Monday Update – November 20, 2017

Welcome to your weekly Title III update for November 20, 2017. This week several motions and incidents of great importance have occurred. Aside from the blockbuster and, to me, surprising decision by Judge Swain to deny the Board’s unilateral appointment of Noel Zamot as PREPA CTO and essentially put the Government of Governor Rosselló on equal footing with the Board, other interesting things transpired. Even still, it remains to be seen if the Board will appeal Judge Swain’s ruling.

The Board filed a motion essentially stating that the COFINA and Commonwealth agents exceed its authority in the Commonwealth v. COFINA dispute. It states at page 2 of its motion:

“[B]oth the COFINA Agent and Commonwealth Agent have exceeded the scope of their respective agencies by making claims and seeking relief that go beyond the narrow issue for which they were appointed to resolve—the Commonwealth-COFINA Dispute. The Oversight Board thus seeks an order confirming the scope of the tasks it expressly assigned to its Agents, so the Agents can answer the single question posed to them, through litigation or authorized settlement, and the Oversight Board can then use that answer to carry out its duty to restructure the debts of the Commonwealth and COFINA.”

As to the Commonwealth Agent, to wit the UCC, the Board objects to Count III that states “the Commonwealth Agent hereby indicates its intent to breach, revoke, and/or reject that unsecured promise” that sales and use tax (“SUT”) “revenues would be transferred to COFINA in the future.”

As to the COFINA agent, the objections are to these causes of action:

“Count II: Declaration that the “Commonwealth’s misappropriation of the Pledged Sales Tax and/or Dedicated Sales Tax” constitutes a violation of the U.S. and Puerto Rico Constitutions.

Count III: Declaration that the “Commonwealth’s misappropriation of the Pledged Sales Tax and/or Dedicated Sales Tax through the Compliance Law” constitutes a violation of PROMESA.

Count VII: Permanent Injunctive Relief against the Commonwealth, preventing the Commonwealth from “interfering” with the Funds.

Count VIII: Declaration that “the GO Bonds, PBA Bonds and Other Debt Issued in Violation of the Debt Limit” Are Not Entitled to Priority under the Constitution.” (Board motion pages 6-8)

The Board motion also argues that the interveners’ motions exceed the scope of the intervention. These objections are much more numerous than the COFINA and Commonwealth Agent objections. The motion specifically objected to several causes of action by Ambac, COFINA Senior Bondholders, Mutual Fund Group/Mutual Fund Group and National.

Irrespective of the merit of these objections, and some are quite meritorious, it is clear that the Board wants to tightly control the Commonwealth v. COFINA litigation. To what extent it will be allowed by Judge Swain, we will soon find out.

Related to the Commonwealth v. COFINA dispute, several motions to strike claims were filed this week. Ambac filed a motion to strike the UCC’s causes of action (claim 12 and 13) claiming COFINA is unconstitutional – which I believe is the strongest claim — and the avoidance claims (claims 4-11). As you can see, Ambac wants to strike the bulk of the UCC’s claims against COFINA. Another party trying to control the scope of inquiry in the Commonwealth v. COFINA dispute.

Judge Hausser, in charge of the mediation team, made some remarks during the November 13, hearing but recognized that “no major breakthroughs had been achieved.” As to the UCC’s motion to conduct discovery as to the legality of PR debt, Judge Dein denied it without prejudice and conditioned any new motion on the UCC confirming:

  1. “that it has entered into a mutually agreeable nondisclosure agreement with the investigator appointed by the Oversight Board (the “Investigator”) or has been unable to do so despite its good faith efforts;
  2. that it has submitted targeted discovery requests for information from the Financial Institutions to the Investigator; and
  3. that the Investigator has failed to seek this information from the Financial Institutions within a reasonable time or has otherwise been unable to obtain this information within a reasonable time.”

The clear message to the Board and its investigator is to take the UCC’s views seriously.

The QTCB Noteholder Group filed a motion requesting that the UCC’s Eight Cause of Action against COFINA be stricken. This cause of action claims “that any security interest of COFINA is subordinate to the rights of the Oversight Board as trustee.”

Also, the GO Ad Hoc Committee filed a motion to strike the following in the Commonwealth v. COFINA litigation:

“a. The Second, Third, Fourth, Seventh, and Eighth Causes of Action asserted in the Amended Answer, Defenses, and Counterclaims of the Appointed Agent of the Puerto Rico Sales Tax Financing Corporation (COFINA) (Dkt. No. 75 ¶¶ 73-102, 117-128);

b. The Third Counterclaim asserted in the Mutual Fund Group’s and Puerto Rico Funds’ Answer and Counterclaims (Dkt. No. 88 ¶¶ 73-80);

c. The Second, Third, and Fourth Causes of Action asserted in the Answer, Affirmative Defenses, and Counterclaims of National Public Finance Guarantee Corporation (Dkt. No. 93-1 ¶¶ 70-102);

d. The First, Second, Third, Fourth, Fifth, Sixth, and Seventh Counterclaims for Relief asserted in Intervenor-Defendant and Counterclaimant Ambac Assurance Corporation’s Answer and Affirmative Defenses to the Unsecured Creditor Committee’s Amended Complaint and Counterclaims Against the Commonwealth (Dkt. No. 94 ¶¶ 56-111); and

e. The Second, Third, Fourth, Fifth, Sixth, Seventh, Tenth, Fourteenth, Fifteenth, Seventeenth, Eighteenth, Nineteenth, Twentieth, and Twenty-first Causes of Action asserted in the Answer in Intervention and Counter and Crossclaims of the COFINA Senior Bondholders’ Coalition (Dkt. No. 90 ¶¶ 69-122, 137-141, 161-175, 182-207)”

Clearly, the Commonwealth v. COFINA controversy is much larger than it seems.

Judge Dein heard argument on several motions for Rule 2004 discovery. She granted Siemens right to request documents and take on deposition on “whether or not the funds identified in the Motion are being held in an escrow account.”

The former representative of the Puerto Rico Government to the Board, Mr. Elías Sánchez, had filed a motion to strike his mention in the UCC request to conduct discovery on the Whitefish contract. Although the UCC amended its motion to reflect the fact that he denied any involvement, Mr. Sánchez insisted in striking any mention of himself. As I predicted, Judge Swain denied the motion to strike.

The UCC and PREPA reached written stipulation on the inquiry as to Whitefish. Maybe at some time we will know the truth behind this scandal.

Aurelius filed a reply to motion to dismiss by the Board and to the Board’s objection to the lifting of the stay. These issues which surround the Constitutionality of the appointment of the Board members is in full fledged briefing schedule. In December, the Solicitor General of the US will file his opposition to Aurelius and Utier and oral arguments are to be held in January 10, 2018. The issue is likely to reach the US Supreme Court.

The Official Committee of Retired Employees of Puerto Rico was allowed to intervene in a limited fashion in the adversary proceeding of the ERS v. Altarir where the validity of certain liens is being challenged.

Lastly, the American Federation of State, County and Municipal Employees filed a reply to Utier’s opposition to their intervention in its constitutional challenge of the Board appointments.

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 – November 13, 2017

Welcome to your weekly Title III update for November 13, 2017. This week and last several motions and incidents of great importance have occurred.

Today, Judge Swain heard oral arguments regarding the Board’s urgent motion to appoint a Chief Transformation Officer for PREPA. After arguments, Judge Swain not only ruled against the Board from the bench, but made important findings in favor of a limited view of the Board’s power. She said nowhere in Title I, II or III of PROMESA was there basis for the appointment of Mr. Zamot. She insisted that PROMESA required that the Puerto Rican Government act first and then the Board could react.

Judge Swain also denied that the Board could impose the recommendations it made in the Fiscal Plan if the Government rejected the recommendations, which puts into question the Board’s power to impose furloughs or pension reductions. Judge Swain mentioned that in the DC Board statute, there was the power to appoint an emergency manager and that this was not included in PROMESA. Moreover, Section 204 of PROMESA does not give the Board power to review all contracts, as it previously claimed. She also mentioned that Section 108(a) does not give the Board power to conduct day-to-day management of recovery efforts. Important, the Board cannot unilaterally borrow money in the name of the Government of Puerto Rico and any feasible Plan of Adjustment must take into account the Government of Puerto Rico. Both the Board and Puerto Rican Government are partners to achieve the dual goals of PROMESA.

All this essentially puts Governor Rosselló and his administration on equal footing with the Board. One cannot do things without the other. It remains to be seen if the Board will appeal this decision or if it will simply seek these prerogatives from Congress.

Finally, I want to make clear that I do not support the Board. I think it has exercised its powers to the detriment of Puerto Rico. It was my professional opinion that PROMESA, as written, gave the Board the powers it was invoking and as is the case in every piece of ongoing litigation, the Judge had the last word unless her decision is appealed. Let’s see how this new balancing of powers works out for Puerto Rico.

Last week, the Asociación de Profesoras y Profesores del Recinto Universitario de Mayagüez, Inc., a professorial association of employees of UPR Mayagüez Campus, filed an amended complaint challenging the UPR fiscal plan as unconstitutional. The problem with the complaint is that the professors lack standing since the reduction in funds to the UPR does not necessarily entail injury to them. Without standing, this challenge will likely fail.

The QTCB Noteholder Group filed a notice of intervention in the Commonwealth v. COFINA dispute to request that the UCC’s Eight Cause of Action be stricken. This cause of action claims that any security interest of COFINA is subordinate to the rights of the Oversight Board as trustee.” COFINA creditors have been filing answers to the complaint aside from what the COFINA agent has done so Judge Swain will have many arguments to sift through.

Two weeks ago, the UCC filed a motion to conduct discovery on the Whitefish contract and quickly several bondholders joined the request. Both PREPA and Whitefish were willing to provide the documents they would provide to Congress. After a short delay, they came to a stipulation to provide documents to the UCC. As the stipulation was filed, the Court cancelled the November 13 afternoon hearing. There will be a hearing on November 15, however, for the myriad other Rule 2004 requests for discovery that have been pending for a while. These requests include requests by bondholders on information as to the financial condition of the Commonwealth. On November 15, Judge Dein will hear further argument in the Siemens Transportation, National Public Finance Guarantee Corp., Ambac Assurance, UCC and GO, Assured Guaranty & Mutual Fund Group Rule 2004 motions. It will be interesting to see whom and to what extent Judge Dein will allow to conduct discovery.

Also, on November 6, the Board announced its policy on the Puerto Rican Government review. PROMESA gave the Board this power but it was only during its October 31 meeting that it decided to utilize this power. Extremely convenient, given the Whitefish contract controversy. The document states:

“This Policy applies to any contract that is proposed to be entered into by the Commonwealth or any covered instrumentality. As used in this Policy, “contracts” also applies to grants and sub-grants. This Policy applies to all contracts in which the Commonwealth or any covered instrumentality is a counterparty, including those with the federal government, state governments, private parties, and nonprofit organizations.”

So much for the Board recognizing the limitations of section 204(d)(2) of PROMESA or the democratically elected government of Puerto Rico.

In addition, Ambac Assurance objected to the Board’s request for an extension to the period to determine whether to reject or adopt unexpired contracts. Understandable, but it is unlikely Judge Swain will not grant the extension.

The saga of Elías Sánchez v. the UCC continues. The UCC amended its motion for Whitefish discovery to acknowledge that Mr. Sánchez denied the allegations but refused to withdraw its statement that former Governor Acevedo Vilá in his radio show claimed Mr. Sánchez was involved in the Whitefish contract. Mr. Sánchez filed a reply but it is unlikely Judge Swain will strike a statement of fact that Mr. Acevedo Vilá made the claim.

The US Government, although asking to be heard via motion, was absent from today’s hearing, putting into question its support of the Board.

The Board also took off the gloves with AFFAF in another issue. AFFAF requested leave to intervene in the Utier challenge to the constitutionality of the Board appointment. The Board objected but said at page 4:

“Defendants support AAFAF’s intervention as a party in interest pursuant to 11 U.S.C. § 1109 (“Section 1109”), consistent with Dkt. 75 in 17-ap-189, and Dkt. 38 in 17-ap-219. Under Section 1109, AAFAF “may raise and may appear and be heard” on issues in this adversary proceeding, including the Motion to Dismiss the complaint. Accordingly, AAFAF should be permitted to file briefs stating its position on issues raised in this adversary proceeding and subject to such notice or other requirements as the court may impose, and be heard at arguments concerning issues raised in this adversary proceeding. AAFAF does not have the right, and should not be afforded the right, to control, appeal, or settle causes of action.”

In other words, AFFAF can state its position and be heard but nothing more. Sort of a permanent Amicus Curiae. Again the Board brushes aside the Government of Puerto Rico. And speaking of the Utier complaint, the union filed an amended complaint cutting 25 pages of its previous motion. It seems that a review of the Aurelius complaint was persuasive.

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 –November 6, 2017

Welcome to your weekly Title III update for November 6, 2017. This week several motions and incidents of great importance have occurred.

Whitefish continues to dominate in the news and in the Court. The UCC filed a motion requesting leave to conduct Bankruptcy Rule 2004 on the Whitefish contract. The motion, which is a superb summary of all the facts and allegations surrounding the Whitefish contract, states that at page 15:

“The only way to address these concerns through the lens of the stakeholders in these Title III Cases is through discovery under Bankruptcy Rule 2004. As the official committee appointed to represent all of the unsecured creditors in PREPA’s title III case, no party stands better suited to investigate and evaluate these issues than the Committee.”

The UCC mentioned that former Governor Aníbal Acevedo Vilá, during one of his daily radio shows, alleged that Elías Sánchez, former Governor Rosselló representative before the Board, was involved with Whitefish, as an example of possible corruption or wrongdoing. Mr. Sánchez was not amused and filed a motion to strike the statement and included a statement, under penalty of perjury, stating he does not represent Whitefish or any of its principals nor have any contracts with PREPA. Judge Swain issued an order that the UCC “shall file an opposition, if any, by November 7, 2017. Mr. Sánchez shall file a reply by November 9, 2017 at 1:00 p.m.” Never a dull moment in Puerto Rican politics!

Related to the Whitefish contract and PREPA, much to my surprise, several parties filed objections to the Board’s request to appoint Mr. Zamot as the Chief Transformation Officer. For example, the Ad Hoc Group of PREPA Bondholders filed a motion claiming that PROMESA does not explicitly allow the Board to appoint Mr. Zamot. The Ad Hoc Group, however, retained an expert that evaluated the grid and found that:

While Hurricane Maria undeniably inflicted substantial damage, ample evidence demonstrates that the vast majority of the assets of the PREPA generation, transmission, and distribution system are substantially intact and could be restored expeditiously if appropriate and competent measures were implemented.” (page 1 of the motion)

The Ad Hoc Group’s motion details the decades of mismanagement of PREPA and specifically, the mismanagement of the corporation under the Rosselló administration. For example, the motion mentions that “on October 31, AAFAF publicly presented a liquidity update that showed that PREPA has had, and was projected to have, over $500 million from July 7 through September 22; by October 20, PREPA’s liquidity balance had decreased only to $471 million.” (Page 5) Moreover, the Ad Hoc Bondhholders filed a declaration by Derek HasBrouck (required reading for all residents of Puerto Rico), which excoriates PREPA for lack of preparedness and total mismanagement in the Hurricane María emergency. Although these bondholders do not support Zamot saying he has no experience in electrical grids, they renew their call for a receiver that would respond to a court (not Judge Swain) to manage PREPA. Fat chance that will happen unless the First Circuit reverses Judge Swain’s decision on the Ad Hoc bondholders’ request.

National filed a short motion objecting to the permanent appointment of Mr. Zamot but stated it “supports the entry of an appropriately tailored order, pursuant to section 105 of the Bankruptcy Code (made applicable to this Title III case by section 301 of PROMESA), authorizing Mr. Zamot to oversee the immediate repairs to the island’s electric power grid on an interim basis for a period of 120 days. Given the extenuating circumstances on the island, such limited relief is both warranted and urgent. National respectfully requests, however, that the Court deny the remainder of the relief requested or, alternatively, defer consideration of it until a later date.” (Page 8)

The Puerto Rican Energy Commission, supposedly PREPA’s regulator, filed a motion saying it took no position as to the Board’s motion but requested from the Court that it “(a) state explicitly that any approval of the CTO Motion does not preempt the Commission’s authority; and, regardless of how this Court rules on the CTO Motion, (b) direct counsel for FOMB and the Commission to develop, for this Court’s approval, a set of protocols ensuring that the actions of each entity are coordinated and mutually supportive, and not in conflict.” (Page 1) No idea how Judge Swain or the Board will handle this.

Obviously, AFFAF, representing PREPA, opposes the Zamot designation, repeating that PROMESA does not authorize the Board to do what it wants done. However, it seems to me its explanation of what the Board may or may not do pursuant to Section 305 of PROMESA ignores the fact that it clearly states that the Court cannot interfere with the local government’s power unless the Board agrees. Since the Board does agree with this interference with local authority, I fail to see how Judge Swain will not find for the Board. Also in disagreement was Scotiabank de Puerto Rico (“Scotiabank”), as administrative agent for PREPA’s “Fuel Line Lenders”. The motion repeats that the Board does not have the authority to appoint Zamot but without that authority it has ample authority to oversee PREPA’s recovery efforts. Scotiabank stated:

“To the extent the Oversight Board wishes to engage a CTO or other individuals to fulfill its statutory oversight role, the Fuel Line Lenders have no objection. In particular, if the Oversight Board has concluded that a CTO will add value in supervising the power restoration process (including through review and approval of contracts), the engagement should go forward on that basis.

The appointment of a long-term chief executive to take over PREPA’s management is completely different. As noted, the Oversight Board has no authority to supplant PREPA’s management. But if PREPA itself were to supplement its senior leadership, the utility would need to undertake an organized process to attract the best available individuals. A standard approach would be to engage an independent search firm (such as Russell Reynolds, which identified candidates to serve on PREPA’s board of directors) to search for individuals, inside or outside PREPA, with significant knowledge of the utility industry and experience managing a large utility such as PREPA. Scotiabank, as agent for the Fuel Line Lenders, stands ready and willing to participate in any such process along with PREPA, the Commonwealth, the Oversight Board, and other stakeholders.” (Page 10)

It is clear to me that creditors do not believe PREPA is capable of bringing electricity to Puerto Rico in a quick fashion, but they also do not trust the Board to be in complete control of the agency. Moreover, as Puerto Rico’s representative to the Board has said, if this remedy is granted, what would prevent the Board from appointing a CTO for the Government of Puerto Rico? Time will tell.

In addition, the PREPA Board of Directors filed a short objection and the U.S. Bank National Association, in its capacity as successor trustee under the PREPA Trust Agreement dated as of January 1, 1974, joined the Ad Hoc Bondholders motion.

Also on Friday November 3, several parties filed objections to Aurelius motion to dismiss the Title III filing for violating the appointments clause. Donald J. Verrilli issued a strong defense of the Board’s appointment, which it is to be expected as he was President Obama’s Solicitor General when PROMESA was enacted. Aurelius will reply soon and oral arguments are to be held in January 2018. If, however, President Trump’s Solicitor General decides not to support the PROMESA appointment process, which is unlikely, Mr. Verrilli will have an uphill battle. The Official Committee of Retired Employees of the Commonwealth of Puerto Rico also filed a motion in opposition to the Aurelius motion to dismiss, giving reasons why supposedly Congress has the authority to limit presidential power to appoint in territories. This has not been the practice in the past, however.

On the other hand, the American Federation of State, County and Municipal Employees, who also filed an objection to the Aurelius request for dismissal of the Title III proceeding, claims that it “opposes dismissing this Title III case based on the Appointments Clause unless, at a minimum, the offensive doctrine of territorial incorporation is completely overruled.” What does that doctrine have to do with Presidential powers is beyond me, but there it is. Obviously, this argument is made because the only one who can reverse the doctrine of territorial incorporation is the Supreme Court of the United States. I find this motion lacking but lets see what Judge Swain decides next year. In an interesting twist, the American Federation of State, County and Municipal Employees filed a motion to intervene in the Utier request for declaration of unconstitutionality of Board appointments to seek the dismissal of the complaint. It seems this group believes it is better off in a bankruptcy proceeding. Also, the GO bondholders joined the Aurelius request for dismissal in a short motion.

In addition, Judge Swain issued an order, pretty much agreed upon by the parties after extensive negotiations, granting Bettina Whyte, the COFINA agent:

“The protections of 48 U.S.C. § 2125 (“Immunity Protections”) shall apply to the COFINA Agent, the Commonwealth Agent (together with the COFINA Agent, the “Agents”) and their respective professionals and employees with respect to all actions of the COFINA Agent or Commonwealth Agent, as applicable, taken in good faith to carry out their duties under the Stipulation and Order; provided, however, that the foregoing shall not prohibit the Oversight Board or any other party in interest from asserting that a claim, counterclaim or defense asserted by an Agent in the Commonwealth-COFINA Dispute, or any other action of an Agent, is outside of the scope of the authority delegated by the Oversight Board to the Agents or otherwise set forth in the Stipulation and Order (a “Scope Objection”), and if the Court enters an order that (i) sustains a Scope Objection or (ii) otherwise rules that the Agents do not have the authority to take an action or litigate a claim, counterclaim or defense (a “Scope Order”), then the Immunity Protections shall not apply to any further actions by the Agents, their professionals or employees to continue to litigate such claim, counterclaim or defense, except that the Immunity Protections shall apply to any appeal of a Scope Order and to any actions taken in mediation with respect to such claim, counterclaim or defense prior to appeals being exhausted.” (Page 2-3)

In addition, the order states that COFINA will pay Ms. Whyte’s fees from the account it has with BPPR and if there is not enough money, then from the NY Mellon Bank account. Loss for AFFAF.

The UCC filed on Friday, November 3, an informative motion as to the issues of Rule 2004 discovery and informed Judge Dein, The Creditors’ Committee’s position has not changed, and the Creditors’ Committee respectfully requests a ruling on its pending Bankruptcy Rule 2004 Motion after oral argument on November 15, 2017.” (Page 1) In addition, the UCC stated that John Couriel’s investigation on behalf of the Board is different from the one it seeks to conduct:

“[T]his investigation as intended not to identify culpable third parties or potential claims but instead “sole[ly] [] to find facts” related to, among other things, “the factors contributing to Puerto Rico’s fiscal crisis” and its debt issuance.5 However interesting this effort may be in developing a historical record of the financial foibles of various Commonwealth actors, the Creditors’ Committee’s interest is rather different. Because it represents the interests of creditors holding billions of dollars in claims that will be satisfied only partially, its intent is in determining whether claims exist that might benefit these creditors. Mr. Couriel is not pursuing that end.” (page 2 of the motion)

If Judge Dein recommends the UCC proceed, this will throw a monkey wrench into the Board’s plans of total control of the Title III proceeding. In the HTA case, the parties also failed to reach an agreement as to Siemens’ request for Rule 2004 discovery.

On the subject of Rule 2004 discovery, an Omnibus motion by different creditors and debtors was filed, essentially stating that no agreement has been reached. Also, the UCC partially joined National’s request for Rule 2004 discovery. All these issues will be discussed during the November 15 hearing.

The Board also opposed the Aurelius motion to lift the stay and the UCC requested leave to argue during the hearings on several motions to dismiss adversary proceedings. The UCC also opposed bondholders’ request for a 90 day stay in the case, as did the Board.

Finally, the Board had a meeting on Tuesday, October 31. I attended the meeting and quite a bit of new information came out. The Board wants a new fiscal plan for the Commonwealth to be provided by December, with a projected approval for February. As to the fiscal plan, Ms. Jaresko and members of the Board warned the Government that with a population reduction since the hurricane of 15% (gasp!) and a projected 40% plus reduction in income, it had to consider what essential services it could provide. This is nothing more than an even more aggressive employment and pension reduction. During the meeting, Ms. Jaresko announced, upon the suggestion of the settlement team, that all stakeholders have an opportunity to comment on the new fiscal plan. Also, the Board will now review any contract of the Commonwealth and its instrumentalities of $10 million or more before it can be approved. The Board will also review, at random, contracts that have been granted, including the Whitefish contract, in particular. Considering that after María the Puerto Rican government has granted 1,600 contracts, this is a herculean task.

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 – October 30, 2017

Welcome to your weekly Title III update for October 30, 2017. This week is dominated by the Whitefish scandal, which will undoubtedly affect the PROMESA litigation and the Board’s roll vis-à-vis the Puerto Rico government.

Whitefish is a recently incorporated Montana-based company with only two employees and reported sales of $1,000,000. The company has no history of mayor reconstruction work, yet, somehow, landed a $300,000,000 contract to reconstruct the PREPA grid. Ricardo Ramos, PREPA’s executive director, said right after Hurricane Irma that the utility had sufficient supplies to repair itself – a claim later debunked. Mr. Ramos stated later that if another hurricane came he would call the American Public Power Association, which would provide its crews for the reconstruction of the power grid. When the APPA crews did not appear, he first said that he had called the association for assistance but received no answer. When the APPA chairman said he had not called, Ramos changed the tune to say they were asking for millions in deposit, something Whitefish did not.  There was no bid for the contract. The contradictions were many and Congressional cries to investigate were loud. Moreover, the contract became public but rather than answer questions it created more. Paragraph 59 reads, “[i]n no event shall PREPA, the Government of Puerto Rico, the FEMA administration, the Comptroller General of the United States, or any of their authorized representatives have the right to audit or review the cost and profit elements of the labor rates specified therein.” This section reeks of bad faith and lack of transparency. Further, in any event would be void as contrary to the law, moral and public order, both in Common Law and Puerto Rico’s Civil Law.  FEMA will have to decide soon whether it will reimburse PREPA for the Whitefish contract – a question sure to be raised when FEMA Administrator Brock Long testifies before Congress this week.   Now, it’s reported the Federal Bureau of Investigation is investigating the Whitefish contract.

Further, on October 26, 2017, Congressman Rob Bishop, chairman of the House Natural Resources Committee, requested from Ricardo Ramos a series of documents pertaining to the adjudication of this contract. Congressman Bishop, in a not very subtle tone, made clear to Mr. Ramos to preserve all communications with Whitefish, which include emails, phone calls, and Linked In messages – the method a Whitefish spokesperson claims is how he first contacted Mr. Ramos. In what seems like a coordinated action with Chairman Bishop’s Committee, the Board announced on October 25, 2017, the designation of Mr. Noel Zamot as the Chief Transformation Officer for PREPA. The next day, the Board filed a motion with Judge Swain in the PREPA Title III proceeding asking for Mr. Zamot to be appointed as CTO, whose duties and responsibilities makes him PREPA’s new CEO, see motion at page 2. The motion, at page 17, states as follows:

“Section 305 of PROMESA provides that, “notwithstanding any power of the court, unless the Oversight Board consents or [the debtor’s Title III] plan [of adjustment] so provides, the court may not by any stay, order or decree, in the case or otherwise, interfere with –(1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.” PROMESA § 305. As this Court reasoned in its rejection of the lift stay motion, a receiver could not be appointed because “permission to require the appointment of a receiver to manage PREPA’s operations and seek the approval of rates higher than those PREPA has thus far chosen to charge – is facially inconsistent with Section 305 of PROMESA [and cannot be ordered by the court] absent the Oversight Board’s consent, which has not been given here.” Order Denying Receiver Motion at 10–11. It follows that, to the extent it is argued that the CTO would necessarily exercise or interfere with political or governmental powers in carrying out its responsibilities, the Court may order the appointment of the CTO provided the Oversight Board consents. The Oversight Board’s consent is given through this Urgent Motion, and it respectfully requests appointment of the CTO with the powers and authority described herein.”

Moreover, at page 19 of the motion, the Board states “[n]othing herein shall prevent the Oversight Board from seeking an order from the court to amend, alter, expand, or limit the Powers and Authority vested in the CTO by any order of the court.” Hence, the Board may seek even more powers for the CTO. This begs the question; can the Board obtain the appointment of a CTO for the Commonwealth Government at some time to eclipse Governor Rosselló? The government has vowed to oppose this latest Board action but I see little chance it may succeed. Judge Swain on Friday ordered the government to oppose the Board’s motion no later than November 3, any reply by November 8 and the oral argument will be on November 13, at 11 am. Fireworks are to be expected unless Governor Rosselló relents.

Why is the Board moving for the Zamot designation? Mostly because it wants to control the María recovery funds, something that is barred at this time by PROMESA section 204(d)(2), and to prove that it is a useful oversight authority rather than simply a tool rip up contracts with Puerto Rico’s creditors. As I said, Judge Swain is very likely to side with the Board since sections 305 and 315 of PROMESA allow the Board to do so.

On Wednesday October 25, the Court held the hearing on the recovery funds motion by the Board and surprisingly, loans were removed by AFFAF from the definition of recovery funds. The language was negotiated between the parties for as I said, there was no real opposition to the Board’s motion, only to some of the language. Also, the UCC said that it expected to settle the COFINA v. Commonwealth litigation, hastily adding that litigation was very costly. Undoubtedly, over 90% of federal cases are settled, but any settlement here that does not involve 100% of COFINA funds for the Commonwealth will be challenged by the GO bondholders, leading to even more litigation.

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 – October 23, 2017

Welcome to your weekly Title III update for October 23, 2017. Again, not much happened in the Court this week but other developments were of great importance.

We should start in Washington where Governor Rosselló met with President Trump and other lawmakers last week.  Since then, some of these lawmakers are sounding off, but without the facts.  Senator Menendez took to the Senate floor to claim that the Trump administration was planning to use the $4.9 billion Community Disaster Loans (CDL) program to pay bondholders, through the new approval process established under this relief legislation, which requires the Secretaries of Treasury and Homeland Security to sign-off on requests from San Juan.  What this tells me is that San Juan’s requests will be heavily scrutinized, and come with stringent conditions imposed by the Trump administration.  This is not exactly what Governor Rosselló had hoped for.  We will see if this forces greater transparency in the Title III process, which has been limited to date by the Board and Governor’s obfuscation.

In other news, Bettina Whyte, the COFINA agent, had requested leave from the Court to retain Centerview Partners LLC for several services, such as familiarizing itself with the fiscal condition of the Commonwealth and COFINA, including financial projections and forecasts; reviewing and evaluating COFINA’s capital structure and advising on possible restructuring strategies; providing expert testimony at any hearings in connection with the Commonwealth-COFINA Dispute; and assisting and advising with negotiation and mediation strategy. The cost for these services would be $1.75 million, plus expenses. Both the Board and AAFAF objected saying the scope of what the agent wants the expert is beyond the scope of its authority as per the parties’ stipulation. Judge Swain decided Monday, Judge Swain denied the request without prejudice and stated:

These disputes, which will be argued at a hearing on the companion application on October 25, 2017, highlight certain ambiguities in the stipulated Procedures and persuade the Court that the proper scope and terms of retention of a financial advisor, if any, for the COFINA Agent, cannot properly be addressed prior to clarification of the scope of the COFINA Agent’s duties and authority. Among the more significant scope issues to be determined is whether formulation of hypothetical restructuring scenarios is an appropriate exercise of the COFINA Agent’s negotiation responsibilities under the Procedures even though PROMESA reserves to the Oversight Board the exclusive power to propose any plan of adjustment for confirmation. Only after such clarification can the appropriate potential range and valuation of the proposed Centerview services be assessed. For this reason alone, denial of the Centerview Application, without prejudice, is appropriate at this juncture.

From reading this it seems the COFINA agent wants to make a deal with the Commonwealth in order to preserve some of its alleged lien, but the Board does not want that. I remember Martin Bienestock arguing during the first hearing that the Board would reserve the right to veto any settlement in the dispute. It seems that idea has not gone away. We will know more on Wednesday.

Also on the COFINA v. Commonwealth case, the UCC and COFINA agent filed a motion informing the Court of an agreement as to discovery, which would allow for discovery to end on February 9, 2018, with a subsequent trial. Interestingly, the Board and AAFAF do not agree to it. It seems that the Board and AAFAF want the COFINA funds at an earlier date. The parties stated they would continue to try to reach an agreement before the October 25 hearing.

Also, the Board filed a notice of amendment of the Management Order to simplify the lifting of stay proceedings. The new proposal would allow the Board to essentially decide without further order to modify the stay. Let’s see what happens.

As expected, no party objected to the idea that federal relief funds would not be available resources to be used to pay creditors but several parties offered amendments to further clarify the situation. Ambac, however, had a rather interesting objection:

First, the definitions of “Federal Disaster Relief Funds” (Motion at 3 n.3) and “Commonwealth Disaster Relief Advances” (Id. ¶ 19 n.6) are overbroad. These definitions should be narrowly tailored to provide that “Federal Disaster Relief Funds” expressly exclude funds and sources of revenue beyond those funds specifically disbursed by the federal government to aid in disaster relief, including funds that are validly pledged to creditors under applicable law. The definitions should further specify that “Federal Disaster Relief Funds” does not include loans. At present, the definition provides that it includes any “funds . . . in the form of grants”; the exclusion of loans received for disaster relief or any other purposes should be made explicit. (Id. At 3 n.3.)

 3. Second, given that the Motion contemplates the deobligation of Federal Disaster Relief Funds and the consequences of such deobligation (Motion ¶¶ 7, 22), the Proposed Order should contain a commitment by the Commonwealth, AAFAF, and the Oversight Board to communicate with creditors in good faith for purposes of, inter alia, identifying all recipients of Federal Disaster Relief Funds and the uses to which such funds have been put by the Commonwealth and all such recipients. (bolded added)

The American Federation of State, County and Municipal Employees (AFL-CIO) had filed an adversary proceeding against the Board to stop the implementation of the employee furloughs and pension reduction. Given that the Board had placed that in hiatus, now the plaintiff is requesting a stay of proceedings, obviously waiting for the new fiscal plan. Interestingly, the plaintiff’s motion states the Board agreed to the stay.

In the adversary proceeding of ERS v. Altair, plaintiff argues that the security interest of the defendants has not been perfected. During the case, discovery requests were made and the defendant’s claimed this week:

Unfortunately, the ERS has consistently resisted providing the discovery the Court expected. Initially, the ERS simply argued that no discovery was necessary at all. Then, when that argument was rejected, the ERS claimed that the scope of discovery should be extremely narrow. After that effort failed, the ERS evidently then decided to unilaterally limit what discovery it would provide.

The defendants want more documents produced, 30(b)(6) depositions (person most knowledgeable) and a decision on documents deemed privileged on the deliberative process privilege. The motion was filed Wednesday and last Friday, Magistrate Judge Dein issued an order that plaintiff had to answer Altair’s motion by October 26 and any reply must be filed by October 27. A hearing is to be held in Boston is scheduled for November 2, at 3 pm.

The House Natural Resources Committee was to hold a hearing on October 24, 2017 to determine whether the Board need to have further powers to deal with the alleged graft and corruption in the distribution of relief funds in Puerto Rico. Without given any reason, however, the hearing was continued sine die. I was told by sources that the Board was lobbying Congress for more power so this came as a surprise. Maybe President Trump is thinking of appointing a National Incident Commander as was done after Katrina and the British Petroleum oil spill in the Gulf. This would dispense with any idea of further powers to the Board.

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

Monday Update – October 16, 2017

Welcome to your weekly Title III update for October 16, 2017. Again, this week not much happened in the Court but other developments were of great importance.

Judge Swain granted the Board’s extension of the time to meet and discuss lifting of the stay in those case where the time expired on September 19 on, as well as the time for Puerto Rico to respond to motions to lift stay. Delay seems to be the name of the game.

On October 12, Judge Swain ordered the Board to “submit a revised proposed order to the Court that includes a procedure for retroactive Court approval of any automatic stay modifications. For example, such procedures may provide the following:

(a) The Debtors, in their discretion, and without immediate leave of Court, may (i) enter into stipulations modifying or lifting the automatic stay and (ii) agree to modify or lift the automatic stay with respect to any prepetition ordinary course civil action against a Debtor;

(b) The Debtors must file Omnibus Lift Stay Motions, every sixty (60) days, identifying each automatic stay modification agreed to by the Debtors during the relevant period and seeking that the Court approve such modifications nunc pro tunc to the relevant modification date; and

(c) Each Omnibus Lift Stay Motion must include personalized information for each automatic stay modification including, as applicable, a brief description of the modification, case information (including case number and court), and counterparty.

Seems the Board wants to further remove the Court’s control over certain proceedings but Judge Swain seems reluctant. Let’s see what happens.

The Board had also filed a motion to set the last date for filing proof of claims but on October 13, withdrew the motion, allegedly due to Hurricane María. This means that there is no bar date for filing of proofs of claim at this time in any of the Title III cases. To this we have to add the withdrawal of the Board of its motion in the PREPA case to establish a procedure to cancel power purchasing agreements.

In the Commonwealth v. COFINA case, the UCC continues serving subpoenas to different parties. In addition, Judge Swain has ordered the parties that no later than October 20, “a proposed revised schedule to govern the remaining briefing and discovery deadlines in the Commonwealth-COFINA Dispute. Such proposal may not include any deadlines starting prior to October 25, 2017.” This may move the Court to continue the December 4-8 hearings for a later date, further delaying decision in the controversy.

Governor Rosselló sent a letter to the Secretary of the Treasury and stated, inter alia:

“Without immediate access to a significant federal liquidity facility, we will be unable to provide essential services to our citizens, such as paying the salaries for teachers and first responders, providing healthcare, and paying pensions.”

“Personnel and advisors from the Government of Puerto Rico and the Fiscal Oversight and Management Board for Puerto Rico (“FOMB”) have been working closely with your staff to provide estimates on the magnitude of the shortfall. This shortfall results primarily from large declines in government revenues and operating deficits at PREPA and PRASA in addition to the need to fund near term recovery efforts.”

In addition, the Board sent a letter to Secretary of the Treasury and stated, inter alia:

 “The Government of Puerto Rico’s ability to provide essential services, such as paying the salaries for teachers and first responders, providing healthcare, and paying pensions, is in jeopardy unless Puerto Rico is given immediate access to a significant federal liquidity facility.”

“This proposal has the flexibility to provide Puerto Rico with the cash that it will need to operate core government services and its disaster response efforts in the near term, in addition to being integrated with PROMESA, its monitoring mechanisms, its fiscal reform goals, and the prehurricane certified fiscal plans.”

The obvious question is what proposal is the Board talking about? I have not seen it and neither has anyone in Puerto Rico, outside the Board and some government officials. Maybe the Centro de Periodismo Investigativo is finding out. I am sure everyone in Puerto Rico and the US want to know.

Congress responded by approving a $36 billion plus aid package with $4.9 billion, supposedly for loans, according to the Governor, who claims most of the monies will go to Puerto Rico.

In other news, the Board hired Williams and Jensen PLLC for $720,000 a year and Off Hill Strategies, LLC, for $180,000 a year to lobby in Congress and the Executive. Before you tell me María has made this necessary, the hiring was effective August 14, 2017, more than a month before the hurricane’s visit. Obviously, this hiring was done to protect the Board from any Congressional attempt to curtail its prerogatives. Power is very beguiling.

Also, the Board officially hired Donald Verrilli, Obama’s Solicitor General, as its attorney in the Aurelius and Utier constitutional challenge. At least five lawyers will be working on the case, at $1,225, $800, $735, $660, and $600 an hour. Clearly, contrary to what some analyst opine, the Board is taking this challenge very seriously. The next step is to wait for the US Solicitor General to announce whether he will defend the law. The Solicitor General usually defends Congressional laws but the Solicitor General asked for an extension to announce its determination.

Finally, to complicate my already complicated life, on Sunday October 15, the Board and AAFAF filed a motion entitled Urgent Joint Motion of the Commonwealth of Puerto Rico, Puerto Rico Highways and Transportation Authority, Puerto Rico Electric Power Authority, and the Puerto Rico Fiscal Agency and Financial Advisory Authority For Order Concerning Receipt and Use of Anticipated Federal Disaster Relief Funds and Preserving Rights of Parties, seeking an:

“. . . order confirming that with respect to the Commonwealth and its instrumentalities’ receipt and use of anticipated Federal Disaster Relief Funds: (i) the Commonwealth and its instrumentalities, including public corporations, will deposit Federal Disaster Relief Funds into new, segregated, non-commingled, unencumbered accounts held in the name of the instrumentality to whom the funds have been allocated according to a governing Project Worksheet or otherwise under applicable law (the “Disaster Relief Accounts”); (ii) no liens, encumbrances, priorities, or other claims by pre-existing creditors of the Commonwealth or Non-Federal Entities in any form whatsoever, shall be asserted against such Federal Disaster Relief Funds, Commonwealth Disaster Relief Advances, or the Disaster Relief Accounts; (iii) such funds shall be applied only to pay or reimburse parties for expenditures within the scope of work identified on a FEMA Project Worksheet or otherwise in accordance with federal law or regulation, and shall not be considered available funds, resources, or revenues for any other purpose in connection with any restructuring proceeding under PROMESA; (iv) no other party in interest shall be permitted to interfere with the transfer of Federal Disaster Relief Funds to Disaster Relief Accounts or parties entitled to payment; and (v) to the extent any Federal Disaster Relief Funds become disobligated, the Commonwealth, as recipient of such funds, shall have a superpriority administrative expense claim against any Non-Federal Entity that is a debtor in a case under Title III of PROMESA to which it transferred such funds.” (Pages 10-11 of the motion)

At pages 7-8, the motion states “[u]nder the FEMA Agreement, the Commonwealth is designated as the sole recipient of all Federal Disaster Relief Funds provided by FEMA. The Commonwealth is then responsible for administering subgrants and transferring Federal Disaster Relief Funds to Commonwealth instrumentalities, public corporations, municipalities, and other eligible non-federal entities, as determined under applicable law, including HTA and PREPA (“Non-Federal Entities”).” This means, as I have mentioned before, that Puerto Rico, not the Board, will handle the relief money, giving Governor Rosselló much needed independence from the Board.

In addition, there is no need to state this since it is clear law. Why did the Board do so? No creditor has claimed that the relief money belongs to them and I doubt any will. What’s even stranger, as a result of federal relief monies, it’s likely Puerto Rico won’t necessarily be required to tap its own resources to pay for the relief effort. Conversely, the Board has also already stated it will review the Fiscal Plan and will likely reduce available monies for debt service to zero. This is despite withdrawing the adversary proceeding to force the Commonwealth to implement the furloughs, and pension reforms, which are being paid out of the Commonwealth Budget. Something doesn’t add up. The Board must do more to reconcile where the revenue from the Treasury is going if it isn’t sending it to bondholder payments nor recovery efforts.

It will be important to watch out for the relief money, FEMA direct payments and insurance payments will pour into the island in early 2018, like it did after Hugo (1989) and Georges (1998). If history is any indicator, the economy will grow and it will be difficult to justify the continued payment of pensions and employees and yet zero debt payment with this economic growth. This will be a big row once the Board “reveals” its new fiscal plan.

Also, at page 5, the Board states that PRASA also suffered damages due to María. Since PRASA has no income at the moment, it remains to be seen if there is Title III in the future for the agency.

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 – October 9, 2017

Welcome to your weekly Title III update for October 9, 2017. This week not much happened in the Court but what did transpire can have profound effects on the Title III litigation.

On October 2, 2017, the Solicitor General of the United States filed a motion for an extension of time notice whether it will defend the way in which PROMESA set out the appointments of members of the Board that has been challenged by Aurelius and UTIER, PREPA’s union. The motion stated, inter alia, “The United States now respectfully seeks an extension of time to file its Notice and, if necessary, its brief in support of the constitutionality of PROMESA. The Government’s deliberation on the issue has taken longer than initially anticipated. Indeed, the approval of the Solicitor General is required for the United States to defend the constitutionality of a federal statute.” It seems to me the Solicitor General and the White House are taking a very close look at PROMESA to determine whether it passes constitutional muster, but beware not to look too much into this. Let’s see what happens.

In response to the above petition, the Court issued an order moving the dates to resolve the Constitutional question. By November 3, 2017, the parties in interest, including the Oversight Board, must file opposition papers to the Aurelius Motions and “answer or otherwise respond to the complaint filed in the UTIER Adversary Proceeding.” By November 6, 2017, the Attorney General of the United States is “to notify the Court of its intent with respect to intervention in connection with the Aurelius Motions and the UTIER Adversary Proceeding.” The oral argument on the constitutional challenge will be held on January 10, 2017, which makes a decision before February/March unlikely.

The UCC continued its mission of intervening in most of the adversary proceedings filed in the Puerto Rico bankruptcies. Just today, the Board responded to the UCC’s motion to intervene stating that the UCC “should be allowed to ‘raise, appear and be heard’ on issues and review discovery and attend depositions subject to any relevant protective order, and nothing more.” The response showed just how unhappy they are with the UCC by outright denying that they have constitutional or prudential standing to control any of the issues at hand. The UCC continues to claim, however, that it does.

It seems likely that the limited interventions sought by the UCC will be granted by Judge Swain. It is also likely that at some point during the pendency of these cases, the UCC will seek greater involvement in the cases, much to the displeasure of the Board. It will be interesting to see what Judge Swain’s reaction will be.

In addition, the Board dismissed its adversary proceeding against the Governor for the furloughs and will not renew it until at least July of 2018 with the new fiscal year. Remains to be seen what will happen.

The Board has also requested an extension on the review of petitions to lift the stay and answers to motions to lift the stay, claiming the Department of Justice has difficulty accessing its files. Since I had to oppose said motion, I will not comment here on its legal implications and correctness.

Late Friday October 6, Assured Guaranty Corp., Assured Guaranty Municipal Corp. (f/k/a Financial Security Assurance Inc.) and National Public Finance Guarantee Corporation filed a notice of voluntary dismissal of their complaint, 17-ap-125, which was up for oral argument on October 11. Although the notice gives no reasons, plaintiffs made the following statement to the press:

“While we continue to believe the current fiscal plan is illegal, we have determined to voluntarily dismiss our complaint without prejudice at this time due to the crisis in Puerto Rico following Hurricane Maria, and the high likelihood that the fiscal plan will have to be revised,’ Dominic Frederico, chief executive of Assured Guaranty said in a statement.”

Since the Board announced it would revise the fiscal plan, it makes sense to dismiss the case, especially since the new one will be even more outrageously anti-bondholder than the original.

Finally, while Washington does not have a direct role in the Title III proceedings, the decisions they make in the coming weeks will have a profound impact on their outcome.  There are two major issues confronting Washington: first, Puerto Rico’s request for federal financial assistance, and second, whether or not PROMESA will be amended.

On October 3, 2017, the Board sent a letter to Congress seeking help for Puerto Rico claiming damages of up to $95 billion across the island.  Anyone who has followed Congress knows that with luck Puerto Rico will get $10-15 billion in aid. Where will the rest of the funds come from, especially when the Government claims it will run out of funds this month? One logical place is COFINA.

Last week, we discussed the possibility of “borrowing” from COFINA but this could take some time. Rather than write letters, a more efficient way for the Board to help would be for the Board to instruct Marty Bienenstock to file an injunction and declaratory judgment requesting that COFINA be declared unconstitutional, borrowing from the UCC’s causes of action 12-13. This would obviate the need for lengthy discovery, could get Puerto Rico some quick cash and reduce San Juan’s SOS calls to Washington for tax dollars.

The Board isn’t the only one writing letters to Congress for relief. Governor Rosselló has been all over cable news demanding that Washington provide loans or a line of credit to service Puerto Rico’s “immediate liquidity needs.”

It’s worth recalling that Janet Yellen, chair of the Federal Reserve, testified before Congress last year that the Fed’s authority, “is extremely limited and it wouldn’t be appropriate for us to give loans to Puerto Rico. We have very limited authority to buy municipal debt and the authority we have if we were to buy eligible debt, I don’t think would be helpful to Puerto Rico, and beyond that we have no ability to make emergency loans, we could not use 13(3) or powers of that type to extend a loan to Puerto Rico, and this is inherently a matter for Congress and is not appropriate for the Federal Reserve.” 

Now, that might not stop the U.S. Treasury from extending a loan to Puerto Rico.  If they do, it would raise significant questions, including whether any new loans would take priority over existing senior creditors as well as if the loan will simply be backed by the federal government, requiring the Puerto Rican Government to go to the private market to secure new monies.

What could be just as important, sources tell me the Trump Administration and some in Congress are demanding accurate and transparent financial information from the Board and the Commonwealth as a precursor and basis for any loans, especially given that there is no precedent for such financial assistance.

Puerto Rico and the Board should use the passage of Hurricane María to get a settlement of all bond claims, but in order to achieve it, they will have to substantially up the 26% payment they have been pushing.

Lastly, there’s been growing discussion regarding possibly amending, and possibly strengthening, PROMESA, which has been raised by Members of Congress. In a recent House Natural Resources Committee press briefing, Representative Rob Bishop went so far as to state that, “[amending and re-opening PROMESA] will be in consideration. Obviously, as we start moving beyond simply the initial way of saving lives as best you can and move to the restructuring and rebuilding process there has to be a way to do that faster than it has been done.” We will see if their suggestions garner any other supporters, but we should keep a close eye on how the conversation develops.

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 –October 2, 2017

Welcome to your weekly Title III update for October 2, 2017. Due to Hurricane María, I was unable to do the September 25 update. Fortunately, my family and I survived with no structural damage. We have water but no electricity or phone service and very limited internet service in the lobby of my condo.

As the last effects of María left the island, the First Circuit Court of Appeals made the Title III cases a lot more interesting. On August 10, 2017, Judge Swain issued an order denying the UCC’s motion to intervene in an Assured litigation. The UCC filed an interlocutory appeal and argued the case. On September 22, the First Circuit issued its ruling. At page 5-6, the Court stated:

“The UCC was appointed in June 2017. Such a creditors’ committee, the duties and powers of which are outlined by statute, see 11 U.S.C. § 1103(c), is intended to serve as “the primary negotiating bod[y] for the formulation of the plan of reorganization” representing the interests of the “class[] of creditors . . . from which [it was] selected.” H.R. Rep. No. 95-595, at 401 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6357. A creditors’ committee is ‘arguably the one party in interest that, for all practical purposes, typically represents stakeholders with the most interest in the outcome of virtually every proceeding.’”

Later, at page 12, the Court stated:

“We believe that the Second and Third Circuits have the better view and, accordingly, hold that the UCC was entitled to intervene under § 1109(b) and Rule 24(a)(1). The statutory language is, indeed, quite broad, providing that ‘a creditor’s committee . . . may raise and may appear and be heard on any issue in a case under this chapter.’”

Although the Circuit also opined that the District Court has discretion to limit the UCC’s participation, the decision definitely broadens its role in the Commonwealth’s bankruptcy. Moreover, the First Circuit mentioned (without a need to do so), that the UCC is a “primary negotiating bod[y] for the formulation of the plan of reorganization.” This means that the Board is not the only one who will be formulating the Plan of Adjustment pursuant to section 312 of PROMESA. The Board must be thrilled.

I must add that the Board stated that it would review the fiscal plan to determine whether there is a need to changes to the Fiscal Plan and the Title III cases. This brings us to an interesting crossroads in the case. Congress and the President have pledged to provide billions to Puerto Rico for its reconstruction, which begs the question of whether the Board will control this money. Section 204(d) of PROMESA states inter alia:

“IMPLEMENTATION OF FEDERAL PROGRAMS.—In taking actions under this Act, the Oversight Board shall not exercise applicable authorities to impede territorial actions taken to—

(1) comply with a court-issued consent decree or injunction, or an administrative order or settlement with a Federal agency, with respect to Federal programs;

(2) implement a federally authorized or federally delegated program;”

What this means is that the Board WILL NOT legally have control over any new money coming in from the Federal Government, but rather the Commonwealth government and Governor Rosselló will. Despite this, as we see recovery efforts ramp up, the Board, notwithstanding section 204(d), wants to be the administrator of the recovery funds and is even trying to lobby Congress to that effect. Further, section 203(e) of PROMESA states:

“TERMINATION OF BUDGET REDUCTIONS.—The Oversight Board shall cancel the reductions, hiring freezes, or prohibition on contracts and financial transactions under subsection (d) if the Oversight Board determines that the territorial government or covered territorial instrumentality, as applicable, has initiated appropriate measures to reduce expenditures or increase revenues to ensure that the territorial government or covered territorial instrumentality is in compliance with the applicable certified Budget or, in the case of the fiscal year in which the Oversight Board is established, the budget adopted by the Governor and the Legislature.”

Therefore, can the Governor argue to the Board that it has “increased revenues” with the addition of more federal funds and furloughs are not necessary? The Board seems to believe it can and announced Saturday, September 30, that there would be no discussion of furloughs until the summer of 2018.

Also, can Bondholders claim they should be paid more if the PR Government will receive greater amounts of federal funding? Questions, questions. What is clear is that the Board’s influence and power has been reduced since María came to PR.

Of lesser importance, although the Board requested that the October 4 hearing be postponed only until October 18, Judge Swain ordered that most of the motions will be decided without oral arguments and others postponed until the November 15 hearing. The Utier/Aurelius constitutional challenge briefing may also be moved. In addition, the Ad Hoc Group of PREPA Bondholders filed a notice of Interlocutory Appeal from Judge Swain’s denial of their request for lifting of the stay in order to request the appointment of a receiver. Let’s see what happens.

Finally, COFINA. COFINA money is currently being held by NY Mellon bank as per Judge Swain’s order. The Board, however, since June has been telling Judge Swain that the Government would likely need to borrow from COFINA come November/December. With the disaster left by hurricane María, not only will Judge Swain be inclined to allow such “borrowing”, she may also be further inclined to declare that COFINA is property of the Commonwealth as the UCC claims in its lawsuit. Trial in that case will be held from December 4-8 and could completely destroy COFINA claims in the amount of $17.6 billion. Would not be surprised to hear COFINA attempting to strike a deal to keep the entity in existence. Should the Government and the Board do a deal that keeps COFINA alive, surely it will set off numerous questions about the Commonwealth’s financial sustainability, whether this is just more of the same financial gimmicks and certainly more legal challenges. It would also likely result in the GO bondholders renewing their claims that COFINA is illegal and the funds are available resources for payment of their bonds.  Let’s not forget about the UCCs role here, too.

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 – September 18, 2017

Welcome to your weekly Title III update for September 18, 2017. As Hurricane María bears down on Puerto Rico, we should recap several important things from the past week. Judge Swain denied the PREPA bondholders’ request to lift the stay to request the appointment of a receiver. Interestingly, the Court based its decision on only one of the Board’s arguments, making it clear that Judge Swain knows who the boss in these Title III cases is. At page 10 she stated:

“Section 305 of PROMESA provides that, “notwithstanding any power of the court, unless the Oversight Board consents or [the debtor’s Title III] plan [of adjustment] so provides, the court may not by any stay, order or decree, in the case or otherwise, interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.” PROMESA § 305. The Debtor here, PREPA, is a government instrumentality of the Commonwealth, exercising governmental powers in providing electrical service to the inhabitants of the Commonwealth, using its property to generate that power and deriving income from the sale of the power so generated. The rates it charges for its services define the magnitude and impact of its principal revenues. The relief that Movants seek – permission to require the appointment of a receiver to manage PREPA’s operations and seek the approval of rates higher than those PREPA has thus far chosen to charge – is facially inconsistent with Section 305 of PROMESA. Section 305 bars the Court, “notwithstanding any power of the court,” from using “any . . . order or decree, in the case or otherwise,” to interfere with such basic functions and assets of PREPA absent the Oversight Board’s consent, which has not been given here.” (underlining added)

At page 13, she made the most important point of the opinion:

“Congress, similarly, denied the Title III court power to displace PREPA’s management, even for misconduct, by omitting Section 1104 of the Bankruptcy Code, which provides for the appointment of a trustee or an examiner in a Chapter 11 bankruptcy case, from the Bankruptcy Code provisions incorporated into PROMESA’s statutory scheme. Instead, Section 301(c)(7) of PROMESA specifically designates the Oversight Board as the sole “trustee” under PROMESA. See PROMESA § 301(c)(7).” (underlining added)

Anyone familiar with a Trustee in bankruptcy knows that when one is appointed for a debtor, she is the one who calls the shots. Hence, Judge Swain has made it clear that the Board, and not Puerto Rico’s elected officials, are in charge of the management of PREPA and the rest of the entities in Title III. Very telling. Board 2, Bondholders 0, but PREPA bondholders have vowed to appeal the decision. Peaje has already filed its notice of appeal.

Also this week, the COFINA agent answered the UCC’s complaint. As you remember from last week’s update, the UCC, as Commonwealth Agent filed a complaint against COFINA with 13 causes of action, including the unconstitutionality of the law. The COFINA agent came out swinging with a 71 page counterclaims, answer and defenses.

In addition to the oft repeated platitudes of legal opinions and legislative statements, COFINA’ First Cause of Action at page 29:

“[S]eeks a declaration that: (i) the statutes creating COFINA and directing transfer of the Pledged Sales Tax and the Dedicated Sales Tax Fund to COFINA are constitutional under the Constitution of Puerto Rico; (ii) the Pledged Sales Tax, including all Pledged Sales Tax revenue collected in the future, and the Dedicated Sales Tax Fund are the property of COFINA; and (iii) the Pledged Sales Tax and the Dedicated Sales Tax Fund are not “available resources” under the Constitution of Puerto Rico. In the alternative, Counterclaim Plaintiff seeks a declaration that: (i) COFINA has a perfected and unavoidable lien.”

Its Second Cause of Action states that Commonwealth actions violate the Takings Clause and Impairment of Contractual Obligations of both Constitutions. The Third Cause of Action that the Compliance law violates PROMESA, the Fourth Cause of Action that Act 84 violates PROMESA. The Fifth Cause of Action claims tortious interference with a contractual relation and the Sixth Cause of Action claims that if COFINA is unconstitutional, PR committed Fraud, which it likely did, since it should have known that the PR Constitution did not permit the surrendering of the power to tax and that GO’s had priority. The Seventh Cause of Action seeks an injunction but the Eighth Cause of Action claims that “GO Bonds, PBA Bonds and Other Debt Issued in Violation of the Debt Limit Set Forth in the Constitution of Puerto Rico Are Not Entitled to Priority Under the Constitution.”

The COFINA dispute promises to be an interesting slug-fest. The complaint was filed on September 8, but the UCC has already issued 22 subpoenas duces tecum including law firms, Banco Popular, Santander, Barclays and Moody’s, to name a few.

Also last week, Siemens Transportation Partnership, S.E., an HTA creditor, sought permission from the Court to conduct Rule 2004 discovery from the GDB, Carlos Vizcarrondo (GDB) and Hector Betancourt (AFAF). Ambac also sought leave to conduct discovery pursuant to Rule 2004 from the Board as representative of the Commonwealth of Puerto Rico, the Commonwealth; and AAFAF and other parties. More specifically, Siemens, at page 5 of its motions, states:

“Siemens files this Motion to obtain information about the account and the funds therein, including GDB’s funding of the account and any withdrawals or transfers, to determine whether and to what extent: (i) Siemens’ claim against HTA Authority may be paid from funds that are not property of HTA or GDB; and (ii) any third parties have received funds from the account, and if so, whether such transfers may give rise to a claim for fraudulent transfer, conversion or other action, such that Siemens may recover on account of its claim against HTA from parties or assets other than the HTA, which is a Debtor in the above-captioned proceeding, under Title III of PROMESA.”

On this same subject, the UCC reported to Judge Dein that the Board was not cooperating on the coordination of Rule 2004 discovery, which the Board confirmed saying:

“Based on the meet and confer and the Initial Work Plan, the Oversight Board proposes that the UCC’s motion be deferred, and that no decision be made on the UCC’s request to conduct an investigation at this time. The Oversight Board makes this proposal based on its belief that there is no need for the UCC to conduct a separate, potentially duplicative investigation at this time. It would be premature for the UCC to conduct its own investigation given the Independent Investigator’s commitment to maintain open lines of communication with the UCC, to solicit input from the UCC, and to seek documents, including but not limited to those already sought by the UCC. The Investigation should proceed as outlined above and, if there comes a time when the UCC is not satisfied with the speed or substance of the Investigation, it should make an application to the Court to pursue its own investigation on the specific matters on which it is not satisfied.”

Translation: The Board wants to be the only one conducting any investigation on Puerto Rico’s debt and wants no interference. The UCC, in my humble opinion, showed that the Board was conflicted and that it was dragging its feet, which lead Judge Dein to say coordinate because the discovery will be done. Let’s see what happens.

Also this week, PREPA filed a motion requesting an order establishing a procedure to reject power purchasing agreements, of which it states more than 60 exists. Pretty normal procedure in a bankruptcy, except that these contracts are for renewable energy. Why does the Board want to reject them? Is it, as I have been saying, to level the playing field to sell PREPA as free of encumbrances as possible? Is it preparing to sell only the generation part of PREPA? Questions, questions.

On September 11, 2017, Judge Swain listened to oral arguments in the Municipality of San Juan’s request for an injunction against the GDB RSA. Absent from the argument was any real proof of irreparable harm, which is essential to any injunction. In addition, Judge Swain seemed to believe that the monies deposited by the Municipality were a loan and hence could be altered via Title VI. Judge Swain took the arguments under advisement and will render her opinion soon. In the meantime, defendants filed a motion to dismiss the complaint and the one filed by the Municipality of Caguas. Given the Judge’s comments and the Federal Courts view of a municipality, they may be granted.

Finally, on Friday, Judge Dein heard arguments on the UCC’s renewed motion to intervene in the NY Mellon-COFINA bondholders dispute. The UCC has filed motion to intervene in most of the adversary proceedings filed in the Commonwealth and COFINA cases. Judge Dein seems baffled by the arguments and will have to further study them.

Before I leave I want to make one thing clear about these weekly updates. 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.

The Oversight Board’s Chrysler Playbook

The second in a series on Puerto Rico’s pensions

On May 3, 2017, the Financial Oversight and Management Board filed the Commonwealth of Puerto Rico’s Title III petition. In the nearly four months since the filing, we have seen the Board develop a legal strategy that relies on elevating pensions over secured bondholders and invalidating contractual liens such as those held by pension obligation bondholders of ERS.   Each of these steps eerily echoes the legal strategy used by the Obama Administration during the Chrysler Bankruptcy.  But what does an automaker’s Chapter 11 bankruptcy have to do with Puerto Rico’s supposed insolvency you may ask?  More than you would imagine, and it’s not confined simply to the court room, either, as we explore.

First, let’s discuss what happened in the Chrysler Bankruptcy.

The Chrysler Bankruptcy

By December of 2008, Chrysler, after years of decline, was in dire straits. It was bloated, inefficient and burdened by labor contracts and pension costs.  The timing – during the midst of the Global Financial Crisis – could not have been worse.  This confluence led Chrysler, along with General Motors, to then start pleading for greater federal financial assistance (i.e. – a bailout; sound familiar?), arguing that liquidation would mean the loss of thousands of good (meaning union) jobs.

In December of 2008, the U.S. House of Representatives voted to bailout Chrysler, but the U.S. Senate voted it down. Then-President Bush proceeded to extend credit but when the credit ran out, then-President Obama intervened, forcing out Chrysler CEO Robert Nardelli and announcing that the federal government would provide additional funds to support Chrysler contingent on the completion of a merger with Fiat within 30 days.

After examining the restructuring plans, the Obama administration decided they were insufficient, thereby forcing Chrysler to file for bankruptcy in April of 2009. Within two months, Chrysler emerged as “The Chrysler Group,” owned by the United Auto Workers (55%), Fiat (20%), the US Government (8%) and Canada (2%). See, The Auto Bailout and the Rule of Law, by Todd Zywicki.

In the years leading to its bankruptcy, Chrysler had been unable to obtain financing and resorted to issuing secured debt to finance its operations. At the time of the filing, Chrysler owed around $6.9 billion in secured debt, but also $10 billion to an unsecured pension plan.

In a bankruptcy, secured debt has the first priority of payment and unsecured creditors get the rest in a pro rata basis. This general principal applies to all Bankruptcy Chapters and hence to Title III. Also, in a Chapter 11, the debtor prepares a Bankruptcy plan pursuant to 11 U.S.C. § 1123 in which it classifies the claims in order of priority and the debtors whose claims are impaired, have a right to vote on the plan. This is the same procedure of a Chapter 9 and hence, of Title III in PROMESA.

In Chrysler, it was done differently.  The U.S. Government created and funded a shell company that, through a § 363 sale, bought substantially all of Chrysler’s assets for $2 billion, giving the secured creditors a paltry return of 29 cents on the dollar. FIAT was brought in to manage the new firm and was given a slice of the new company’s stock. New Chrysler (formally: New CarCo Acquisition LLC) then assumed the old company’s debts to the retirees, most dealers, and trade creditors. The unsecured claims of the retirees’ benefits plan were replaced with a new $4.6 billion note as well as 55% of the new company’s stock.  Assessing the Chrysler Bankruptcy, by Mark J. Roe and David Skeel at page 5.

How the Board is using the Chrysler Playbook in Puerto Rico

In Puerto Rico, the Board has told the Court that COFINA, Peaje (HTA), and Altair (ERS) do not have a lien – essentially ripping up binding contracts. The Board has also told GO bondholders that they do not have a priority in payment structure, evidenced by the elevation of pensions over their constitutional-backed debt.

At the same time, the Board has allowed the Commonwealth to pay 100% of pensions, which will total $2.5 billion a year, as well as pay all suppliers and tax refunds. The Board will ensure a modest haircut of 10% on these pensions at some point in the future, although the details are vague and applies to only certain pensioners.  Even this move by the Board has met resistance from the Rosselló administration, who has rejected any claims that say they will not pay pensions in full.

As we can see, the Board is trying to deprive secured creditors of their security so their claims can be deeply cut while at the same time, favoring non-secured pensions to be paid. Exactly like Chrysler.

Not wanting to waste time while the Title III proceedings unfold, the Board and the Rosselló administration are getting a jump start through legislative actions.

Together, these seemingly ‘opposing entities’ have jointly pushed through legislation in the Puerto Rico House of Representatives and Senate that codifies pensions as a higher priority payment than constitutionally-prioritized debt, and worse, crystallizes entitlements from the date enactment, instead of upon retirement, which essentially attempts to lock in pensions at current rates and not subject them to a restructuring on a pro-rata basis in Title III without creating claims, a flexibility that the Commonwealth might otherwise have enjoyed. At the same time, they do a farcical face-off about a 10% cut in pensions to give the impression there will be some pain.

This action underscores that neither the Board nor the government are just waiting for the courts to act, as was the case in the Chrysler bankruptcy, but rather enacting policies that will lay the groundwork for the outcome they want in court – to give themselves and pensioner’s protection and outright injuring the secured bondholders they owe.

The Link between Puerto Rico and Chrysler

Judge Arthur González is a member of the Board and without a doubt its intellectual leader. He is on the most important committees, attends Judge Taylor Swain’s hearings (an old colleague of his as they used to be bankruptcy judges in the Southern District of New York together) and most importantly, was the presiding Judge in the Chrysler bankruptcy. Moreover, Judge Gonzalez was president Obama’s choice for the Board – a telling sign.

Additionally, the information I have received is that Judge González was adamant on hiring the Board’s law firm of Proskauer Rose, whose principal restructuring lawyer is Martin Bienestock. According to the University of Michigan Law School bio on Mr. Bienestock, he “developed for General Motors the section 363 sale free and clear strategy that the United States Auto Task Force deployed for both Chrysler and General Motors.” As the saying goes, there is no such thing as a coincidence. It is all too true in the case of Puerto Rico.

One closing thought, what bewilders me is how the Board and government believe they can pursue a legal strategy that will simply invalidate liens and contracts, and elevate pensions above and beyond adequate funding as directed by Congress in direct contradiction with PROMESA and the Puerto Rico Constitution.

In the next installment I will discuss the critics of the Chrysler Bankruptcy in detail, including some that will surprise you.