Congress not changing Law 600. Or as the Court in Downes v. Bidwell, 182 U.S. 244, 289-290 (1901) said:

The Constitution has undoubtedly conferred on Congress the right to create such municipal organizations as it may deem best for all the territories of the United States, whether they have been incorporated or not, to give to the inhabitants as respects the local governments such degree of representation as may be conducive to the public wellbeing, to deprive such territory of representative government if it is considered just to do so, and to change such local governments at discretion.

The current governor should read this passage a few times.

Although Utier pushed the issue of invalidity of the Board’s actions, Judge Torruella would have none of it. At pages 52-53 stated:

Here, the Board Members were acting with the color of authority — namely, PROMESA — when, as an entity, they decided to file the Title III petitions on the Commonwealth’s behalf, a power squarely within their lawful toolkit. And there is no indication but that the Board Members acted in good faith in moving to initiate such proceedings. See Leary v. United States, 268 F.2d 623, 627 (9th Cir. 1959). Moreover, the Board Members’ titles to office were never in question until our resolution of this appeal.

Other considerations further counsel for our application of the de facto officer doctrine. We fear that awarding to appellants the full extent of their requested relief will have negative consequences for the many, if not thousands, of innocent third parties who have relied on the Board’s actions until now. In addition, a summary invalidation of everything the Board has done since 2016 will likely introduce further delay into a historic debt restructuring process that was already turned upside down once before by the ravage of the hurricanes that affected Puerto

Rico in September 2017.

This may mean that Utier or maybe Aurelius will seek certiorari from the Supreme Court of the United States. Given that less than 1% of the certioraris requested are granted, it will probably not happen.

Later at page 54, the Court decided:

Finally, our mandate in these appeals shall not issue for 90 days, so as to allow the President and the Senate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause. Cf. Weinberger v. Romero-Barceló, 456 U.S. 305, 312-313 (1982). During the 90-day stay period, the Board may continue to operate as until now.

Judge Torruella summarized the Court’s decision at pages 54-55:

In sum, we hold that the Board Members (other than the ex officio Member) must be, and were not, appointed in compliance with the Appointments Clause. Accordingly, the district court’s conclusion to the contrary is reversed. We direct the district court to enter a declaratory judgment to the effect that PROMESA’s protocol for the appointment of Board Members is unconstitutional and must be severed. We affirm, however, the district court’s denial of appellants’ motions to dismiss the Title III proceedings.

This decision is nothing short of monumental. The whole Board may be changed, although of course President Trump has the choice of re-nominating the same members but will have a tough time getting them through the Senate. This may mean more debt payment, dismissal of the Title III, more intervention with the PR Government. We will have to wait and see what transpires but first I would like to comment on the wild speculation I have seen in both the main stream media and social media.

Judge Torruella’s decision does not mean that PROMESA has to be amended. The opinion states at page 51:

Accordingly, we hold that the present provisions allowing the appointment of Board Members in a manner other than by presidential nomination followed by the Senate’s confirmation are invalid and severable. We do not hold invalid the remainder of the Board membership provisions, including those providing the qualifications for office and for appointment by the President with the advice and consent of the Senate.

Since PROMESA does not NEED to be amended, it is unlikely the Board can secure more powers.  Democrats are leery of the Board’s handling of the PR Government and are reluctant to give it more power. Also, given the contentious nature of Governor Rosselló with President Trump and his campaigning for democratic candidates in Florida, he is unlikely to have much influence on who is appointed.  The Claims Committee of the Board will continue to exist until May 16, 2019, when the 90-day period expires. What will happen to the Board’s objection to 2012 and 2014 GO’s? Not clear but even if the new Board does not want to continue the case, the UCC is likely to want to do so and it probably could pursuant to section 926(a) of the Bankruptcy Code, also adopted in PROMESA.

What can Judge Swain do? Not much. She can continue to act until May 16 but in the back of her head she must realize it all could be for naught. Moreover, she must not be feeling very good since this is the 5th straight time she has been reversed. I am sure she will be sustained in other cases that have been argued before the Circuit but those will have to wait. Finally, the Republican President and Republican Senate will be involved in naming the next Board. Only 51 votes are needed (Republicans have 53) for the new members. In any event, I don’t see a filibuster unless a candidate is someone extreme. We will have to wait and see.

Monday Update – February 11, 2019

Welcome to your weekly Title III update for February 11, 2019.  

On February 4, 2019, Judge Swain approved the COFINA plan of adjustment and later filed an amended order. After the Board made it clear that the rejection of the plan of adjustment would lead to no deal, Judge Swain ran roughshod over all the objections filed by different bondholders and politicians. As a result, COFINA is the owner of part of the SUT and these funds are not “available resources” for payment of other public debt. One has to congratulate the legal representation of the COFINA Seniors Coalition who are the big winners here. Not only do they get less than 7% haircut, but they get some of the attorney’s fees back for their work.

Judge Swain’s rational for the deal can be seen at paragraph 171, page 74 of the order:

Confirmation of the Plan demonstrates that Puerto Rico is taking the steps necessary to enable its return to the capital markets. The restructuring of the COFINA debt under Title III of PROMESA is expected to act as a catalyst for other restructurings, setting the stage for Puerto Rico’s emergence from bankruptcy and reducing costly litigation.

In other words, one deal done and the rest will line up. Let’s see if it happens. In addition, Judge Swain dismissed the Municipality of San Juan’s belated effort to file a brief of amicus curiae by saying at footnote 10:

Because the arguments untimely raised in the proffered amicus brief will not provide “supplementing assistance” to existing counsel, and because the Autonomous Municipality of San Juan has not established that it has a “special interest in this case” that justifies the filing of an amicus brief at this juncture, the San Juan Motion is hereby denied.

In a similar fashion, Judge Swain dismissed the PDP senate minority objections by saying at footnote 14:

Additionally, in its amicus brief, the PDP argues that the New Bond Legislation impermissibly restricts the ability of a successor Legislative Assembly to exercise its exclusive taxing, spending, and police powers. PDP’s position is unfounded. Although the New Bond Legislation sets forth procedures that must be met before any amendments to the New Bond Legislation can become effective, the procedures do not preclude the possibility of future alterations. The New Bond Legislation merely clarifies

the means by which the Legislative Assembly’s taxing power may be exercised in the future without impairing COFINA’s interests.

This is especially important for some of the senators saying that Judge Swain has given them leave to amend the COFINA deal in the future. Actually, former Governor García Padilla again showed his ignorance of these matters by saying that the COFINA deal was to be revisited and payments reduced. It is very clear from this footnote and the order itself, that Puerto Rico may alter the New Bond Legislation but cannot impair “COFINA’s interest.”

Also, Judge Swain dismissed VAMOS and Puerto Rican Rep. Natal’s objections by saying at footnote 14:

The VAMOS objectors argue that a pending adversary proceeding challenging the constitutionality of the New Bond Legislation must be resolved prior to confirmation of the proposed COFINA Plan. (See VAMOS Obj. at 2-6.) These objectors contend that the New Bond Legislation is unconstitutional under both the United States and Puerto Rico Constitutions because Representative Natal-Albelo was prohibited, in violation of the rules of the House of Representatives, from participating in the legislative process leading up to the House of Representatives vote on the New Bond Legislation. Plaintiffs also assert that both the original COFINA legislation and the New Bond Legislation violate the Constitution of Puerto Rico because borrowing authorized there under allegedly exceeds the limits on“public debt” set forth in Sections 2 and 7 of Article VI of the Constitution of Puerto Rico (which sections respectively limit the amount and duration of direct obligations of the Commonwealth backed by a pledge of the full faith and credit and taxing power of the Commonwealth, and provide that appropriations for a fiscal year shall not exceed total estimated revenues for the year absent the imposition of taxes to cover the shortfall). Plaintiffs’ arguments regarding an alleged violation of the rules of the Commonwealth House of Representatives are non justiciable and are therefore overruled insofar as they are raised as objections to the Plan. See Noriega Rodríguez v. Jarabo, 136D.P.R. 497 (P.R. 1994); Silva v. Hernández Agosto, 118 D.P.R. 45, 18 P.R. Offic.Trans. 55 (P.R. 1986). Furthermore, arguments regarding the Commonwealth’s “public debt” limit have been resolved as part of the 9019 Settlement Agreement between the Commonwealth and COFINA insofar as they relate to the statutory authorization of the existing COFINA bonds. The New Bond Legislation, which is presumptively valid and not facially inconsistent with the cited Puerto Rico constitutional provisions,clearly provides that Reorganized COFINA is a “corporate and political entity independent and separate from the Government of Puerto Rico,” that Plan of Adjustment Bonds shall be payable solely from COFINA Revenues, and that the “COFINA Revenues do not constitute ‘available resources’ or ‘available revenues’ of the Government of Puerto Rico as used in Section 8 of Article VI of the Puerto Rico Constitution.”

As mentioned before, Judge Swain also decided the PROSOL-Utier objection and repeated the rational at footnote 16:

The Court precluded the tender of an economist’s declaration concerning future Commonwealth finances because its proponent, PROSOL-UTIER, lacks standing as a non creditorof COFINA. (Docket Entry No. 4848 in Case No. 17-3283, January 16, 2019 Hearing Transcript, 130:8-132:11.) PROSOL-UTIER also argued that the Plan’s proponents had a burden to tender expert economic evidence. The Court finds the declaration of Brownstein, an experienced municipal finance professional who participated in the formulation of the COFINA Fiscal Plan, sufficient to carry the Plan proponents’ burden as to feasibility.

On the other hand, I do not believe the Court properly addressed the claim of violation of the Takings Clause of the Constitution. She stated:

Considering the first factor, the Court notes that the actions challenged by the objecting parties will not result in the total destruction of the value of the liens securing the existing bonds. Pursuant to the terms of the Plan, bondholders will receive substantial value in new secured bonds and, in some cases, cash. Furthermore,based upon the record before it, the Court finds that the resolution of substantial legal challenges to the structure underlying the existing COFINA bonds provides significant value to the bondholders. Second, although the proposed treatment of bondholders’ claims may interfere with certain bondholders’ subjective investment expectations, bondholders’ reasonable expectations must take account of the claims and potential claims that have been the subject of the substantial litigation that the Settlement Agreement and the Plan, which were negotiated with the assistance of the Mediation Team,propose to resolve. Third, the character of the governmental action strongly supports the Court’s conclusion that the Plan and Settlement Agreement do not result in an unconstitutional taking. The challenged proposals are not physical invasions of property by the government. Rather, the restructuring of the relationships between the Commonwealth and COFINA, and between COFINA and its bondholders, using the powers established by Congress in PROMESA is a quintessential example of a “public program adjusting the benefits and burdens of economic life to promote the common good.”

Judge Swain seems to be saying that there is no violation of the taking clause because bondholders will recover some of their bond’s value. In any event, she argues, they could have ended up recovering zero principal. With all due respect to Judge Swain, I don’t think that is the measure of whether a taking violates the Constitution. In any event, some bondholders claim they will appeal. I won’t go into details but appealing the approval of a plan of adjustment creates special problems as the General Motors case showed. Let’s see what happens.

In the PREPA receiver litigation, the Board filed a motion to compel discovery it believes is connected directly to the issue of the value of bondholders’ lien. It claims that the value of the lien is zero and hence, there is no need to provide adequate protection. The problem with this argument is that movants want a rate increase so that their lien will have value. This motion shatters the possibility I posited of the Board agreeing to the receiver but does not eliminate the possibility of negotiations to resolve the monolines’ haircut. We shall know more by the end of February when Judge Dein will deal with this.

A few months ago there was mention of a Federal overseer of aid to Puerto Rico. This idea has been revived after the Resident Commissioner visited acting Chief of Staff Mick Mulvaney at the White House. It is being called a Federal Coordinator of federal funds. The Resident Commissioner is ok with the idea but Governor Rosselló, as usual, opposes any challenge to what he perceives as his authority. It is interesting to note that there is no mention of using the Board for this purpose. Also, there are rumors of disagreement between the Board and the Commonwealth on the definition of essential services. Given that the Board wants to file a plan of adjustment for the Commonwealth sometime this year, this is an important undertaking. I bet the Board wants to cut around 30% of employees or furlough them and the Commonwealth insists that each and every one of them is indispensable. Dying to 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.

Monday Update – February 4, 2019

Welcome to your weekly Title III update for February 4, 2019.  

On January 30, 2019, Judge Swain held an Omnibus hearing in the case. During the hearing, the lawyer in charge of investigating McKinsey’s alleged conflicts of interest, Michael Lusking, reported that it would have a report ready for publication by February 18. As to PREPA, the Board reported negotiations are continuing (more on that latter) and that they will announce the winner of the distribution contract in the 3rd quarter of this year. As to the Plan of Adjustment for the Commonwealth, negotiations will be in February/March, 2019, and it may be that some legal questions will be put to the Court.

When the main event, the procedures motion on the GO challenge came about, Judge Swain had several questions to all parties and it became obvious she was not going to sign the order as proposed. On the other hand, she did say she would issue some kind of order. Later in the week, she issued an Order Regarding Submission Of Revised Proposed Order Establishing Procedures With Respect To Omnibus Objection To Claims Filed Or Asserted By Holders Of Certain Commonwealth General Obligation Bonds, where she explained how she wanted the order to read. The parties are to meet and confer within 7 days for a proposed order reflecting the guidance issued by the Court. The notices to the bondholders must be written in English and Spanish with a view to clarity as to the potential consequences of movants’ success. The parties must have 60 days from entry of the order to file the Notice of Participation, and the notice must include that if not filed on time, a party may be precluded from participating in the litigation. The suggestions by the Court include what information participants may have to provide. The order continues with other suggestions. In essence, once the order is issued, all holders of GO’s of 2012 and 2014 should hire an attorney to represent their interests. COFINA jrs. are still kicking themselves for not having intervened in the case sooner. BEWARE.

Connected to this, Assured requested leave to intervene in the UCC adversary proceeding against the PBA’s. As Mark Stancil said during the Omnibus hearing, the PBA adversary proceeding and the UCC challenge are overlapping. We will see more on this later in the month.

In regards to COFINA, Judge Swain approved the COFINA-Commonwealth settlement today but she decided that she will address the Plan of Adjustment in a separate order. Swain argued that the court was “not required to decide the numerous questions of law and fact raised by [the objectors].” Rather, its task was to determine the “reasonableness” of the settlement agreement, which Judge Swain deemed was sufficient. Since the announcement came out today, I will provide a more thorough analysis next week.

Continuing with the developments, the First Circuit in the ERS bonds case reversed Judge Swain for the fourth time. In its opinion, the First Circuit stated:

We affirm the district court’s holding that the 2008 Financing Statements did not perfect the Bondholders’ security interest in the “Pledged Property.” We determine that the Bondholders met the requirements for perfection beginning on December 17, 2015, and so reverse the district court. PROMESA’s incorporation of the Bankruptcy code does not allow for the avoidance of perfected liens, and so we vacate the district court’s holding that the Bondholders’ security interest can be avoided under PROMESA. Concerning the district court’s dismissal of the Bondholders’ second and third counterclaims with prejudice, we vacate and remand to the district court for further consideration in light of this opinion. We affirm the district court’s dismissal of the Bondholders’claim regarding the January 2017 Stipulation.

The Third Cause of action mentioned above has to do with section 928 of the Bankruptcy Code, which is the subject of another appeal not yet decided by the First Circuit and argued on November 7, 2018. In addition, this case shows that in any litigation, there are winners and losers and you can never predict on which side you will end. I have won cases I thought I was going to lose and lost cases I swore I was going to win.

As to the PREPA receiver controversy, the parties were supposed to file an amended schedule for the resolution of the case on or before January 31, but that date passed without any filing. The Board could be negotiating a haircut deal with the monolines or agreeing to some type of receiver—or both. Hopefully we will know soon.

The Puerto Rico House of Representatives amended the public policy energy bill and the Senate did not agree. Further negotiations will ensue. Also, PREPA has reported that the Integrated Resources Plan will be filed in February. Seems to me that politicians really don’t want to sell PREPA. Hopefully, it will happen irrespective of political shenanigans.

In other news, the Board ordered the Commonwealth to file a new Fiscal Plan by February 22. The letter indicates that the plan is to certify a new Fiscal Plan by April 26, 2019. Moreover, the new budget must come by June of 2019. Given that the Plan of Adjustment must conform to the Fiscal Plan, this means that the former will not be filed until either summer or fall of 2019. This will also be dependent on the outcome of the GO challenge and other legal issues now being mediated.

In a separate letter, the Board sent a detailed letter as to the budget which must include:

Additional reductions based on U.S. mainland state benchmarks for the Legislative Assembly, applying standard executive branch right-sizing targets to the State Elections Commission, as well as a reduction to WIPR’s budget reflecting its privatization by the end of the third quarter of the fiscal year.

In other words, there will be more cuts to the Legislature, the CEE and the privatization of WIPR, which is a government TV station. Some have hailed this as a way for Government employees to receive wage increases but the letter explains it will; “[t]o the extent that applying these parameters results in reductions to appropriations beyond those contemplated by the Fiscal Plan, the Oversight Board will agree to reinvest those savings in the high priority areas of Public Safety and Public Education.” Hence, the Board wants further austerity. Not sure the Government will agree and not sure what the Board will do if it does not.

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.