Monday Update – April 29, 2019

Welcome to your weekly Title III update for April 29, 2019. A busy week was dominated by the Omnibus hearing of Wednesday April 24.

The Board started the hearing with a report on the timetable for the Fiscal Plan and for the Budget, all very conveniently moved in order to argue an extension of the First Circuit Stay. More on that later. PREPA’s transformation is supposedly on track and the concession for transmission and distribution should be completed by the second quarter of 2020. Mr. Bienestock also stated that the PREPA negotiations were very promising as are negotiations with the Retirees’ Committee on the pensions and with the Judges Association. He also stated that the Board was negotiating the plan of adjustment of the Commonwealth but not with all holders involved. I can assure you that my clients are not included in those negotiations. We’d have to assume Bienenstock is negotiating with the “Lawful” group. The Court was informed that Trump would probably re-nominate the current members of the Board but nothing is certain. Also, Mr. Rosen for the Board informed the Judge that in the next couple of weeks it will present a plan for ADR procedures to be discussed in the June Omnibus but the UCC has not been involved in it.

The Procedures motion on ERS was postponed due to the Retirees Committee filing an objection to ERS bonds as invalid. Given the Board’s May 16 deadline looming and the possibility that the UCC could be excluded in these proceedings, this filing assures that the challenge to the Bonds will continue.

The GO Procedures motion was extensively discussed. Mark Stancil for the Ad Hoc group of GO bondholders argued, with some reason, that they could not bring the PBA bondholders to the case because Rule 14 did not apply to objections and that res judicata could apply later to any claims the could have. Judge Swain mentioned that he could always claim there was lack of an indispensable party but surprisingly, she reserved her decision for later. Therefore, it is likely she will approved the procedures but subject to the objections she mentioned.

The Board, the UCC and other parties agreed to a stipulation where the Committee could be a co-plaintiff with the Board and be a section 926 trustee for the claims to be brought against third parties. The UCC, however, lost its request to bring those actions the Board did not want to bring. That means that no individual will be deemed responsible for the island’s indebtedness. Too bad but Judge Swain again deferred to the Board and said that granting the motion would interfere with its work. That’s the way the cookie crumbles.

But at the 11th hour, the Board revealed it would bring suit against 27 underwriters, 9 law firms and 5 accounting firms under several theories, but not fraud. It will be interesting this week to see who they are.

In preparation for this, Judge Swain issued a new order on cases with more than one hundred defendants or is it in anticipation of bringing all PBA’s into a case? Who knows? In addition, the Board and the UCC have to get together to determine when the list of causes of action and against whom, which were filed under seal, will be unsealed. Seems to be the second half of May.

Going back to PREPA, National objected to the one week extension on the RSA that would include the monolines but Judge Swain, as I predicted, granted the motion. National seems hell bent on seeing the lift stay motion but as I have said many times, I think it is a negotiating tactic to get a better deal for its bonds. In any event, the PREPA lift stay hearing will be held during the June Omnibus.

In a minor defeat, Judge Swain denied without prejudice the blanket equitable tolling on the statute of limitations, asserting that she did not believe she has the power to do so. Implicit in this denial is the possibility that when and if a party raises the issue, she may, or may not, grant the issue of equitable tolling.

Judge Swain also denied, as I predicted, Mr. Hein’s request for a GO small claims Committee. He will be able to call into Court Solutions and listen to the hearings but all other requests he made were denied.

Last week the Board filed its request for certiorari with the SCOTUS. Aside from the usual legal arguments, the Board also averred the following:

The Board is the linchpin of the plan that Congress enacted to address a financial and humanitarian crisis of immediate and unprecedented proportions. Since 2016, the Board has overseen the restructuring of billions of dollars of the Commonwealth’s debt. The Board has filed five Title III restructuring cases on behalf of the Commonwealth, which together involve over $100 billion in claims, and most of which remain ongoing. In connection with that process, the Board recently completed an $18 billion restructuring of COFINA’s bond debt, reaching a settlement that was supported by the principal bondholders and that will save Puerto Rico $456 million in debt payments annually. See p. 8, supra. In addition, through the fiscal-plan and budget approval process, the Board has negotiated intensively with the Governor and the Legislature to identify a range of structural reforms and strategic investments. Given the gravity and breadth of the Board’s responsibilities, the cloud of uncertainty that now hangs over the Board’s actions is intolerable. This Court has routinely granted certiorari to determine whether particular officials were constitutionally appointed in circumstances where far less was at stake. See, e.g., Lucia v. SEC, 138 S. Ct. 2044 (2018); Ortiz, 138 S. Ct. at 2170; Noel Canning, 573 U.S. at 521-522; Edmond, 520 U.S. at 655; Freytag, 501 U.S. at 873. This Court’s attention to appointments issues reflects the fundamental need for certainty concerning the legality of official appointments. Questions about the constitutionality of an official’s appointment cast into doubt the validity of the official’s actions, and the existence of mitigating or remedial measures such as the de facto officer doctrine or ratification do not lessen the need to provide Congress, the President, and the affected officials with certainty concerning permissible appointment methods. See, Ryder, 515 U.S. at 182-183. The need for certainty is all the more pressing here.

B. This Court’s review is also warranted because the decision undermines ongoing efforts to alleviate Puerto Rico’s financial crisis. Notwithstanding the progress the Board and other Puerto Rican government entities have already made, much work remains: tens of billions of dollars in debt still must be restructured through Title III proceedings, and additional reforms are necessary for Puerto Rico to achieve sustainable solvency. The Board must continue to pursue these efforts, lest creditors seek to dismiss the Title III proceedings and subject Puerto Rico to lawsuits that would seek immediate payment of billions of dollars and threaten irreparable damage to the Puerto Rican economy. And an interruption in the fiscal plan and budgetary process could disrupt progress towards fiscal solvency. While the Board has continued to operate pursuant to a stay of the mandate, App. 44a, the decision below has injected considerable uncertainty that has affected the Board’s ongoing negotiations, both with bondholders in the restructuring process and with the Puerto Rican Governor and legislative leaders in the fiscal process. Jayden Sangha, Current Status of Puerto Rico Debt Restructuring, (Mar. 20, 2019) (although “progress was being made to achieve the objective of debt restructuring for Puerto Rico, this new ruling” threatens to “knock[] any progress off its rails”).

Undoubtedly, the Board is indispensable under PROMESA, BUT, not the current members. Let’s not forget the Aurelius case is NOT about PROMESA, but about how the current members of the Board were appointed. This is a fact conveniently forgotten by the Board. More interestingly, the Board filed the writ of certiorari without the U.S. Solicitor General joining in. Seems the Trump administration will wait to see if a stay is granted before sending any names to Congress. Also, the reforms the Board advocates are not accepted by the Commonwealth and its members have not taken advantage of the powers two First Circuit decisions say it has in order to force these changes. Too afraid to make reforms before the Commonwealth Plan of Adjustment is presented? Also, even a few weeks delay past May 16 would not convince Judge Swain to dismiss the Title III proceedings via 11 U.S.C. § 930. I am sure Aurelius and Utier will point this out in their filings. Speaking of Utier, my sources tell me it will file a writ of certiorari to reverse the First Circuit’s decision on the Board’s pre- and post-decision actions being valid. Would be ironic if SCOTUS grants that certiorari and invalidates these actions.

Additionally, the Board filed with the First Circuit a request for extension of the stay until the certiorari petition is decided, citing the same concerns mentioned above. Judge Torruella issued an order at 7 pm on Thursday April 24 that any comments should be filed by April 29 at 5 pm. I am sure Aurelius and Utier will oppose and would not be surprised if the Solicitor General files in support. We shall see.

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

Monday Update – April 22, 2019

Welcome to your weekly Title III update for April 22, 2019. This has not only been a busy week but possibly a transcendent one.

As reported last week, the Board wants to conduct discovery as to the identity of the GO bondholders and has served several banks with subpoenas. Magistrate Judge Dein sided with the Board and ordered that the parties get together to protect the confidentiality of the information requested. This order makes one wonder if the Court is aware of how weak the Board’s argument for equitable tolling is? We will know more on Wednesday.  Continuing with discovery, the ERS bondholders, who are also requesting they be named section 926 Trustee, are fighting it out with the Board. Let’s see what happens.

The QTCB Noteholder Group objected Omnibus Conditional Objection of the Ad Hoc Group of General Obligation Bondholders to Claims Filed or Asserted by the Public Buildings Authority, Holders of Public Buildings Authority Bonds, and Holders of Certain Commonwealth General Obligation Bonds, claiming it is not ripe for adjudication since the Board and UCC objections have not been decided. Ambac, National and the UCC filed similar motions, including lack of subject matter jurisdiction. The Ad Hoc Group replied on Saturday April 20, 2019, insisting this is a justiciable issue. The controversy will probably be argued on Wednesday during the Omnibus or shortly thereafter.

On April 16, 2019, the UCC and the Board filed a joint motion for a stipulation where the former would be named a trustee pursuant to section 926 of the Bankruptcy Code. The motion also states:

Following the Oversight Board’s and the Special Committee’s disclosure of the preliminary list on April 5, 2019, the Parties have met and conferred extensively to discuss, among other things, the Debtors’ potential causes of actions against certain parties and the allocation of litigation responsibilities. As a result of the meet and confer process, the Parties have agreed to a framework to pursue the potential causes of action, as set forth in the Stipulation. As part of this agreement, but subject to entry of an order approving the Stipulation, the Committee has agreed to waive its right to file an Omnibus Motion with respect to claims or causes of action of the Commonwealth,5 except (i) to the extent provided in paragraph 18 of the Stipulation with respect to Additional Claims and (ii) with respect to claims or causes of action that are subject to tolling agreements or Court-ordered tolling stipulations other than Tolling Agreements with the Potential Defendants. Additional Claims are defined in paragraph 18 of the Stipulation as Commonwealth claims or causes of action, in addition to those to be asserted by the Oversight Board or the Special Claims Committee, related to or with respect to the offerings of the Commonwealth’s GO bonds, PBA bonds, and ERS bonds against the Financial Party Targets, including on theories of fraudulent transfer, fraud, breach of fiduciary duty, and/or deepening insolvency.

So far so good, until we turn to paragraph 18 of the stipulation;

During the meet and confer process with respect to the joint prosecution of claims and causes of action of the Commonwealth and the allocation of litigation responsibilities, the Committee requested that the Oversight Board pursue Commonwealth claims or causes of action (the “Additional Claims”), in addition to those to be asserted by the Oversight Board or the Special Claims Committee, related to or with respect to the offerings of the Commonwealth’s GO bonds, PBA bonds, and ERS bonds against the Financial Party Targets, including on theories of fraudulent transfer, fraud, breach of fiduciary duty, and/or deepening insolvency. The Special Claims Committee declined to assert the Additional Claims. Therefore, the Committee requested that, as part of this Stipulation, the Oversight Board consent to the Committee being appointed as sole trustee/plaintiff to commence adversary proceedings or lawsuits to pursue the Additional Claims, with the same meet and confer process, and the potential for Court intervention, as set forth in paragraph 13 above (i.e., that the Parties would meet and confer after commencement of the adversary proceeding, and, in the case of disagreement, the Oversight Board would have the ability to seek, by motion to this Court, upon notice and a hearing, to terminate the Committee’s appointment as sole trustee/plaintiff in such adversary proceeding upon a showing of good cause). The Special Claims Committee declined to consent to this request; however, the Parties agreed that, notwithstanding this Stipulation, the Committee may seek, by motion to the Court, to be appointed as trustee/plaintiff to pursue the Additional Claims … (Bold added)

This motion was opposed by certain ERS bondholders, claiming that the “there is a sharp conflict of interest between the UCC, on one hand, and the creditors and the ERS, on the other, due to the pending litigation between the Commonwealth and ERS’ secured creditors over the Commonwealth’s siphoning of ERS assets to the Commonwealth through the Post-Petition Legislation.”  National, also objected but went further:

 The Oversight Board, not the Committee, is the appropriate party to evaluate and bring debtor causes of action against non-Debtors. The Stipulation would permit the Committee to override the Oversight Board’s judgment with its own. Through the Section 926 Motion it filed this morning the Committee affirmatively seeks to supplant the FOMB’s judgment with its own. The Court should not allow this to occur.

 National has serious concerns over whether the Committee is the proper representative of the Commonwealth or any other Debtor in these causes of action. It is unclear what interests the Committee currently represents; i.e., whether the Committee members currently hold outstanding, unpaid prepetition claims against the Commonwealth, HTA or PREPA and, even if they do hold such claims, that the parochial interests of certain members are not otherwise represented.

Neither the Oversight Board nor the Committee is the appropriate party to evaluate and bring debtor causes of action on behalf of or against other Debtors (e.g., HTA and PREPA) because they are hopelessly conflicted by virtue of the fact that they sit on both sides of the action and/or do not have a vested interest in vigorously pursuing such causes of action because their recoveries are not at stake.

The Ad Hoc GO Bondholder Group, later joined by Oppenheimer Funds, also raised several technical objections, but also one of great importance:

These specific references to the UCC’s reservation of its rights to object or respond to any settlement agreed to by the Oversight Board or Special Claims Committee could arguably give rise to a negative implication that the rights of other parties in interest are not so preserved. Such a negative implication would plainly be inappropriate. The GO Group therefore respectfully requests that the Stipulation be modified to make clear that the objection rights of all parties in interest are reserved with respect to the settlement or compromise of all causes of action governed by the Stipulation.

Assured and Ambac also opposed the Board/UCC motion, stating, inter alia:

HTA and its creditors hold substantial causes of action against the Commonwealth and certain of its instrumentalities on account of the illegal diversion of excise taxes assigned to HTA and its creditors by Commonwealth law. Because FOMB and the UCC have both actively supported this diversion of revenues, and because FOMB and AAFAF have admitted that this diversion has rendered HTA insolvent and unable to pay its creditors (not merely bond claims), it would be manifestly inappropriate for the UCC, FOMB, or the Special Claims Committee to serve as plaintiffs or co-trustees with respect to such causes of action. These entities indisputably suffer from debilitating conflicts of interest that call into question how they could even pursue claims by HTA against the Commonwealth. As just one of many possible examples, the UCC—which indisputably is dominated by entities with putative claims against the Commonwealth—cannot be expected to take a position on the Commonwealth’s diversion of HTA revenues and whether such a diversion is avoidable.

The Lawful Constitutional Debt Coalition filed a short reservation of rights stating that it was supportive but:

Given the extremely shortened notice on which the Motion was filed, however, the LCDC has had only limited time to review the Stipulation, and has not yet had an opportunity to discuss its potential ramifications or application with the Movants. Accordingly, in an abundance of caution, the LCDC files this limited objection to ensure that nothing in the Stipulation (i) modifies in any way the application of Section 1123(b) of the United States Bankruptcy Code to any plan of adjustment or any Commonwealth Cause of Action, including the ability to create a litigation trust to continue to pursue or commence Commonwealth Causes of Action, or (ii) impairs creditors’ rights to object to the manner in which any Commonwealth Causes of Action are addressed under a plan of adjustment. To the extent that the Stipulation does so, the LCDC hereby objects to its entry.

On April 17, 2019, before 9:00 am, the UCC filed a motion for Order Authorizing Committee to Pursue Certain Causes of Action on Behalf of Commonwealth and Granting Related Relief. And it was a bomb, saying at pages 3-4:

The Special Claims Committee provided its preliminary list to the Committee as required. That preliminary list indicated that the Special Claims Committee would be pursuing a number of the Causes of Action. In the ensuing meet and confer, the Special Claims Committee, through its counsel, “doubled down” on this representation, stressing that causes of action relating to the bond issuances would also be brought against individuals. On April 12, 2019,4 counsel provided the final list required pursuant to the Procedural Order, which confirmed that a number of the Causes of Action would be pursued.

 The Special Claims Committee represented through its counsel that it would assert claims based on, among other theories, deepening insolvency against the various parties involved in Puerto Rico’s debt offerings. The Special Claims Committee’s counsel further stated that it would allow the Committee to join in litigation against these parties to pursue such claims against them. As the meet and confer period continued, however, counsel for the Special Claims Committee gradually reversed course. First, counsel advised the Committee that the Special Claims Committee would not, after all, bring claims against any individuals. Next, counsel revealed that [REDACTED SPACE]. Finally, the Special Claims Committee reneged on its offer to allow the Committee to bring such claims. Notwithstanding these setbacks, the Committee continued its discussions with the Oversight Board and its Special Claims Committee.

At page 5, footnote 6, the UCC states “[i]n particular, the Committee understands that (a) the Special Claims Committee will not pursue any claims against any individuals involved in the Puerto Rico’s bond issuances and (b)[REDACTED].” At page 6, the motion states:

In sum, the Oversight Board’s Special Claims Committee waited until approximately two weeks before the Causes of Action Deadline to advise the Committee that it intended to abandon certain valuable Causes of Action (some of which it had previously represented it would pursue) and then declined the Committee’s request to be appointed to pursue these Causes of Action. Faced with this abrupt and unexpected turn of events, the Movants had no choice but to file this Motion requesting authorization for the Committee to pursue the Causes of Action on the Commonwealth’s behalf.

In other words, the UCC was duped into believing all was going to be done the way it wanted but then the Board changed its mind. Considering that the Commonwealth’s actions must be filed on or before May 2 and that the Board has not made a good showing for an equitable tolling, this is major stuff. The UCC also requested and obtained leave to file an unredacted motion under seal.

On April 19, 2019, the Board opposed the UCC’s request for section 926 appointment. It started its argument by saying:

Notwithstanding the Committee’s failure to show that its Motion is in any party’s best interest, the Motion fails on a fundamental gating issue. PROMESA absolutely prohibits the Court from interfering with the property of the Commonwealth without the consent of the Oversight Board. This is “notwithstanding any power of the court” granted by elements of the Bankruptcy Code that are incorporated into PROMESA. Litigation claims held by the Commonwealth are property of the Commonwealth. The Commonwealth simply has not consented, and will not consent, to allow the Committee the right to pursue any claims except as provided in the Joint Stipulation. Thus, respectfully, this Court cannot permit the Committee to pursue any other claims.

This is a clear reference to section 305 of PROMESA, but the section has a caveat, subject to Title I and Title XX of PROMESA. In other words, the Board could consent to this if it wanted. This was Judge Swain’s view in the PREPA lift stay decision. Also, In re N.Y. City Off-Track Betting Corp., No. 09-17121(MG), 2011 Bankr. LEXIS 319, at *17 (Bankr. S.D.N.Y. Jan. 25, 2011) the Court determined that the “contention that section 904 prohibits a court from appointing a trustee without the consent of the debtor renders section 926 mere surplusage.” Section 305 of PROMESA comes from section 904 of the Bankruptcy Code. Also, Bankruptcy section 926 legislative history supports this view:

[B]ecause a municipality might, by reason of political pressure or desire for future good relations with a particular creditor or class of creditors, make payments to such creditors in the days preceding the petition to the detriment of all other creditors. No change in the elected officials of such a city would automatically occur upon filing of the petition, and it might be very awkward for those same officials to turn around and demand the return of payments following the filing of the petition. Hence, the need for a trustee for such purpose. (See, S. Rep. No. 95-989, at 68 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5795)

The Board also objects saying that no “draft complaint” or “bullet point summary” was provided of the causes of action. True, but neither did the Board do so in the stipulated motion for the UCC’s appointment, presumably for confidentiality purposes. Moreover, if requested, I am sure the UCC may file a long list of whom it wants to sue and for what. The Board’s motion continues stating:

In fact, as the Committee was advised in black and white, the SCC intend to pursue on behalf of the Oversight Board claims against dozens of parties including underwriters, bond counsel, disclosure counsel, tax counsel, swap counterparties, auditors, and remarketing agents for their respective roles in issuing bonds that are the subject to contentions of being null and void.11 Furthermore, these parties will be pursued under many legal theories including breach of fiduciary duty, aiding and abetting such breaches, professional malpractice/negligence, unjust enrichment and/or fraudulent transfer.12 Given the scope and magnitude of the claims and causes of action that the SCC has advised the Committee it will pursue, it is difficult to understand exactly what the Committee hopes to gain by bringing additional claims (which they have not defined) on theories that are purely speculative. Rather, the Committee appears to be hoping to pressure individuals to implicate other parties in the hope that some real claim or cause of action eventually will come to light.

 As best as the Objectors can discern, the Committee has long favored actual fraud and conspiracy-based claims, seeking recovery for deepening insolvency as a stand-alone cause of action against many of the same institutions that the SCC has already committed to pursue as well as certain unnamed individuals.13 Again, these same or similar theories were raised in the past by the Committee which, it should be noted, has done nothing to investigate the merits of its theories in the many months since they were first articulated.

 In the end, the Objectors do not believe the Committee’s theories are colorable or that their prosecution would be cost-effective or yield greater recoveries for the Commonwealth than the claims the Objectors already intend to pursue. . .

 Most recently, the Objectors gave the Committee a full download of the claims the SCC intends to bring, consenting to add the Committee as co-plaintiff and co-trustee. Despite the spirit of compromise that is reflected in the Joint Stipulation, ultimately, the Objectors could not conclude that the theories of liability espoused by the Committee were sound and the Objectors were not prepared to allow the Committee to expend estate resources on claims that it does not believe are likely to enhance recoveries for the Commonwealth. (Bold added)

Here we see the “justification” of the Board, to wit, its attorneys do not believe the causes of action championed by the UCC will not succeed or will bring little money to the pot. This certainly may be true but the UCC could be allowed to bring the causes of action subject to success and payment via section 316(a) of PROMESA, which specifically contemplates section 926 appointments and payments.

The Board’s motion continues criticizing the UCC’s claims, which had been previously dismissed as not being detailed. True, but if they are not detailed, you can’t complain they don’t comply with federal pleading rules. Finally, the motion states that “[n]owhere in the Motion does the Committee state that it believes the Commonwealth would have an ability to collect material amounts in damages from any of its contemplated targets, or that revenge is an appropriate motive for a bankruptcy trustee to expend estate resources in litigation.” Again, this could be handled by tying the UCC’s compensation to the recovery of funds. I have been hired by bankruptcy trustees in more than one occasion to recover moneys for the estate on a contingency fee basis. Something similar can be done, here. Moreover, since the UCC implies causes of action against banks, Board members could have a conflict of interest and as the ERS bondholders argue in other motions, a conflict of interest is a good reason for the appointment of a section 926 trustee.

AAFAF also filed an opposition, echoing the same arguments made by the Board. There is no reason AAFAF should be siding with the Board, in my view.

Aside from the Board and AAFAF, other parties filed oppositions on April 20, 2019. National filed technical objections and states:

The Committee has filed a sweeping and overbroad motion requesting relief that would give the Committee unfettered authority over claims and causes of action. The lack of transparency in the Motion leaves parties in interest without a full understating of the scope of the requested relief. It is difficult to fully evaluate the legal ramifications of the Motion because National simply does not have any visibility into what avoidance actions or other undefined “causes of actions” the Committee plans to pursue. National has no way to know how the Motion will affect its recoveries or legal rights. Indeed, granting the requested relief may have a significant impact on the Commonwealth’s ability to reach a global settlement with its creditors—presumably, the Oversight Board has or will exercise its judgment in determining that the Causes of Action should not be pursued, which is a decision that ultimately impacts settlements embodied in a proposed plan. Granting the relief requested in the Motion would permit the Committee to second guess that judgment and give the Committee undue leverage in plan negotiations with other creditors and the Oversight Board.

The Official Committee of Retired Employees of the Commonwealth of Puerto Rico filed a limited objection, exhorting the Court to grant the tolling motion by the Board and if not:

In the event the Court denies the Tolling Motion, the Trustee Motion should be granted but only with the addition of certain procedural safeguards. Specifically, the UCC should be allowed to file solely its identified avoidance-action Causes of Action, since only avoidance actions are subject to appointment of a trustee under Bankruptcy Code section 926(a) (and only avoidance actions are subject to the urgency of the statute of limitations under section 546(a)). Further, the filing of such actions should be subject to this Court subsequently making findings through a structured process that the FOMB’s refusal to bring the Causes of Action was not motivated by reasonable and appropriate considerations but “by reason of political pressure or desire for future good relations with a particular creditor or class of creditors”—the scenario Congress envisioned requiring the appointment of a trustee when it created section 926(a). S. Rep. No. 95-989, at 111 (1978). In addition, to ensure that only material claims are brought, the Court should require that any Cause of Action brought seek the avoidance of at least $25 million in alleged transfers or at least $25 million in alleged damages for non-avoidance Causes of Action (or some similar materiality threshold as the Court determines appropriate), from a set of defendants that can reasonably be expected to satisfy such a judgment.

Oppenheimer Funds also filed an objection echoing the Board and AAFAF’s arguments. Ambac filed a limited objection, agreeing with the UCC as to the filing of the causes of action but said:

At the same time, however, Ambac objects to the Committee’s Motion because the Committee is the wrong entity to prosecute the Causes of Action. The parties most directly impacted by the challenged debt issuances are not the relatively small-dollar creditors that the Committee has added as movants as a means of addressing the fact that the Committee itself is not a “creditor” within the meaning of Section 926(a), and thus likely may not serve as a trustee under that provision. Rather, the parties most directly impacted by the challenged debt issuances are the holders and/or insurers of bonds that were issued in earlier years with proper constitutional authority. Debt service on those challenged bonds—and monies that were paid to financial and other professionals in connection therewith—are funds that would have been available for other purposes, preventing (or at least mitigating) the catastrophic bond defaults that have occurred since 2016 and caused Ambac alone to pay tens of millions of dollars in claims on its applicable financial guaranty insurance policies (with no end in sight). This is especially so with respect to vintage bonds that Ambac insures and owns, including pre-2012 GO bonds, pre-2009 PBA bonds, and revenue bonds issued by the Puerto Rico Highways and Transportation Authority, Puerto Rico Infrastructure Financing Authority, and Puerto Rico Convention Center District Authority, to which Ambac has a collective exposure exceeding $1 billion. The Committee and its constituent members seeking trustee status and/or derivative standing are not remotely comparable in terms of their motivation to pursue the Causes of Action to their appropriate conclusion.

Oppenheimer requests the denial of the UCC’s motion but if granted, requested from Judge Swain the following:

In the alternative, should the Court conclude that appointment of the Committee as trustee/derivative plaintiff is proper, it should do so without prejudice to creditors’ rights to move to intervene as co-plaintiff, seek appointment as co-trustee, or otherwise join in the prosecution of the Causes of Action. Such a structure would have the added benefit of ameliorating “Aurelius risk”—i.e., the possibility that the acts of the Oversight Board following the First Circuit’s decision in Aurelius Investment LLC v. Commonwealth of Puerto Rico, No. 18-1761, including the acts of any statutory committee prosecuting claims on the Debtor’s behalf, might be undone, with valuable claims being lost in the process.

Complications upon complications. Assured and Financial Guaranty also filed objections on April 20, 2019. They essentially say that the statutes cited by the UCC do not provide the UCC with a remedy. Could be but my worry is that valid causes of action may be otherwise lost if the motion is not granted. The UCC will probably file a reply some time on Monday April 22. We will know on Wednesday what is the Court’s opinion.

On Thursday, April 18, 2019, Judge Swain heard argument on the original motion and stipulation between the Board and the UCC. She seems inclined to grant the motion, asked the parties to come to an agreement and if not, she will rule during the Omnibus. I am sure she will grant it. Not sure what she will do with the UCC’s motion.

Finally, the Association of University Professors and individual UPR retirees, filed an adversary proceeding and requested the Court issue the following:

enter a Declaratory Judgment decreeing that any oversight act by the Oversight Board in relation to the University of Puerto Rico Retirement System is null and void;

 grant injunctive relief staying any involvement of the Oversight Board with the operation and benefits of the Retirement System;

 enter a Declaratory Judgment decreeing that the Governing Board cannot obey the instructions of the Oversight Board regarding the Retirement System;

 grant injective relieve staying further compliance of the Governing Board with the instructions of the Oversight Board regarding the Retirement System;

 order the Governing Board to comply with Certification 146 (2014-2015);

 order the University of Puerto Rico to repay any loss or depreciation of trust property and any profit made by trustee resulting from the breach of fiduciary duties of the Governing Board, and any profit that would have accrued to the trust property if there

The complaint has a few good points. Although PROMESA supersedes any Commonwealth law, including the Puerto Rico Constitution (see Judge Lynch’s opinion in the Legislature decision), I don’t think a Board order is sufficient to stop the UPR’s requirement to comply with the local law. Of course, the Board may sidestep all this by sending the UPR into Title III as it has intimated in the past. Let’s see what happens.

In other news, the Board announced that it expects the Commonwealth to begin paying debt by fiscal year 2020-21, which begins on July 1, 2020, little over a year from now. Given everything that is going on, I doubt very much the plan of adjustment will be approved by then or that the Government of PR will want to pay anything more than a token of what it owes.

Today there are 22 days remaining for the appointment of the new Board. President Trump has failed to send any names to Congress, even though it seems he will re-nominate the current members. Let’s see what happens.

Finally, with deep regret I am announcing that I will file my last Monday Update on April 29, 2019. As you all know, I have been providing this newsletter to keep those interested abreast of what is going on in PROMESA but it has gotten so complicated that I am spending many, many hours doing it. Hence, my next Monday update will be my last. I will keep the website open for a while and maybe I will occasionally inform you of momentous happenings in the PROMESA litigation. Perhaps.

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 – April 15, 2019

Welcome to your weekly Title III update for April 15, 2019. This was a busy week.

On Monday, April 8, 2019, and as part of the effort to justify its lack of effort to file causes of action against all possible invalid bonds, the Board filed an urgent motion for entry of an order under bankruptcy rules 1007(i) and 2004 authorizing discovery and compelling disclosure of lists of security holders. The UCC filed a motion in support of the request. The motion is directed to several banks, including Bank of NY Mellon, Bank of America and others to obtain information on the past payment of GO bonds. This is part of the insane effort to claw back amounts paid on the allegedly illegal bonds issued by Puerto Rico. Later in the week, U.S. Bank National Association and U.S. Bank Trust National Association filed an objection to this motion’s timetable and the confidentiality of the information sought. Bank of NY Mellon filed a much stronger opposition and said;

The Motion ignores legal requirements that compel BNYM to maintain the confidentiality of the information the Oversight Board seeks by this Motion. Nor does the Oversight Board allow for a necessary process by which BNYM can provide its customers with notice and an opportunity to object to the Oversight Board’s request. These failings alone warrant the denial of the motion. . .

This Court should deny the motion. Alternatively, and in light of the various legal claims that might be asserted against BNYM for complying with the Oversight Board’s request should this Court grant the motion and order BNYM to produce some or all of the requested information, as well as the financial expense BNYM will incur in collecting and producing the information, BNYM needs this Court’s protection. The Court should provide in any Order that:

(1) No action taken by BNYM pursuant to or in compliance with such order shall subject BNYM to any liability whatsoever;

(2) BNYM shall, prior to producing documents to the Oversight Board, notify its customers of the request to disclose their information and provide reasonable time for customers to object to the production, or, in the event that the Court does not grant BNYM’s request to notify its customers of, and/or to serve its customers with, the Court’s Order, then BNYM is relieved from any obligation to so notify and/or serve its customers, for good cause shown;

(3) The Oversight Board shall indemnify and hold BNYM harmless against any claims, whether direct or indirect, arising from BNYM’s compliance with the Court’s Order;

(4) The deadline for BNYM to comply is no earlier than April 30, 2019, which deadline may be extended for reasonable cause, and BNYM shall not be subject to sanctions for any failure to meet such deadline if it is attempting in good faith to comply;

(5) The Oversight Board shall maintain the confidentiality and security of any customer information BNYM produces in response to the discovery request; and

(6) The Oversight Board must bear the fees, costs, and expenses, including, without limitation, the fees and costs of internal and external counsel, research costs, and production costs, for conducting the requested search and production.

In addition, Bank of America filed an objection, also requesting payment or sharing of costs and stated;

The Oversight Board’s requested Rule 2004 discovery is premature at best, unduly burdensome and potentially unnecessary, as it may be obviated (a) by the adjudication of the Joint Claim Objection, ERS Bond Objection, and Ad Hoc Objection (collectively, the “Bond Objections”), and (b) at least in part by the information received from DTC which the Oversight Board “expects [] will identify with reasonable accuracy” certain of the Participant Holders. The Oversight Board acknowledges that its request is premature, by stating in its Motion that its need to identify the holders of Challenged Bonds is “depend[ent] on the outcome of the Joint Claim Objection, ERS Bond Objection and Ad Hoc Objection.” See Motion ¶ 3. Furthermore, should the Court rule in the Oversight Board’s favor and grant the relief sought in the Equitable Tolling Motion, the Oversight Board’s relief requested here would not be urgent or necessary at this time.

Moreover, the Oversight Board’s overbroad and patently burdensome requests in the Motion exceed the scope of Rule 2004. Instead of utilizing the discovery expected from DTC to narrow by date and purported holder its overly broad requests to BANA, the Oversight Board’s discovery requests relate to multiple BANA entities, seeking information pertaining to what could be thousands of transactions, contained on what could be different platforms and/or systems at BANA and/or another Bank of America entity. Indeed, at this stage, BANA has not yet been able to confirm that BANA is the correct repository and/or entity for the information sought. The information sought is expected to take significant time to identify and retrieve, let alone review with an eye for production. 

The objections on confidentiality and costs are very valid and may force Judge Swain to establish procedures for payment and even for notice of the clients subject to the search to see if they want to object. This will further delay proceedings, which may be the reason for the filing of the motion, i.e., to bolster the tolling request by the Board to the SCOTUS. Speaking of said motion, the oppositions began. Andalusian Global Designated Activity Company and others, all ERS bondholders, represented by Jones Day’s Bruce Bennett stated in their opposition:

It has been over twenty-two months since the Board commenced Title III proceedings on behalf of ERS. The Board has therefore nearly exhausted the two-year period that Congress provided for the commencement of avoidance actions under the Bankruptcy Code. See 11 U.S.C. § 546(a); see also 48 U.S.C. §2161(a) (rendering § 546 applicable to Title III proceedings). In all this time, the Board has done essentially nothing to investigate or pursue possible avoidance actions against holders of ERS Bonds. In fact, the Board admits it has not even determined what information it needs to identify the historic owners of ERS Bonds, much less begun the process of obtaining that information. See Motion ¶ 48.

 The sole avoidance action against ERS Bondholders that the Board addresses in its motion is based on the argument that ERS’s issuance of its ERS Bonds was an ultra vires act. Yet the Board’s extreme delay in raising this claim is not because the Board only just learned of this theory. In fact—while the Board emphasizes that the Unsecured Creditors Committee (the “Committee”) only recently filed a claim objection to the ERS Bonds on this basis—the Board fails to inform the Court that this very ultra vires argument was first raised and briefed in November 2017 in two adversary proceedings to which the Board itself is a party. Yet the Board inexplicably did nothing in the intervening seventeen months to investigate this argument or pursue related avoidance actions.

You may remember on my last entry on April 1, I mentioned the several motions by the UCC requesting discovery on these issues and time and again the Board and the Court said stop. What will Judge Swain will do is anyone’s guess but there is clear evidence of the Board’s lack of interest in these actions. If Judge Swain agrees to the extension, as I believe she will, then those affected will have to wait to a case being filed against them, or at best, an appeal to the First Circuit, which has not been kind to her rulings.

All this has other implications. It seems the Trump administration is poised, sometime, to re-nominate present Board members to a three-year term. Should the President do this given the Board’s lack of interest in the Commonwealth’s causes of action? Can Democrats and leaders like Chairman Raul Grijalva support the current Board if they have ignored suing BPPR and Santander, among other banks, for their involvement in Puerto Rico’s debt? After all, Chairman Carrión and Carlos Garcia benefited from the actions of their respective banks. This is not me speaking, the UCC since early summer of 2017 has been insisting in conducting discovery on these issues but has stymied by the Board and the Court. Has the Board shown any respect to the “the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act” as per section 201(b)(1)(N) of PROMESA? Has it instituted the structural changes that Puerto Rico needs as per sections 201(b)(1)(F) and 405(m)(4) of PROMESA? We must remember that it has failed to define essential services, which is the first step in ensuring “the funding of essential public services” as per section 201(b)(1)(B) of PROMESA? Any observer of the Board’s acts and omissions would have to say no. As of today, 31 days remain of the 90-day period provided by the First Circuit. What will happen is anyone’s guess.

The Ad Hoc Group of GO Bondholders filed a limited objection to Mr. Peter Hein’s request for an official Committee for GO’s. The motion states:

In the GO Group’s view, Mr. Hein’s alternative request—for the appointment of a committee comprising both small and large holders of GO Bonds—would more appropriately address the important concerns he has identified than would the appointment of a committee representing only bondholders with more modest holdings. As a matter of statute, the ordinary approach for formation of official committees is that the largest claimholders are selected as members. Legally, the claims of small and large GO Bondholders are the same. Moreover, a more broadly defined membership would help to ensure that the new committee possesses a diversity of perspectives and should also allow the committee to take advantage of the expertise that larger holders of GO Bonds have developed over the course of this matter. Indeed, Mr. Hein himself implicitly acknowledges the value of that expertise by noting (Memo. 7) that any new official committee “should coordinate with the efforts of major holders and their ad hoc committees.”

 Mr. Hein’s Motion is premised on the assumption that a “commonality of interests” among all GO Bondholders should lead them to vigorously resist efforts to invalidate their claims. Memo. 7. Recent experience, however, suggests that this assumption may be mistaken. For some GO Bondholders, with holdings weighted toward unchallenged GO Bonds, a shortsighted pursuit of a more favorable recovery may lead them to join with the Oversight Board and the UCC in their meritless attempt to jettison the Commonwealth’s binding commitments to (certain of) its bondholders. The GO Group therefore respectfully submits that the membership of any official committee representing GO Bondholders should be limited to those individuals and institutions with holdings of GO Bonds weighted toward the series of GO Bonds that the Oversight Board and UCC have targeted for invalidation—either expressly or implicitly. While some modest degree of cross-holdings should be permitted, the U.S. Trustee should be directed to ensure that the committee’s membership is consistent with its mission of facilitating GO Bondholders’ defense to the Selective Claim Objection. (Bold added)

The Board opposed the Hein motion and stated:

First, consistent with the Court’s findings attendant to prior requests, adequate representation of the interests of GO Bondholders, as defined below, is provided through the zealous representation of GO Bondholders by ad hoc groups formed over the past two years. Second, appointment to the UCC would disrupt the Title III process and present a direct conflict. Specifically, as the UCC is party to the GO Related Objection, as defined below, having GO Bondholders seated on the UCC would generate internal conflicts and cause paralysis.

 The UCC also filed an opposition for similar reasons. As I have said in the past, I doubt Judge Swain will appoint such a Committee but it is important to note the mention of “a shortsighted pursuit of a more favorable recovery” in the Ad Hoc Group which is a clear reference to the newly formed Lawful Constitutional Debt Coalition, which (more on this latter) has thrown the gauntlet to challenge the 2012 and 2014 GO bonds. Since the Lawful Constitutional Debt group is represented by the same firm which successfully negotiated the Senior COFINA deal, one has to wonder if their stance in the GO litigation has to do with that advantageous deal.

In a motion that passed without notice by the local press, the Puerto Rico Funds, bondholders of ERS, filed a motion to vacate the appointment of the Official Committee of Unsecured Creditors in the Employees Retirement System of the Government of the Commonwealth of Puerto Rico Title III case. The reasons is alleged conflict of interests:

By design, the Post-Petition Legislation effectively turned the Commonwealth into ERS’s creditor. The UCC’s members are almost exclusively composed of unsecured creditors of the Commonwealth, and none are creditors of ERS. This creates a real and impermissible conflict of interest because the UCC cannot properly represent both ERS creditors and Commonwealth creditors at the same time—as the assets and future income ERS would use to pay its creditors were stripped and sent to the Commonwealth, which will use those same assets to pay its own creditors. As such, each member of the UCC has a significant conflict of interest with the unsecured creditors of ERS, whose interests the UCC is charged to represent.

 To make matters worse, the UCC does not adequately represent ERS unsecured creditors because not a single UCC member filed a claim against ERS. Moreover, the ERS unsecured creditors, consisting of a significant amount of retirees and pensioners, already have adequate representation through the statutory Retiree Committee (defined below), making the UCC duplicative and unnecessary for the ERS case. For these reasons and as set forth herein, the Court should vacate the appointment of the UCC as the creditors’ committee in the ERS case.

This motion shows the high stakes in the ERS bond litigation. The UCC is challenging these bonds as illegally issued and the PR Funds is going against the legitimacy of the UCC as to ERS. Although the motion has merit, we have to examine the UCC’s response and in any event, I doubt Judge Swain would grant this motion.

The PR Funds also filed a limited objection to the “Motion of Official Committee of Unsecured Creditors, Under Bankruptcy Code Sections 105(a) and 502 and Bankruptcy Rule 3007, Establishing Procedures with respect to Objections to Claims Asserted by Holders of Bonds Issued by Employees Retirement System of Government of Puerto Rico and Requesting Related Relief.” The motion requests the Court hold in abeyance the UCC’s motion until it decides the vacatur motion as to the Committee. Again, procedural tactics in this high stakes litigation.

Ambac filed its position as to the objections to claims filed by the Board and the UCC. It argues that the PBA leases are true leases, not disguised financings but believes the bonds should be included in the constitutional debt limit calculation. The motion, however, reserves Ambac’s right to settle claims while at the same time it claims the Board and the UCC “are motivated by different interests and objectives in the Title III cases. In particular, they may have different views on whether, and on what terms, to compromise or dismiss the GO Claim Objection.” In a similar vein, the Lawful Constitutional Debt Coalition filed its position also stating that PBA bonds are valid leases but that they must be included in the debt ceiling calculation. The Coalition also states that the 2012 and 2014 GO bonds are invalid but deviates from the Board and UCC position by saying “[w]hether or not such GO bonds and guarantees have any allowable claim, they clearly are not entitled to any lawful priority under Commonwealth law.” At footnote 19, it also states “The LCDC submits that any dispute concerning the appropriate remedy, if any, for holders of unlawful 2012 and 2014 GO bonds and guarantees should be deferred until the appropriate court determines the proper construction of the Commonwealth Constitution-a pure question of Commonwealth law.” (bold added, more on this later)

The Coalition also filed an objection to the Ad Hoc GO’s request for procedures (docket 6104), and state:

By the Conditional Procedures Motion, the GO Group asks the Court and hundreds of creditors to undertake an unnecessary months-long process for litigating its Conditional PBA Claims Objection, an objection that seems more interested in influencing public opinion than presenting a justiciable case or controversy.

The Coalition wants the litigation to be divided in two, to wit, (a) litigation involving the interpretation of the Constitutional debt limit and (b) a determination of what remedies, if any, that holders of the 2012 and 2014 may have against the Commonwealth. Interestingly, at footnote 18 of this motion, the Coalition states that during the first phase “parties may wish to move the Court to certify the issue of the interpretation of the Puerto Rico Constitution to the Supreme Court of Puerto Rico. If so, the Court may consider whether certification is warranted and appropriate under the circumstances.” (bold added) What does this mean? Two things, as I have argued, the invalidation of GO bonds does not mean there is no debt as per the Puerto Rico Civil Code. Second, the Coalition is giving notice that, as I have mentioned in the past, the Board and UCC objections to the GO’s is purely a Commonwealth law dispute. The attorneys for the Coalition were the same attorneys who joined Bettina Whyte in requesting that the District Court certify to Puerto Rico Supreme Court several issues (see, COFINA docket 332). Hence, we will soon see a motion to certify the questions to the Puerto Rico Supreme Court, which has merit but would deprive the District Court of control over this important litigation. Food for thought.

The Coalition also objected to the Board’s motion to toll the statute of limitations, calling it “inappropriate, unjustified and ill-timed.” The motion argues that the tolling must be used sparingly, that the Board has not “undertaken the requisite due diligence necessary for invoking” the doctrine and that it “has not identified any ‘extraordinary circumstance” beyond its control that made it impossible to filed the Challenged Bond Avoidance Actions.” The QTCB Noteholder Group filed a motion for reservation of rights as to the tolling, agreeing to a six-month tolling but not to any further extension.

The Commonwealth and HTA had agreed to extend time to file avoidance claims but FGIC filed a limited objection. It believes that HTA has avoidance claims against the Commonwealth and wants to be part of the stipulation. The Board said no and hence the objection. The UCC also filed an objection and said:

The Stipulation—which the Oversight Board negotiated and filed without consulting at all with, or even providing advance notice to, the Committee—tolls the time in which avoidance actions must be brought by the Commonwealth against the HTA, or vice versa. That aspect of the Stipulation is obviously not problematic. Critically, however, the Stipulation also allows the Commonwealth or the HTA—but only the Commonwealth or the HTA—to terminate, or indefinitely extend, the tolling period, including the No Suit Provision. Moreover, the Stipulation provides that it is binding on “any trustee which may be appointed pursuant to section 926 of the Bankruptcy Code.” In other words, while ostensibly engaging in a meet and confer process with the Committee as required by the Procedures Order, the Oversight Board was simultaneously agreeing to a Stipulation that effects exactly the result the Committee, in those same negotiations, had advised was unacceptable. . .

 At the very least, the Court should not decide whether it is appropriate to approve a Stipulation that binds a Section 926 Trustee and allows the Debtors and/or the Oversight Board to indefinitely extend a tolling agreement until there is clarity as to how the section 926 process will unfold and whether, as stated in the Joint Motion, the Committee and the Oversight Board are able to reach a consensual resolution obviating the need for any Section 926 Motion.

The section 926 issue is important. The UCC has informed the Court it may ask to be appointed as trustee under said section to pursue actions that the Board may not want to take. The Committee asked for an extension until today to file such a motion. This undoubtedly will bring conflict with the Board.

In PREPA, the Board and some monolines agreed to further extend the time for the lift stay hearing, having come to certain agreements but Syncora and National objected. Judge Swain extended the period since she prefers everything to be settled, as every judge I know prefers. The hearing, if actually undertaken, is set for May 29, 2019. Another issue to be presented to the SCOTUS when the Board requests a stay on the First Circuit Aurelius decision.

Also, PREPA bondholders filed an urgent motion objecting a privilege log and lack of timely production of documents and seeking “for an immediate status conference, to take place on Friday, April 12, 2019, or on the earliest other date and time that the Court can reasonably accommodate.” Obviously, the Board opposed the motion. Finally, PR Senate Bill 1121 was signed by the Governor, the public energy policy. As an example, we will have 40% renewable energy by 2025. If you believe that one, I have a little bridge in Brooklyn you can buy.

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 – April 8, 2019

Welcome to your weekly Title III update for April 8, 2019. This was a busy week.

On Monday, April 1, 2019, Judge Dein listened to arguments on discovery disputes in the ERS case. It seems she was not happy with the Board and its attorneys and their objections were mostly denied. Judge Dein ordered that the parties meet and resolve disputes. On Friday, April 5, a stipulation was filed by AAFAF, the Board and ERS bondholders purportedly resolving most of the disputes. This discovery dispute is part of the ERS bondholders request to be named Trustee of the agency. Difficult, but we will see.

On Tuesday, the Ad Hoc Group of General Obligation Bondholders filed a “Conditional Objection” to “Claims Filed Or Asserted By The Public Buildings Authority, Holders Of Public Buildings Authority Bonds, And Holders Of Certain Commonwealth General Obligation Bonds.” This objection states that the Board and UCC’s objections are wrong BUT, if they are right, they have to sue many other groups of bonds since the claims in the objection are also valid for a series of bonds. The statement is totally true and I assume was intended to put pressure on the Board to stop its actions since the statute of limitations runs out for the Commonwealth on May 2, 2019. That same day, however, the Board filed a motion requesting the equitable tolling of the statute of limitations for actions against bonds and intimated that it could included other GO, PBA, ERS, HTA bonds, among others.

The Board, quoting Pace v. DiGuglielmo, 544 U.S. 408, 418 (2005), states that “[f]or those statutes of limitation to which equitable tolling applies, a litigant who seeks tolling must establish at least two elements: (1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstances stood in his way.” The motion makes a very self-serving discourse of the Board’s actions, which is not exactly true. I explain.

On May 2, 2017, the Board authorized the Commonwealth to file for Title III protection. This means that the possibility had been considered for months before and Proskauer Rose, the Board’s attorneys, were hired on November 25, 2016. Moreover, Proskauer was not a stranger to the Commonwealth Government for it has contracts with Puerto Rico in the García Padilla administration and allegedly was the author of the Recovery Act that was invalidated by the District Court, Appellate Court and later the Supreme Court.

More importantly, as any seasoned bankruptcy lawyer knows, one of the first things you start looking into a case is what causes of action, if any, there are for in the fog of litigation, the two-year statute of limitations runs out quickly. Given this, did the Board diligently pursue the claims? Not really. As I mentioned, the Commonwealth Title III was filed on May 2, 2019. During May, June and July of 2017, not a peep from the Board on any causes of action to be filed. The first time the issue comes out is on July 21, 2017 motion, not by the Board but by the UCC, who argued that there were causes of action against, among others, Banco Popular Securities and Santander Securities and requested leave to conduct discovery via Rule 2004 of the Bankruptcy Rules.  On July 28, 2017, Santander and BPPR filed oppositions and on July 31, 2017, AAFAF also filed objections. All three argued that the Board was entrusted under PROMESA to do so, which is true BUT, there had been no attempt to do at the time. On August 3, 2017, the Board filed its opposition claiming it had the right to do so under PROMESA. On August 2, 2017, it had announced a request for proposals for the investigation, on August 8, 2017 created a special committee for said claims and on September 13, 2017, hired Kobre and Kim to conduct it. The Board’s tolling motion does not mention the UCC’s motions questioning the methods of Kobre and Kim, the lack of access to documentation, the limitations on the access to said documents and the fact that the interviews conducted were no under oath. In fact, many of the “extraordinary circumstances” claimed by the Board were foreseen by the UCC in the several motions it filed on said investigation. Seems to me that any opponent to the Board’s motion can find a lot more detail on these “circumstances” than the one’s I can recollect. In fact, the Board’s motion, at page 8, paragraph 23, states:

The Final Report [of Kobre & Kim] was not intended to identify Avoidance Actions and other potential claims the Commonwealth and its instrumentalities might hold against individuals and entities involved in the Commonwealth’s financial transactions.

In other words, the Board did nothing to look into these claims until very recently. Also, the Board’s motion is much more than an equitable tolling issue. At page 13, paragraph 34, it states that not only are the GO bonds objected to invalid and do not have to be paid, but that it will seek the clawback payment of whatever the Commonwealth gave bondholders. In other words, the Commonwealth committed fraud against the bondholders, will not pay its obligations and will get back whatever it paid. Then at page 19-20, paragraphs 52-53, the Board pontificates that defendants have had to defend these cases and having the Board sue everyone would be an undue burden on these poor souls and it would be better to toll the statute of limitations to see if the Board is successful. In other words, all those that may potentially be sued by the Board must patiently wait for the resolution of a case in which they are not involved but whose outcome will determine if they will be sued in the future. Talk about a Damocles sword.

The extension of the statute of limitations would be 90-days after the ruling on the claims objection or 90 more days to finalize the investigation on the “Challenged Board Avoidance Defendants.” Even with what I have said, there is little doubt Judge Swain will grant the Board’s request and toll said statute of limitations. What the First Circuit will say about this is anyone’s guess.

On the same vein, the HTA and Commonwealth filed a stipulation to toll the statute of limitations between them. Similar motion was filed with other instrumentalities. In an adversary proceeding of seven credit unions v. the Board and Commonwealth, 18-0028, plaintiffs requested and were granted leave to amend the complaint, which now, inter alia, claims:

After having taken plaintiffs’ capital and liquid resources through a fraudulent scheme and dereliction of its duties, the government’s lack of honesty was continued and aggravated by its failure to mitigate the risks and losses caused by it, a failure ever graver in light of the responsibilities inherent to the government’s role as financial regulator and insurer of member shares and deposits.

The claims here go back to the Fortuño administration but it is emblematic of the view many of us have of the Commonwealth’s Government. The complaint also claims that once discovery commences, they will sue “Securities firms A–Z, which acted as underwriters, underwriting syndicate member, selling group manager, selling group member, broker and/or dealer, financial advisor, or in any other capacity in relation to the Puerto Rico Debt Securities,” and “[l]aw firms and counsel who acted as advisors and/or legal representatives to defendants identified in the preceding paragraphs and/or to issuers of Puerto Rico Debt Securities, with respect to said Puerto Rico Debt Securities and/or with regards to policy actions and omissions related thereto,”  and “[a]ccounting and/or auditing firms which made audits or financial analysis or reports, or that acted in any other capacity in relation to the Puerto Rico Debt Securities, as defined hereinafter.”  The Amended Complaint also claims violations of the Act Against Organized Crime and Money Laundering of the Commonwealth of Puerto Rico, a sort of local RICO Act. Corruption galore!

Add to this President Trump’s “Rebuilding Puerto Rico Efficiently and Accountably” of April 4, 2019, that discusses Puerto Rico’s many cases of governmental corruption, both at the Commonwealth and Municipal levels. Moreover, the Grand Jury investigation on the Commonwealth’s Department of Education and purportedly also of its former Secretary, Julia Keleher, adds to the uncertainty.

This uncertainty can be seen in President Trump’s lack of urgency in sending the reappointment of the Board’s members to the Senate with only 38 days left of the 90 day stay granted by the First Circuit. When will these appointments be sent to the Senate? Will the Supreme Court issue a stay? Since the Board’s appointment expires on August 30, 2019, one can argue that even if the Supreme Court were to grant a certiorari, it would be moot once these appointments are made. On the other hand, if the SCOTUS grants the certiorari and the Senate confirms the Board, what happens to the reappointment? PROMESA requires that any Board member to be reappointed must be done in the same way he/she were originally appointed. If the SCOTUS say that the original appointments were valid, any Senate consent and advice would be contrary to PROMESA and we would have to go through the same maelstrom. Hence, it all depends on what the President and the SCOTUS will do. In any event, given that President Trump seems poised to reappoint the same members of the Board, Aurelius and Utier must change the dynamics of their message. Let’s see what happens.

A case that seems to be forgotten since it is not one in the PROMESA litigation but that is intimately related is Altair Global v. USA, before the US Court of Federal Claims, where the insurer wants the Federal Government to pay, as a taking without just compensation. The Judge assigned to the case denied the Federal Government’s request for dismissal but stayed the case until the Aurelius decision came down. Subsequent to the stay, the Judge was changed (Court of Federal Claims is not an Article III Court and hence Judges do not have the usual District Judges protection). After the Aurelius decision came down, the new Judge, issued the following order:

Accordingly, the court LIFTS the stay of proceedings and will proceed to resolve defendant’s motion to dismiss in its entirety. To facilitate its resolution, the court requests that the parties submit supplemental briefing in accordance with the schedule set forth below. The briefing shall address the following legal issues:

  • Does the First Circuit’s ruling in Aurelius have any effect on the arguments advanced by the parties in their briefing and oral argument on defendant’s motion to dismiss or the rulings made by the Honorable Susan G. Braden in her July 13, 2018 Memorandum Opinion and Order? If the answer is “yes,” then what is that effect?
  • Does the First Circuit’s ruling in In re The Financial Oversight and Management Board for Puerto Rico, 914 F.3d 694 (1st Cir. 2019), have any effect on the arguments advanced by the parties in their briefing and oral argument on defendant’s motion to dismiss or the rulings made by the Honorable Susan G. Braden in her July 13, 2018 Memorandum Opinion and Order? If the answer is “yes,” then what is that effect?
  • Have any binding, precedential decisions issued since July 13, 2019, that would affect the arguments advanced by the parties in their briefing and oral argument on defendant’s motion to dismiss or the rulings made by the Honorable Susan G. Braden in her July 13, 2018 Memorandum Opinion and Order? If the answer is “yes,” then what are those decisions and what is their effect?
  • Are there any arguments––not previously raised by the parties in their briefing and oral argument on defendant’s motion to dismiss––that the parties wish to make in support of or in opposition to defendant’s motion?

Defendant USA must file by April 29, plaintiffs by May 30 and the reply brief by June 13. This case, if won by plaintiffs, has the potential of derailing PROMESA for ever since I doubt that Congress would want to pay for any monies that Puerto Rico does not pay.

National, the Oversight Board, and Citigroup filed a stipulation in the PREPA lifting of stay for appointment of receiver case, resolving their discovery disputes, and Judge Dein denied the Board’s reconsideration of her order denying certain discovery it requested. In addition, the Board and plaintiffs requested and obtained an order from the Court moving the date for the hearing to May 15, one day before the stay expires, in order to continue settlement negotiations. I have said many times that I view this litigation as a tool by plaintiffs to obtain a better settlement than other bondholders but this could also be a way for the parties to stipulate the lifting of the stay for the appointment of a particular receiver. We will have to keep an eye on these developments since the stipulation before May 15 would be valid as per the First Circuit’s ruling, but will be strongly challenged by Utier, who insists, with good reason, that the Board’s actions are illegal.

Peter Hein, a COFINA and GO bondholder, filed a motion for the appointment of a GO bondholder official committee of holders of $2.5 million or less. Judge Swain denied without prejudice his first request, directing him to the US Trustees Office, who essentially denied his request. His point, which is not without merit, is that Puerto Rico is spending millions to invalidate bonds it issued and should pay for the representation of these bondholders. I sympathize with him but doubt that the Court would grant it given the lack of support by the US Trustees office. Again, I urge GO bondholders to unite and retain counsel.

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 – April 1, 2019

Welcome to your weekly Title III update for April 1, 2019. Things are speeding up.

Andrew Scurria of the Wall Street Journal reported that President Trump would nominate the present Board members for confirmation by the Senate. Subsequently, two independent sources confirmed this information. Given the Board’s actions, there will be opposition on both sides of the isle in the Senate but some democrats may think it is better than a bondholder-friendly appointees. The PPD minority leader in the Puerto Rico’s House of Representative has already signaled his opposition to the appointments and the Commonwealth is complaining that the Board is using Puerto Rico’s money to lobby in DC for their reappointment. In any event, with only 46 days left in the 90-day stay period, the schedule is very tight for confirmation.

On March 25, the UCC filed a motion requesting that the Board inform them by April 1 of the avoidance actions it intends to file and requested an expedited consideration of their request. It also requested that the Court consider naming it Trustee pursuant to 11 U.S.C. § 926 to file any actions the Board would not. Not surprisingly, the Board opposed the motion and said that, if anything, it should be considered during the April 24 Omnibus hearing. The problem is that on May 2, 2019, the statute of limitations runs out to file said actions by the Commonwealth. Seems Judge Swain understood very well and ordered the Board to give the UCC a preliminary list by April 5. “The Committee and the Oversight Board shall promptly meet and confer regarding the contents of the Oversight Board’s preliminary list and anticipated allocation of litigation responsibilities. The Oversight Board shall thereafter provide to the Committee its final list of Commonwealth Avoidance Actions, including the aforementioned designations” by April 10. I think this means Judge Swain envisions the UCC and Board either dividing work on the avoidance actions or filing joint complaints. The order continues stating that the UCC could file a motion to be appointed Trustee by April 12 and the Board must file opposition by April 15. Court will hear argument during the April 24 hearing. This is clear victory for the UCC and only the third time Judge Swain has not sided with the Board on important issues. Moreover, given the timetable, no other party will be able to file a section 926 motion in time. Hence, if there is the appointment of said Trustee, it will be the UCC.

The UCC also filed an objection to the PREPA bondholders request for the lifting of the stay to appoint a receiver along predictable lines. Time for the Board and AAFAF to file was extended by Judge Swain, although many believe there will be some kind of settlement beforehand. Let’s wait and see.

Utier, PREPA’s union, filed a motion opposing the lifting of the stay and appointment of the receiver. What is different is that Utier calls instead for the appointment by the Court of an Independent Private Sector Inspector General and even if a receiver is appointed, to also have this “Inspector General.” The problem with this request is that the First Circuit, in FOMB v. Ad Hoc Group, 899 F.3d 13, 19 (1st Cir. 2018), made clear that Judge Swain cannot interfere with PREPA’s use of its property pursuant to section 305 of PROMESA without the Board’s consent. Since it is obvious the Board will not consent, this request will go nowhere.

The ERS dispute discovery dispute continues and will be argued on April 1 before Magistrate Judge Dein. I am sure that both sides have valid points and Judge Dein will have a reasonable solution to the disputes.

In the PBA adversary proceedings, Defendants-Intervenors /Counterclaim Plaintiffs Assured Guaranty Corp. and Assured Guaranty Municipal Corp. answered the complaint and filed  counterclaims against FOMB and the UCC. The counterclaims are for:

(b)enter judgment in favor of Assured declaring that the Leases are non-severable and valid leases under Commonwealth law and are unexpired leases of nonresidential real property for the purposes of Bankruptcy Code section 365(d)(3);

(c) enter judgment in favor of Assured declaring that, pursuant to Bankruptcy Code section 365(d)(3), the Leases give rise to administrative expense claims for all postpetition amounts that remain due and owing by the Debtors under the PBA Leases, as well as any amounts that may accrue moving forward until such Leases are assumed or rejected by the Debtors;

(d) enter judgment in favor of Assured declaring that PBA is entitled to a priority administrative expense claim under the Leases pursuant to Bankruptcy Code sections 503(b)(1) and 507(a)(2), and that any such claim filed or asserted against the Debtors shall be allowed in full

The PBA/GO’s litigation is not going to be simple or short. Hence, I agree with Ms. Jaresko that the Commonwealth Plan of Adjustment will probably be filed at the end of this year or later. Especially if Judge Swain has not decided the PBA/GO’s issue.

Finally, there was an interesting twitter exchange between Cate Long and David Skeel on Sunday. Cate wrote:

I think Puerto Ricans and creditors would find this statement more credible if PR govt had not issued +1,900 advertising contracts since the start of the fiscal year (July 1, 2018). OBoard never required an identification of “essential services” as Promesa requires

To which Skeel responded “[a]s you know, @cate_long , PROMESA requires @FOMBPR to “ensure the funding of essential public services.” That’s exactly what we’re trying to do.” Section 201(b)(1)(C) of PROMESA requires that the Fiscal Plan “ensure the funding of essential services.” The mere fact that it is not services but ESSENTIAL services that need to be funded makes it clear that not all services provided by the Government are essential, as we saw during the Federal Government’s shutdown. The PR Government, however, has refused to downsize except through attrition and the Board, despite Judge Torruella and Judge Lynch separate opinions on the Board’s powers, has refused to force the Government to cut back in contracts, funding of useless government agencies (WIPR TV station and the State Elections Commission not in election years come to mind) or furlough employees. Moreover, the Board has even refused to define what is an essential service and so has the Commonwealth. Hence Cate’s comment. This lack of action by the Board will become important when the Commonwealth’s plan of adjustment is presented, which according to Mr. Skeel, is this month.

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.