Monday Update – July 16, 2018

Welcome to your weekly Title III update for July 16, 2018. Again, a lot has happened in the Title III case.

After Aurelius filed its motion reminding Judge Swain that two new cases related to it’s Appointments Clause challenge to the Board had come down from the Supreme Court, the US, the Board, Governor Rosselló and others filed oppositions. On Friday, Judge Swain issued its ruling and not surprisingly, sided with the Board.

In synthesis, Aurelius and Utier, PREPA’s principle union, had challenged the Title III and other Board actions by averring that the Board had not been properly appointed as per the Appointments Clause of Article II, Section 2, Clause 2 of the Constitution of the United States. As stated before, a ruling favorable to the Board was expected but how the ruling was made will have a profound impact in US-Congress relations to Puerto Rico. The Court explained defendants’ positions:

The United States, which has exercised its statutory authority to intervene in these proceedings to defend PROMESA’s constitutionality (see 28 U.S.C. § 2403(a)), argues that PROMESA’s appointment mechanism is not subject to the Appointments Clause because (i) the Oversight Board members are territorial officers rather than “Officers of the United States,” and (ii) the Appointments Clause does not govern the appointment of such territorial officers. (See generally U.S. Mem. of Law.) In support of its position, the United States cites historical practice and argues that Congress’s plenary power over the territories is not subject to the distribution of powers provisions that regulate the federal government. (Id. at 8-15.) The Oversight Board primarily raises the same argument. (Docket Entry No. 1622, the “FOMB Opposition,” at 7-21.) In addition, the Oversight Board contends that (i) the Appointments Clause does not constitute a “fundamental” constitutional provision and, as such, it does not apply to Puerto Rico, and (ii) even if the Appointments Clause is applicable, the Oversight Board members were properly appointed. (Id. at 23-31.) The other opponents raise substantially similar arguments to those advanced by the United States and the Oversight Board. (See generally, Docket Entry Nos. 1610, 1629, 1631, 1634, 1638, 1640.) . . .

The principal question thus presented for the Court on this motion practice is whether the Constitution required compliance with the Appointments Clause in the appointment of the Oversight Board members.

Judge Swain, the Solicitor General and the Board all knew that the Appointments Clause applied, unless the Territorial Clause could trump it. In order to do so, Judge Swain analyzed Congressional power over Puerto Rico. She stated:

The Territories Clause of Article IV of the Constitution vests Congress with the “[p]ower to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” U.S. Const., Art. IV, § 3, cl. 2. The Supreme Court has long held that Congress’s power under this clause is both “general and plenary.” Late Corp. of the Church of Jesus Christ of Latter-Day Saints v. United States, 136 U.S. 1, 42 (1890) (reasoning that the people of the United States became the “sovereign owners” of the territory of Utah upon its acquisition, that the United States as their government exercises power over the territory subject only to the provisions of the Constitution, and that Congress therefore could supersede pre-acquisition legislative acts). Acting under the Territories Clause, Congress may, for example, create local governments for the territories of the United States. See, e.g., United

States v. Wheeler, 435 U.S. 313, 321-22 (1978) (stating that “a territorial government is entirely the creation of Congress,” while noting the unique status of Native American tribes, whose prior sovereignty is preserved in certain respects). The constitutional division between state sovereignty over affairs within state borders and affairs ceded to the federal government pursuant to the Constitution is not applicable to territories, whose governments are “the creations, exclusively, of [Congress], and subject to its supervision and control.” Benner v. Porter, 50 U.S. 235, 242 (1850); see also Cincinnati Soap Co. v. United States, 301 U.S. 308, 323 (1937) (explaining that “[i]n dealing with the territories . . . Congress in legislating is not subject to the same restrictions which are imposed in respect of laws for the United States considered as a political body of states in union”).

The Court continues its explanation:

A federal territory’s “relation to the general government is much the same as that which counties bear to the respective States, and Congress may legislate for them as a State does for its municipal organizations.” First Nat’l Bank v. Yankton Cty., 101 U.S. 129, 133 (1879). Congress can thus amend the acts of a territorial legislature, abrogate laws of territorial legislatures, and exercise “full and complete legislative authority over the people of the Territories and all the departments of the territorial governments.” Id. With respect to territorial governance, Congress exercises the governance powers reserved under the Constitution to the people in respect of state matters. Id. In this sense, Congress occupies a dual role with respect to the territories of the United States: as the national Congress of the United States, and as the local legislature of the territory. See Cincinnati Soap Co., 301 U.S. at 317 (“A [territory] has no government but that of the United States, except in so far as the United States may permit. The national government may do for one of its dependencies whatever a state might do for itself or one of its political subdivisions, since over such a dependency the nation possesses the sovereign powers of the general government plus the powers of a local or a state government in all cases where legislation is possible.”); see also Keller v. Potomac Elec. Power Co., 261 U.S. 428, 442–43 (1923) (recognizing that, in exercising Congress’s substantially identical power over the District of Columbia, Congress had power to create courts “of the District, not only with the jurisdiction and powers of federal courts in the several states, but with such authority as a state (1828) (recognizing the power of Congress to create a territorial court with jurisdiction that could not otherwise have been constitutionally granted to a state court); United States v. McMillan, 165 U.S. 504, 510–11 (1897) (explaining that territorial courts are not “courts of the United States, and do not come within the purview of acts of Congress which speak of ‘courts of the United States’ only,” although Congress exercises the combined powers of the general government, and of a state government with respect to territories and could directly legislate for any territory or “extend the laws of the United States over it, in any particular that congress may think fit.”) may confer on her courts”); Am. Ins. Co. v. 356 Bales of Cotton, 26 U.S. (1 Pet.) 511, 546 (1828) (recognizing the power of Congress to create a territorial court with jurisdiction that could not otherwise have been constitutionally granted to a state court); United States v. McMillan, 165 U.S. 504, 510–11 (1897) (explaining that territorial courts are not “courts of the United States, and do not come within the purview of acts of Congress which speak of ‘courts of the United States’ only,” although Congress exercises the combined powers of the general government, and of a state government with respect to territories and could directly legislate for any territory or “extend the laws of the United States over it, in any particular that congress may think fit.”). (emphasis supplied)

At footnote 11, Judge Swain dismisses Aurelius’ arguments as to the two new SCOTUS cases stating the following:

On July 6, 2018, the Court received and reviewed a supplemental informative motion filed by Aurelius (Docket Entry No. 3451, the “Aurelius Supplement”) The Court subsequently received and reviewed informative motions filed by the Oversight Board, the United States, and the COFINA Seniors in response to the Aurelius Supplement. (Docket Entry Nos. 3494, 3495, 3500.) In its submission, Aurelius cites the Supreme Court’s June 22, 2018 decision in Ortiz v. United States, 138 S. Ct. 2165 (2018), for the

propositions that military and territorial courts are created pursuant to similar powers, and if separation of powers concerns pertain to one they must necessarily pertain to the other. (Docket Entry No. 3451 at 5.) The Ortiz Court’s focus has no such implications, however. The Court was examining the question of whether the military court rulings before it were within its appellate jurisdiction. It cited past examples of judicial proceedings in state, military and territorial courts from which it had entertained appeals, emphasizing the judicial review, as opposed to executive action or original determination, aspects of the matter that was before it in Ortiz. Ortiz does not speak to the question of whether Congress can create a territorial court or any other entity that is not a court of the

United States and is not subject to the Appointments Clause. The Ortiz Court’s treatment of the Appointments Clause is similarly inapposite, as the Court held that Congress was empowered to permit the challenged military officer to perform in the job in question and the appellant’s Appointments Clause argument (which the Court rejected) concerned whether a single person could be both a principal and an inferior officer of the United States, an issue that is not raised here. See Ortiz, 138 S. Ct. at 2183-84. The supplemental informative brief also cites the Lucia case, which is similarly inapposite as it involved a distinction between an officer of the United States and an employee. Lucia v. S.E.C., 138 S. Ct. 2044 (2018).

Judge Swain summarized her view of Puerto Rico’s relation to Congress and said:

In summary, Congress has plenary power under the Territories Clause 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. It has exercised this 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 plenary Article IV authority by authorizing a significant degree of local self-governance. Such territorial delegations and structures may, however, be modified by Congress. John R. Thompson, 346 U.S. at 109. Congress purported to do so in creating the Oversight Board as an entity of the territorial government of Puerto Rico. (emphasis supplied)

Judge Swain then dispatches Aurelius strongest argument, to wit, that the Board wields substantial federal power, by saying;

The Oversight Board’s statutory objectives and scope of authority thus mark its character as territorial rather than federal.

You could literally hear the applause at Fortaleza and the Board’s offices after Swain’s ruling; however, their joyful mood may be temporary. In a surprising twist, the Federal Court of Claims denied the motion of the United States to dismiss in a case where several bond insurers are claiming that PROMESA constituted a taking without just compensation by the United States. The United States claimed:

[T]he court does not have jurisdiction to adjudicate Plaintiffs’ Takings Clause claim, because: (1) the Oversight Board is not part of the United States Government; (2) Congress authorized the United States District Court for the District of Puerto Rico with exclusive jurisdiction to adjudicate creditors’ claims against the Commonwealth and the Oversight Board; (3) the October 31, 2017 Amended Complaint is barred by 28 U.S.C. § 1500; (4) Plaintiffs’ takings Clause Claim is not ripe for adjudication; and, in the alternative, (5) Plaintiffs’ October 31, 2017 Amended Complaint fails to state a claim on which relief may be granted.

What is very important is that the Federal Claims Court determined that the Board was part of the United States – meaning Federal not Territorial. In doing so, it stated:

The text of PROMESA provides that the Oversight Board is an entity of the Commonwealth, but specified that it “shall not be considered to be a department, agency, establishment, or instrumentality of the Federal Government.” 48 U.S.C. § 2121(c). Statements made by Congress during the passage of PROMESA, however, refer to the Oversight Board as a “federal oversight board.”15 In addition, the House Report on PROMESA directed the Congressional Budget Office to “treat the Oversight Board as a federal entity[,] because of the ‘significant degree of federal control involved in [the Oversight Board’s] establishment and operations.’” H.R. Rep. No. 114-602 at 72. Although this legislative history is relevant in determining whether the Oversight Board is a federal entity, the court does not need to rely on legislative history, because established precedent is dispositive of this threshold issue. (emphasis supplied)

Although Judge Swain dismissed Aurelius mention of two new cases of the SCOTUS with a footnote, Judge Susan G. Branden discussed Lucia v. SEC at length with approval and said:

On June 21, 2018, the United States Supreme Court issued a decision in Lucia v. S.E.C., 138 S. Ct. 2044 (2018), that held certain administrative law judges (“ALJs”) were “Officers of the United States,” under Article II, Section 2, Clause 2, because they “hold a continuing office established by law.” Lucia, 138 S. Ct. at 2047; see also Freytag v. C.I.R., 501 U.S. 868, 881 (1991) (holding that “[t]he office of special trial judge is established by [l]aw . . . and the duties, salary, and means of appointment for that office are specified by statute.”) (internal quotation marks omitted). In this case, Oversight Board members hold a continuing office established by Congress that specifies their “duties . . . and means of appointment.” Freytag, 501 U.S. at 881; see also 48 U.S.C. §§ 2121–2129. Similarly to the ALJs in Lucia, Oversight Board members exercise “significant discretion” in carrying out their “important functions.” Lucia, 138 S. Ct. at 2053 (quoting Freytag, 501 U.S. at 882). Although the special trial judges in Freytag and the ALJs in Lucia were engaged in different and much more limited duties than those exercised by Oversight Board members, there is little doubt that the latter are also “federal civil officials ‘with responsibility for an ongoing statutory duty.’” Lucia, 138 S. Ct. at 2056 (Thomas, J., concurring) (quoting NLRB v. SW General, Inc., 137 S. Ct. 929, 946 (2017) (Thomas, J., concurring); see also Lion Raisins, Inc. v. United States, 416 F.3d 1356, 1362 (Fed. Cir. 2005) (“There is no question that the United States, in general, incurs takings liability for the acts of its agents. That is, a takings claim against the United States may be based on the acts of an agent of the United States.”) (internal quotation marks omitted).

Importantly, Judge Branden stayed the case stating:

The separate issue of whether the Oversight Board members’ manner of appointment violates Article III, Section 2, Clause 2, is presently pending before the United States District Court for the District of Puerto Rico in two separate lawsuits. See Objection And Motion Of Aurelius To Dismiss Title III Petition, In re The Financial Oversight and Management Board for Puerto Rico, No. 17-03283-LTS (D.P.R. Aug. 7, 2017), Dkt. No. 913; see also First Amended Adversary Complaint, Union de Trabajadores de la Industria Electrica y Riego v. Puerto Rico Elec. Power Auth., No. 17-228, Dkt. No. 75 (D.P.R. Nov. 10, 2017). In the event that the United States District Court for the District of Puerto Rico determines that it does, the “appropriate remedy” may render the actions of the Oversight Board alleged in the October 31, 2017 Amended Complaint unlawful and require restoration or restitution of the Pledged Property that served as collateral for the ERS bonds owned by Plaintiffs.

Therefore, the court has determined that the Government’s 28 U.S.C. § 1500 challenge and alternative motion to dismiss the October 31, 2017 Amended Complaint, pursuant to RCFC 12(b)(6), are not ripe. Accordingly, the interests of justice require that this case be stayed, at least until a decision and final judgment is entered in each of the above-referenced cases: In re The Financial Oversight and Management Board for Puerto Rico, No. 17-03283-LTS; and Union De Trabajadores De La Industria Electrica Y Riego v. Puerto Rico Electric Power Authority, No. 17-228.

I had no doubt Judge Swain would side with the Board since to do so would mean a stay of the case while appeals ensued or President Trump proceeded with the appointment. What I was not counting on was the Court of Claims deciding the issue in a contrary fashion. This case will be appealed and undoubtedly Aurelius and Utier will ask that the appeal be expedited by the First Circuit. That would allow a judgment by the appellate court before the end of the year and a request of certiorari to the SCOTUS in time for the next term and possibly a decision before June 30, 2019. The fact that there are two different decisions in two different “Circuits” (the Court of Claims is to a certain extent like a Federal District Court and its decisions are appealed to the Federal Circuit) puts further weight on the granting of a certiorari in this case. Since Judge Swain’s decision now makes it necessary for Judge Brendan to determine whether the United States is liable for PROMESA, it puts further stress on the appellate courts to prevent this. I am not saying they will, but is always a consideration to protect the United States from having to pay judgments. Also, if the Claims Court were to find the United States liable, it could repeal PROMESA or at least Title III. So many possible scenarios.

In imitation of the Commonwealth, the Puerto Rico legislature filed a complaint against the Board. Fortunately, for us paying taxes here, the Legislature did not hire a stateside law firm but rather a local one. The complaint is different from the Government’s, which tries to skirt the inevitable clash with PROMESA section 106(e) that divests the district court of jurisdiction to review the Board’s certifications, and goes to questionable arguments such as:

Despite the fact that the Legislative Assembly approved a valid budget, consistent with the Fiscal Plan, due to the Legislative Assembly’s disapproval of the bill repealing Law 80 in the way and manner the FOMB wanted, FOMB refused to certify the Commonwealth’s budget approved by the Legislative Assembly, and retaliated against it by imposing punitive measures in reducing the Legislative Assembly’s operational budget. It’s important to highlight that the Legislative Assembly’s budget was lower than the FOMB’s own approved budget. The FOMB’s retaliation constitutes an impermissible imposition of penalties or sanctions against the Commonwealth and/or its officers or employees, which PROMESA does not allow, and in contravention to Puerto Rico’s sovereignty.

If this were not enough to raise Judge Swain’s brow, the complaint twice invokes Puerto Rico’s sovereignty and requests as remedy, inter alia, the following order:

Declaring that, by forcing the Legislative Assembly to advance its own agenda, and punishing the government by not approving the 2018-2019 Legislative Assembly Budget when its strong-arm tactics failed, the FOMB exceeded its statutory authority under PROMESA;

Declaring that, the 2018-2019 FOMB Budget is null and void, and

Declaring that the 2018-2019 Legislative Assembly Budget duly approved by the Legislative Assembly and signed by the Governor of Puerto Rico shall be reinstated.

Enjoining the defendants from implementing the FOMB’s 2018-2019 Budget;

Ordering the defendants to certify the 2018-2019 Legislative Assembly Budget;

Although the Government’s challenge is unlikely to succeed, this is even more daunting. I do not know under what authority in PROMESA Judge Swain may order the Board to “certify the 2018-2019 Legislative Assembly Budget,” or that the “2018-2019 Legislative Assembly Budget duly approved by the Legislative Assembly and signed by the Governor of Puerto Rico” be reinstated.

On July 12, the Board filed its expected motion to dismiss the Government’s challenge and it came out swinging. After the Zamot defeat and Judge Swain’s denial of the PREPA loan, it seemed the Board was doubting its powers under PROMESA. Not so here. The motion states:

The entire Complaint rests on one legal gambit, namely that every Fiscal Plan and budget provision the Governor finds objectionable is and can only be a “recommendation” under PROMESA § 205, that he alone determines whether to accept them, and the Oversight Board is powerless to enforce them. Notably, to support his view, the Governor cites the “additional view” of Puerto Rico’s nonvoting representative to Congress (Complt. ¶¶ 25-26), rather than citing the statute, and the actual House Report which says the opposite: “The Oversight Board may incorporate any recommendations – even those not adopted by the Legislature or Governor – into the development of Fiscal Plans.”

Predictably, it tells the Court it lacks jurisdiction to entertain the motion:

Despite the Complaint’s repeated protests to the contrary, the Complaint is a challenge to the certified Fiscal Plan and Budget. The Court has recognized that, to be meaningful, PROMESA § 106(e) precludes an exploration into whether the contents of the Fiscal Plan violate PROMESA § 201(b). Pursuant to PROMESA § 106(e), the Court lacks subject matter jurisdiction over challenges to certifications. If the Complaint is not such a challenge, then it is a request for an advisory ruling (unobtainable from this Article III Court) because without eliminating the certifications, the provisions of the Fiscal Plan and Budget do not change.

In a direct dig at the politicians of Puerto Rico challenging its authority, the Board quotes Congressman Duffy:

Congress recognized that “the elected officials in Puerto Rico have known that this issue has been coming for years, and they haven’t been able to get their hands around it, haven’t had the political will to fix the burning problem. So we are going to put into effect an oversight board to actually work with the island government to get its finances and its budgets under control.” Rep. Duffy, CONG. REC. 162:91 (June 9, 2016) p. H3600.

How unsurprising the Board quoted Duffy. The Board kept with the critique of the island’s politicians and reminded the Court of its own rulings on the subject of certifications:

The relief sought in the Complaint boils down to a declaration that Plaintiffs do not need to implement and enforce provisions of the certified Fiscal Plan and Budget, which in the Governor’s view are recommendations within the meaning of PROMESA § 205(a). PROMESA, however, gives the Oversight Board the final word on the contents of the certified Fiscal Plan and Budget. As the Court observed in the CTO Decision, the Oversight Board can certify its own Fiscal Plan and Budget after it follows “an interactive process with the territorial government [which] does not yield a plan or budget that is acceptable to the [Oversight Board].” 583 B.R. at 631.The Court went on to note that if the Oversight Board “develops and certifies its own Fiscal Plan and/or budget under these circumstances, the Commonwealth’s government is deemed to have accepted the [Oversight Board’s] plan or budget.” Id. Giving the Oversight Board this final, determinative authority makes sense, because Congress recognized that, at least in part, Puerto Rico’s fiscal emergency was caused by “the inability of its local politicians to bring order and transparency” to the territorial economy. See H.R. Rep. No. 114-602, at 40 (2016).

Hammering at the Fiscal Plan, the Board states:

To achieve these core tenets of the Fiscal Plan, the Oversight Board must have power to specify how that should be done. That is why PROMESA § 201(b)(1) requires that the Fiscal Plan shall provide a “method” for achieving fiscal responsibility and access to the capital markets, and requires that the Fiscal Plan shall “enable the achievement of fiscal targets,” PROMESA § 201(b)(1)(G) (emphasis added). As Plaintiffs themselves recognized, “Titles I and II give the Oversight Board authority to shape broad fiscal policy by certifying Fiscal Plans and approving budgets that serve as the blueprints for restructuring efforts and reforms necessary to achieve fiscal responsibility.” In the same way a builder cannot omit or ignore key parts of a blueprint without risking the building collapsing, the Governor cannot reject piecemeal aspects of the fiscal plan or deem them “optional” without disrupting the carefully constructed balance of economic and fiscal measures designed to meet PROMESA’s objectives. Therefore, Congress mandated that if the Governor fails to submit a Fiscal Plan “that the Oversight Board determines in its sole discretion satisfies the requirements” of PROMESA § 201(b), the Oversight Board“ shall develop and submit” its own Fiscal Plan, which “shall be deemed approved by the Governor” and then certified. PROMESA §§ 201(d)(2), (e)(2).

Likewise, Congress entrusted the Oversight Board with the obligation and authority, “in its sole discretion,” to approve budgets for the Commonwealth and its instrumentalities “compliant with the applicable Fiscal Plan.” PROMESA § 202(c)(1). As with Fiscal Plans, however, if the Governor and Legislature fail in the first instance to develop and approve a Budget compliant with the Fiscal Plan, PROMESA mandates the Oversight Board to submit its own Budget, which is “deemed to be approved by the Governor and the Legislature,” id. § 202(e)(3)(A), and is “in full force and effect beginning on the first day of the applicable fiscal year.” Id. § 202(e)(3)(C).

Distinguishing Judge Swain’s decision in Zamot, the Board claims:

Plaintiffs contend the Oversight Board is overstepping limits identified by the Court in its decision regarding the PREPA Chief Transformation Officer (“CTO”) by “micromanaging” the Government through its detailed Budget. E.g., Complt. ¶¶ 6-7, citing the CTO Decision. To the contrary, Plaintiffs are undermining what PROMESA and the CTO Decision squarely identified as being duties of the Oversight Board, and are engaging in behavior not at issue in the CTO matter. See CTO Decision, 583 B.R. at 636 (“It is notable here that the [Oversight Board] has not asserted that PREPA is non-compliant with a certified Fiscal Plan or budget.”). Unlike the CTO dispute, the Oversight Board is not attempting to “impose changes in structure or reporting lines” within the Commonwealth. Id. Rather, the Oversight Board is fulfilling its mandate by utilizing its express fiscal plan and budgetary powers under Title II of PROMESA to certify Fiscal Plans and budgets that provide a method for Puerto Rico to achieve fiscal responsibility and access to capital markets.

Going directly to the “recommendations” objected by the Government, the Board pushed its position of being able to force those recommendations:

Pursuant to PROMESA § 201(b)(1)(K), a Fiscal Plan shall “adopt appropriate recommendations submitted by the Oversight Board.” “Appropriate recommendations” are those determined by the Oversight Board as coming within § 201(b) and § 205(a). See PROMESA § 201(b) (“A Fiscal Plan developed under this section shall … provide a method to achieve fiscal responsibility and access to capital markets …”); § 205(a) (recommendations “ensure compliance with the Fiscal Plan, or to otherwise promote the financial stability, economic growth, management responsibility, and service delivery efficiency of the territorial government….”). If the Oversight Board certifies a Fiscal Plan containing such recommendations, in its sole discretion, PROMESA §§ 201(c)(3), and 106(e), it is “deemed approved by the Governor” and is binding. PROMESA § 201(e)(2). If the Oversight Board exercises its discretion to develop a budget, it is “deemed to be approved by the Governor and the Legislature” and “in full force and effect.” PROMESA § 202(e)(3).

The statutory scheme of PROMESA as a whole is incompatible with Plaintiffs’ argument. Courts must construe statutes as a whole, in light of all of their provisions, and giving effect to each part. See, e.g., United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371 (1988) (noting that “[s]tatutory construction . . . is a holistic endeavor’ and that a court should select a ‘meanin[g that] produces a substantive effect that is compatible with the rest of the law”); Kelly v. Robinson, 479 U.S. 36, 43 (1986) (in interpreting a statute, a court “must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy” (internal quotation marks omitted)); La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 370 (1986). Under PROMESA, a Fiscal Plan must “adopt appropriate recommendations submitted by the Oversight Board under section 205(a)” in its Fiscal Plans. PROMESA § 201(b)(1)(K). PROMESA does not say such recommendations shall be adopted only if the Government has already “agreed to adopt” them, as Plaintiffs argue. Complt. ¶ 42. . . For present purposes, PROMESA § 201(b)(1)(G) empowers the Oversight Board to insert into the Fiscal Plan measures to enable achievement of fiscal targets. PROMESA §§ 203 and 204 provide remedies and precautionary measures to achieve Fiscal Plan targets and budget targets. And PROMESA § 108(a)(2) bars the governor from imposing rules or orders impairing or defeating PROMESA. (emphasis supplied)

The Board continued hammering section 201(b)(1)(G):

In an attempt to interpret PROMESA in a manner thwarting the language of § 201(b)(1)(K), which empowers the Oversight Board to adopt appropriate recommendations in the Fiscal Plan, Plaintiffs provide a distorted and incomplete recitation of the legislative history, contending that: “Congress specifically considered – but resoundingly rejected – granting the Oversight Board the broad power to impose its policy preferences over Government objections … [and] discarded these ‘anti-democratic’ provisions, which appear nowhere in PROMESA as enacted.” See Complt. ¶¶ 4, 41.

To the contrary, the actual legislative history confirms Congress knew full well that “recommendations” would potentially become adopted pursuant to certified Fiscal Plans after being rejected by the Commonwealth government, and would be mandatory in that circumstance. In its discussion of PROMESA § 205, the actual House Report, as opposed to its appended “Additional Views,” concludes the “Oversight Board may incorporate any recommendations – even those not adopted by the Legislature or Governor – into the development of Fiscal Plans.” H.R. Rep. 114-602(I) (2016) at 46 (emphasis added). And Senator Menendez noted that § 201(b)(1)(K) “allows the board to ‘adopt appropriate recommendations’ submitted by the Oversight Board under section 205,” so that “in essence, they can adopt the very essence of what they are saying is a recommendation.” Yet another report stated “[t]he Board’s broad powers include: the imposition of legislative or executive recommendations….” Congress clearly intended to do what it did: to pass a bill granting the Oversight Board broad responsibilities and the means to fulfill them in a Fiscal Plan. Other legislative history is in accord. The Governor’s complaint does not quote from the actual legislative history. It quotes from an “additional view” put forward by Puerto Rico’s then nonvoting representative to Congress. . . The Discussion Draft granted the Oversight Board the authority, “by a majority vote of its members” to “take such action concerning the recommendation as it deems appropriate” the moment it was rejected by the Governor. Discussion Draft § 207(c)(1). The Discussion Draft also granted the Oversight Board authority “at any time [to] issue such orders, rules, or regulations as it considers appropriate . . . to the extent that the issuance of such an order, rule, or regulation is within the authority of the Governor or the head of any department or agency of the Government of Puerto Rico.” Discussion Draft § 207(d)(3). This provision granted the Oversight Board power equal to that of the Governor to issue orders, rules, and regulations. It would have allowed the Oversight Board to essentially control entire departments of the government of Puerto Rico. But Discussion Draft section 207(d) was deleted. When section 207(d) was deleted, section 207(c) was inserted into section 201(b)(1)(K) providing Fiscal Plans shall adopt appropriate recommendations. The requirement for a majority of the Oversight Board to approve the recommendation was maintained because PROMESA § 101(h)(2) requires majority approval to certify Fiscal Plans. The “additional view” Plaintiffs cite, provided by Pedro Pierluisi, Puerto Rico’s then nonvoting Congressional representative, also explained that under § 201(b)(1)(K) the governor would have to adopt appropriate recommendations in any Fiscal plan he proposes.

As I said after the Board revealed it was going to certify a new Fiscal Plan back in 2017, it decided it would certify a Fiscal Plan of such nature that would allow it to rule Puerto Rico. And that is what it is telling Judge Swain PROMESA allows. This may not sit well with Judge Swain who may simply say she is without jurisdiction to review the Fiscal Plan or the budget. Moreover, after the decision on the Aurelius challenge, she may go further and side with the Board, especially after last week’s resignations in PREPA. She may even be wondering on the wisdom of her decision on Zamot. Irrespective, last week’s PREPA fiasco looms large in regards to the bigger question: Who should take the decisions in Puerto Rico, the politicians or the Board?

This brings us to another issue; if the Board wins big on these motions and the Government must comply, there will be little, if any cooperation with the Board. On the other hand, if Judge Swain sides with the Government and Legislature, there will be no meaningful role for the Board, which could then dismiss the Title III petitions. Even if they don’t, with politicians calling the shots, it is highly unlikely that a confirmable Plan of Adjustment could be prepared, forcing the dismissal of the Title III. Then what?

In any event, the Government must file its reply by July 17 and will file a motion to dismiss the Legislature’s complaint by July 18. The motions will be discussed in the July 25 Omnibus hearing and I expect Judge Swain to rule from the bench. Without a doubt, this is a crucial ruling.

In other cases, the HTA appeal by Assured Guarantee is moving along and the Board filed its opposition on July 9. This case is being followed closely by the Municipal Bond community and will be of great importance for state financing. Stay tuned.

The Puerto Rico Civil Rights Commission filed a request to file a brief of amicus curiae last week. The brief, signed by the Commissioners, none of whom is admitted in federal court, was chock full of references to International law, United Nations resolutions and other matters totally irrelevant to the Title III. Justice Scalia must be turning in his grave. The brief requests that the Court take a human rights approach to the restructuring of Puerto Rico’s debt. Essentially they want Judge Swain to ignore Title III, US Bankruptcy law and the island’s constitution and put services ahead of debt. Judge Swain dismissed it without prejudice, correctly saying this was not the time and that they should wait until the Plan of Adjustment. Moreover, it is clear that Judge Swain does not like amicus briefs. Another wasteful use of taxpayers’ money.

The Official Retirees Committee was forced to file a motion requesting payment by the Commonwealth. In essence, it says:

The Retiree Committee’s professionals have worked diligently to resolve the issues presented by this Motion without this Court’s intervention over the past several months. They have provided all requested summary information, all certifications, and all declarations. They have even enlisted—at their own expense—the services of Deloitte in Puerto Rico to provide tax and accounting assistance to Hacienda. Despite the Retiree Committee’s professionals’ best efforts, Hacienda has failed to pay amounts that are due under the Interim Compensation Orders.

If the Commonwealth is not paying the official committees, will it pay creditors pursuant to a Plan of Adjustment? Very embarrassing, and gives political support to the Federal Claims court’s reasoning.

In other news, there were a few objections filed as to the Exit plan of the Investigator. Irrespective, the big issue will be when the report comes out on August 15 and which causes of action, if any, the Board will exercise against the banks or others. Also, whether the UCC will attempt to file its own if the Board does not. Let’s see what happens.

Assured objected to the Board’s request for a stay of proceedings on its adversary proceeding challenging the Fiscal Plan pending a decision on appeal. These stays are not common and it is not likely the Court will issue it. It will be simpler for her to simply deny the requested remedy. Seems the Board fears that the actual challenge to the Fiscal Plan may reach the First Circuit and section 106(e) deemed unconstitutional. Let’s see what happens.

The ERS bondholders’ request to be paid has raised objections from the Retirees Committee and other bondholders. Again, this is a challenge that will continue to be brought forward by bondholders. Let’s see what the appellate court eventually decides.

Finally, Caribbean Business reports that not all is well in the COFINA settlement case. Seems that Junior bondholders are not happy with what they will receive. We will know more by August 4 since that is the deadline. If the Government loses its Fiscal Plan challenge, it could decide to play the spoiler. Also, as I have said before, unless the Commonwealth and GO’s accept the COFINA deal, there will be litigation about it. As if Puerto Rico needed more.

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 – July 9, 2018

Welcome to your weekly Title III update for July 9, 2018. This time, a lot has happened in the Title III cases.

Governor Rosselló quickly dispelled any doubts of which budget he would execute and on Thursday morning announced he would sue the Board to delimitate the bounds of the Board’s powers. At 1 pm on Thursday July 5, 2018, the complaint was filed. It states, inter alia:

Over the past several months, the Oversight Board has used the fiscal plan and budget certification processes contemplated by the Puerto Rico Oversight, Management, and Economic Stability Act, 48 U.S.C. §§ 2101-2241 (“PROMESA”), in an attempt to impose its policy preferences on Puerto Rico’s people, micromanage every aspect of budget expenditures, and exercise legislative power the Board does not have, all over the objections of Puerto Rico’s elected Government. The Board’s efforts exceed its lawful powers and should be enjoined by this Court. . .

Specifically, the Oversight Board cannot do what it is attempting to do: impose mandatory workforce reductions, change the roles and responsibilities of certain government officials, criminalize certain acts under Puerto Rico law and otherwise seek to micromanage Puerto Rico’s government.

The Commonwealth cited the Zamot decision as an important precedent preventing the Board from behaving in this fashion and is careful to claim,“the Government is not challenging certification.” This is important since section 106(e) of PROMESA purportedly strips the District Court of jurisdiction to review Board certifications. Let’s see what the Commonwealth actually objects to:

The Oversight Board’s Fiscal Plan includes the following objectionable provisions:

  • Suspension of Reprogramming Authorization for Prior Fiscal Years. The Board Fiscal Plan seeks to suspend the Government’s authorization to seek reprogramming for prior fiscal years, stating that “[a]ny power of OMB, the Fiscal Agency and Financial Advisory Authority (“AAFAF”, by its Spanish acronym) or the Department of the Treasury, including the authorities granted under Act 230- 1974, as amended, known as the “Puerto Rico Government Accounting Act” (“Act 230”), to authorize the reprogramming or extension of appropriations of prior fiscal years is hereby suspended. Notwithstanding this section, the appropriations approved in the budget certified by the Oversight Board may be modified or reprogrammed with the approval of the Oversight Board.” Board Fiscal Plan § 11.2.1.
  • Imposed Government Agency Consolidations. The Board Fiscal Plan attempts to dictate how the Government will organize itself to conduct day-to-day operations, including through the creation of an Office of the Chief Financial Officer and to “right-size” the Government through agency consolidation and reduction and/or elimination of government services. See Board Fiscal Plan § 12. Some, but not all, of these consolidations were agreed to by AAFAF as part of the fiscal plan development process.
  • Automatic Budget Reductions for Future Fiscal Years. The Board Fiscal Plan seeks to impose automatic budget reductions on the Government, stating that, “[i]f, after the third fiscal quarter of any fiscal year there remains unrealized agency efficiency savings for any grouping relative to the projected agency efficiency savings in the New Fiscal Plan for the applicable fiscal year, the Oversight Board will automatically reduce the budget for the corresponding grouping for the following fiscal year in the amount equal to the unrealized agency efficiency savings. In particular, if the Oversight Board determines that there is material underperformance in agency efficiency savings relative to the projections set forth in the New Fiscal Plan, intentional workforce reductions will be necessary to meet the agency efficiency savings targets set forth herein.” Board Fiscal Plan § 12.3.
  • Elimination of Statutorily Mandated Christmas Bonuses. The Board Fiscal Plan sets forth several recommendations affecting government-employee compensation, including: (i) instituting a hiring freeze; (ii) limiting paid holidays to 15 days annually across all public employees; (iii) prohibiting carryover of sick and vacation days between fiscal years; (iv) prohibiting any future liquidation of sick and vacation days; (v) eliminating the Christmas bonuses for all public employees; and (vi) standardizing employee healthcare benefits so that all employees receive $100 worth of benefits per month. See Board Fiscal Plan § 12.4. The Christmas bonuses that the Board Fiscal Plan seeks to eliminate are statutorily mandated under Puerto Rico’s Christmas Bonus Act, Law No. 148 of June 30, 1969 (“Law 148-1969”), as amended by Law 4-2017 and the Fiscal Plan Compliance Act, Law No. 26 of April 29, 2017 (“Law 26-2017”).

As to the Board’s budget resolutions, the Commonwealth stated:

The Budget Resolutions are not simply itemized budgets. Rather, the Oversight Board has used them to dictate substantive policy and effectively make new laws for Puerto Rico, including the following key provisions:

Section 7 of the General Fund Resolution and Special Resolution provide that: “Any power of OMB, AAFAF or the Department of the Treasury, including the authorities granted under Act 230-1974, as amended, known as the “Puerto Rico Government Accounting Act” (“Act 230”), to authorize the reprogramming or extension of appropriations of prior fiscal years is hereby suspended. Notwithstanding this section, the appropriations approved in the budget certified by the Oversight Board may be modified or reprogrammed with the approval of the Oversight Board.” Notably, this language is identical to the language in section 11.2.1 of the Board Fiscal Plan.

Section 10 of the General Fund Resolution provides that: “OMB may withhold from any of the allocations to the agencies of the Executive Branch the amounts necessary to pay for the pay-go contribution, unemployment insurance, or taxes withheld from their employees, when OMB determines that such a withholding is necessary to ensure compliance with these obligations by the agencies concerned. Any such amounts withheld by OMB shall solely be reprogrammed to pay the corresponding outstanding obligations related to pay-go contributions, unemployment insurance, or taxes withheld from employees as allowed in this Section.”

Mandates for Corrective Action. Section 15 of General Fund Resolution and section 14 of the Special Resolution provide that: “If during the fiscal year the government fails to comply with the liquidity and budgetary savings measures required by the New Fiscal Plan for Puerto Rico certified by the Oversight Board, the Government shall take all necessary corrective action, including the measures provided in PROMESA sections 203 and 204.”

Expansion of Board’s Punishment Powers for Budget Non-Compliance. Section 16 of the General Fund Resolution and section 15 of the Special Fund Resolution provide that: “The Secretary of Treasury, the treasurer and Executive Directors of each agency or Public Corporation covered by the New Fiscal Plan for Puerto Rico certified by the Oversight Board, and the Director of the OMB (or their respective successors) shall be responsible for not spending or encumbering during fiscal year 2019 any amount that exceeds the appropriations authorized for such year. This prohibition applies to every appropriation set forth in this Joint Resolution, including appropriations for payroll and related costs. Any violation of this prohibition shall constitute a violation of this Joint Resolution and Act 230.”

Funding of Oversight Board Members’ Favored Projects. The Special Resolution includes a line-item expenditure for the Institute of Puerto Rican Culture in the amount of $437,000 to fund the “operating expenses of the Luis Muñoz Marin Foundation.” Special Resolution § 1(23)(F). On information and belief, this expenditure was inserted on the express instructions of one of the Oversight Board Members. The inclusion of a pet project of an Oversight Board Member is inappropriate micro-managing, serves no discernable purpose, and aims to establish a public policy. None of the foregoing provisions in the Board Fiscal Plan and Budget Resolutions are proper exercises of the Board’s power under PROMESA or permitted by PROMESA itself. Instead, they represent overreach by the Board.

A cursory review of these objections and the request that the provisions be set aside in the complaint show that contrary to its protestations, the Commonwealth wants the court to review the certified Fiscal Plan and the certified budget. Moreover, at page 33, paragraph 78, the Commonwealth states:

To be clear, the Government does not seek a declaration that the Board Fiscal Plan was improperly certified, or that the Board Fiscal Plan suffers from any legal infirmities except to the extent set forth with respect to specific policy recommendations that cannot be imposed by the Board. (emphasis supplied)

On Friday, July 6, the Commonwealth filed a motion requesting a scheduling order from the Court, to wit:

The Court should expedite resolution of this case to address the injury to the Commonwealth and its people occurring every day due to the Board’s attempt to seize day-to-day control of Puerto Rico’s government. As set forth in the proposed order, attached as Exhibit A, Plaintiffs request the Court to shorten the time to respond to the Complaint, with either an answer or motion to dismiss due by July 12, 2018. If the Board files an answer, Plaintiffs will file a motion for summary judgment or judgment on the pleadings by July 16, with Defendants’ response due by July 20 and Plaintiffs’ reply due by July 23. If the Board files a motion to dismiss, Plaintiffs will file a response by July 17, with Defendants’ reply due by July 20. Plaintiffs’ proposed schedule ensures that all briefing will be complete by July 23. Should the Court desire oral argument, Plaintiffs request that it occur during the omnibus hearing on July 25, 2018 (or any day on or before August 3, 2018).

The proposed schedule will ensure the dispute is fully briefed and heard in less than three weeks—a schedule slightly more generous than that which the Court ordered for the CTO Motion that the Board filed on October 26, 2017.

The Board quickly opposed the motion and counter proposed the following:

Although the issues in this dispute are important and should be resolved expeditiously, plaintiffs have proposed an unrealistically short schedule presuming knowledge they do not have of Defendants’ responses and potential counterclaims. Accordingly, Defendants submit the Court should set instead the following expedited schedule, which contains the necessary flexibility to adapt to the different legal and factual defenses and counterclaims Defendants may propound:

July 18, 2018 Defendants shall answer or otherwise respond to the Complaint, listing all defenses and asserting any counterclaims.

July 19, 2018 The parties shall meet and confer on a schedule for the expeditious adjudication of the parties’ claims, including motions on any threshold issues under Fed. R. Civ. P. 12(b), discovery (if any), and motions for judgment on the pleadings, and, summary judgment.

July 20, 2018 The parties shall submit a joint statement setting forth the agreed upon schedule, and where there are differences in proposals, identify plaintiffs’ proposal and defendants’ proposal.

July 25, 2018 The parties shall be prepared to address their scheduling proposals at the omnibus hearing to the extent the Court deems it necessary.

The motion does not end there and gives us a glimpse of the Board’s future averments:

The Complaint seeks to have the Court determine how Congress allocated authority between the Oversight Board and the government of the Commonwealth. To properly present the issue to the Court requires careful and thorough briefing and possibly fact-finding. (footnote 2 omitted)

Second, Defendants’ proposed schedule is appropriately expedited to deal with the serious issues raised in the Complaint, and to be raised in the answer and counterclaim. To the extent a quick resolution is needed, this schedule provides for it. The procedural and substantive issues will be framed within two weeks, and the parties will have an opportunity to set the schedule for an expedited resolution on the merits.

Third, Plaintiffs’ supposed “uncertainty” about which budget is the operative budget (Mot. at 2, 7) is of their own making. PROMESA provides for only fiscal plans and budgets that are certified by the Oversight Board. It does not permit fiscal plans or budgets that are not certified by the Oversight Board. With full knowledge of this elemental fact, the Governor signed an uncertified budget having no force or effect under PROMESA sections 201(e)(2) and 202(e)(3). The moment that the Oversight Board certified the relevant fiscal plan and budget under PROMESA sections 201(e)(2) and 202(e)(3), they were deemed approved by the Governor and Legislature. No signatures are necessary or even relevant. The Governor’s signature on the Legislative Budget has no force and effect and cannot be used by Plaintiffs to justify emergency relief.

Fourth, Defendants take exception to Plaintiffs’ argument that the briefing schedule for the dispute last fall regarding appointment of a chief transformation officer (“CTO”) for PREPA should somehow be the yardstick for the present dispute. Although the CTO issue was significant, it did not raise anything close to the number of substantive and jurisdictional issues raised here.

Fifth, Plaintiffs’ reliance on PROMESA § 106(d) to argue for further expedition (Mot. At 5) is also misplaced. Clearly the intention of § 106(d) is to direct the courts to advance PROMESA matters relative to other non-PROMESA cases on their dockets, not to accelerate PROMESA matters beyond the pace provided for in the applicable bankruptcy rules. Section 106(d) uses the term ‘expedite’ in conjunction with the Court’s disposition of the matter, and not in conjunction with scheduling.

Sixth, Plaintiffs’ proposed schedule leaves no time for Defendants to effectively prepare counterclaims. To frame the issues appropriately, Defendants may seek declaratory judgments, injunctions, and/or related relief. This pleading (and Plaintiffs’ response) will require careful thought, for which Plaintiffs’ schedule provides inadequate time.

Finally, we add that nothing herein is intended to create subject matter jurisdiction (which parties cannot do) or to waive any rights under PROMESA Titles I, II and III. Additionally, Defendants have sought in this submission to address solely the scheduling issue presented to the Court for urgent review, not to rebut various gratuitous arguments about the merits, such as Plaintiffs’ contention (Mot. at 5) that the Oversight Board is attempting “to seize day-to-day control of Puerto Rico’s government.” Such arguments will be addressed at the proper time.

Three things stand out; one, the Board will raise the jurisdictional defense and claim that irrespective of the merits of the Commonwealth’s claims, the Court cannot entertain them. Two, the Board wants to conduct discovery. Footnote 2 of the motion states, “[p]laintiffs contend the issues in this adversary proceeding are “purely legal.” (E.g., Mot. at 6.) The Oversight Board agrees that there are significant legal issues implicated in the Complaint, upon which this dispute may be resolved. But the Complaint contains many disputed factual contentions (e.g., Complt. ¶ 59) that may be disputed and require discovery.” Paragraph 59 of the Commonwealth’s complaint is where it avers that the governor submitted a written statement pursuant to section 205(b)(3) of PROMESA. Third, the Board will file counterclaims, very possibly to test its own interpretation of PROMESA.

I remind my readers of Congressman Bishop’s brief of amicus in the First Circuit. In it he was clear that:

Once a fiscal plan is in place for the Commonwealth or a territorial instrumentality, the entity must comply with it in its official acts. Section 202, 48 U.S.C. § 2142, requires that territorial and instrumentality budgets be consistent with the fiscal plan. Section 204, 48 U.S.C. § 2144, requires that all contracts, rules, regulations, and orders conform to the fiscal plan, and gives the Oversight Board extensive powers to ensure compliance. . . In short, the fiscal plan sets policy for the covered territory or territorial instrumentality at a sufficient level to ensure fiscal responsibility and restore access to capital markets.

I must caution those relying on the Zamot opinion by Judge Swain, that on page 19, she made an important observation; there the Board was not claiming that there was a violation of the Fiscal Plan or of the Budget. Here, the Board will make that claim and invoke section 106(e) of PROMESA.

This unholy mess was created for political reasons. Since the President of the Senate refused to eliminate Law 80, the Board imposed a far stricter budget. Senator Rivera Schatz threatened he would go to Court and if he did, even if he lost, he would be a hero in the minds of many. Governor Rosselló, who wanted the Law 80 deal, calculated that he would not lose anything by challenging the Board. Although, it is obvious to everyone he will probably lose. A pro-statehood administration is defending the powers of the Territorial Commonwealth simply to be able to administer the government as it sees fit. Until this mess with the Board is resolved, there can be no Plan of Adjustment, which further delays the resolution of the Title III, risking dismissal via 11 U.S.C. §930(a)(2). Moreover, if the Board were to lose this challenge, the politicians would be in charge of the Fiscal Plan and hence the Plan of Adjustment, making it near impossible for it to be approved by creditors or even for the Court to cram it down, also resulting in dismissal of the Title III.

Judge Swain ruled late Saturday and granted the Commonwealth’s scheduling motion and ordered oral argument on the merits for the Omnibus hearing of July 25.  This means it is unlikely she will grant the Board any time for discovery on any issue and that she wants to rule on the issues quickly. Let’s see what happens.

On other news, Aurelius filed an informative motion regarding two important SCOTUS cases related to its claims:

Aurelius’s Objection and Motion to Dismiss is premised on the argument that the members of the Financial Oversight and Management Board for Puerto Rico (Board) “are Officers of the United States because they derive their authority from the federal government, are appointed by the federal government, are overseen by the federal government, and exercise significant executive authority under the laws of the United States.” Aurelius Obj. & Mot. to Dismiss at 11; see also, e.g., Aurelius Reply to U.S. 12, Dkt. 2169 (arguing that the Board is a federal entity under the standard articulated in Lebron v. National Railroad Passenger Corp., 513 U.S. 374, 397–98 (1995), because the Board was “established and organized under federal law,” it was “established ‘for the very purpose of pursuing federal governmental objectives,’” Congress can “repeal, alter,  or amend” the statute “at any time,” and the Board’s members are “appointed ‘by the President’”). For this reason, Aurelius has argued, Congress violated the separation of powers and the Appointments Clause by allowing the Board members to be appointed without Senate confirmation and by usurping a substantial portion of the President’s appointment power.

The Opposing Parties and the United States have defended the Board against this challenge chiefly by pointing to the Property Clause of the Constitution, which gives Congress the power to “make all needful Rules and Regulations respecting the Territory or other Property” of the United States. U.S. Const., Art. IV, § 3, cl. 2. For instance, the Board has contended that when Congress exercises its “plenary” power under the Property Clause, it is not “constrained by constitutional separation-of-powers provisions” in general, and “[t]he Appointments Clause” in particular “does not govern Congress’s exercise of its plenary municipal authority under Article IV to create territorial offices and designate the method of appointment.” Board Opp. at 8–9, Dkt. 1622; see also U.S. Br. 12, Dkt. 1929 (“[G]iven Congress’s wide latitude in governing the territories, the Appointments Clause is inapplicable to the appointment of territorial officers like the Oversight Board members.”).

Ortiz v. United States undermines this argument by equating the scope of Congress’s power over the territories with its broad power over the military. Ortiz held that the Supreme Court had appellate jurisdiction over cases arising from the Article I military Court of Appeals for the Armed Forces because that entity is a “court” for purposes of the Supreme Court’s appellate jurisdiction. Ortiz slip op. 5–19. In coming to this conclusion, the Ortiz Court noted that “the Constitution grants Congress broad authority over the territories: to ‘make all needful Rules and Regulations respecting’ those areas.” Id. at 12–13 (quoting U.S. Const., Art. IV, § 3, cl. 2). And the “court-martial system” at issue in Ortiz “stands on much the same footing” as the territories, where Congress has created a system of territorial courts, since it “rests on an expansive constitutional delegation,” namely, the “legislative power ‘[t]o make Rules for the Government and Regulation of the land and naval Forces,’” which is “just like” Congress’s territorial authority. Id. at 10, 11, 14 (quoting U.S. Const., Art. I, § 8, cl. 14). Thus, Congress possesses the same “plenary grant[ ] of power” over “the military” as it does over the “territories.” Id. at 14.

The Ortiz Court’s confirmation that Congress’s control over the territories is equivalent to its power over the military further demonstrates the error of the Opposing Parties’ argument. If the Opposing Parties were correct that plenary congressional authority was exempt from the Constitution’s structural guarantees, including the Appointments Clause, then the Ortiz Court’s holding makes clear that this principle would necessarily also extend to the military. But in fact it is absolutely clear that the Constitution’s structural guarantees do constrain Congress despite its “plenary” power to structure the military. In particular, there is no doubt that “the Appointments Clause applies to military officers,” Weiss v. United States, 510 U.S. 163, 170 (1994), and the Supreme Court has repeatedly emphasized that “military trial and appellate judges are officers of the United States and must be appointed pursuant to the Appointments Clause,” Edmond v. United States, 520 U.S. 651, 654 (1997); see Ryder v. United States, 515 U.S. 177 (1995). Indeed, Ortiz itself involved an Appointments Clause challenge, which the Supreme Court resolved on the merits without any suggestion that the Appointments Clause applies any differently with respect to military judges than it does with respect to other federal officers. Ortiz slip op. 23–25.

The Ortiz decision is thus irreconcilable with the Opposing Parties’ view that Congress is free to legislate in connection with the territories without regard to the Appointments Clause. As with congressional power over the military, Congress is also not immune from the Constitution’s structural guarantees when it legislates pursuant to the Property Clause, which is “just like” the military clause. See Ortiz, slip op. 14. In fact, the Ortiz Court reached this conclusion even though the amicus in that case, in his motion to participate in oral argument (which the Court granted), brought these very proceedings to the Court’s attention. Mot. of Prof. Aditya Bamzai for Leave to Participate in Oral Argument as Amicus Curiae and for Divided Argument at 4–5, Dalmazzi v. United States et al., Nos. 16-967 et al. (U.S. Dec. 14, 2017). The amicus cautioned the Court that “[i]f [it] accept[ed]” “the premise that Congress’s authority to legislate for the court-martial system is coterminous with Congress’s authority to legislate in the territories,” then that “would have dramatic implications,” because the United States is currently arguing here that “Congress’s authority over the territories is plenary and not subject to the complex distribution of powers that regulate the Federal Government.” Id. (quoting U.S. Br. 4). And the amicus reiterated this concern at oral argument, warning that, if the Supreme Court were to hold that military courts are on the same footing as territorial courts, then that would lead to separation-of-powers difficulties, because “the government’s position is that the appointments clause does not apply to the territories.” Transcript of Oral Argument at 34, Ortiz v. United States (2018) (No. 16-1423). But the Supreme Court felt no concern about equating Congress’s power over the military and the territories, thus suggesting that Congress is equally constrained by the separation of powers when it regulates either.

Aurelius references a second case, Lucia v. SEC, which I pointed out in the Monday Update of June 25. Aurelius argued:

Lucia v. SEC, meanwhile, is relevant to Aurelius’s argument that the Board members exercise the “significant authority” (Lucia slip op. 6) that qualifies them as “officers of the United States” subject to the Appointments Clause. In Lucia, the Supreme Court held that, under a straightforward application of Freytag v. Commissioner, 501 U.S. 868 (1991), an SEC ALJ is an inferior officer who must be appointed in conformity with the Appointments Clause. Lucia slip op. 6. The SEC ALJs “have equivalent duties and powers as” the judges at issue in Freytag, and therefore are just as much “officers” as the Freytag judges. Id. at 9.

This is the same argument that Aurelius has made with regard to the Board members. See Obj. & Mot. to Dismiss at 15. Like the SEC ALJs (and the judges at issue in Freytag), the Board “take[s] testimony,” “receive[s] evidence,” issues “subpoenas,” and “administer[s] oaths” to “witnesses” at “hearings.” Compare Lucia slip op. 9 with 48 U.S.C. § 2124(a), (f). Also just like the SEC ALJs, the Board exercises “significant discretion when carrying out” its “important functions,” Lucia slip op. 8, as the Board undeniably is empowered to take numerous actions in its “sole discretion,” see, e.g., 48 U.S.C. §§ 2121(d)(1)(A)–(E); 2141(a); 2142(a); 2146(a).

The Lucia Court also rejected the idea that ALJs are not officers simply because they do not have the authority to punish contempt. Lucia slip op. 10. Instead, the Court held that the power to exclude the wrongdoer from the proceedings was a powerful enough disincentive; the ALJs did not need an “especially muscular means of enforcement” such as “the power to toss malefactors in jail.” Id. Here, the Board’s power to implement its authority and to enforce a federal statute in federal court, see 48 U.S.C. § 2124(f)(2), (k), and its exclusive power to initiate Title III proceedings, id. § 2164(a), and act as the sole representative of, and decision-maker for, the Title III debtor, id. § 2175(b), are more than sufficient to satisfy this test—as demonstrated by Board Member José Carrión’s recent statement urging “the governor to reconsider his” opposition to the Fiscal Plan and stating that the Board is “ready to go to court,” warning that he “[did not] want anyone to be imprisoned,” and that “[w]hat [the Board] would be doing is enforcing a federal law.” See Caribbean Business News Service, Puerto Rico Fiscal Board Member: Too Much Pain with Too Little Promise (Apr. 19, 2018), available at http://caribbeanbusiness.com/puerto-rico-fiscal-board-member-more-pain-will-come.

Finally, the Lucia decision supports Aurelius’s arguments regarding the appropriate remedy for a violation of the Appointments Clause. Some parties have posited that the proper remedy for the Board’s structural infirmities is to accord the Board’s past actions de facto validity. Board Opp. 33–34; see AAFAF Opp., Dkt. 1640, at 32 (arguing that this Court should “declare the Board’s actions to date de facto valid, deny Aurelius’s motion to dismiss, and issue a stay to permit statutory revision or the Board’s reconstitution”); Unsecured Creditors’ Comm. Opp., Dkt. 1631, at 27 (“[T]he Oversight Board’s actions (including the title III cases) should be accorded de facto validity and the  Court should permit this proceeding to continue unimpeded.”). But the Lucia decision confirms that an Appointments Clause violation demands a meaningful remedy. As Aurelius has argued, see Obj. & Mot. to Dismiss at 34–35, a party that raises a timely Appointments Clause challenge is entitled to an appropriate remedy because “Appointments Clause remedies are designed not only to advance [the structural purposes of the Appointments Clause] directly, but also to create ‘[i]ncentive[s] to raise Appointments Clause challenges,’” Lucia slip op. 12 & n.5 (quoting Ryder, 515 U.S. at 183)).

In other news, Altair filed a motion for the lifting of the stay in regards to certain ERS bonds seeking adequate protection. As part of a deal, these bonds were partially paid out of reserves held by the Trustee bank but there will not be enough money for the August payment. In addition, the UCC filed a Motion “outlining the items that, in the Committee’s view, should be addressed at the July 25, 2018 Omnibus Hearing as part of the continuation of the court’s consideration of the Committee’s Renewed Motion Seeking Entry of Order, Under Bankruptcy Rule 2004, Authorizing Discovery With Respect to Certain Causes of Puerto Rico Financial Crisis Beginning On August 15, 2018.” The motion, which is heavily redacted, sets different areas that the Investigator’s report allegedly will not touch. It will interesting to see what Magistrate Judge Dein decides on these issues.

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 – July 2, 2018

Welcome to your weekly Title III update for July 2, 2018.

In a surprise move, Rob Bishop, Chairman of the House Committee on Natural Resources and architect of PROMESA, filed request of leave to file a brief of amicus curiae in the First Circuit in the Ambac Assurance appeal, 18-2118. With the request, Congressman Bishop filed the proposed amicus. Congressman Bishop stated that he “has an interest in ensuring that PROMESA is interpreted by this and other courts consistent with legislative intent.” The petition continues stating:

During the course of that argument [Peaje], Judge Kayatta requested that, “in cases going forward,” parties to proceedings concerning Puerto Rico’s restructuring put PROMESA “in context” and explain both how PROMESA operates and the differences between PROMESA and the Bankruptcy Code. Rep. Bishop possesses special knowledge of PROMESA and its legislative history, which, if allowed to be presented in an amicus curiae brief, is likely to assist the Court in both placing PROMESA “in context” and interpreting PROMESA consistent with legislative intent.

In the brief itself, Congressman Bishop lays out the Committee’s view of PROMESA in clear contrast to the views and actions of the Board, the Puerto Rico Government (Governor and Legislature) and even Judge Swain.

Congress determined that, along with providing access to restructuring support, the Commonwealth’s financial house must be placed in order to remedy the decades of financial mismanagement that led to the present crisis. Congress also required the Commonwealth to deal fairly with its existing creditors and respect their rights, to enable conditions by which Puerto Rico could reach access to credit at reasonable rates of interest in the capital markets. The purpose espoused in Section 101 governs all of PROMESA’s provisions. 48 U.S.C. § 2121(a).

The purpose espoused in Section 101 governs all of PROMESA’s provisions. PROMESA prioritizes consensual resolutions, makes a nonconsensual restructuring available only as a last resort, and provides that creditors’ rights must be protected during negotiations and any restructuring process.

The Brief continues explaining:

[T]he Committee included protections for creditors’ rights before, during and after a Title III case to ensure any nonconsensual restructuring would not be adverse to Puerto Rico’s future access to capital markets. During the pendency of a Title III proceeding, creditors’ rights are protected by key provisions of the bankruptcy code incorporated into Title III in Section 301(a), 48 U.S.C. § 2161(a). Specifically, 11 U.S.C. § 362(d)(1) permits the Title III court to lift the automatic stay to let creditors seek relief if their collateral is not adequately protected. Furthermore, 11 U.S.C. §§ 922 and 928, the “special revenue” provisions of Chapter 9 of the Bankruptcy Code, are intended to ensure that revenue streams pledged to bondholders continue to pay out during a Title III proceeding just as they would during a Chapter 9 bankruptcy by municipal debtors. Title III also contains creditor protections that apply at confirmation of a plan of adjustment, the means by which a debtor exits Title III. A plan of adjustment cannot be confirmed unless it complies with the applicable fiscal plan—which itself must respect lawful priorities and liens, as per Section 201.

This is clearly not what the Board has been doing. Congressman Bishop continued saying:

Testimony at hearings before the Committee in February 2016 reflected a need for Congress to make debt restructuring available for Puerto Rico only alongside a “long-term fiscal and economic authority” capable of addressing “comprehensively all of Puerto Rico’s issues.” The hearings further indicated that any authority created by federal legislation would need to be independent, free from island political influence, and empowered to oversee Puerto Rico’s fiscal and governmental activities, including the authority to enforce structural changes through budgets.

The legislation developed in response to these hearings was designed to instill fiscal discipline, restore legal order, uncover the fiscal data behind the island’s finances, return the island to the capital markets, and prohibit contagion effects into other municipal markets. The Committee agreed to provide Puerto Rico access to restructuring, conditioned by the inclusion of provisions to prioritize consensual negotiations, improve transparency on the island, preempt unilateral debt-related measures, and protect the best interests of creditors. If nonconsensual restructuring were to ultimately prove necessary, the legislation provided that it could occur only under clear federal mandates that would respect creditor interests and enable Puerto Rico’s future access to capital markets.

The theme of a Board free of Puerto Rico political influence and Title III as a last resort continues all through Congressman Bishop’s brief, which also stated:

However, the Committee rejected the notion that free access to bankruptcy would be helpful for the economic future of Puerto Rico. This rejection echoed a similar conclusion throughout Congress, as both the House and the Senate had ignored proposed legislation that would have simply allowed Puerto Rico access to bankruptcy protections under Chapter 9 of the Bankruptcy Code. . . As Mayor Anthony Williams recognized in his testimony before the Committee on April 13, 2016, nonconsensual “debt adjustment powers” were to be made available to the Oversight Board only “as a last resort.” Therefore, PROMESA mandated that bankruptcy proceedings under Title III be available only as a last resort if voluntary negotiations failed.

Again, the theme of bankruptcy as a last resort. Further on the brief:

Although the Oversight Board has steered debtors into Title III proceedings, Title III was created as a last resort, to be used in truly intractable cases after a lengthy negotiation period proved fruitless. To implement this, the Committee imposed several gating requirements on the Oversight Board to prohibit a rush into the Title III restructuring process and to ensure the Oversight Board would consistently and proactively engage with the creditor community. The Committee not only envisioned these gating requirements as substantial hurdles that would be overcome only by “truly unsustainable debt,” but also as mandated items that were intended to encourage dialogue between affected parties, promote transparency in financial data, and return Puerto Rico to the capital markets, before resort could be made to Title III.

Board members were appointed on August 30, 2016 but it was only in November 2016 that it stated that negotiations would start in December, which made no sense since a new government was coming in on January, 2017. Moreover, it was not until April of 2017 that bondholders met with the Board and representatives of the Commonwealth government. Also, not all creditors were included in these negotiations. Since the Commonwealth Title III was commenced in May of 2017, it is highly unlikely there were any good faith negotiations by the Board or the Governor. The brief continues by saying:

Another gating requirement under Section 206 focused on transparency. It mandated that the debtor entity have “adopted procedures necessary to deliver timely audited financial statements” and “made public draft financial statements and other information sufficient for any interested person to make an informed decision with respect to a possible restructuring.” The Committee required this gating mechanism to ensure the Oversight Board, and interested persons, including creditors, had access to enough financial information to “determine whether the entity actually needs restructuring.” The purpose of Section 206(a)(2) was to require the Oversight Board to implement transparency measures sufficient to support dialogue about the fate of an entity before beginning a Title III case.

To this day, the Puerto Rican government has not produced audited, GAAP compliant records of the Commonwealth’s financials, and the Board has taken a blind eye to this requirement that was mandated from Congress.  How then does a restructuring take place?  The Board is hoping everyone looks the other way.

Chairman Bishop brief continues:

Despite the clear intent and design of the gating provisions, the Oversight Board filed Title III cases for four debtors within one month of the expiration of the stay under Section 405, 48 U.S.C. § 2194. The Committee did not intend for the expiration of the stay to prompt the initiation of Title III cases; rather, the automatic stay was included to allow the Oversight Board ample time to establish itself under the statutory framework of PROMESA, and to initiate voluntary negotiations under Title VI. The Board’s haste to begin what was meant as a last resort has sown confusion in the lower court’s interpretation of PROMESA. PROMESA should be read and interpreted with the understanding that the Oversight Board (and the fiscal plans) were intended to operate for an extended period of time prior to any Title III proceedings—if, indeed, such proceedings ever needed to be  filed. (emphasis added)

Congressman Bishop has been very clear, I don’t think I need to add anything. His brief further states:

The Committee envisioned fiscal plans as governing documents that would “require Puerto Rico to balance its budgets, incorporate pro-growth reforms, and ensure legislative acts advance Puerto Rico towards the goal of fiscal responsibility and regaining access to the capital markets.”

Once a fiscal plan is in place for the Commonwealth or a territorial instrumentality, the entity must comply with it in its official acts. Section 202, 48 U.S.C. § 2142, requires that territorial and instrumentality budgets be consistent with the fiscal plan. Section 204, 48 U.S.C. § 2144, requires that all contracts, rules, regulations, and orders conform to the fiscal plan, and gives the Oversight Board extensive powers to ensure compliance. . . In short, the fiscal plan sets policy for the covered territory or territorial instrumentality at a sufficient level to ensure fiscal responsibility and restore access to capital markets. . . Rather, the fiscal plan is a negotiated document with economic and governmental consequences to which all budgets, laws, contracts, rules, regulations, and executive orders must conform for the duration of the Oversight Board’s mandate—in Title III or outside of it.

This is clear rebuke of the Puerto Rico legislature that has resisted many of the needed reforms the Board has advanced. More on this later. Also, Bishop envisions the Fiscal Plan surviving Title III discharge as a way of ensuring that the bad practices from the past are not repeated. Difficult to achieve in Puerto Rico. In addition, Chairman Bishop’s brief sstates something of critical importance regarding the review of the Fiscal Plan:

Accordingly, Congress imposed requirements on the development of the plans in Section 201(b) of PROMESA to further these objectives. The requirements of Section 201(b) are not optional. A fiscal plan “shall” include each of the delineated items. If the Title III court finds the approved fiscal plan fails to comply with the requirements of Section 201(b), then the court should direct the Oversight Board to revise such plan accordingly.

I confess I did a double take when I read this. Section 106(e) of PROMESA states that “[t]here shall be no jurisdiction in any United States district court to review challenges to the Oversight Board’s certification determinations under this Act.” I have long advanced that the Court would review the Fiscal Plan at the Plan of Adjustment stage, as per PROMESA 314(b)(7) and Judge Swain has stated in the Peaje opinion that she would do so.

Here, however, Chairman Bishop is going further and stating that she may order that the Fiscal Plan be changed to conform it to section 201(b)(1). Strong stuff. The Brief continues with the Fiscal Plan and states:

Section 201(b) was modified during the legislative process to ensure the lawful priorities and liens held by creditors would be respected. The initial introduced version of PROMESA, HR 4900, was silent on the hierarchy of creditor rights in respect to fiscal plans. Responding to concerns expressed by Committee members and the creditor community, the Committee wrote in two new provisions in the reintroduced version of PROMESA, H.R. 5278, which required fiscal plans to: 1) prohibit the unlawful transfer of assets, funds, or resources between instrumentalities, and 2) “respect 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.” These provisions were included to “ensure fiscal plans keep intact the structural hierarchy of prioritized debt.” These additions to Section 201(b), which were included in the final legislation, prevent the Oversight Board from altering or impairing lawful liens and priorities held by creditors when developing fiscal plans. Congress intended for fiscal plans to govern the Commonwealth and its instrumentalities for an extended period of time, and to apply mostly outside of Title III proceedings, so these creditor protections and other Section 201(b) requirements are not limited to Title III cases. (emphasis added)

Altering or impairing lawful liens and priorities held by creditors is all the Board has done in this case in the 2 years since they took their oath. One could argue that their intent is to eliminate creditor rights so that there be no liens and no priorities so it can decide, like a feudal lord with its serfs, who gets what and when. Again, strong stuff and a clear rebuke of the Board’s actions to date.  Surely, creditors will use this brief at the right time.

Next comes a rebuke on the Court’s opinions:

PROMESA incorporates 11 U.S.C. §§ 922 and 928, the “special revenue” provisions from Chapter 9 of the Bankruptcy Code. Because government entities typically cannot mortgage their assets to creditors, they instead offer revenue bonds—liens on ongoing streams of revenues like taxes, tolls, or fees. Several territorial instrumentalities in Puerto Rico, including the Highway & Transportation Authority (HTA) and the Puerto Rico Electric Power Authority (PREPA) have significant outstanding revenue bond debt. This debt is “non-recourse,” meaning that creditors cannot collect from any source other than the pledged revenues. Taken together, the special revenue provisions ensure that creditors’ liens on special revenues streams are not interrupted by the filing of a Title III case, exempting their claims from the automatic stay.

This is a clear rebuke to Judge Swain’s decision that sections 922 and 928 allowed a municipality to pay its bonds if it wanted but did not force it to pay. The muni community was appalled at the decision and some groups filed their own amicus briefs. Personally I believe the Court will reverse Judge Swain’s decision for further evidentiary hearings but this brief could change said decision.

The brief continues stating:

Once a Title III case proceeds to plan confirmation, PROMESA provides additional protections not found in Chapter 9 of the Bankruptcy Code. Upon the introduction of the first draft of PROMESA, the Committee heard testimony that Chapter 9 proceedings throughout the country had failed to respect creditor rights despite Chapter 9’s intent—a failure that had been recognized by at least one member of the Oversight Board. . . Second, Section 314(b)(6) requires that any plan be “in the best interests of creditors,” in light of the recovery creditors could reach through “available remedies under the non-bankruptcy laws and constitution of the territory.” Together these provisions ensure that the Title III process protects creditors’ rights and definitively precludes the confirmation of a plan that would result in an adverse result for creditors and hinder Puerto Rico’s return to the capital markets.

Clearly, the Brief is worried with the Board’s actions against bondholders, the Puerto Rico legislature’s flaunting of the Fiscal Plans and Judge Swain’s decisions. Judge Swain is protected by the Constitution from influence by the political branches, but not the Board or the Puerto Rico Legislature. The timing is clearly meant to influence the First Circuit – although its about 2 years late – so even if the First Circuit does not allow the amicus brief or simply ignores it, Congressman Bishop is the Chairman of the House Natural Resources Committee with jurisdiction over Puerto Rico.  Put another way, the Brief is quite simple, and if denied by the First Circuit, the Chairman could move to codify these points into law by amending PROMESA.

At the local level, the Puerto Rico Legislature ignored the Board’s newly certified Fiscal Plan, which is the Fiscal Plan it certified in April and approved a non-compliant budget.  This will force the Board to certify its own Fiscal Plan. Senate President Thomas Rivera Schatz has vowed to take this challenge to the Courts.

What will happen will depend on the different possible scenarios. Pursuant to section 202(e) of PROMESA, if the Legislature and governor do not provide a compliant budget, the Board may certify its own and send it to the governor. It will then become the Commonwealth’s budget as if it had been approved by the Legislature and signed by the governor. The latter, however, is the one called upon by the Constitution to execute the budget and this leaves Governor Rosselló with a political conundrum. Will he side with the Board and execute their budget, losing face with the Legislature? Will he side with the Legislature and enter into a fight he knows he cannot win? If the governor sides with the Board, will the Legislature go to Court as it has announced to enforce its budget? The first question would be if the Legislature has standing? I think it does based on Arizona State Legislature v. Arizona Independent Redistricting Commission, 576 U.S. __ (2015) if its argument is that the Board’s actions are interfering with its constitutional duties. This only means they can sue, since as I have stated before, section 106(e) of PROMESA deprives the Court of jurisdiction to review the Fiscal Plan. It could, however, argue that the Board’s actions are repugnant to the Federal Constitution, which arguments Judge Swain has rightly decided she can hear. I can’t think of any arguments that would hold water but we will see some effort. When, I do not know and will depend on the Governor’s actions.

Oh, and not to be lost on anyone, the Board claims that failure to enact Law 80 will now result in $25 billion less for bondholders.  Theoretically, that should then negatively affect the Board’s support for the Commonwealth-Cofina Agent’s agreement, if the forecast is actually accurate.

Stay tuned.

Not much happened in the cases but AAFAF requested that Adversary Proceeding 18-0059, Assured Guarantee, Corp. v. Commonwealth, be stayed pending the Ambac appeal. Let’s see what the Court decides.

June 29 was the last date for the Proofs of Claims to be filed and in the afternoon, the Prime Clerk website collapsed. Judge Swain was promptly informed but her answer was to tell filers that they could file in ECF. Problem is that those Prime Clerk users where individuals who could not or did not want to hire an attorney to do the filing. I assume the Board will allow some leeway since many of those who wanted to file, employees and retirees, did not have to file.

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 – June 25, 2018

Welcome to your weekly Title III update for June 25, 2018. Not much happened this week in the case or outside the case.

As I said, not much happened but the controversies that developed centered on a request that at first seemed so innocuous, so I decided not to include it in last week’s report.

On June 14, 2018, the UCC filed an Urgent Motion, Pursuant To Bankruptcy Code Section 105(A) and Bankruptcy Rule 9019, for the Order Establishing Procedures Governing 5.5% SUT Revenues Collected on or after July 1, 2018. The specific relief requested was:

In particular, by this Urgent Motion, the Commonwealth Agent requests entry of the Proposed Order, establishing the following procedures governing the Post-July 1, 2018 Funds:

(a) BONY shall separately account for (i) all 5.5% SUT revenues currently in BONY accounts or received on or before June 30, 2018 (i.e., the Pre-July 1 2018 Funds) and (ii) all 5.5% SUT revenues received by BONY on or after July 1, 2018 (i.e., the Post-July 1, 2018 Funds), so as to ensure that the two pools of funds (and proceeds from investment of such funds) are clearly identifiable;

(b) Upon the effective date of the settlement, the Post-July 1, 2018 Funds shall be allocated and released to the Commonwealth and COFINA in accordance with the percentage shares of the PSTBA set forth in the settlement agreement (i.e., 53.65% for COFINA, which would be the first dollars of the 5.5% SUT, and 46.35% for the Commonwealth) (as it may be modified by a settlement agreement or order of this court, including an order confirming a plan of adjustment for COFINA or an order authorizing such settlement agreement pursuant to Rule 9019 in the Commonwealth’s Title III case); and

(c) In the event that either (x) the Agents do not execute a settlement agreement by August 4, 2018 or (y) the effective date of COFINA’s Title III plan of adjustment approving and incorporating the settlement does not occur within 200 days after the Commonwealth Agent and the COFINA Agent have executed the settlement agreement (as such deadlines may be extended pursuant to the terms of the Agreement in Principle), then the court’s eventual ruling on the ownership of 5.5% SUT not yet collected by the Commonwealth (as of June 30, 2018) shall govern the disposition of the Post-July 1, 2018 Funds (it being understood that neither party is waiving any appellate rights with respect to such determination).

At first glance, this seems like a fairly straightforward way of clarifying how the post July 1 COFINA funds would be distributed in case the settlement is approved.. The ensuing motions, however, show a more profound problem. AAFAF responded and said:

AAFAF does not object to the relief sought in the Urgent Motion, provided that the Proposed Order fully reflects the narrow scope of the relief sought and AAFAF and the Government of Puerto Rico’s (the “Government”) full reservation of all of their rights.

First, and foremost, it is imperative that the Government’s sovereignty and rights to control its instrumentalities not be affected by granting the relief sought in the Urgent Motion. PROMESA section 303 protects the Government’s political and governmental power over itself and its territorial instrumentalities, including COFINA. Those rights should remain exactly as they currently exist. The Commonwealth and AAFAF expressly reserve those rights, including, but not limited to, the exercise of those rights in relation to COFINA, its structure, and the treatment and handling of SUT revenue, as well as the right to oppose or seek modification of the Agreement in Principle or the settlement described therein.

Second, it must be made clear that nothing in the Proposed Order affects in any way the treatment of—including but not limited to collection, deposit, and distribution—the 5.5% SUT collected after the PSTBA is fulfilled in each Fiscal Year, starting with Fiscal Year 2019, beginning on July 1, 2018, and going forward. Those Commonwealth funds are wholly outside the reach of the Commonwealth-COFINA Dispute

Third, it must be clarified that entry of the Proposed Order does not constitute a breach of the COFINA Amended and Restated Sales Tax Revenue Bond Resolution adopted on July 13, 2007, as amended on June 10, 2009.

Fourth, the expeditious resolution of the Commonwealth-COFINA Dispute continues to be of paramount importance to the Government because there is an urgent need to determine whether the Commonwealth or COFINA owns the PSTBA. The Court has already given the Agents until August 4, 2018, to finalize a settlement and the procedural concerns raised in the Urgent Motion should not be used to unreasonably delay the resolution of the Dispute. Thus, the parties in interest must be able to object to any extension of time and to move to modify or terminate the Proposed Order.

Lastly, the Commonwealth-COFINA Dispute only concerns the ownership of the PSTBA and will not resolve issues antecedent to the question of ownership. Accordingly, the Proposed Order should make clear that the Court’s eventual ruling on the ownership of the Post-July 1, 2018 Funds is subject to the resolution of any rights, claims and counterclaims to the disposition of those funds that are antecedent to the ownership question.

Two important things come from this filing. First, AAFAF wants to complete the settlement by August 4, 2018 and may very well object to any extension to this date, meaning that it better be included in the settlement negotiations. Second, even if the settlement is reached, it wants “the resolution of any rights, claims and counterclaims to the disposition of those funds that are antecedent to the ownership question.” Hence, the settlement will not end the Commonwealth-COFINA dispute.

The COFINA Senior Stakeholders took umbrage of AAFAF’s motion and filed a response in support of the UCC motion stating:

However, in light of the response to the Account Motion filed by the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF” and its response, the “AAFAF Response”) (Dkt. 501), the COFINA Senior Stakeholders wish to bring the following points to the Court’s attention: (1) the Commonwealth’s sovereign immunity in the form of control over “COFINA, its structure, and the treatment and handling of SUT revenue” ceased to be “unfettered” upon voluntary issuance of COFINA bonds with a grant of property rights and a non-impairment covenant made for the benefit of COFINA and its bondholders consistent with the U.S. and Puerto Rico constitutions; (2) the alleged reservation of sovereign power was waived by the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), as the representative of COFINA in the title III case, pursuant to the Protocol to the extent necessary to achieve the Agent-led framework; (3) the Court explicitly expanded the authority of the Agents, with the consent of the Oversight Board, for settlement purposes to encompass the final resolution of all claims against or entitlements to COFINA property; (4) the Agreement in Principle contemplates a global settlement of all claims, including claims by COFINA Bondholders against the Commonwealth and AAFAF arising under the U.S. and Puerto Rico constitutions for the impairment of contracts and taking of property—issues clearly within the expanded settlement authority; and (5) AAFAF’s request for an order declaring that no breach of the COFINA bond resolution occurs by virtue of the Account Motion was not part of the Commonwealth Agent’s request, is not properly before this Court, and is in any event beyond the scope of the claims asserted in the Commonwealth-COFINA Dispute.

First, AAFAF is not the proper party to file a response on behalf of the Commonwealth to the Account Motion. Section 315 of PROMESA makes clear that the Oversight Board is each Debtor’s representative in these title III cases. PROMESA § 315 (“The Oversight Board in a case under this title is the representative of the debtor.”). The Oversight Board consented to the Court’s jurisdiction over the authority delegated to the Agents in the Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute, Case No. 17-3283-LTS (Dkt. 996) (the “Protocol”), thereby waiving its and the Commonwealth’s rights under Section 305 of PROMESA to challenge that jurisdiction now. See Protocol ¶ 2 (“Solely to the extent, if any, that section 305 of PROMESA serves as a limitation on judicial power over the authority delegated to the Agents, the Oversight Board hereby consents.”). By its response, AAFAF now seeks to encroach upon the authority that Congress granted to the Oversight Board under PROMESA, and insert itself into a dispute for which Congress granted it no authority. Simply put, AAFAF’s right to be heard in the Commonwealth-COFINA Dispute does not empower it with the ability to infringe upon the Agents’ responsibilities under the Protocol or the Oversight Board’s powers under PROMESA. Consequently, to the extent AAFAF seeks to limit the Court’s jurisdiction over the Agents’ disposition of COFINA property in a manner inconsistent with the authority delegated to the Agents as part of a negotiated settlement, that power has been waived.

Second, AAFAF incorrectly asserts that “the Commonwealth-COFINA Dispute only concerns the ownership of the PSTBA and will not resolve issues antecedent to the question of ownership.” AAFAF Response at 4. This assertion completely ignores the Court’s express expansion of the Agents’ authority to mediate and settle all of the “causes of action, claims and counterclaims” that the Court had previously dismissed as out-of-scope. See Order Granting Joint Urgent Motion of the Financial Oversight and Management Board for Puerto Rico, the Commonwealth Agent, and the COFINA Agent for an Order Expanding for Mediation Purposes Only Authority and Immunity Protections (the “Expanded Immunity Order”) (Dkt. 284). Prior to granting the Expanded Immunity Order, the Court heard AAFAF’s objection to that motion (Dkt. 279), based on the same arguments it now makes in the AAFAF Response, and overruled the objection. See Expanded Immunity Order at 6-7 (“PROMESA’s statutory structure thus provides that the Oversight Board, when exercising authority granted to it by PROMESA, is acting as a Commonwealth governmental authority. . . . AAFAF’s objections to the Motion are therefore overruled.”). AAFAF cannot now seek to collaterally attack the Expanded Immunity Order or otherwise narrow the scope of the Agents’ settlement authority.

Third, any concerns regarding the infringement of AAFAF’s sovereignty over COFINA and the SUT are misplaced. The Agreement in Principle contemplates a global settlement of all claims relating to COFINA, including any potential claims against the Commonwealth for exercising its “sovereignty” in violation of, inter alia, the constitutions of the United States and Puerto Rico. There is no violation of sovereignty in settling a dispute regarding the ownership of property and then preventing the government from violating attendant constitutional private rights arising from that settlement to be approved by a federal court.

Finally, AAFAF’s inclusion of purported “clarifying” language as to the Agreement in Principle’s impact on the COFINA bond resolution is procedurally and substantively improper. AAFAF is not party to the Agreement in Principle and therefore has no standing to seek “clarification” of someone else’s intentions. Moreover, the issue of whether the manner in which revenues pledged to COFINA bondholders are being held at BNYM constitutes a breach of the COFINA bond resolution is an intra-COFINA creditor issue that is entirely outside the scope of the Commonwealth-COFINA Dispute. As the Court is aware, these issues have already been thoroughly briefed in a different adversary proceeding before this Court. (emphasis supplied)

Bettina Whyte supported the UCC’s motion and also objected to AAFAF’s motion

It is inappropriate to pre-litigate objections that AAFAF believes it may have to the proposed settlement prior to its final documentation and the submission of a COFINA plan of adjustment that incorporates that settlement as contemplated by the Stipulation and Order. See AAFAF’s Response to the Commonwealth Agent’s Urgent Motion, Pursuant to Bankruptcy Code Section 105(a) and Bankruptcy Rule 9019, for Order Establishing Procedures Governing 5.5% SUT Revenues Collected on or After July 1, 2018 [Adv. Pro. Dkt. No. 501]. The Commonwealth Agent’s Motion only seeks an order dealing with the narrow issue of the procedures for handling post-July 1, 2018 SUT collections pending the parties’ final documentation of the proposed settlement and the Court’s consideration of the plan of adjustment to be submitted pursuant thereto, and the Court should not consider AAFAF’s procedurally improper attempt to seek declaratory relief on other aspects of the Agreement in Principle.

AAFAF was quick to respond to its critics and filed a sur-reply to the COFINA Seniors:

First, the Stakeholders incorrectly assert that AAFAF’s Response encroaches on the Oversight Board’s powers under PROMESA. See Stakeholders’ Response at 3. Not so. AAFAF’s Response requests only that AAFAF’s and the elected Government’s “rights [under PROMESA] should remain exactly as they currently exist.” AAFAF’s Response at 3. This is wholly consistent with the Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute (the “Stipulation and Order”) [Case No. 17-03283, Dkt. No. 996], which expressly reserves AAFAF’s and the Government’s rights and powers under PROMSEA section 303. Stipulation and Order ¶¶ 4.g, 11.

  1. Further, the Stipulation and Order clearly provides that the Government, through AAFAF, has a right to participate in the settlement process:

To the extent it is necessary or desirable to link a settlement to the treatment of creditors’ claims in a title III plan of adjustment, the Oversight Board and AAFAF may participate in the negotiations and Mediation in an effort to reach such a settlement, . . . . . [and] [a]ll parties in interest, including the Oversight Board and AAFAF, may appear and be heard with respect to any proposed settlement; provided, however, that neither the Oversight Board nor AAFAF shall have any right to contest any judgment made by the Agents pursuant to subparagraph f. Stipulation and Order ¶¶ 4.h and k. Far from seeking to expand the Government’s rights, or in any way “encroach upon” the Oversight Board’s authority, AAFAF’s Response requests the preservation and reservation of rights the Court has already recognized. (emphasis supplied)

  1. Second, the Stakeholders mistakenly claim that in requesting confirmation that “the Commonwealth-COFINA Dispute only concerns the ownership of the PSTBA and will not resolve issues [separate from] the question of ownership,” AAFAF is attempting a collateral attack on the Court’s prior order expanding the Agents’ authority to negotiate a settlement. Stakeholders’ Response at 4, quoting AAFAF’s Response at 4. But AAFAF’s request has nothing to do with settlement negotiations. Rather, it simply seeks confirmation of the Dispute’s scope in the event that the settlement process fails, in which case the Agents’ expanded authority to mediate and settle the Dispute is inapplicable. Because AAFAF’s request for clarification concerns a situation that will only arise if the Agreement in Principle is not consummated, it cannot possibly “attack the Expanded Immunity Order or otherwise narrow the scope of the Agents’ settlement authority.” Stakeholders’ Response at 4 (emphasis added). Indeed, far from prejudicing the Stakeholders, AAFAF’s request sought to protect rights, claims, and counterclaims of all the interested parties, including the Stakeholders.

6.Third, the Stakeholders again miss the point in asserting that AAFAF’s “concerns regarding infringement of [its] sovereignty over COFINA and the SUT are misplaced” because neither a court-approved settlement, nor the Court’s enforcement of constitutional private rights will violate its sovereignty. Stakeholders’ Response at 5. The Urgent Motion only seeks to put in place interim procedures pending the settlement of the Commonwealth-COFINA Dispute or the Court’s eventual ruling in the litigation. See Urgent Motion at 1-5. As previously stated, AAFAF filed its Response and Proposed Order to provide clarifications ensuring—among other things—that its rights under PROMESA were not prejudiced or waived by the interim relief sought. The scope and legitimacy of the proposed settlement are not at issue here. Indeed, both the Commonwealth Agent’s and AAFAF’s respective Proposed Orders reserve the rights of the parties in interest to “oppose the settlement described in the Agreement in Principle” or “object to entry of any order implementing the settlement . . .” Commonwealth Agent Proposed Order ¶ 8; AAFAF Proposed Order ¶ 11.

  1. Fourth, and finally, the Stakeholders wrongly assert that AAFAF “has no standing to seek ‘clarification’” regarding “the Agreement in Principle’s impact on the COFINA bond resolution.” Stakeholders’ Response at 5. This assertion is directly contradicted by the Stipulation and Order, which, as noted above, gives AAFAF standing to appear, participate, and be heard in regard to the settlement process. Stipulation and Order ¶¶ 4.h and k. Paragraphs 4.h and k were ordered by the Court and agreed to by the Stakeholders.4 Further, the Court has held that AAFAF has standing to be heard with regard to the Commonwealth-COFINA Dispute. See Order Approving COFINA Agent’s Motion Pursuant to 48 U.S.C. § 2161 and 11 U.S.C. § 105(a) for Order: (I) Confirming that 48 U.S.C. § 2125 Applies to COFINA Agent; (II) Confirming Retention of Local Counsel; and (III) Clarifying Payment of Fees and Expenses of COFINA Agent and Her Professionals [Case No. 17-03283, Dkt. No. 1612] (“Section 105 Order”) at 2 (finding that AAFAF had “standing to be heard”).

8. AAFAF’s request for clarification that entry of an interim order will not constitute a breach of the COFINA bond resolution is also consistent with the Section 105 Order. That order expressly addressed the issue of a court order potentially breaching the COFINA bond resolution. See id. at 4 (“provided, however, that any payment of the Agent/Professional Fees . . . from the COFINA Custody Account . . . at Banco Popular shall not be deemed to be a breach of any of the relevant COFINA bond resolutions or provision of Puerto Rico law.”). Thus, AAFAF has standing to make its request for clarification, and the Court has jurisdiction to clarify the interim order’s impact on the COFINA bond resolution.

The GO Group supported the UCC’s motion but stated:

The GO Group’s joinder in the Motion does not change the GO Group’s position on the Agents’ agreement in principle as currently drafted. As explained in the GO Group’s response to the motion to hold summary judgment in abeyance (No. 17-257-LTS Dkt. 488), the agreement in principle is fatally flawed, and the GO Group expects to work constructively with all parties in interest during the abeyance period to fix the agreement’s flaws in an effort to achieve a consensual resolution. Without adjustments to remedy those flaws, however, a settlement based on the Agents’ agreement in principle cannot and should not be approved.

In its Omnibus motion to reply to oppositions, the UCC discussed AAFAF’s requested language and stated:

Notwithstanding the Commonwealth Agent’s acknowledgement that AAFAF’s rights (if any) should be (and are) preserved, it is at least questionable whether the specific rights AAFAF seeks to “preserve” here are rights that AAFAF actually possesses under the Stipulation. Accordingly, the Commonwealth Agent cannot agree to the language proposed by AAFAF in its revised proposed order 24 as the scope of AAFAF’s (and any other party’s) rights under the Stipulation should not be litigated in the context of the Urgent Motion.

  1. Specifically, AAFAF asserts that the sovereign rights it seeks to “preserve” in connection with section 303 of PROMESA include rights over the “structure” of COFINA, the “treatment and handling of SUT revenue,” and the right to “seek modification of” the Agreement in Principle. Whether the Stipulation grants AAFAF such rights is questionable, given that the Stipulation (i) includes an express waiver of the sovereign protections of section 305 of PROMESA and (ii) is clear that negotiation of a settlement is left to the Agents, and will be “effective upon” the Commonwealth upon the satisfaction of certain conditions, none of which require the Commonwealth or AAFAF’s consent, and, in fact, expressly prohibits AAFAF from “contest[ing] any judgment made by the Agents pursuant to subparagraph f.”

16. Stated otherwise, AAFAF’s rights regarding the Commonwealth-COFINA Dispute and the Agreement in Principle are set forth in the Stipulation and are neither impaired nor affected by the Urgent Motion. Determination of the exact extent of AAFAF’s rights (or any other party’s rights) under the Stipulation are not the subject of the Urgent Motion—which expressly leaves all such rights undisturbed—and can be determined (if necessary) at a later time. Moreover, AAFAF’s request that the order state that it does not affect any SUT revenues collected after the PSTBA is first reached for each fiscal year is unnecessary, as the Revised Proposed Order already clarifies that it does not affect “the collection, transfer, or deposit of SUT revenues that are not deposited with BONY.” (emphasis added)

17. Separate from its demand for a reservation of rights, AAFAF also states that it does not object to the Urgent Motion “provided that the Proposed Order fully reflects the narrow scope of the relief sought.” While benign in theory, AAFAF’s formulation of the narrow scope of the Urgent Motion is not only beyond the scope of the relief sought in the Urgent Motion, it actually would inappropriately expand the scope of the Commonwealth-COFINA Dispute. In particular, AAFAF demands that any order granting the Urgent Motion make clear that its entry does not constitute a breach of the COFINA Amended and Restated Sales Tax Revenue Bond Resolution adopted on July 13, 2007. However, the question of what is a breach of the COFINA resolution is a purely intra-COFINA creditor dispute not properly before the court in this adversary proceeding. As the court knows well, the question of whether there has been a breach of the COFINA resolution is the subject of the interpleader action commenced by BONY separately pending before the court, in which neither of the Agents is a party.

18. Finally, AAFAF states that “the Commonwealth-COFINA Dispute only concerns the ownership of the PSTBA and will not resolve issues antecedent to the question of ownership,” and demands that any order granting the Urgent Motion clarify that any ruling on ownership of the SUT revenues is subject to these “antecedent” issues. The question of exactly what issues are within the “scope” of the Stipulation and can be settled by the Agents is already the subject of multiple court orders; it is wholly inappropriate to use the Urgent Motion to relitigate these issues, and the court should therefore reject AAFAF’s requested language (which is, in any event, ambiguous). Moreover, the Revised Proposed Order now clarifies that the court’s ruling will only determine the ownership issues as between the Commonwealth and COFINA (in contrast to the relationship between COFINA and its creditors), which should more than address the AAFAF’s concern. (emphasis supplied)

From this discussion, it is obvious that the Commonwealth and the GO’s want to participate in the settlement discussions but neither Bettina Whyte nor the UCC want them there. That is why the new proposed order states that the ownership issues of the Court ruling will only be about ownership issues between the Commonwealth and COFINA, which leaves the GO’s out, as well as AAFAF, since the UCC has been designated by the Board as its representative.

In essence, the UCC, COFINA Agent and COFINA bondholders want to make a deal only between them. A deal that cannot be challenged by the Commonwealth or the GO bondholders. That however, will not happen since these two parties have been very clear they want to participate and if their objections are not addressed, they will object to the settlement. Judge Swain will likely look askance at a settlement pertaining to the SUT that does not include the Commonwealth or the GO’s. This will only delay the filing of the Plan of Adjustment for COFINA and the Commonwealth. And, the clock is ticking.

The Bank of New York Mellon, the COFINA trustee, also objected to the UCC’s motion, “on the basis that the Proposed Order does not preserve the status quo but instead alters it in favor of the Commonwealth.” The UCC replied:

As explained in the Urgent Motion, it is possible that, if the settlement were to fail, the court eventually could issue a “split ruling” on the merits of the Commonwealth-COFINA Dispute, pursuant to which the Commonwealth would be held to own all future SUT revenues, but COFINA would be held to own SUT revenues already deposited in the BONY  accounts. A confluence of factors — the possibility of such a “split ruling,” the upcoming resumption on July 1, 2018 of the deposit of SUT revenues into accounts with BONY, and the Abeyance Order — means that the mere passage of time could inequitably improve COFINA’s position. Thus, in the event of a “split ruling,” the daily collection and transfer of SUT would cause the steady erosion of the Commonwealth’s position beginning on July 1, 2018, and the simultaneous and corresponding improvement of COFINA’s position.

In addition, the Mellon Bank requested intervention in the Commonwealth-COFINA dispute and, surprise, surprise, the UCC objected, except to a very limited aspect, to wit:

Notwithstanding its focus on BONY’s asserted need to protect the (alleged)

interests of an amorphous group of “Beneficial Holders” (which need, as described above, is illusory), the BONY Intervention Motion (and the Proposed BONY Objection) also identifies a few procedural matters that are applicable solely to BONY:

 BONY asserts an interest in ensuring that any order granting the Urgent Motion clarifies that BONY will not be liable for complying with such order;

BONY asserts a right to be heard with regard to the specific procedures to be put in place by an order granting the Urgent Motion, to ensure that such procedures are not unduly burdensome to BONY; and

 BONY asserts a right to payment from SUT revenues it holds for its fees and expenses and indemnification that has priority over all payments to COFINA bondholders.

The Commonwealth Agent acknowledges that BONY’s interests with respect to these limited issues are not adequately represented by the existing parties, and has no objection to BONY being heard on these limited issues.8 However, the Commonwealth Agent believes that the modifications reflected in the Revised Proposed Order should fully address BONY’s concerns.

The Puerto Rico Senate officially refused to repeal Law 80 and the insult filled exchange between its President, Thomas Rivera Schatz, and the Governor, was epic. Seems to me that Rivera Schatz is betting the Board will not impose draconian budget cuts and even if it does, he has said he will go to Court. Representative Luis Vega Ramos has publicly stated that if the Board does not respect Puerto Rico’s budget, he will also go to go to Court. Even if they lose, which they probably will, they can claim they are the true leaders of the opposition to PROMESA and the Board. Again, this type of litigation will only delay the filing of the Plan of Adjustment to the detriment of the People of Puerto Rico. Let’s see what happens.

Other developments far from Puerto Rico will have an impact on PROMESA. On June 21, 2018, the Supreme Court of the United States decided the case of Lucia v. Securities and Exchange Commission. In it, the Court determined that the ALJ of the SEC wielded substantial power based on federal statutes and therefore were subject to the Appointments Clause of the US Constitution. This is precisely the question presented to Judge Swain in by Aurelius and Utier. The oral arguments were on January 10, 2018 but Judge Swain has not ruled yet. It would seem the Judge really does not want to rule on it since it could derail the whole PROMESA proceedings. However, with the ruling by SCOTUS, how much longer can Judge Swain hold off from addressing the question before the Court?  We already know what parties will do next regardless of her ruling.

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.

Hearing on UCC Document Request

On June 18, 2018, Magistrate Judge Dein presided over a hearing regarding a request by the UCC on documents currently held by the Oversight Board and their independent investigator, Kobre & Kim.  AAFAF informed that it had handed over all of the GDB’s non-privileged documents to the court and that by Wednesday a privileged log would be made public barring any problem in signing the Non-Disclosure Agreement with the UCC.

Kobre & Kim stated that it had shared the term searches with the UCC used with Banco Santander, Banco Popular Puerto Rico and the GDB. All third parties have denied the investigator the permission to share the documents with the UCC. Hence, it has not shared with the UCC search terms or identity of document custodians.

Kobre & Kim said that it wants to deposit all documents in a room and then have any interested party petition to see them. Those who oppose this, will have the right to do so. The Board’s investigator will file his exit plan by July 3 but before doing so they will meet and consult with the UCC and the Retiree Committee, and reaffirmed the report will be complete by August 15.

The UCC explained that Kobre & Kim had only shared the documents it was provided. In the case of the GDB, certain search terms resulted in over 100,000 documents, but decided to have copies total slightly over 5,000 pages. Judge Dein said she did not want the UCC reviewing those documents given the volume. The UCC said the parties would work something out. The UCC also claimed that the GDB waived its privilege when it gave the Board’s investigator the documents.

Moreover, and interestingly, the UCC said that the stumbling block on the NDA was AAFAF’s claim that it wanted to retain those documents that could cause harm to elected officials.

At this time, AAFAF insisted that there were no documents that fell into that category but that it would be appropriate to have the fiscal agency prove its right to do so if the issue was raised. Judge Dein, quite correctly, said she was not going to rule on documents that did not exist.  She further noted she will reserve this right in the NDA if the documents do come up then she will give her ruling. AAFAF also raised the issue that many of the documents that were produced to the Board pursuant to PROMESA section 104(c) were documents pursuant to a particular federal law, which the UCC did not necessarily have access to, since the power of the Board to get the documents was broader than a subpoena.

The issue of AAFAF claiming a right to reserve documents that could cause harm to elected officials flies in the face of all of Puerto Rico’s case law regarding the public’s access to government documents. It behooves the mind to hear this and makes you wonder what AAFAF is hiding. Maybe AAFAF is protecting 3 board members – Caco Garcia, Jose Ramon Gonzalez and Jose Carrion – and Mr. Portela himself, all of which have tricky connections to the debt. I can’t see how, if AAFAF claims to do this, the Court would allow it. Guess we will have to wait and see.

As to the Board’s power under section 104(c)(2), which is the one applicable to the Government of Puerto Rico, it states:

OBTAINING OFFICIAL DATA.—

FROM TERRITORIAL GOVERNMENT.—

Notwithstanding any other provision of law, the Oversight Board shall have the right to secure copies, whether written or electronic, of such records, documents, information, data, or metadata from the territorial government necessary to enable the Oversight Board to carry out its responsibilities under this Act. At the request of the Oversight Board, the Oversight Board shall be granted direct access to such information systems, records, documents, information, or data as will enable the Oversight Board to carry out its responsibilities under this Act. The head of the entity of the territorial government responsible shall provide the Oversight Board with such information and assistance (including granting the Oversight Board direct access to automated or other information systems) as the Oversight Board requires under this paragraph.

Does this mean that the Government of Puerto Rico could not invoke any privilege against the Board? Was any privilege invoked against the Board? Questions, questions. In fairness, AAFAF does have a point, depending on how these questions are answered. Again, we need to wait and see what happens.

Monday Update – June 18, 2018

Welcome to your weekly Title III update for June 18, 2018. Not much happened this week in the case or outside the case.

In the issue of the UCC’s request for discovery on the causes of the debt crises, the Board filed a report by the investigator. The report states, inter alia:

The Final Report will provide a comprehensive discussion of claims and avenues for recovery. Parties in interest or members of the public may review the Final Report and determine that they require access to documents that have been collected by the Independent Investigator. Accordingly, in advance of publishing its Final Report, the Independent Investigator will seek court approval for procedures governing the storage of, and access to, documents collected during the Investigation, all of which will be placed into a secure document depository for the future use of various stakeholders. . .

 The Independent Investigator anticipates filing a motion for approval of these proposed procedures concerning the documents on or before July 3, 2018, so that it may be heard before the end of July 2018. The filing of this motion will precede the publication of the Final Report, in part, because the motion will also seek to establish procedures for resolving any confidentiality disputes that arise in connection with the publication of the Final Report. As noted, various producing witnesses have entered into confidentiality agreements with the Independent Investigator. Although these agreements generally provide the Independent Investigator with broad discretion to disclose a witness’s confidential information if doing so is in the public interest or necessary to enable the Independent Investigator to fulfill its obligations under PROMESA, witnesses will generally be provided with advance notice of the disclosure of their confidential information, and they may elect to seek a protective order or similar relief prior to such disclosure. The document procedures will seek to funnel any such disputes to a single forum that will apply a uniform set of dispute resolution procedures.

This means that the Investigator will have the report ready by August 2018, with avenues for recovery of claims. If true, the Board would then have to evaluate the “avenues” and make a determination of whether it will pursue these “avenues.” Even without reviewing the documentation and witness testimony, I find it difficult to evaluate whether such “avenues” are promising. Hence, the Board would need to seek permission from the Court to review the documents and witnesses to make sure the “avenues” are, in fact, viable. Then and only then, would the Board be able to pursue said “avenues.”

This time frame is important as 11 U.S.C. § 546(1)(A) limits the time for the trustee – in this case the Board – to seek avoidance of transactions, etc., to 2 years from the date of the filing of the petition, which in the case of the Commonwealth, would be May 2019. Moreover, the Board may decide not to pursue a particular cause of action, but pursuant to 11 U.S.C. § 926(a):[i]f the debtor refuses to pursue a cause of action under section 544545547548549(a), or 550 of this title, then on request of a creditor, the court may appoint a trustee to pursue such cause of action.”This means even more delays, which has always been the UCC’s point in seeking to commence its investigation. This will undoubtedly come up in the June 18, 2018 hearing with Magistrate Judge Dein.

The Board is playing legal games, so if the UCC is serious about conducting an investigation, it will have to consider what additional “avenues” are available to it.

The Puerto Rico legislature finally approved the “Bill to Transform the Puerto Rico Electric System.” It is only in Spanish at this time. Although it has yet to be signed by Governor Rosselló, there is no indication he will not. The bill, however, is definitely not what we expected.

You may remember Bruce Walker, Department of Energy Undersecretary, saying his department had paid the Southern States Energy Board “in association with DOE, is working in coordination with the governor and legislature of Puerto Rico to establish a reliable, affordable, and sustainable electric energy grid system, and to develop a policy and legal framework to provide a regulatory process for possible privatization efforts.” This aspect of the sale was totally ignored by the bill, which only talks about the Southern States Energy Board and the Department of Energy helping with the evaluation of public policy on energy and a regulatory framework necessary for the transformation of PREPA. Moreover, this is contrary to what the Board told Senator Murkowski in a letter in May:

As the representative of PREPA in the Title III court proceedings, the Oversight Board leads the negotiations to restructure PREPA’s legacy obligations, such as debt and unfunded pension. The Oversight Board also plays an integral role in the process to transform PREPA into a modern electric utility that provides low-cost, reliable energy because any transaction to effectuate that transformation will have to be approved by the Title III court as part of PREPA’s plan of adjustment to emerge from Title III. The Oversight Board has retained Citigroup Global Markets, Inc. as the financial advisor, representing both the Oversight Board and the Government, on any potential transformation transactions. Among other things, Citi intends to conduct a broad market sounding exercise to gauge interest level in participating in any potential such transformation transactions that could entail a long-term concession for the transmission and distribution system and the potential sale of generation assets. This market sounding will help shape the RFQ and RFP process that will be conducted pursuant to the amended P3 legislation that is currently being debated in the Puerto Rico Legislature.

It is difficult to reconcile the bill with these statements, especially if you consider that it does not mention the role of the Oversight Board. Further, the bill puts the Public Private Authority Commission in charge of the sale. In addition, the bill requires ratification of the legislature for any sale of the generation. Moreover, the bill requires that to any extent possible, the proceeds of the sale go to the PREPA retirement system and specifies that “the system cannot be suspended by this law or by any transaction it authorizes. The Retirement System can be defined by subsequent legislation.” Unions will not be happy with this.

The bill also states that “[t]he energy public policy and the regulatory framework must be approved by the Legislative Assembly in a period that must not exceed one hundred eighty (180) days since the approval of this law.” During this period, no contract for the sale of PREPA will be finalized. The problem with this is that how can anyone agree to buy a part of PREPA if it does not know the “the energy public policy and the regulatory framework?”  Moreover, PREPA has not completed its integrated resources plan, which the new buyer has to comply with. This will delay any sale – hence the PREPA Plan of Adjustment.

One can easily see that a conflict with the Board will rise. More litigation and expenses while the Board still lords over Puerto Rico. Oh, well.

Finally, the House of Representatives approved another version of the repeal of Law 80 but the Senate president said he does not agree with its changes. Normally, this would go to a Conference Committee that would iron out any discrepancies.  However, the budget, which must be approved by June 30, is dependent on its repeal. If not, the Board will reinstate the previously approved Fiscal Plan with deep cuts on the budget including the elimination of Christmas bonuses. A total mess.

The entire Law 80 debacle has exposed a deeper flaw: the Fiscal Plan and economic assumptions associated with it can be adjusted at the whim by the Board. On one hand, you remove Law 80, and the economy will create thousands of jobs, but the surplus goes down. On the other hand, if Law 80 isn’t repealed, the budget cannot be approved without eliminating the Christmas bonus. This fuzzy math doesn’t add up.  The Board is in a pickle.  Expect creditors to raise these concerns during the Plan of Adjustment. Remember, they now have access to Mr. Wolfe’s data.

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.

Making Sense of the Commonwealth and COFINA Agent’s Agreement

Over the last few days there has been a lot of reporting on the Commonwealth -COFINA Agent Agreement, but not much of it was substantive.  Is this return fire from the Agent’s following the GO-COFINA global settlement?  Every step made from here, both in and out of the court, will have huge implications for the case. Here, I attempt to break down the agreement, examine key questions, and look at the road ahead.

First, it might help just to clarify who the Agents exactly are and who they represent.  The Agent for the Commonwealth is actually the Unsecured Creditors Committee (UCC).  The Agent for COFINA is not the COFINA creditors (comprised of COFINA Seniors, COFINA Subordinate (Jrs.) and Capital Appreciation Bonds (CAB), both Senior and Jr.), but Bettina Whyte, appointed to help bring the conundrum of who represents the interests of COFINA (Commonwealth, Board or the creditors themselves) to an end.

Second, while I think the reporting has improved since the deal was first announced, this Agreement is not a GO-COFINA settlement.

Third, this deal raises substantial questions and by no means is it a done deal.  Here’s just some of the questions:

  1. The Commonwealth’s taxing authority; can Board surrender it?
  2. Is this the best possible deal?
  3. What is the role of the Government of Puerto Rico?
  4. What are essential services?
  5. What is the future protection for the SUT (locally and federally)?
  6. What is the GO priority claim?
  7. The Board rejected the voluntary agreement between GO-COFINA creditors but has not rejected this… why?
  8. Finally, how many does it take to tango…? 2 or 3?

Overview of the Agreement

The deal, which is 8 pages long and only an agreement in principle, states as follows:

“COFINA will receive (a) 53.65% of the yearly scheduled PSTBA (beginning with payments made on 7/1/18), and (b) 100% of the cash held in trust at Bank of New York Mellon as of 6/30/18.

COFINA’s 53.65% portion of the PSTBA would be the first dollars of the 5.5% SUT distributed each year.

Securities to be structured subsequently.

COFINA’s Title III  plan of adjustment shall provide that, to the extent permitted under applicable law, all restructured securities issued by reorganized COFINA (or a new entity established pursuant to COFINA’s Title III plan of adjustment) will be tax-exempt, with the COFINA Agent being satisfied (in its sole discretion), prior to execution of the settlement agreement, that this condition will be met.

The PSTBA shall be equal to the sum of “original fixed income” as prescribed in section 3 of Act 91 (as amended and currently in effect), i.e., the amount of $783.2 million for Fiscal Year 2019, growing at 4% annually up to a cap of $1.85 billion by Fiscal Year 2041. In no event shall the make-whole provision of section 5(d) of Act 91 (as amended and currently in effect) operate to fund amounts on COFINA bonds by reason of any purported acceleration or defaults.

The Commonwealth will receive 46.35% of the yearly scheduled PSTBA (beginning with payments made on 7/1/18), any residual of the 5.5% SUT, and the additional 4.5% SUT surcharge.

The Commonwealth’s 46.35% share of the PSTBA would be received by the Commonwealth each year after COFINA receives its full 53.65% share of the PSTBA.

COFINA shall own each year the first dollars of the 5.5% SUT up to the amount of COFINA’s 53.65% share of the PSTBA, and the Commonwealth shall own each year the 5.5% SUT in excess of such amount.

Escrow Account

The Commonwealth’s share of the PSTBA will be held in escrow by an escrow agent selected by the Commonwealth Agent (in its sole discretion, but after consultation with the Oversight Board)  and approved pursuant to an order of the Title III court, with such escrowed funds being allocated to holders of claims against the Commonwealth under a Commonwealth Title III plan of adjustment; provided, however, that the Commonwealth shall have recourse to the funds in escrow (after exhausting its ordinary sources of liquidity) to the extent necessary to pay for essential services, as determined by the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) (or a subsequent entity (if any) having similar supervisory authority as the Oversight Board after confirmation of the Commonwealth’s Title III plan of adjustment).

Therefore, COFINA surrenders 46.35% of its funding to the Commonwealth, resulting in a possible haircut in that amount. There is no indication in the document of how this 53.65% will be distributed between Seniors, Jrs, or CAB’s. Depending on what each get, this deal could be approved, or not. More on this later. Also, COFINA gets the money held by Mellon Bank, about one year of payments but the agreement does not explain how it is going to be divided within the Seniors and Jrs. Also, the UCC filed today a motion so there will be no further deposits to Mellon Bank, essentially putting a cap on what COFINA will get. In any event, will it all go to the Seniors as payment for what they will not get from the PSTBA? Will some of it go to the CAB’s, which are not supposed to be payed until they mature? Questions, questions.

In addition, the Commonwealth’s 46.35% is going to be used for payment of “holders of claims against the Commonwealth under a Commonwealth Title III Plan of Adjustment.” Notice that it does not say payment of GO bonds, but rather holders of claims. This means that the money’s will be used for the payment of all creditors and even then, it may be clawed back for payment of “essential services” as (finally) determined by the Board, who until today, has refused to define them. What will they be is anyone’s guess but I can assure you it will not make bondholders happy. Also interesting is that the agreement says “or a subsequent entity (if any) having similar supervisory authority as the Oversight Board after confirmation of the Commonwealth’s Title III plan of adjustment.” Does the Board suspect the PROMESA structure will be soon changed by Congress? Questions, questions.

Further down, the agreement states:

“Post-July 1, 2018 Collection of SUT

SUT revenues collected on or after July 1, 2018 (up to the PSTBA amount) shall be deposited into an escrow account at Delaware Trust Company (the “Interim Escrow Account”) pending approval of the settlement by the Title III court, provided that:

upon the effective date of the settlement, such escrowed funds shall be released to COFINA and the Commonwealth (subject to the escrow arrangement above) in accordance with the percentage shares of the PSTBA set forth above; and

in the event that either (i) the Agents do not execute a settlement agreement within 60 days after the date that the Commonwealth Agent and the COFINA Agent agree to the terms set forth herein, or (ii) the effective date of COFINA’s Title III plan of adjustment approving the settlement does not occur within 200 days after the Commonwealth Agent and the COFINA Agent have executed the settlement agreement (as such deadlines may be extended pursuant to the terms hereof), then the ruling by the Title III court concerning the ownership of Pledged Sales Taxes not yet collected by the Commonwealth (as of June 30, 2018) shall be determinative of the disposition of the funds in the Interim Escrow Account (it being understood that neither party is waiving any appellate rights with respect to such determination).”

Apparently, the escrowed account before July 1, 2018 will be handed over to COFINA, which is a substantial amount, and from that date on it will be escrowed until the deal is finalized upon the approval of the Plan of Adjustment. The timetable, which could be extended, is for the approval to come in approximately 260 days, which would be in the beginning of 2019. In addition, the deal states:

Injunction

The effectiveness of the settlement is conditioned on the following:

An injunction (or some federal legislative action) barring, as part of the settlement, any future challenges to (i) all of the terms of the settlement, (ii) the 5.5% SUT, and (iii) the COFINA structure and its related legislation, with the COFINA Agent being satisfied (in its sole discretion), prior to execution of the settlement agreement, that this condition will be met; provided, however, that any factual or legal findings made by the Title III court in connection with the approval of the settlement (i.e., the order confirming COFINA’s Title III plan of adjustment and the order approving the settlement in the Commonwealth’s Title III case) with respect to the COFINA structure and its related legislation shall have no preclusive, collateral estoppel, res judicata, precedential, or other similar effect on any aspect of the Title III cases of the Commonwealth of Puerto Rico and its instrumentalities (whether such cases are currently pending before the Title III court or to be commenced in the future) (collectively, the “Title III Cases”), (b) no factual or legal inference may be drawn from such findings in connection with any aspect of the Title III Cases, and (c) no party or counsel for any party shall be precluded from taking a position inconsistent with such findings in any other proceeding or contested matter in the Title III Cases, except (in each of (a), (b), or (c)) to the extent necessary to protect or enforce the terms of the settlement (whether in the Title III Cases or in any other court or proceeding). The purpose and goal of an injunction would be to preclude any future challenges to COFINA and the Commonwealth’s respective ownership and other rights to the 5.5% SUT under the settlement.

I am sure Congress can change the Puerto Rico Constitution (not that they will necessarily), but I am not inclined to believe that the Court can or would be inclined to do so. Also, those confined to the COFINA litigation could be bound by res judicata etc., but then it says it cannot be used against the agreement. The rules of res judicata, collateral estoppel, etc., in Federal Court are established by the federal common law but in Commonwealth law, they are ruled by statute and civil law. The rules on the application of those doctrines from federal court to Commonwealth courts are have been delineated in case law. Moreover, a prohibition from ever challenging the ownership of the SUT seems illegal to me, although of course, I have not made any research on this.

Commonwealth Debt Priority

Moreover, this seems to violate the priorities clause of the Puerto Rico Constitution, Article VI, section 8 and priority established for the GOs in PROMESA section 201(b)(1)(N). Furthermore, without a doubt, Congress can pass legislation that destroys that priority but it is questionable whether the Court can, under these circumstances, issue an order steamrolling the Puerto Rico Constitution.  And as I stated, they already addressed priority of the Commonwealth debt in PROMESA.

Also important, the deal states:

Non-Recourse to Commonwealth and 40-Year Maturity

The restructured COFINA securities will (a) be non-recourse to the Commonwealth (including the portion of the PSTBA allocated to the Commonwealth under the terms of the settlement) and (b) have a fixed maturity of not more than 40 years commencing on July 1, 2018.

Commutation

Treatment of monoline insurance policies and commutation will be addressed in COFINA’s Title III plan of adjustment.

As it is now, the COFINA bonds can only be paid from the PSTBA, now shrunk by 46.35%. It is important, however, that the deal does not mention or have anything to do with how the insurers will be dealt with. They will probably be reimbursed from the escrowed accounts but what happens later? Will they accept these deep cuts? If they are not mentioned here, somehow I doubt they’ll have a right to vote in the Plan of Adjustment. The agreement continues saying:

Conditions to Effectiveness

  1. Effectiveness of settlement to be conditioned on:

Title III court enters (a) an order in COFINA’s Title III case confirming COFINA’s Title III plan of adjustment that incorporates the settlement and (b) an order in the Commonwealth’s Title III case approving the Commonwealth’s entry into the settlement. Entry of the settlement order in the Commonwealth’s Title III case shall be a condition to confirmation of COFINA’s Title III plan of adjustment.

The settlement shall terminate automatically if the effective date of COFINA’s Title III plan of adjustment approving the settlement does not occur within 200 days after the Commonwealth Agent and the COFINA Agent have executed the settlement agreement; provided, however, that the Commonwealth Agent may extend, in its sole discretion, the outside date for the effective date of COFINA’s Title III plan of adjustment. If the Oversight Board determines it is impracticable to schedule a timely confirmation hearing on a Commonwealth Title III plan of adjustment embodying the settlement, then the Commonwealth Agent shall use reasonable best efforts to seek approval by the Title III court of the settlement agreement in its Title III case (by filing a motion in its Title III case on or before the later of (a) three days after the deadline to vote on COFINA’s Title III plan of adjustment or (b) the day that is 45 days before the date scheduled for the hearing on confirmation of COFINA’s Title III plan) contemporaneously with confirmation of COFINA’s Title III plan of adjustment incorporating the settlement. The COFINA Agent shall use reasonable best efforts to obtain confirmation of its Title III plan of adjustment incorporating the settlement (accounting for the fact that the Oversight Board is the only party that may propose a Title III plan of adjustment).

At or before execution of the settlement agreement, the Commonwealth Agent shall be satisfied (in its sole discretion) that a sufficient number of holders of COFINA debt will support COFINA’s Title III plan of adjustment incorporating the settlement.

  1. The settlement would not be conditioned or tied to the confirmation or effectiveness of a Commonwealth Title III plan of adjustment.

I think the above needs to be more thoroughly addressed.  It has huge implications for the case.

The settlement becomes effective when the COFINA Plan of Adjustment is approved but it is also necessary that a settlement order be entered in the Commonwealth case. Bankruptcy Rule of Procedure 9019(a) deals with settlements and states:

a) Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.

Moreover, Second Circuit precedent favors settlements. In Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983) states:

“In undertaking an examination of the settlement, we emphasize that this responsibility of the bankruptcy judge, and ours upon review, is not to decide the numerous questions of law and fact raised by appellants but rather to canvass the issues and see whether the settlement “fall[s] below the lowest point in the range of reasonableness”, Newman v. Stein, 464 F.2d 689, 693 (2 Cir.), cert. denied sub nom. Benson v. Newman, 409 U.S. 1039, 93 S.Ct. 521, 34 L.Ed.2d 488 (1972). We shall not attempt to deal with every argument advanced by appellants but will concentrate on what seem the most nearly persuasive.

Even with this easy standard, Judge Swain will be hard pressed to accept a settlement where part of the parties involved cannot agree to said settlement. For example, if the COFINA Jrs. don’t know what their cut is going to be, how will they agree to the settlement? And we have not yet started on the other stakeholders’ position on the agreement. Therefore, the internal COFINA distribution is of paramount importance. In addition, the 200-day period to have the Plan of Adjustment approved may be extended.

As to the settlement not being affected by the Commonwealth’s Plan of Adjustment, seems unlikely since that Plan of Adjustment will be deeply influenced by this agreement and how can the COFINA deal stand if not accepted in the Commonwealth Title III case? Moreover, the COFINA Plan of Adjustment must include the COFINA bondholders as a class in said plan but does it have to include the GO’s as a class? Does the Plan of Adjustment have to include the Commonwealth as a creditor? What if the Commonwealth does not agree to the settlement? Questions, questions.

Also, COFINA may issue future debt, conditioned to this:

Permitted Future Debt Issuances

COFINA may issue securities to refinance the restructured COFINA securities issued under COFINA’s Title III plan of adjustment, subject to the limitations that (a) regardless of the terms of such new securities, COFINA shall not be entitled to an increase of its share of the PSTBA under the settlement and (b) the maturity date of such new securities is no later than the maturity date of the restructured COFINA securities.

To the extent the Oversight Board determines that it is beneficial to the Commonwealth and/or COFINA, the restructured COFINA securities would be callable after a period of time on terms to be negotiated with the Oversight Board.

The Commonwealth may cause COFINA to issue future debt or securities out of COFINA (the “Additional Securities”); provided, however, that COFINA will be prohibited from issuing such Additional Securities, unless (i) the interests of the holders of such Additional Securities in the portion of the 5.5% SUT in COFINA’s 53.65% share of the PSTBA under the settlement, or subsequently transferred to COFINA by the Commonwealth, is subordinate to the interests of the holders of restructured COFINA securities (or any securities refinancing such securities) in the portion of the 5.5% SUT allocated in COFINA’s 53.65% share of the PSTBA under the settlement, (ii) the preceding year’s collections of the 5.5% SUT (grown annually at a percentage that is equal to (a) for the fiscal years 2019 through 2023, the SUT growth rates as stated in the Certified Fiscal Plan dated April 19, 2018, and (b) for the fiscal years after fiscal year 2023, the average SUT growth rate for the preceding 5 years) is at least 1.75x times the COFINA debt service for each year (pro forma for any new debt/securities), (iii) the preceding year’s collections of the 5.5% SUT is at least 1.10x the maximum COFINA debt service for any year (pro forma for any new debt/securities), and (iv) such Additional Securities are included for purposes of calculating the Commonwealth’s debt limitation under Article VI, Section 2 of the Puerto Rico Constitution.

The new COFINA bonds would be subordinated to the COFINA bonds now issued and they would be subject to the 15% limit of Article VI, section 2 of the Puerto Rico Constitution. At least something positive.

The settlement releases are as follow:

Releases

Except as set forth in the settlement agreement, the settlement fully, finally, and forever resolves and releases all claims against and ownership interests in any SUT revenues, including without limitation all claims, causes of action, and counterclaims (i) that were or could have been asserted consistent with the Stipulation and (ii) concerning or relating to the Pledged Sales Taxes or the Commonwealth-COFINA Dispute.

Except as to the rights expressly set forth in the settlement agreement, COFINA, all insurers of COFINA bonds, and all holders of COFINA bonds shall be barred from bringing or pursuing any and all claims (a) in the case of the insurers of COFINA bonds and holders of COFINA bonds, arising out of their capacities as COFINA bondholders/insurers in any way related to the COFINA structure, the SUT, or the Pledged Sales Taxes and (b) in the case of COFINA, in any way related to the COFINA structure, the SUT, or the Pledged Sales Taxes, against the Commonwealth, its instrumentalities, the Commonwealth Agent, the COFINA Agent, the Oversight Board, and each of their respective current and former officers, directors, agents, attorneys, employees, affiliates, advisors, consultants, attorneys, and members.

For the avoidance of doubt, there shall be no release of any claims by any party against the underwriters of the COFINA bonds or the GO bonds, including their current and former officers, directors, agents, attorneys, employees, affiliates, advisors, consultants, attorneys, and members.

Again, monolines and GO’s are not part of this agreement, at this time. Moreover, both GO’s and Assured, a monoline, expressed objections to the agreement and insisted in being part of the negotiations. The GO’s stated, inter alia:

The GO Group does not object to the requested 60-day delay, with the expectation that this period will be used not merely to document the terms of the Agents’ agreement but to engage in good faith with all affected constituents—including the GO Group—regarding those terms. As we explain below, the Agents’ agreement in principle in its current form represents a breach of the Commonwealth Agent’s duties to its constituencies and suffers from a number of serious flaws: Certain of its provisions are simply unlawful, such as the conspicuous attempt to surrender the sovereign power of the Commonwealth to wield its own taxing authority. Indeed, the agreement in principle appears to elide this fundamental gating issue, laying claim to 40 years of future tax revenues while simply declaring that some (unspecified) way will be devised to prevent the sovereign from disturbing those future taxes. . .

What is more, there were serious shortcomings regarding the process pursuant to which this agreement in principle was reached. The so-ordered stipulation governing this litigation (Dkt. 996 in Case No. 17-03283-LTS) (the “Stipulation”) guaranteed a representative selected by the GO Group a right of consultation with the Commonwealth Agent, but the Commonwealth Agent ignored multiple requests for information regarding the key terms of the agreement. The Commonwealth Agent thus denied itself the input and expertise of the parties most able to assist in this process. This course of conduct has resulted in an agreement in principle in which COFINA will receive first-dollars recourse to the Commonwealth’s sales and use tax (the “SUT”), which will lead to a massive diversion of value to COFINA that may exceed $3 billion over and above what COFINA’s bondholders would have received under a prior, pari passu settlement framework that commanded the support of key COFINA stakeholders. This value grab is likely to result in COFINA’s senior bondholders receiving approximately 125 percent of the face amount of their bonds. The GO Group cannot countenance the waste of Commonwealth’s resources, which is precisely why the Stipulation included consultation rights. Indeed, the massive diversion of value will make any consensual restructuring of the Commonwealth’s obligations nearly impossible.

Our hope and expectation is that the period of abeyance requested in the Motion will be used to address these provisions—as contemplated by the terms of the Stipulation affording the GO Group and others consultation and other rights in connection with these proceedings—and present a settlement to the Court that does not suffer from these fundamental defects. In its current form, the agreement in principle is a recipe for further litigation, not the constructive solution this case so urgently needs.

Here’s the GO’s explanation as to what they mean by the 125% of face amount of bonds:

This distinction is of vital economic significance. Because the stream of future cash flows that would be paid to COFINA under the Agents’ deal is substantially more secure than the ones that would have been earmarked for COFINA claimholders in the creditor-initiated framework, the appropriate discount rate for valuing that stream is substantially lower than the one used to value recoveries under the creditor-initiated framework. Depending upon the appropriate discount rate, the Agents’ deal may represent an incremental recovery for COFINA’s bondholders of $3 billion (or more) beyond what numerous COFINA stakeholders were prepared to accept as part of the creditor-initiated framework—an increase in value of approximately 25% (or more) for the COFINA entity. And that, in turn, is likely to translate to a recovery for COFINA’s senior bondholders well in excess of 100 percent of their claim amount. Following the senior-subordinate split in the creditor framework, for example, the Agents’ agreement in principle would lead to a recovery for COFINA’s senior bondholders in excess of 125 percent of the face amount of their bonds.

The claim of 125% is at the heart of this settlement. The Oversight Board was quick to reject the GO-COFINA settlement framework, but they have not done so here.  How so, if the 125% is accurate?

The GO motion also objects to the agreement in other areas:

“The Agents’ agreement in principle also attempts to glide over a crucial gating issue. More particularly, the agreement promises to insulate COFINA not only from the core legal challenges in this case (whether the Commonwealth’s SUT revenues were transferred to COFINA, and whether such a transfer was constitutional) but also to deprive the Commonwealth of its core sovereign authority over the remaining 40 years of the COFINA structure. It does so by providing that, as a term of the Agents’ deal, the COFINA Agent must be satisfied that the SUT “would not be subject to repeal [or] limit.” Term Sheet 3. In other words, the Agents appear to anticipate that this Court’s approval of their arrangement would prevent the Commonwealth from repealing the SUT or reducing its amount—in effect, stripping the Commonwealth of its sovereign power for the next 40 years.

By purporting to bind the Puerto Rico legislature’s hands in this manner, the Agents’ deal is inconsistent with the basic principle that, because “one legislature cannot abridge the powers of a succeeding legislature,” Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 135 (1810), a statute is “alterable when the legislature shall please to alter it.” Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803); see also, e.g., Dorsey v. United States, 567 U.S. 260, 274 (2012) (explaining that “statutes enacted by one Congress cannot bind a later Congress, which remains free to repeal the earlier statute, to exempt the current statute from the earlier statute, to modify the earlier statute, or to apply the earlier statute but as modified”). The Agents’ agreement on this point asks the Court to exceed its own authority and lacks any lawful basis. It must be removed.

  1. Finally, the Agents’ agreement in principle would inappropriately prejudge the priority of stakeholders’ claims on the Commonwealth’s share of the SUT, by providing that these funds may be invaded by the Commonwealth to fund whatever the Oversight Board (or any successor entity) deems to be “essential services.” Term Sheet 1-2. Whether, and to what extent, the Board’s unbounded view of essential services may justify compromising the claims of prepetition creditors is sure to be a hotly contested issue when this Court is asked to confirm a plan of adjustment for the Commonwealth.

The message being sent here by the GO’s is very clear; the agreement, as it stands, invites substantial litigation by this group as well as others. Better to negotiate a deal in which we all can agree upon. Cleverly, the GO motion discuss such a deal:

Under the creditor-initiated framework announced in May, a new trust would be created and would be stipulated to take ownership of the full 5.5% Commonwealth SUT. Dkt. 3140-3 in Case No. 17-03283-LTS, at 1-2. The trust would hold all COFINA bonds contributed to the trust pursuant to a plan of adjustment for COFINA, and would make an exchange offer for Commonwealth general obligation bonds and general unsecured claims. Id. at 1. Importantly, all holders of the resulting trust certificates—including holders of COFINA claims and Commonwealth claims—would share in the trust’s distributable value on a pari passu basis. In other words, the creditor-initiated framework does not include any senior-subordinate structure, under which a shortfall in SUT receipts would affect only a subordinated class of securities, while leaving senior recoveries intact. Thus, holders of COFINA claims and Commonwealth claims shared equally in the risk that the Commonwealth’s future SUT receipts might fall below expectations, because in that instance all creditors’ recoveries would be reduced proportionately.

The recovery for holders of COFINA securities under the creditor-initiated settlement framework—an amount that key stakeholders on the COFINA side publicly acknowledged they would accept in settlement of their claims—was approximately $12.132 billion in present value terms, using an appropriate discount rate for a pari passu securitization structure of this sort. Dkt. 3140-3 in Case No. 17-03283-LTS, at 7. The settlement framework was publicly criticized

by the Commonwealth and Oversight Board as providing creditor recoveries that were too generous. See, e.g., Financial Oversight and Management Board for Puerto Rico, Press Release, Oversight Board States Terms Of GO-COFINA Creditor Proposal Are Unaffordable, Do Not Align With Certified Fiscal Plan, May 14, 2018 (stating that the “economic terms” of the settlement framework were “completely unaffordable”); Puerto Rico Fiscal Agency and Financial Advisory Authority, Press Release, Response To Joint Settlement Proposal From Commonwealth-COFINA Creditors, May 14, 2018 (stating that the debt-service requirements contemplated by the settlement framework “are not sustainable”).

Importance of Pari Passu

The pari passu aspect of the deal is important. Right now, pursuant to the agents’ deal, the COFINA Jrs. do not know how much they stand to lose and they should be concerned because it could be a lot. Under the GO-COFINA proposal, they would get equal shares. This is politically very important since the COFINA Jrs. bonds were only sold in PR, although it is unknow how many locals are holders at this moment. In addition, there are more outstanding COFINA Jrs. bonds outstanding than COFINA Senior.  Also, if COFINA Jrs. are essentially wiped out, it is likely they would sue the Commonwealth for fraud, since the sale documents made clear assurances as to the legality of the structure and now the Commonwealth claims it is the owner of the SUT and not COFINA.

Assured is a monoline that ensures GO bonds, among others. It stated in its motion:

“Assured does not oppose the Agents’ request in the Motion for a 60-day delay in the Court’s issuance of a decision on the summary judgment motions in the Commonwealth-COFINA Dispute, provided that the Agents use the requested 60-day abeyance period to (i) involve Assured and other GO Bond creditors in the negotiations and (ii) remedy a number of important defects in the preliminary Terms and Conditions of Agreement in Principle to Resolve Commonwealth-COFINA Dispute (the “Term Sheet”) disclosed by the Agents on June 7, 2018.

See Exhibit A to Joint Informative Motion of Commonwealth Agent and COFINA Agent Disclosing Agreement in Principle, Adv. Proc. No. 17-257-LTS, ECF No. 486-1.

For example, the Term Sheet provides for the establishment of an escrow account

to hold the Commonwealth’s share of PSTBA, with “such escrowed funds being allocated to holders of claims against the Commonwealth under a Commonwealth Title III plan of adjustment.” Adv. Proc. No. 17-257-LTS, ECF No. 486-1 at 1. The Term Sheet then goes on to provide that “the Commonwealth shall have recourse to the funds in escrow . . . to the extent necessary to pay for essential services, as determined by the Financial Oversight and Management Board for Puerto Rico.” Id. at 2. This provision raises several substantive and procedural problems, and, accordingly, requires additional discussion.

As another example, the Term Sheet in its present form contains various overly broad releases that—inadvertently or not—could be read to undermine the GO Bonds’ constitutional first-priority claim to all “available resources” (including PSTBA). Id. at 5-6. These releases need to be significantly narrowed and refined before they could be incorporated into a viable settlement or Title III plan.”

Puerto Rico Government Position

It doesn’t seem the Puerto Rico Government is entirely on board with this proposal. Gerardo Portela has stated that he had not been part of the negotiations but welcomed any effort to solve differences.On Monday, however, the motion filed by AAFAF was anything but welcoming. It stated:

“The Government does not oppose the Court holding its decision in abeyance for a period of 60 days to allow discussions among all parties regarding the proposed agreement in principle reached by the Commonwealth and COFINA Agents. These discussions must include the Government and various bondholders and other constituents that are not party to the proposed agreement in principle.

The Government is evaluating whether the proposed agreement in principle serves the best interest of Puerto Rico, and will actively work with all parties to reach consensus on a comprehensive restructuring solution.

If consensus is not reached in the next 60 days, decisions on critical issues such as whether the Pledged Sales Taxes are property of the Commonwealth or COFINA should move toward judicial resolution. AAFAF therefore reserves the right to oppose further motions to hold such decisions in abeyance.”

Global Resolution

The Commonwealth wants all of the SUT—that is clear.  It also seems to me that AAFAF wants to sit down with all parties and come to a Global Settlement. That’s smart politics, and Governor Rosselló understands this. As it stands, this agreement is only with COFINA. By contrast, the GO-COFINA deal included the two strongest bonds and $35 billion of the $72 billion PR owes. If such a deal could be had, it would create momentum for other deals to be completed. Once you have the first one, and the bigger the better, the others fall in line.

Looking Ahead

There remain key questions, many of which we don’t have answers to. What would happen if the Commonwealth does not agree with the agreement as it stands? Can the Board nevertheless get an approval of the agreement in the Title III via Rule 9019 and the Plan of Adjustment? It is complicated. Rule 9019 states that the compromise may be presented by the Trustee, which is the Board, but the agreement also calls for the Commonwealth to surrender its taxing power to COFINA, which is an inherent power of any territory as long as authorized by Congress. Article VI, section 2 of the PR Constitution unequivocally states “The power of the Commonwealth of Puerto Rico to impose and collect taxes and to authorize their imposition and collection by municipalities shall be exercised as determined by the Legislative Assembly and shall never be surrendered or suspended.” On the other hand, section 108(a)(2) of PROMESA allows the Board to request that the enforcement of said part of the Constitution  “impair[s] or defeat[s] the purposes of this Act, as determined by the Oversight Board.” Would the Board invoke this? Would the Judge agree to it? From her order approving the 60-day extension to finalize the agreement with a provision for extension of the term, it is quite obvious Judge Swain wants a deal. Section 314(b) of PROMESA however, requires that the “the debtor is not prohibited by law from taking any action necessary to carry out the plan” in reference to Plan of Adjustment. If PR cannot surrender its power to tax, and both the UCC and the Retirees Committee argued that it could not, then it is questionable whether the Board can force PR to surrender said power. Would Judge Swain confirm a Plan of Adjustment without the approval of the Commonwealth? Difficult question. Hence, Governor Rosselló may have a veto power over any settlement involving the taxing power of the Commonwealth. Finally, 11 U.S.C. section 1129(a)(3) requires that the Plan of Adjustment be filed in “good faith and not by any means forbidden by law.” If the Plan of Adjustment hinges on illegally surrendering Puerto Rico’s taxing power, how can Judge Swain approve it?

Seems to me the best bet for a settlement to be approved would be a global settlement with GO-COFINA where Board, Commonwealth, UCC, Retirees, COFINA and GO’s all agree. This would require, however, a clear breakdown of what goes to Seniors, Jrs. and GO’s.. That is something we don’t have at this time but can be achieved with some common sense negotiations.

Moreover, who will be able to vote in the Plan of Adjustment? Only those COFINA creditors whose claims are impaired may vote, which brings us to another issue; the Board, as the only one allowed to file a Plan of Adjustment in the COFINA Title III, will group creditors in classes. I have a feeling that it will put all COFINA bondholders in one class since the Bankruptcy Code requires that all classes agree to the Plan of Adjustment. That way, it would need 2/3 of the debt amount and more than half of the number of creditors in that class to approve it. For example, if the Jrs. are in another class, they may vote against the plan but if bunched together with the seniors, it may work out. But where, if anywhere, would the Commonwealth be if it rejects the agreement? No idea.

Does it take Two to Tango or is it Three or Four?

If you are not a lawyer who understands bankruptcy and PROMESA, you may be tempted to believe that this deal only needs some fine tuning and the blessing of the UCC and COFINA. Not quite, though. As you have seen, the GO’s and Assured both say the deal, as it is written, violates Puerto Rico’s Constitution and PROMESA. Moreover, they want to be included in the negotiations. The Commonwealth government, far from giving the deal a ringing endorsement, wants to be included in the negotiations, as well as other interested parties. If they are not included, it is likely they will fight tooth and nail against the agreement, both in the Commonwealth Title III and in the COFINA Plan of Adjustment. Let’s remember that Judge Swain has made it clear she cannot review the Fiscal Plan until the Plan of Adjustment stage, which will open it to claims that section 201(b)(1)(N) is being violated by not respecting 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.” Moreover, the Retirees Committee has endorsed this agreement but if the GO’s and the Commonwealth are invited to the negotiations, will they be invited also? If the Board wishes to avoid further litigation on all these issues it seems logical that they will include all these parties to negotiate the deal, which will increase the chances of a global settlement. Otherwise, all I foresee is more and more wasteful litigation.

I will be working on a new post to explain how the Plan of Adjustment and its approval works. Until next time.

Monday Update – June 11, 2018

Welcome to your weekly Title III update for June 11, 2018. This week, many things happened in the case and outside the case.

This week, we had the Omnibus hearing, which I reported on and the Commonwealth and COFINA agents presented their draft settlement agreement. More on this later, but what no one in the press even mentioned is that on June 5, 2018, the First Circuit listened to oral arguments on the PREPA bondholders request for lifting of the stay to appoint a receiver and the Peaje request for adequate protection, and surprise, surprise, things may change. The oral argument were with Judges Howard, Kayatta, and Torresen (District Court Judge from Maine). Judges Howard and Kayatta were two of the three judges in the Peaje First Circuit decision of January 11, 2017. Continuity seems to be important in PROMESA.

During the oral argument, the Judges had difficulty understanding what bondholders collateral was. The Board’s position was that it was movant’s fault, but then one of the Judges asked “how can you do the balancing of interests [in the lifting of stay] if you don’t know what the collateral is?” The Board did not provide a satisfactory answer to the question.

The Judges also asked whether Judge Swain could attack the adequate protection issue if she can’t touch the revenues as she interprets sections 305 and 315 of PROMESA unless the Board agrees to it. The Board’s answer was very surprising: Mr. Bienenstock stated unequivocally that if movant’s 5th Amendment rights were impaired, Judge Swain could dismiss the Title III case, but she cannot micromanage the Board. The Judges asked, her leverage is I am out of here? Answer, yes that is what the movants want. Difficult to swallow, in my opinion.

Another of the Judges questions to the Board was what protects movants’ property interests? Answer, PREPA’s transformation, better fuel mixture which will bring fewer costs. The most movants can hope for is for a plan that will change PREPA. In order words, trust us, we are the Board. I would definitely not trust the Board.

In rebuttal, movants emphasized that the receiver does not raise rates – that is the Energy Board’s job. The Board does not manage PREPA, that is the PREPA Board’s job and the receiver would substitute this Board, subject to the Oversight Board’s powers and of course, the Court’s powers.

All during this oral argument, the Judges kept hammering as to what was the security interest; whether the Judge could do the balancing act required by the petition to lift the stay if she did not know what the actual collateral was. Moreover, at the end of movant’s argument, Judge Torresen said she still had many questions and repeated this same statement at the end of movants’ reply. Given this, I would not be surprised if the First Circuit reverses Judge Swain with detailed instructions on the actual questions they have. This would require an evidentiary hearing and another round of appeals for whomever loses. More expenses in the case.

Things were a little different in the Peaje oral argument. There was a repeat of questions pertaining to the Judges power pursuant to section 305 of PROMESA. Seems they have difficulty wrapping their heads around what Judge Swain decided. They questioned movants if they had a lien opposable to third parties, in other words, if their collateral was sent to a third party, could Peaje collect from them. The answer was yes.

The Board argued that Judge Swain saw this case ending in two more years, which would be in 2020. The Board also argued that no lien rights can be affected until the Plan of Adjustment but in the case of Peaje, it did not have a lien. The Judges asked the amounts of the lien and the Board said the lien, if it existed, was limited to the amount in the account at the time of Title III, no more. But the Judges said you pledged your revenue stream and special revenues can be more than revenues with a lien. Another question was how can you balance injury (important in the injunction stage) or relief of stay without knowing which is which, in clear reference to whether there is a lien. This case, given there was a full evidentiary hearing, will be less probable to be remanded for further consideration but the issue of the lien and pledge looms large and it is definitely possible the Judges would like further clarification.

At the end of the arguments, the Judges said they were aware of their obligation and decided to expeditiously the issues and would endeavor to do so. I foresee a quick resolution of the issues but not necessarily in a manner that will satisfy the Board.

On May 7, 2018, Gerardo Portela, Executive Director of AAFAF, sent the Board a letter in which he assured it the audited financial statements for the year 2015 would be completed and issued by June 8, 2018. As usual, this did not happen. The Puerto Rico Treasury Secretary said the Commonwealth sent the financial statements to its auditors the previous week. Difficult to see how something so large and complicated could be completed in one week, but what do I know? There is no timetable for their completion.

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.

Omnibus Hearing Special Update – June 7, 2018

Earlier this week, the Board, the COFINA agent and the Commonwealth agent filed an urgent motion announcing a settlement in principle in case 17-257 and requested 60-days to finalize their agreement. Contrary to what has been reported, this is not a COFINA-GO deal. Although the motion cautioned that there were still many details to be discussed and it could all fall through, Judge Swain was obviously pleased and praised the parties at the start of the Omnibus hearing noting, “I am pleased with the settlement agreement… It is an enormous significant development.” She granted until next Monday to specific objections to the COFINA motion and replies by next Wednesday.

Later in the morning, the UCC mentioned that the COFINA deal would be done within the Plan of Adjustment and the Board lawyers assured the Judge that they would endeavor to the have issued resolved before the 60 day period end. The UCC also mentioned that they will have to deal with the COFINA acceleration claims and the COFINA Juniors.

I always had the sense that the COFINA Seniors wanted to make a deal for they believed they would lose the litigation. Why settle if they were absolutely sure they had an ironclad lien?

Moreover, the Board desperately needed a creditor whose claim was impaired in order to have a cramdown, see PROMESA section 314(c), 11 U.S.C. sections 1129(b)(1), 1129(b)(2(A) and 1129(b)(2)(B). The settlement with one class that is impaired, be it only COFINA Seniors or all COFINA bondholders, will ensure, in the Board’s view, a cramdown by Judge Swain. This view, however, may be premature. As the UCC has said, there are several issues to smooth out with the COFINA bondholders, and the agreement has not even been made public, yet. If and when they are smoothed out, Judge Swain will have the deal made public (at least to parties in interest), there will be a hearing where anyone who objects, will. It seems likely the GO’s would object since any COFINA deal will involve the Commonwealth accepting they have a right to a part of the SUT. It will be interesting to see if the Governor, who desperately wants the SUT for the General Fund, will object. Depending on the deal, Junior COFINA holders could object to the deal since the COFINA Seniors claim they get paid first.

Also, although the UCC is party to the deal, any unsecured creditor could also object claiming that the COFINA structure, as the UCC claimed in its court documents, is illegal and hence it is not bond debt. Whether any of the challenges will succeed in derailing any agreement is open to question, but the effort will almost surely be made.

The Board’s attorneys presented an update of the situation in the cases and discussed the certification of the Fiscal Plans, the oral argument on the Peaje and PREPA lifting of stay, that to date there were 17,000 proofs of claim, which will be subject to objections with a procedure with low discovery and low litigation as to the claims to be put in the Plan of Adjustment. Once the objections are made, it becomes a contested matter pursuant to Bankruptcy Rule of Procedure 9014 and becomes a mini-trial. Hence the low discovery and low litigation. I will have to examine the procedure to know.

AAFAF presented an update on the GDB Title VI procedure, stating that it had secured the approval of slightly more than half the creditors and $2.6 billion of the $4.5 billion of outstanding debt. Title VI needs 2/3 of the amounts and 51% of the number of creditors for it to be approved. The debt will be exchanged for new bonds for approximately 55% of the debt. One of the problems, however, is that some of the money from which the bonds will be payed include a GDB proof of claim for $905 million loan (after set-offs for deposits) against the Commonwealth. Wonder how this will work. In addition, the Legislature still has to approve legislation dealing with this transaction. Solicitations for votes will begin in July 5, 2018.

The Court informed AAFAF that it would not be available for a hearing on the last week of August, so it will have to be scheduled for later in September. The September Omnibus hearing could be used but there is a need for a proposed timetable for either a contested matter with discovery and hearing or a confirmation hearing with discovery. The UCC, however, stated that it needed more information on the role of the GDB and Government and could object to the Title VI and challenge the proceeding. Interesting. Of course, AAFAF questioned the standing of the UCC but the gauntlet has been dropped.

Siemens has an adversary proceeding against the GDB claiming it is the owner of some money held by the bank. It wants the issue resolved in the adversary proceeding not in the Title VI hearing. The issue has been taken under advisement. Judge Swain reminded everyone there is only one of her. It is very true but she has several hot topics to decide, including Aurelius challenge to the Board appointment, review of the Fiscal Plan and others.

PREPA reported that it does not foresee the need for a loan for the time being. What a surprise. Judge Swain asked about efforts to strengthen PREPA’s response to future hurricanes. The answer was that PREPA was coordinating with FEMA and USACE. Is this accurate? Each week the Governor complains about the USACE, and then gives new contracts to PREPAs favored contractors. The Judge was right to ask this question, but the Court should not be satisfied with the response.

The Fee Examiner, the entity that makes sure the lawyers and experts do not overcharge debtors, had a presentation. During the presentation, the Fee Examiner and the Court reminded the parties to file joint motions on that in which they agreed. Good point. The Court suggested that there be a presumptive fee for attendance to mediation hearings and if the party exceeded that, it would have to file a confidential memo with the Fee Examiner to justify it. Electronic research has decreased in costs but users should explain if providers charge them a flat fee and what percentage of the flat fee is the research done. The Court approved the Fee Examiner’s adjusted fees and allowed him to look at previous bills to see if the changes suggested had been made.

The Fee Examiner suggested that McKenzie’s fees be reviewed and approved by the Board since no agreement could be reached. The Judge demurred and said she could not delegate that authority to the Board, citing sections 316 and 317 of PROMESA. She insists there must be metrics to be reviewed by the Fee Examiner.

PREPA requested that it be allowed to remove cases from state court all the way to the Plan of Adjustment. Again, the Court demurred but gave them 180-day extension until November 30, 2018. If PREPA needs more time, it could seek an extension at the November Omnibus.

Next, the Court heard the Retirees’ Committee motion requesting that a committee for PREPA retirees be appointed or its authority expanded to do so. The US Trustee’s office had no position but the PREPA Retirement Board objected, saying it was doing the job. After hearing the argument, Judge Swain cautioned that there were serious retiree issues, but denied the motion without prejudice. She asked the parties to monitor the situation and if they thought it was needed to file again.

In the afternoon, Judge Dein heard arguments on the UCC’s renewed motion for Rule 2004 discovery on the origins of the debt crisis. The UCC stated, quite correctly, that the Investigator appointed by the Board had said that it was not going to point fingers at anyone, but to make recommendations so there was not a repeat of the crisis.

In addition, the UCC said that it was receiving documents from BPPR and Santander but nothing from the GDB or third parties. That is when things got hairy. Although counsel for AAFAF had made a presentation from NY about the GDB agreement, during this issue, other counsel for AAFAF claimed they did not represent the GDB and that they had nothing to do with GDB documents. Judge Dein was obviously confused and not happy. From what I saw, this does not seem to be something the lawyers staged but that there is a conflict as to how to deal with these issues between the GDB, presided by one Government official and AAFAF, presided by another Government official. A very embarrassing situation.

I am not going to bore you with the legal gerrymandering. Suffice it to say that Judge Dein said very clearly those documents would be produced. Trying to save the rapidly deteriorating situation, the Board’s lawyers read a statement from the Investigator which stated the August 15 report will identify claims and avenues for recovery. This is a good idea since Judge Dein agreed with the UCC that a statute of limitations could run out come May 2019. The UCC wants to review all the documents the Investigator received in order to question the legality of various bond issues. If they were illegally issued, the money would still have to be paid, minus principal and interest paid, but there would not be any lien or Constitutional priority. It would just be another non-secured debt.

Judge Dein insisted she did not want this discussion on the documents being provided to the UCC on August 15, as the Board insisted, but rather right now. She issued an order today that states, inter alia:

“1. The Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) shall submit a status report to the Court on or before June 13, 2018 addressing the Independent Investigator’s position with respect to the issues addressed in the Renewed Motion including, without limitation, a. the Independent Investigator’s position with regard to the disclosure of search terms and custodians to the Official Committee of Unsecured Creditors of all Title III Debtors (other than COFINA) (the “UCC”) and the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (the “Retiree
Committee”);
b. the status of the availability of any production to the UCC and Retiree Committee of documents produced by parties to the Independent Investigator other than the Government Development Bank of Puerto Rico (“GDB”), Santander 2 and the Popular Entities3;
c. a description of the exit plan to be submitted by the Independent Investigator identified by the Oversight Board at the June 6, 2018 hearing. A schedule for the submission of the exit plan will be addressed at the continued hearing scheduled below.
2. The Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) shall submit a status report to the Court on or before June 13, 2018. Therein, AAFAF shall update the Court on:
a. The status of the production of documents from the GDB to the UCC and Retiree
Committee of those documents provided by GDB in the course of the ongoing independent investigation, including any privilege logs if necessary. This should include the parties’ progress on any relevant non‐disclosure agreement.
3. The Court will hold a continued hearing on the Renewed Motion in Boston,
Massachusetts on June 18, 2018 at 2:00 p.m. A representative with full settlement authority from GDB must be present at the hearing. A formal procedures order for the hearing will follow.”

Again, the Puerto Rico Government’s obfuscation is being eroded. A big win for the UCC and transparency. Let’s see what comes of it.

Monday Update – June 4, 2018

Welcome to your weekly Title III update for June 4, 2018. This week, many things happened in the case and outside the case.

I mentioned last week that the Retirees Committee had requested that it be appointed to represent the PREPA retirees and everyone seemed to be in agreement until the Sistema de Retiro de los Empleados de la Autoridad de Energía Eléctrica (SREAEE) filed its opposition saying they should represent these retirees. I thought that filing would be the end of the issue. I was wrong. The Retirees Committee, while professing to be neutral as to the issue of who would represent the PREPA retirees as long as someone represented them, replied to the SREAEE motion by noting it had potential conflicts of interest since 4 of its members were designated by PREPA management, three were active employees and only one was a retiree. The Retirees Committee also pointed out to the litigation in which AAFAF claims that its retirement system is part of PREPA with no independent existence. In addition, the Retirees requested from SREAEE documents to support its contention that “retirees had expressed, through the organizations which group them, that they want to be represented by SREAEE in these Title III proceedings.” The Retirees Committee questions whether this is true and whether they have been informed of the alleged potential conflict of interests. In a sur reply, SREAEE filed a resolution that includes several organizations that purport to represent retirees showing their support to the organization representing them. The resolution purportedly includes three organizations that include around 7,500 retirees. Given that PREPA retirees number 18,500, this still does not answer the Retiree Committees question. Judge Swain has asked that a representative of the US Trustee’s office be present at the June 6, 2018 hearing. Definitely will be interesting to see what the US Trustee has to say about this.

The UCC had filed on May 15 a renewed motion to conduct discovery as to Puerto Rico’s financial institutions, such as but not limited to Banco Popular of Puerto Rico, Popular Securities and Santander Securities, even though the Board hired an investigator to conduct such discovery.  The Board and the objects of the investigation objected to the  UCC motion saying the investigator is doing its job. It is never a good sign when the investigated say the investigator is doing a good job, especially when there are substantial financial ties between three board members (Carrion, Garcia, Ramon Gonzalez) and two of the institutions being investigated (Banco Popular, Santander). It is never a good sign when the investigated say the investigator is doing a good job. The UCC filed an omnibus reply, restating that the job the investigator is going to do and their view of the investigation are different. Also, the UCC points out that the time to file avoidance actions would expire May 2019 before they run the risk of expiring under section 546 of the Bankruptcy Code. The UCC also, quite correctly, states:

“Likewise, the “ownership” arguments rest on the false premise that discovery can only be relevant for the purposes of bringing affirmative claims. That is not the case, and Bankruptcy Rule 2004 allows examination of the “acts, conduct, or property

 [] of the debtor, or to any matter which may affect the administration of the debtor’s estate.” Fed. R. Bankr. P. 2004(b); see also 11 U.S.C. § 1103(c)(2) (Committee may investigate “any other matter relevant to the case or to the formulation of a plan”). Indeed, as the Committee has stated before, discovery from the Puerto Rico Financial Institutions may be used for a number of other purposes, including:

 Evaluating or objecting to the potential claims asserted by the Puerto Rico Financial Institutions (or other entities which are affiliated or have acquired claims through the Puerto Rico Financial Institutions) against the Commonwealth;

 Placing a value on the likelihood of success of potential claims against individuals or entities for the purposes of plan formulation or other negotiations—i.e., as is currently ongoing in the negotiations over the GDB’s Restructuring Support Agreement under title VI of PROMESA. See Renewed Motion, ¶ 20 (noting that GDB has attempted to release directors and officers from liability);

 Evaluating whether certain bonds issued with the assistance of the Puerto Rico Financial Institutions were valid or, instead, violated the Puerto Rico constitution.

 Ensuring that creditors who “re-invest” in the Commonwealth as part of a plan of adjustment understand whether any culpable individuals or entities would remain involved in Commonwealth financial affairs going forward.”

The UCC again points out the conflicts of interest of AAFAF and the Board:

“AAFAF seems to believe that the Committee should not play a role in any of the title III cases, noting for example that “any defenses to creditor claims can be asserted by the Oversight Board or AAFAF.” AAFAF Objection, ¶ 7. While the Oversight Board and AAFAF could certainly take any number of actions—and the parties may indeed share common interests in many areas—the fact of the matter is that debtors often do not always take actions that are in their creditors’ best interests. That is especially true where certain parties are rife with conflicts, such that they cannot plausibly be taken seriously when they claim that they should take the lead as to those entities. The Committee raised these issues at length in its briefing on the Original Motion, but it bears repeating that these agencies are personally led by individuals associated with potential “targets” of the Committee’s discovery:

 AAFAF is led by an investment banker who spent eight years at Santander (including in the municipal finance field) before joining the government and could have participated in many of the transactions that have given rise to the Committee’s concerns.

 At least three members of the Oversight Board are deeply enmeshed with the Puerto Rico Financial Institutions. Two of the Oversight Board’s members, Carlos Garcia and José R. González, were directly employed by Santander and worked on the transactions at issue here. In addition, Oversight Board Chairman José Carrión III is a scion of the family that founded Banco Popular, the son of a former Popular Inc. board member, a relative of the current Executive Chairman of the Board of Popular Inc., and the founder of an insurance firm which has received millions per year in commissions from Popular Inc.

21. As the Committee then observed, and perhaps as a result of these conflicts, the Oversight Board commenced its investigation only after the Committee filed its original Motion—even though it had the authority to do so for more than a year. Conflicts like these, and the need for an outside view by a party most incentivized to “grow the pie,” are part of the reason that Congress has not given debtors a monopoly over any investigation. In fact, the importance of the Committee’s “watchdog” role has already played out in these title III cases, even outside the public eye or its efforts in prompting this investigation. For weeks, AAFAF questioned the Committee’s requests for lists of any bank accounts containing over $2 million in deposits, questioning “the purpose of the bank account request.” See Ex. 5, September 14, 2017 email chain between counsel for Committee and counsel for AAFAF. Interestingly enough, a short time after the Committee’s request, AAFAF announced that it “discovered” nearly $6.9 billion in hundreds of previously “missing” cash accounts. There are likely many other unforeseen examples in which the Committee—equipped with the discovery it now seeks—can advance the overall goals of PROMESA, including the aim of promoting financial transparency.”

Given the obvious conflict of interest and the rollover of the time table of the investigator’s report, it makes sense to me that the Judge, who knows a thing or two about bankruptcy, will think long and hard to the UCC’s request.

On the subject of discovery, several bondholders, the Board and AAFAF, as strongly suggested by Magistrate Judge Dein, came up with a protocol to challenge the latter’s claims of deliberative process privilege, which was promptly approved via order. Hopefully, this will advance the Title III case, which has now been active for over a year.

The American Federation of State County and Municipal Employees had filed a motion requesting and order from the Court against the mediation team and other parties in reference to the COFINA and GO’s stipulation a couple of weeks back. Judge Swain denied the motion saying:

“AFSCME’s Motion seeks to compel the Mediation Team, the FOMB, AAFAF, and the COFINA Agent to “comply immediately with the Stipulation,” and refrain from “participating in any discussions to settle the Commonwealth-COFINA [D]ispute with the Commonwealth Creditor Representative selected by the Ad Hoc Group of General Obligation Bondholders and Assured Guaranty Corp. . . . unless and until such a settlement is reached between the Commonwealth Agent and the COFINA Agent first.” (Docket entry no. 3092-1 at 2.) The Motion focuses primarily on paragraph 4(i) of the Stipulation, which relates to the roles and responsibilities of certain Agents and Representatives in the context of Commonwealth-COFINA Dispute negotiations, and under the dispute resolution structure established pursuant to the Stipulation. Among other things, the Stipulation defines the parameters of the Agents’ authority and requires that settlements negotiated by the Agents be subjected to particular disclosure and approval protocols. Contrary to AFSCME’s structural assumption that paragraph 4(i) prohibits other parties from participating in settlement discussions, the Stipulation does not constrain the ability of any other party in interest to participate in mediation or negotiation of any issues, nor does it constrain the general authorization of the Mediation Team to facilitate such efforts. Thus, the Motion rests on a faulty legal premise. AFSCME’s Motion is also lacking in factual foundation to the extent that it is premised on speculation regarding activity in the confidential mediation setting. The Court makes no assumption about, and will not inquire into, such confidential communications.”

It was a bizarre request that unfortunately took up too much of the Court’s time.

PBJL Energy Corporation filed a RICO complaint against PREPA but ethical considerations bar me from saying anything more. I used to represent plaintiff but not at this time and was not involved in the filing of this complaint.

Western Surety Company and Continental Casualty Company file an adversary proceeding in order from the Court:

“[D]eclaring that the funds retained by the PRHTA to prime contractor in the public work projects, Betteroads Asphalt, LLC and/or Betterecycling Corporation, are not property of the estate of the PRHTA in the pending Title III case, but rather property of the Sureties as result of its equitable lien and rights of subrogation, and pursuant to the terms the General Agreement of Indemnity executed by the prime contractor, among other indemnitors.”

In addition, the Hermandad de Empleados del Fondo del Seguro del Estado, Inc., also known as Unión de Empleados de la Corporación del Fondo del Seguro del Estado, , Asociación de Empleados Gerenciales del Fondo del Seguro del Estado Corp., and Unión de Médicos de la Corporación del Fondo del Seguro del Estado Corp., all labor unions associated with the Puerto Rico Workmans’ Compensation Fund, filed a complaint claiming PROMESA is unconstitutional since it violates the 13th (slavery) and 15th (voting rights) Amendments. Their thesis is that since the members of the unions do not vote for president or Congress, PROMESA is unconstitutional. Although definitely imaginative, this tells us to the extremes the unions in Puerto Rico will go to get rid of PROMESA. Aside from the more obvious problems with the complaint, it is a good idea to remember that no territory has ever voted for the President or Congress. It took the approval of the 23rd Amendment in 1961 for DC residents to be able to vote for President. The Constitution itself reserves presidential and Congressional vote for states, not territories. Let’s see what Judge Swain does with this.

The saga of the Commonwealth budget continues to simmer with the Senate surprisingly approving the prospective elimination of law 80. The Board quickly announced that this was not the agreement with the Government. Then, the House, that originally had said would approve the elimination of Law 80 now seems to have second thoughts. God only knows where this will end. Although the Board recertified the fiscal plan, it is up in the air whether there will be further changes if it believes that the Legislature has not complied with the agreement. This will also delay any future Plan of Adjustment. Looks like one big parody. Again, let’s see what happens.

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