Weekly Update – February 20, 2018

Welcome to your weekly Title III update for February 20, 2018. This week was dominated by the PREPA Interim Financing request.

On Thursday, February 15, Judge Swain heard evidence and arguments pertaining to the PREPA loan. The hearing started with testimony by Mr. Filsinger, detailing the dire consequences of not granting the DIP loan and the way the system would be shut down, starting with residential clients being cut off. Mr. Filsinger did explain that if the $550 million was lent, by June 2019, PREPA would be OK. There was no evidence presented, however, for the need for $1 billion the Board requested.

Things started to go south when Gerardo Portela, head of AFFAF, came on. Portela sent 27 letters to different Commonwealth agencies for them to pay the PREPA bill, but did not put the total amount owed by these corporations, rather an amount he determined was adequate. When asked why not loan to public corporations, there was an objection by his attorneys. Bondholders cleverly did not insist on the answer to the question. In addition, Portela did not know of the law of 2016 that required that in 45 days the public corporations and PREPA would have to determine how much they owed the utility and in 60 days work out a payment plan. He is also unfamiliar with the law of his agency, which makes you wonder how effective a manager he can be.

Although AFFAF was the agent for the Commonwealth and PREPA on the loan negotiations, Mr. Portela was not present in all the meetings, he had other people dealing with it. He did not know if anything else was offered by the Commonwealth as to the loan or if different terms were offered by the Commonwealth or even if different interest rates were offered. All in all, Mr. Portela was a terrible witness that seemed not to understand simple questions that were posed to him. This happens when witnesses think they are brighter than the attorneys posing the questions, or maybe he’s tired and looking for the exit door.

Dustin Mondell from Rothchild testified that this was not an  “arm’s length negotiation,” as required, rather it was a cooperative negotiation. Also, Mr. Mondell said that FEMA would approve the CDL loan if the Hacienda TSA account went down to $800 million. PREPA negotiations started when the FEMA letter was received. There were no negotiations for other lenders. As Gibbs rule #39 states, “There is no such thing as a coincidence.” Obviously, the Commonwealth and the Board want to empty out the General Fund so it can qualify for the CDL loan from the Federal Government. The Board and the Governor must think no one in Washington is watching.

Judge Swain, however, threw a monkey wrench on the Board and Commonwealth plans. Judge Swain ruled that PREPA needed money but movants have not proven need or legality of the $1 billion loan. There was no evidence of negotiations on the loan and that there were no “arm’s length negotiations.” She stated she was willing to approve a $300 million non-priming loan, superpriority administrative expense, but the record must be clear about robust effort for third party financing. She also stated that the Business Judgment test is inadequate because bondholders’ interest must be considered. Any proposed order must include Ad Hoc GO’s bondholders’ observations and objections.

Early Friday morning, approximately 4:21 am Puerto Rico time, the Board filed their new request for a loan, but also stated that they would seek further loans in two to four weeks. On Friday afternoon, Judge Swain gave objectors until 7 pm Puerto Rico time on Saturday to file and the Board until Sunday at 3 pm Puerto Rico time to respond. As expected, there were objections.

National objected to the proposed order stating the following:

“[A]s written, it is directly contrary to the Court’s oral ruling at the February 15, 2018 Hearing on PREPA’s Financing Motion (the “Hearing”) in a number of respects, including: (i) as to the applicable legal standard (i.e., entire fairness, not Movants’ invented “permissible judgment as a governmental instrumentality”); (ii) as to the Court’s ruling that the requirement of Section 364(e)’s good-faith showing has not been met; and (iii) as to the Court’s admonition to include in the proposed order only essential provisions.”

The Ad Hoc Group of PREPA bondholders filed a short encompassing objection. I found especially telling that it objected to the use of the Business Judgment standard invented by the Board, especially after the Judge stated that it “focused solely on rationality from a PREPA business point of view is inappropriate.”

The PREPA Bond Trustee also objected and said, inter alia:

“The Movants’ draft attempts to retain priming features in the Revenues that either fail to credit the Court’s ruling or presume the outcome of litigation not properly before the Court. Secondly, there are changes proposed to clarify that the promises of the Authority in the Credit Agreement need to be consistent with: (i) the Authority’s obligations under the Trust Agreement, without attempting to resolve what those duties are; and (ii) the Financing Order and the realities of what can legally be done under Title III of PROMESA on account of a super-priority administrative expense claim.”

The GO Ad Hoc Group of Bondholders also filed a detailed objection, but also stated what everyone in Puerto Rico knows:

“The Commonwealth’s persistence in offering below-market terms to PREPA is also of a piece with its ongoing attempts to undercut the possibility of any private, arms-length financing for PREPA, including the financing offer recently proposed by PREPA’s bondholders. This pattern began with AAFAF’s inexplicable delay in beginning any search for private financing, continued when that search amounted to nothing more than a token effort to check the boxes, and culminated when the Commonwealth offered terms so favorable to PREPA that no arms-length lender could possibly compete. This irresponsible course of conduct has now placed the Court in an impossible position, with the Oversight Board and AAFAF asking for approval of financing on an emergency basis because PREPA faces serious liquidity challenges that were entirely avoidable if AAFAF and the Oversight Board had made a serious effort to secure private financing alternatives.

All of this is part of a cynical effort to make the Commonwealth’s liquidity appear less than it really is—to game the federal government and the Commonwealth’s own creditors. And it is just the latest in the Commonwealth’s continual strategy—aided and abetted by the Oversight Board—of withholding or manipulating information in order to game the system.

The GO Group therefore urges AAFAF and the Oversight Board to heed the Court’s direction that, to the extent they intend to seek approval of a larger financing facility for PREPA in the future, the record must “demonstrat[e] far more robust efforts to solicit third-party financing on terms that do not include super-priority or security provisions.”

The Board’s reply to the objections was lengthy and attempts to convince the Judge that objectors’ concerns were addressed but that is unlikely for a couple of reasons. First, the Board said twice that the Third Supplemental Filsinger Declaration demonstrates that Commonwealth would not lend without superiority status. If one examines the declaration, however, that is not what Mr. Filsinger said:

“I asked Secretary Maldonado if the Government would be willing to make a proposal with terms more favorable to PREPA than those proposed by the ad hoc PREPA bondholders.

Secretary Maldonado advised me that he believed that the Government’s creditors and constituents preferred a 364(d) priming lien but in light of PREPA’s urgent cash flow crisis and the negative implications for the Government if PREPA runs out of money, the Government would be prepared to offer unsecured financing of $300 million on the following terms: (i) the Facility would have superpriority status (pursuant to 11 U.S.C. § 364(c)(1)), and (ii) the interest rate on the Facility would be increased from that set forth in the original proposal to 5% per annum.”

Nowhere does Mr. Filsinger state that the Commonwealth refuses to lend to PREPA otherwise and have the lights go out. But the Board stated that at pages 11 and 13 of its motion and Judge Swain will not appreciate this since she reads all documents. Moreover, the Board’s motion states that it denied around half of the objections to the financing and most of the objections to the Financing Document.

Moreover, PREPA has commenced to shutdown part of its systems redundancies allegedly to prepare in case the loan does not come through. This completely obviates the Commonwealth’s obligation to come to PREPA’s aid lending the $300 million since it claims it does not need permission to do so. Moreover, the Commonwealth could use the same $300 million it is to lend PREPA to lend to the public corporations so they can pay PREPA. They can even prepay PREPA as allegedly the Commonwealth did. No responsible government would jeopardize the peace of mind of its citizens by refusing to lend to its power utility but apparently that is what the Governor and the Board are willing to do to obtain CDL financing.

Nevertheless, Judge Swain approved the loan on Monday, February 19. Let there be no doubt about this; the Board suffered a major defeat when Judge Swain did not approve its original DIP petition. The fact that Judge Swain reduced the loan to $300 from the original $1.3 billion that was requested shows she did not believe the Board and AFFAF’s experts and witnesses. The changes made to the loan documents were substantial, as stated by the Board’s motion for the $300 million loan:

The material changes in the Revised Financing are:

  1. Principal Amount. Reduced to $300 million.

  2. Interest Rate. Fixed at 5% per year.

  3. Superpriority. Unchanged.

  4. Collateral. Eliminated.

  5. Good Faith Lender Finding for 11 U.S.C. § 364(e). Eliminated.

  6. Insulation from Attack in the Commonwealth Title III Case. Eliminated.”

In addition to this, the order also places constraints on future changes to the loan, as for example, a CDL loan from the federal government:

“Amendments, Consents, Waivers, and Modifications.

(a) Subject to the approval of the Oversight Board, the Debtor may enter into any amendments, consents, waivers, or modifications to the Credit Documents, in accordance with the terms thereof, without the need for further notice and hearing or any order of this Court; provided, however, that to the extent any material amendment, material consent, material waiver or material modification to the Credit Agreement or any other Credit Document, including without limitation Sections 9-2, 4-13, 5-5, and 5-6 of the Credit Agreement, is approved by the Oversight Board (for the avoidance of doubt, including any refinancing of the Facility), such material amendment, material consent, material waiver or material modification or any other material change (however accomplished) shall not become effective without further Court order, which shall be submitted on presentment with notice to parties in interest in accordance with the case management procedures then in effect in the Debtor’s Title III case. For the avoidance of doubt, such material amendments, consents, material waivers, or material modifications subject

to this paragraph shall include any consent to the use of proceeds of the Facility to fund or otherwise pay for any Ineligible Uses; provided, however, that the foregoing shall not prevent the Court from ordering, or a party from requesting, a more extended briefing schedule and a hearing relating to such submission, nor shall it prejudice any party’s right to object to any such extension request.

(b) In the event the Facility is funded through a Commonwealth Financing that results in a material change to or additional economic terms of the Facility or any other transfer or assignment of any rights under the Credit Documents, such change or addition shall not become effective without further Court order, which shall be submitted on presentment with notice to parties in interest in accordance with the case management procedures; provided, however, that the foregoing shall not prevent the Court from ordering, or a party from requesting, a more extended briefing schedule and a hearing relating to such submission, nor shall it prejudice any party’s right to object to any such extension request.”

Moreover, PREPA, in accordance with Article 5 of the Loan Document, must provide:

“5.2 Weekly Reports. On the Wednesday of each week following the Effective Date, the Borrower shall provide the Lender and the Oversight Board, with copies made available to the Committee and the creditors of the Lender and the Borrower who are party to the Mediation Agreement or a customary non-disclosure agreement with the Borrower, with (i) an update to the Budget (which shall include reconciliation of actual results with the prior Budget), (ii) cash balance, (iii) total accounts payable and, if available, accounts payable aging schedule, (iv) grid restoration report for so long as any restoration activities are ongoing, (v) generation restoration report for so long as any restoration activities are ongoing and (vi) a FEMA Flash Report for so long as applicable.

5.3Monthly Reports. No later than the fifteenth (15th) day of each month following the Effective Date, the Borrower shall provide the Lender and the Oversight Board, with copies made available to the Committee and the creditors of the Lender and the Borrower who are party to the Mediation Agreement or a customary non-disclosure agreement with the Borrower, with an updated schedule of accounts receivable, and, if available, accounts receivables aging schedule.”

Although the loan document states that the Board and AFFAF will attempt financing again in 2-4 weeks, they better come up with more convincing financial information for the Judge to approve it.

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

Monday Update – February 5, 2018

Welcome to your weekly Title III update for February 5, 2018. This week has been dominated by the PREPA Interim Financing request but again issues outside the litigation are looming large. Due to the importance of the DIP loan sought and the number of motions filed in the last four days, this Update will be longer than usual.

Many motions opposing the request for an order for interim financing for PREPA were filed. The Board listed them as:

“(a) Limited Objection by and Reservation of Rights of Arc American, Inc. to the Urgent Joint Motion of the Financial Oversight and Management Board for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final Orders (a) Authorizing Postpetition Secured Financing, (b) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (c) Modifying the Automatic Stay, (d) Scheduling a Final Hearing, and (e) Granting Related Relief [ECF No. 563] (the “Arc Objection”), filed by Arc American, Inc.

(b) The Ad Hoc Group of General Obligation Bondholders’ (i) Objection to the Urgent Joint Motion of the Financial Oversight and Management Board for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final Orders (a) Authorizing Postpetition Secured Financing, (b) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (c) Modifying the Automatic Stay, (d) Scheduling a Final Hearing, and (e) Granting Related Relief, and (ii) Urgent Cross-motion, in the Alternative, to Intervene [ECF No. 566] (the “GO Objection”), filed by the Commonwealth’s General Obligation Bondholders.

(c) Objection and Reservation of Rights of PREPA Bond Trustee to Urgent Motion of the Financial Oversight and Management Board for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final Orders (a) Authorizing Postpetition Secured Financing, (b) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (c) Modifying the Automatic Stay, (d) Scheduling a Final Hearing, and (e) Granting Related Relief [ECF No. 568] (the “Bond Trustee Objection”), filed by the PREPA Bond Trustee.

(d) Objection of Ad Hoc Group of PREPA Bondholders to Urgent Joint Motion of the Financial Oversight and Management Board for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final Orders (a) Authorizing Postpetition Secured Financing, (b) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (c) Modifying the Automatic Stay, (d) Scheduling a Final Hearing, and (e) Granting Related Relief [ECF No. 570] (the “PREPA Bondholder Objection”), filed by PREPA’s Bondholders.

(e) Limited Objection of Whitefish Energy Holdings, LLC to Urgent Joint Motion of the Financial Oversight and Management Board for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final Orders (a) Authorizing Postpetition Secured Financing, (b) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (c) Modifying the Automatic Stay, (d) Scheduling a Final Hearing, and (e) Granting Related Relief [ECF No. 571] (the “WEH Objection”), filed by Whitefish Energy Holdings, LLC (“WEH”).

(f) Response and Limited Objection of Scotiabank de Puerto Rico, as Administrative Agent, to Urgent Motion for Entry of an Interim Order Authorizing Postpetition Secured Financing [ECF No. 572] (the “Scotiabank Response”), filed by Scotiabank de Puerto Rico.

(g) Statement of Solus Alternative Asset Management LP in Response to the Urgent Joint Motion for Postpetition Secured Financing [ECF No. 576] (the “Solus Statement”), filed by Solus Alternative Asset Management LP.

(h) Objection of National Public Finance Guarantee Corporation to Urgent Joint Motion of the Financial Oversight and Management Board of Puerto Rico and the Puerto Rico Fiscal Agency & Financial Advisory Board for Entry of Interim and Final Orders (a) Authorizing Postpetition Secured Financing, (b) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (c) Modifying the Automatic Stay, (d) Scheduling a Final Hearing, and (e) Granting Related Relief

[ECF No. 580] (the “National Objection”), filed by the National Public Finance Guarantee Corporation.

(i) Ambac Assurance Corporation’s (i) Objection to the Urgent Joint Motion of the Financial Oversight and Management Board for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Interim and Final Financing Orders, and (ii) Urgent Cross-Motion, in the Alternative, to Intervene [ECF No. 582] (the “Ambac Objection”), filed by Ambac Assurance Corporation.

(j) Objection of Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Syncora Guarantee Inc. to the Urgent Joint Motion of Financial Oversight and Management Board for Puerto Rico, and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final Orders (a) Authorizing Postpetition Secured Financing, (b) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (c) Modifying the Automatic Stay, (d) Scheduling a Final Hearing, and (e) Granting Related Relief [ECF No. 585] (the “Assured Objection”), filed by Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Syncora Guarantee Inc.

(k) Statement of Official Committee of Unsecured Creditors in Response to Urgent Joint Motion of the Financial Oversight and Management Board for Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final Orders (A) Authorizing Postpetition Secured Financing, (B) Granting Priming Liens and Providing Superpriority Administrative Expense Claims, (C) Modifying the Automatic Stay, (D) Scheduling a Final Hearing, and (E) Granting Related Relief [ECF No. 597], filed by the Official Committee of Unsecured Creditors of the Commonwealth of Puerto Rico.

(l) Joinder of U.S. Bank National Association in its Capacity as PREPA Bond Trustee to Objections to Urgent Joint Motion of the Financial Oversight and Management Board of Puerto Rico and the Puerto Rico Fiscal Agency & Financial Advisory Board For Entry of Interim and Final Orders (A) Authorizing Postpetition Secured Financing, (B) Granting Priming Liens And Providing Superpriority Administrative Expense Claims, (C) Modifying The Automatic Stay, (D) Scheduling A Final Hearing, And (E) Granting Related Relief [ECF No. 606], filed by U.S. Bank National Association in its Capacity as PREPA Bond Trustee.

(m) Siemens Transportation Partnership Puerto Rico, S.E.’s Limited Objection With Respect to the Urgent Motion for Postpetition Secured Financing, Priming Liens, and Providing Superpriority Administrative Expense Claims [ECF No. 2335 in Case No. 17-03282], filed by Siemens Transportation Partnership Puerto Rico, S.E.”

The oppositions to the loan request included questions on the amount of the loan, its particulars and the fact that the Commonwealth is the lender. Here are a few.

Arc objects and states:

“If the Motion is approved in its current form, Arc may never be paid millions of dollars despite having conferred post-petition tangible benefits directly to PREPA, its bankruptcy estate and the people of Puerto Rico. Instead, Puerto Rico, as Lender, and the professionals for the Debtor, Oversight Committee and Creditors’ Committee, likely will be the only administrative creditors that are paid, while bondholders may receive a minimal recovery and Arc is unlikely to recover anything on an administrative expense claim, in an amount close to $19 million, once allowed by the court.”

The Ad Hoc Group of GO Bondholders objected and stated:

“Let us be clear, the GO Group does not object to PREPA obtaining financing to meet a demonstrated need, from an appropriate source, and on commercially reasonable terms. But the Proposed Loan meets none of those criteria. Rather, the Proposed Loan reflects a unilateral decision by the Oversight Board to use the resources of the Commonwealth—itself a Title III debtor that claims to be unable to pay its own creditors—to subsidize a legally separate instrumentality that has its own Title III case, its own creditors, and its own assets. Worse still, the Oversight Board’s maneuvering seeks to displace the legitimate path for seeking such funding for PREPA, which would involve a reasonable market process and adequate disclosures of the debtor’s finances. The Oversight Board, which serves as representative of both the would-be borrower and the would-be lender, has simply determined for itself that this unprecedented transaction is best for all involved. To the contrary, the Proposed Loan is a massive windfall to PREPA, a severe and unnecessary financial blow to the Commonwealth, and a startling arrogation of power by the Oversight Board. The Proposed Loan seeks immediate authorization for $550 million, even though the movants’ own (unsupported) numbers justify only a small fraction of that amount in the near term. The terms of the loan do not resemble a reasonable, arms-length transaction.”

Scotiabank, a fuel line supplier of credit, also objected:

“The Fuel Line Lenders, however, have several objections to the Interim Financing Order in its present form. First, the Oversight Board has requested authority to borrow up to $550 million prior to a final hearing. But, under the “Initial 13-Week Budget” submitted with the Financing Motion, PREPA does not need that amount on an interim basis. Moreover, based on public information, PREPA is owed significant amounts by Government entities. Before PREPA is permitted to borrow funds that it does not immediately need, PREPA must either collect what it is owed by other Government entities or provide a compelling justification for failing to collect those amounts.”

Siemens claims that the HTA owes it several millions for the Urban Train and filed a limited objection:

“Siemens objects to the Motion only to the extent that the terms of the financing requested therein seeks to pledge, use as collateral, or otherwise encumber funds that are held by GDB for Siemens’ benefit, including the funds located in the Siemens Account. While Siemens does not believe that the Motion contemplates a lien on the Siemens Account or funds held therein, in an abundance of caution Siemens files this Limited Objection.”

National Public Finance Corporation also objected:

“PREPA has failed to demonstrate that the Facility meets the entire fairness standard for insider transactions and the Bankruptcy Code’s and PROMESA’s requirements for postpetition financing, or that the Commonwealth should be entitled to the good faith protections for a postpetition lender under the Bankruptcy Code. First, PREPA has not shown it was unable to obtain financing on an unsecured basis. The Commonwealth could easily have provided PREPA with ample liquidity simply by paying—or causing its instrumentalities to pay—some or all of the outstanding electricity bills owed to PREPA. Second, PREPA has not demonstrated that the $550 million requested on an interim basis and $1.3 billion requested on a final basis are commensurate with PREPA’s actual needs. In fact, given the unpaid electric bills that the Commonwealth has accrued, there is little doubt that any immediate and irreparable harm could be avoided by payment of even some of these outstanding amounts. Third, the Facility is not fair and reasonable because the payment obligations are not offset or reduced by the Commonwealth’s unpaid bills. In addition, granting an administrative expense claim to the Commonwealth would effectively permit the Commonwealth to exercise control over PREPA’s plan of adjustment process, to the further detriment of PREPA’s creditors. Fourth, to grant priming liens to the Commonwealth, PREPA must ensure that bondholders’ liens are adequately protected. The FOMB’s insistence that bondholders are adequately protected because proceeds of the Loans will be utilized to preserve PREPA’s assets is entirely speculative and therefore wholly insufficient to provide adequate protection.

Finally, given the role of the FOMB and AAFAF in negotiating the Facility for both borrower and lender, and the Commonwealth’s overreaching in requesting a superpriority claim and priming lien, PREPA has not shown that the Facility was negotiated at arms’ length and in good faith. Instead, the Financing Motion leaves open many questions regarding the circumstances and process followed to develop the proposed Facility.”

U.S. Bank National Association, in its capacity as the PREPA Bond Trustee, objected to the DIP financing as premature and prefers the Commonwealth to pay what it owes the utility. It stated:

“The DIP Motion proposes a solution that is premature, improper, and the proposed priming lien violates 11 U.S.C. § 364(d). In addition, the PREPA Bond Trustee submits that the proposed interim financing order includes findings that are and will be unsupported by the record and grant rights and protections that are objectionable as set forth herein.

The DIP Motion lumps together two distinct proposed lending relationships between PREPA and the Commonwealth bankruptcy estates that should be reviewed by the Court separately. The first consists of low interest rate direct advances by the Commonwealth to PREPA of up to $550 million (the “Direct Advances”) pursuant to Joint Resolution 196 of the Puerto Rico legislature, dated January 25, 2018 (the “Joint Resolution”). The second proposed relationship consists of the Commonwealth serving as a pass-through lender of proceeds that the Commonwealth hopes to receive from the federal government for community disaster loans (“CDLs”) that PREPA could qualify for under applicable disaster relief statutes (the “Pass-Through Advances”). Together the Direct Advances and the Pass-Through Advances could total $1.3 billion. In both cases, however, the proposed lender/borrower relationship is premature and imposes an inequitable burden on the PREPA bankruptcy estate and its creditors. And, any priming lien would violate § 11 U.S.C. 364(d)(1)(A) and (B).”

Even the UCC informally (whatever that may mean) objected to the DIP request:

“Although the Committee is not formally objecting to the Financing Motion, given the Committee’s overarching responsibility as a “watchdog” for the Debtors in these title III cases, the Committee is duty-bound to advise the court of the Committee’s position and concerns with respect to the Financing.

First, the Committee is, of course, supportive of PREPA having sufficient liquidity to operate and continue to operate as close as possible to ordinary course of business under the circumstances.4 Moreover, the Committee recognizes that the Commonwealth and its unsecured creditors generally benefit from the continued operation of PREPA given the critical importance of a functioning electricity infrastructure. That said, PREPA and the Commonwealth are separate Debtors with separate asset pools and different sets of creditors, and, therefore, the impact and benefits of the Financing must be evaluated separately for creditors of each Debtor and the Financing should be as close as possible to market terms.

Second, while the Committee generally supports PREPA’s efforts to obtain postpetition financing, the Committee believes that the proposed Financing does not reflect market terms from the point of view of the Commonwealth. This is especially true for the interest rate, which would be 0% for the first six months, increase by 50 basis points every six months thereafter, and then top out at 3% after three years. Zero percent DIP loans do not exist in the marketplace, and this feature means that millions of dollars of value are being transferred from the Commonwealth and its creditors to PREPA (and possibly and unintentionally, to the benefit of the entity which will acquire PREPA pursuant to the recently announced privatization program). As a point of comparison, the PREPA secured bondholders previously offered postpetition financing to PREPA at an effective interest rate of approximately 8%.

The Committee recognizes that the court is being asked to authorize PREPA (not the Commonwealth) to enter into the proposed Financing. Indeed, the Oversight Board takes the position that the Commonwealth need not seek court authorization to use its funds to extend the Financing to PREPA on the grounds that (a) section 305 of PROMESA prohibits the court from interfering with any of the Commonwealth’s property or revenues, unless the Oversight Board consents,5 and (b) section 363 of the Bankruptcy Code is not incorporated into title III of PROMESA. However, the matter is not as clear-cut. In fact, in the proposed order attached to the Financing Motion, the Oversight Board is seeking a factual finding that the Financing is fair to the Commonwealth.6 The Oversight Board cannot, on the one hand, claim that the court may not interfere with the Commonwealth’s decision to enter into the Financing, but then, on the other hand, ask this court to bless the transaction from the perspective of the Commonwealth. By asking the court to make factual findings as it relates to the Commonwealth, the Oversight Board is, in essence, consenting to the court’s interference with the Commonwealth’s use of property and revenue, thereby taking the matter outside of section 305 of PROMESA. Accordingly, the court should evaluate the proposed Financing from the perspective of both PREPA and the Commonwealth.”

Ambac, who is not a PREPA creditor, also filed an objection to the fair and reasonable language of the proposed order and also stated:

“The Court must not lose sight of the fact that this is not the typical case. Here, the entity proposing to hand out more than a billion dollars virtually interest free for up to 30 years is itself a debtor with nearly $18 billion dollars of debt. In light of the financial condition of the Commonwealth, and the potential impact the Proposed Loan will have on the Commonwealth’s ability to service its debt, it is a virtual certainty that it will be subject to scrutiny and attack by Commonwealth creditors.

The Proposed Loan is a sweetheart deal for PREPA that will deplete the Commonwealth of sorely needed cash and harm the Commonwealth’s creditors. Although Ambac agrees that PREPA must be provided with adequate liquidity, that liquidity cannot be provided on terms that are both inconsistent with PREPA’s actual needs and harmful to the Commonwealth and its creditors.”

The PREPA Ad Hoc Creditors Committee objected extensively to the DIP loan, including under the premise of adequate protection:

“There is no emergency need here other than the one created by the Commonwealth itself. Even if PREPA’s 13-week budget is a good faith estimate of its cash needs, the budget shows PREPA needs less than $77 million prior to a final hearing on the proposed loan.4 If the Commonwealth and its instrumentalities (collectively, the “Commonwealth Government”) were to pay what they owe to PREPA under past due bills for power provided during this Title III case, PREPA would have more than enough cash to operate without the Commonwealth Loan . . .

The Commonwealth controls PREPA; it controls its other instrumentalities. It has the money to make the loan – therefore it has the money to pay past-due bills. It also has the power to direct PREPA to bill other customers and collect from other customers. Instead, it has directed PREPA (alone among its instrumentalities) not to bill and not to collect from its customers – but to continue supplying power that is not being paid for.

Because the Commonwealth has required PREPA to provide power to customers who do not pay, thus forcing PREPA to take ever-increasing credit risk, the Commonwealth should be required to pay, rather than lend, the cost of this subsidy. Having PREPA’s bondholders bear the cost of power-for-free by granting a priming lien on their collateral would constitute a taking under the Fifth and Fourteenth Amendments of the United States Constitution. Armstrong v. United States, 364 U.S. 40 (1960).

Moreover, where the lender controls the borrower, and the need for the loan is created by the lender’s own defaults and the lender’s own constriction of the borrower’s revenues, the lender – the Commonwealth – is not extending credit in good faith under 11 U.S.C. § 364(e). The Oversight Board – which controls both the Commonwealth and PREPA – cannot show either the “immediate and irreparable harm” required by Bankruptcy Rule 4001(c)(2) or that the Commonwealth Loan passes the “entire fairness” standard that governs approval of selfinterested transactions. Therefore, the Commonwealth Loan cannot be approved.”

Solus, however, did support the loan, but with modifications:

“Based on PREPA’s publicly filed 13-week cash flow forecast, Solus recognizes that PREPA has an immediate liquidity need to meet its operating expenses because PREPA’s General Fund is projected to be negative by the week ending February 16, 2018.5 Until the CDL loans or other sources of funding become available, the DIP Facility appears to be the best (and only) option to pay for PREPA’s near-term operating expenses.

Nevertheless, Solus believes certain modifications to the DIP Facility are appropriate, including (i) limiting the amount of loans that can be borrowed on an interim basis to the amount that PREPA projects will be needed during this interim period (per the 13-week cash flow forecast); (ii) preserving PREPA’s setoff rights against amounts owed by the Commonwealth and its instrumentalities; and (iii) requiring notice and a hearing for any material amendments to the DIP Facility.”

After the first objections started coming in, the Board asked the Court to limit the scope of its review to only two issues, to wit “whether PREPA could obtain similar or better financing without providing to the Commonwealth a priming lien and superpriority claim, and whether PREPA’s bondholders, asserting a security interest in PREPA’s Revenue, are adequately protected.” Judge Swain, however, disagreed:

“The Court has considered all of the submissions carefully. The Scope Motion improperly seeks to curtail the scope of the Interim Hearing and is hereby denied.

In connection with the Omnibus Hearing, scheduled for February 7, 2018, the Court will conduct an Interim Hearing on the Financing Motion in the following two stages:

First, the Court will hear oral argument and any relevant evidence as to whether interim relief is “necessary to avoid immediate and irreparable harm” prior to a final hearing on the Financing Motion that will be held, in New York, on February 15, 2018.

Second, if the Court determines that interim relief is necessary, the Court will then hear oral argument, and any relevant evidence, on the merits of the Financing Motion.

The Debtor is directed to file, with its reply papers on the Financing Motion: (i) an updated budget that includes actual amounts for recent weeks, (ii) a declaration identifying and quantifying any additional sources of receipts that are not otherwise identified on the Debtor’s budget (e.g., insurance proceeds), and (iii) a supplement to the Financing Motion that includes a revised summary of the key terms of the credit agreement that satisfies the express requirements Federal Rule of Bankruptcy Procedure 4001(c)(1)(B).”

The Board quickly complied with the Court’s order and replied to the objections in an Omnibus order. It withdrew its request for interim financing given the final hearing date of February 15. The Board’s order also states:

“(i) clarify that material amendments must be approved by the Court after notice and a hearing; (ii) for creditors who wish to obtain information that do not participate in mediation, PREPA will address requests for information as received; and (iii) clarify that the Final Financing Order does not alter any setoff rights PREPA or any other party has, and all setoff rights are reserved.”

The Board continued its arguments that the only questions at hand were whether PREPA could obtain a better deal and the adequate protection of its bondholders.

In my opinion, it failed to explain why the Commonwealth and its dependencies could not pay PREPA what is owed or why the terms, which could not be obtained commercially, were fair and reasonable. Also, although PROMESA Section 305 prevents the Court from interfering with the Commonwealth’s use of its funds, it behooves the mind to believe that it cannot question whether it can lend to an entity that needs judicial permission to take a loan.

As several parties suggested, PREPA can continue operating with a much more modest loan that the one proposed by the Board. Why offer so much then? My take is that the Board and the Commonwealth, acting in concert, want to dramatically draw down the latter’s liquidity in order to convince the US Treasury to release the CDLs it wants. Moreover, since the CDLs, if and when they come, will likely be for an interest rate above what the Commonwealth is offering, the advantageous terms are illusory.

As the Judge Swain stated in her order, she will decide whether she will hear oral arguments on this issue, which runs counter to her practice of usually having them. Hence, we may or may not know on February 7 whether she will approve said financing.

HTA and GO Rulings

In addition to all this, Judge Swain issued two important opinions in cases involving HTA Bonds and GO Bonds. In the first case dealing with HTA, the Judge dismissed all claims, but those having to do with the claim of lien were dismissed for jurisdictional reasons, namely ripeness, and can be, as the Judge suggested, at a later time such as when the Plan of Adjustment is to be confirmed. Judge Swain determined that 11 U.S.C. § 922 does not require that revenue bonds be paid and hence are not subject to the automatic stay. Rather, she opined, it gave the debtor the chance to determine whether it would continue to pay the revenue bonds. Importantly, Judge Swain decided that bondholders were not the owners of the HTA funds or that they were held in trust for them. Since these are some of the allegations of the COFINA bondholders, this does not abode well for their claims.

As to the GO claims, again, the Judge dismissed for jurisdictional reasons the claims as to liens and priorities, clearly leaving them for another date. Although AFFAF’s Gerardo Portela claimed a “significant victory” for the Commonwealth, his exuberance is misplaced and a fundamental misunderstanding of Judge Swain’s ruling, but we’ve come to expect this from the Rosselló government. The Section 922 issue definitely is the ultimate question of liens and priorities is more important. In bankruptcy, liens must be paid. If these liens exist, the Plan of Adjustment must include their payment. In any event, GO bondholders filed a notice of appeal and the HTA bondholders will probably do the same.

Clearly, Judge Swain is taking a leaf out of Judge Rhodes book: Deny everything and force creditors into agreements in mediation. The difference here is that the Puerto Rico Fiscal Plan presented to the Board has no provision for debt payment. Also, the Board said on November 13, 2017, that there was no money for debt payment in the next 5 years. This position may have changed, however. During the Puerto Rico Chamber of Commerce Second PROMESA Conference, José Carrión was one of the speakers. When asked what was the Board’s position as to paying debt service, Mr. Carrión said: “The vision of the Board is that debt must be paid. . . We are basing ourselves on the premise that the right thing is that we should pay sustainable debt. Because if we don’t, we believe that we will not be complying with a fundamental part of our mandate, which is to ensure that Puerto Rico can regain access to the capital markets.”  At the same time, Carrion refused to answer a question on the validity of bondholder’s liens.

Does the above mean that the Board will now change its tune? I doubt it. This can very well mean that the Board will graciously offer its bond creditors “growth bonds”, to wit, a new instrument that will be paid when Puerto Rico starts growing at a particular clip. It is doubtful, however, whether bondholders will accept this, so litigation will continue up to the Plan of Adjustment and beyond. More and more of Puerto Ricans taxpayer money going to lawyers.

Mr. Carrión also made it clear that Puerto Rico does not deserve the power system it has and that PREPA must be sold. He stated that the Board is behind the Government’s intention of selling PREPA. I seldom agree with Mr. Carrión, but I wholeheartedly support the idea of selling PREPA. The devil, however, is in the details.

Finally, I found disturbing that Arc claims it is owed $19 million and Whitefish claims it is owed $100 million. How is Puerto Rico going to rise if those who are doing the dirty work are not paid? This reinforces the idea that PREPA must be sold, the sooner the better.

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 – January 29, 2018

Welcome to your weekly Title III update for January 29, 2018. Things in the Puerto Rico’s bankruptcy are picking up and important activity in the political sphere is strongly impacting the litigation.

On January 22, 2018, Governor Rosselló gave a televised speech announcing that PR would sell PREPA. The short 15 minute speech only stated that legislation would be presented to allow the sale, that a period of negotiations would ensue and then the sale, all in the period of 18 months. It was also stated that the generation would be sold but transmission would be leased.

Immediately, political analysts in PR showed their ignorance of bankruptcy law and PROMESA by stating that Governor Rosselló could not sell PREPA without Court permission or the Board’s agreement. As to the first, PROMESA, the same as Chapter 9, did not adopt section 363 of the Bankruptcy Code which requires Court approval of any sale outside the ordinary course of business. As to the Board, let’s just remember what Judge Swain said in her opinion on the appointment of Mr. Zamot as CEO of PREPA, at page 16:

“The FOMB’s assertion that Title III creates or reinforces direct managerial power granted by Titles I and II rings hollow as well. PROMESA section 303 reserves the territory’s political and governmental powers to the territory or “any territorial instrumentality thereof,” subject only to Titles I and II. See id. § 303.6 As the Court has explained, nothing in Titles I and II permits the FOMB to displace local government structures and authority by declaration. Similarly, sections 305 and 306 do not empower the FOMB to interfere unilaterally with the debtor’s political and governmental powers, or with the debtor’s property or revenues.”

Since PREPA is owned by the Government of Puerto Rico, the Board’s agreement to the sale is not needed. The way the Governor wants to sell PREPA, however, free of liens and debts, however, requires the Board’s agreement since it is the only entity allowed by PROMESA to file a Plan of Adjustment, see PROMESA section 312 and page 18 of the Zamot opinion. But any Plan of Adjustment that impairs creditor classes must be approved by said creditors and if no such approval ensues, the Court may, but does not have to, cramdown the Plan, see, section 314(c) of PROMESA. If the Court does not allow the cramdown, however, the Title III petition must be dismissed, see, 11 U.S.C. § 930.

In addition, this sale creates many questions. Will the monopoly be extended to the purchaser or purchasers, creating then an oligopoly or cartel? What will happen to the employees? What will be the sale price? The new PREPA fiscal plan states that it has assets of $9.4 billion and debts of $11.4 billion. This was contradicted by the Board and AFFAF’s motion on Saturday for interim financing for PREPA where it states that the utility has debts of over $14 billion. It would be nice if the Government and the Board would make up their minds as to the actual numbers.

Also during the week, separate from the litigation, PREPA, PRASA and the Commonwealth filed their Fiscal Plans. Although Governor Rosselló insisted on January 10, that he was ready to hand in the plans, the three documents are clearly marked as drafts, something that is not what the Board wanted. The PREPA and PRASA fiscal plans are also filled with disclaimers which puts doubts as to the reliability of their numbers. The Commonwealth fiscal plan is long on what it is going to do, but short on how it will be done.

In addition, it postpones a balanced budget until 2022, making the Board a permanent fixture until at least 2026. In addition, the Commonwealth fiscal plan has no employee furloughs or reductions of pensions as was required by the Board in the past. Moreover, the fiscal plan does not define essential services and hence does not explain how they will be funded nor does it explain how it 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 in effect prior to the date of enactment of this Act.” (Section 201(b)(1)(N) of PROMESA).

My view is that the Board will reject the plan for various reasons and will order the furloughs and the reduction of pensions. Since the Government will reject these changes, the Board will certify its own fiscal plan in order to dictate policy. The same will happen with the PREPA and PRASA fiscal plans for only that way will the Board ensure that it will call the shots. The Government will go to Judge Swain and the vicious cycle of infighting will continue to the detriment of the people of PR.

Meanwhile, creditors have become increasingly vocal about their own concerns with the revised fiscal plan. Given the plan’s lack of debt service, and mounting evidence of ample liquidity, this is not surprising. Assured Guaranty released the following statement, which points to their view of the broader implications of the plan, beyond just further litigation and delay in returning the Commonwealth to capital markets:

“This disregard for creditors’ rights would shake, on a nationwide basis, investors’ confidence in the enforceability of their contracts, the rule of law and public officials’ willingness to abide by the commitments they have made. In doing so, they will make it more expensive for municipalities throughout the United States to fund essential services and infrastructure for their taxpayers.”

Turning now to the litigation. As was to be expected, the Board opposed the GO’s motion to conduct discovery pursuant to Bankruptcy Rule 2004. What is new is the Board, the Commonwealth and AFFAF’s position as to the payment of prepetition debts. At page 6 of their motion they stated:

While, as a practical matter, the Oversight Board and Commonwealth want to repay as much debt as is consistent with carrying out PROMESA’s directive to create fiscal responsibility and access to the capital markets, PROMESA § 314(b)(6) does not require the debtor to pay prepetition claimholders as much as it can. Rather, it provides the Court should “consider” what creditors could recover under applicable non-bankruptcy law, i.e., what a race to the courthouse would produce for “the creditors” under non-bankruptcy law.”

My take on this is that the Board and the Government of PR are taking the position they do not have to pay what they can but what they want to creditors. Doubt this was missed by all the bondholders who claim a lien on bond payments.

Finally, on Saturday, the Board and the Commonwealth filed a motion for interim financing of PREPA. As we have discussed before, FEMA and the US Treasury informed PR at the beginning of January that according to its own documents, it had too much money in its accounts to qualify for a CDL loan and that they would not lend to PREPA directly. The letter mentions that after the hurricanes, the Government account did not go below $1.5 billion and that recently it had informed the “discovery” of over 800 accounts with $6.875 billion. The Board and the Commonwealth, however, claimed in its motion that given the allegedly precarious economic condition of PREPA, they decided to proceed pursuant to 11 U.S.C. § 364 for an emergency approval of a loan. The motion states that the lender will be the Commonwealth of Puerto Rico and the debtor will be PREPA. The loan will have senior secured priming super-priority not to exceed $1.3 billion but initially the Commonwealth will only provide $550 million.

The security interests, liens and superpriority administrative claim will be subject only to a carve-out for professional fees and costs of administration incurred during the Title III Case (defined below) of the Debtor (as approved by the Court), any state matching requirements of Federal grants and loans and certain fees due and owing to the Office of the United States Trustee as set forth in the Title III Order.

In addition:

The proceeds of the Loans shall be used to make expenditures and disbursements: (i) for the Debtor’s operations including, without limitation, employee payroll and benefits, facilities maintenance costs that are not capital expenditures or infrastructure improvements, and normal operational materials, supplies, fuel and power supplies, vendor, and services payments (collectively, “Eligible Uses”) and (ii) for reimbursement of amounts expended for Eligible Uses from September 6, 2017 until the funding of the Loans. . .

“Unless otherwise specifically consented to in writing by the Lender and the Oversight Board, the proceeds of the Loans shall not be used for debt service; capital improvements; repair or restoration of damaged public facilities; paying the non-federal share of any Federal program; tax refunds; lobbying; Title III costs including but not limited to judgments arising from Title III cases and related cases, and legal or advisory fees; deposits, transfers, or payments to accrual accounts, reserve funds, or contingency accounts that do not represent an actual, immediate cash disbursement to continue current government operations for essential services; administrative costs of Federal disaster assistance grants and loans; or disaster related expenditures eligible for reimbursement from the Federal Government; or any expense that is not a “Current Expense” under the Trust Agreement (collectively, the “Ineligible Uses”). . . “

The motion also foresees the parties positions as to this loan. It states:

“Prior to filing this Urgent Motion, certain holders of general obligation (“GO”) debt of Puerto Rico advised the Oversight Board in writing that they oppose any lending from the Government of Puerto Rico to the Debtor without court approval, and that they oppose the concept of the Government of Puerto Rico borrowing from the federal government to lend to the Debtor. While the Government of Puerto Rico and the Debtor never intended to enter into this loan transaction without court approval in the PREPA Title III case, the Government of Puerto Rico cannot necessarily assuage the GO debtholders’ general opposition or their statements that they might seek stay relief and oppose any plan of adjustment.”

The motion dispenses with PREPA bondholders claims of lien in the following fashion:

“As explained below, the existing lien securing bonds under the Trust Agreement already provides for “Current Expenses” (including a sixty-day operating reserve) to be paid from revenues. Because the Lender’s loan to the Debtor can only be used to pay Current Expenses, the existing lien is not diminished or impaired by the first lien to be granted to the Lender because Current Expenses already have a prior right to be paid from the Debtor’s revenues before any positive net revenues exist that could go to creditors. This situation is unique because the priming lien the Lender is requesting, does not subordinate the existing creditors’ lien to anything to which it is not already subordinated. For example, in the ordinary course, if the Debtor had $1 billion of revenue and $1 billion of current expenses, the revenues would pay the Current Expenses, not creditors. If instead, the Debtor has $200 million of revenues and $1 billion of Current Expenses, the $200 million of revenues and the next $800 million of revenues would be paid to cover Current Expenses before there would be collateral available to creditors.”

In other words, the Board claims that PREPA bondholders have only a net lien; that is, they get paid only after all expenses are paid. PREPA bondholders on the other hand, claim a gross lien, meaning that they get paid from the stream of income irrespective of expenses. What this means is that before the loan is approved, Judge Swain will have to weigh on these objections.

The motion also alleges there are no other alternatives but it only mentions one offer from a group of bondholders. On the other hand, the motion mentions that “[b]eginning on January 21, 2018, the Debtor, through Rothschild, initiated a marketing effort to obtain alternative financing.” If, as the motion states, AFFAF has been negotiating with Treasury for the CDL loan, whose funds were appropriated by Congress in October, why the delay in searching for other sources? Could it be that the Board and the Government of PR have been playing hide the potato (funds) and now have been caught in their own web of deceit? After all, as mentioned in the last update, the Board and the Government knew about the “discovered” accounts since July of 2017 and did not then proceed with an audit to determine what part of those funds were available. In fact, neither of the two have proceeded with the hiring of said auditors. Interesting indeed.

In any event, there are 7 entities that have signed non-disclosure agreements to have access to a data room to commence the process  The interest rates of 0% for the first semiannual period, .50% for the second semiannual period, 1% for the third semiannual period, 1.5% for the fourth semiannual period, 2% for the fifth semiannual period, 2.5% for the sixth semiannual period and 3% thereon.  This does not appear to be a serious effort on behalf of the Commonwealth or the Oversight Board in seeking private financing for PREPA.  Perhaps they still believe the Trump Administration will provide a CDL directly to the Commonwealth or PREPA itself.

All of this leaves me with many other questions. How does the Commonwealth lend to PREPA if its agencies and the Municipalities still owe PREPA more than the $550 million? What happens if Judge Swain determines that PREPA bondholders have a gross lien? Will the sale still go through? Does the lien follow the stream of income if PREPA is sold? If the Commonwealth is broke, how can it lend to PREPA? Given the Board’s statements as to the net lien, do the pension funds in PREPA have to be paid as part of the “current expenses” definition of the 1974 Bondholders Agreement? These and many other questions will have to be answered and soon.

In addition, the parties have been filing slight modifications to the Board’s motion for Bar date. It is likely that the Board will accommodate any reasonable suggestion since it is in everyone’s interest that this issue be dealt with without 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 – January 22, 2018

Welcome to your weekly Title III update for January 22, 2018. Things in the Puerto Rico bankruptcy are picking up, but developments outside the case, which were for the most part political in nature, dominated the week.

On January 17, 2018, El Nuevo Día reported that FEMA and the US Treasury were denying PR’s requests for a loan pursuant to the Community Disaster Loan Program, commonly known as CDL. The letter, however, has a print of received on January 9, 2018, more than a week before it was reported. In the letter, the agencies told AFFAF Director Gerardo Portela that the Commonwealth, PREPA and PRASA projected in late September that they would exhaust their operating funds by October 31, 2017, but as of December 29, the Commonwealth had $1.7 billion cash balance and “discovered” $6.875 billion in over 800 accounts. The letter continued saying:

“Because the Commonwealth’s central cash balance, as publicly reported, has consistently exceeded $1.5 billion in the months following hurricanes, and considering the implications of the reported $6.875 billion of total cash across the Commonwealth, the Federal Government will institute, as a matter of policy, a Cash Balance Policy, that will determine the timing of CDLs to the Commonwealth and its instrumentalities, including PREPA and PRASA. Under this Cash Balance Policy, funds will be provided through the CDL Program when the Commonwealth’s central cash balance decreases to a certain level.”

In response to FEMA and US Treasury, Mr. Portela attempted to downplay these newly discovered monies writing in a response to the Federal Government, “The disclosure in the Initial Report reflects a preliminary analysis of hundreds of bank accounts of the Commonwealth and Commonwealth instrumentalities, but it does not provide an accurate picture, or should not be construed as indicative, of governmental liquidity for unrestricted general use.”

Similarly, Mr. Portela told Politico late Friday that PREPA and PRASA faced severe liquidity problems and that the Commonwealth had provided the Federal Government all that it requested. Politico reported, however, that a “Treasury spokesperson pointed the finger back at Puerto Rico’s government for failing to provide information that the administration wans to fulfill the loan request. ‘We are closely monitoring Puerto Rico’s liquidity and stand ready to support the island’s needs,’ the spokesperson wrote. ‘The Government of Puerto Rico has the responsibility to demonstrate liquidity needs in a transparent fashion to ensure appropriate program use and stewardship of taxpayer dollars.” Yet, another sign that the Trump administration is not buying the claims of the Commonwealth or the Board.

Predictably, the Oversight Board, on that same date of January 17, announced a hearing to discuss the “discovered” cash. The meeting was nothing more than a blatant attempt to whitewash the Commonwealth’s cash situation. The AFFAF presentation, has several caveats that make it of questionable use for either the Federal Government, the mediation team or Judge Swain. In its disclaimer section, AFFAF states that the information contained in the presentation is preliminary and subject to further analysis, the account balances have not been confirmed through an audit in accordance to the generally accepted auditing standards and it makes no representation with respect to the information it presents.

“Discovered” Monies: What the Board Knew and When

The Board’s attempt to whitewash the “discovered” funds, however, fails for several reasons. Andrew Scurria, a reporter for The Wall Street Journal, wrote an article in the Bankruptcy section of the daily, revealing that the Board knew of these accounts not in December of 2017 but in July 2017. See here for the proof. There are several email exchanges between the Board and AFFAF pertaining to these accounts. This begs the question of why the Board continued to tell Judge Swain in the summer of 2017 that the Commonwealth’s finances were so bad that it would have to borrow from COFINA in November. Later the Board changed its tune to December, but after the hurricanes, upped the ante. On November 7, 2017, Natalie Jaresko told Congress PR needed $3.6 billion before the end of the year and between $13-$21 billion for the next 7 quarters. Clearly, the Board has some explaining to do to Congress and Judge Swain.

Without a CDL, Puerto Rico Seeks to Finance PREPA Directly

This leaves the Rosselló administration in a bind. It desperately needs to reestablish electrical power in Puerto Rico in order to run again in 2020. Hence, it needs to fund PREPA and PRASA. Since the Federal Government told the Governor, for now, to use his own funds, it has decided to lend these corporations money. This was previously reported by The Wall Street Journal, and I have examined this draft Commonwealth-PREPA term sheet.

In short, the Commonwealth would provide for and initial $250 million loan and up to $1.5 billion, but the latter only if there is a CDL. The loan would be secured by a lien on the net revenues of PREPA and would not be for payment of debt. Although the loan would be secured, its payment would be as an administrative expense, after lawyers and experts are paid. The loan will be without interest unless Puerto Rico has to pay interest from the CDL and then the same rate will apply.

Profound Implications for Title III Case

All this mess has profound implications for the Title III litigation and PROMESA in general. For example, if the Treasury demands a lien over Commonwealth funds, and it probably will, this would affect the GO Bondholders claim they have a lien over the same funds. Hence, pursuant to 11 U.S.C. § 363(c)-(f), Judge Swain would have to intervene, determine the validity of the GO claim and if she finds they have a lien, make sure this is paid in full in the Plan of Adjustment before she can grant the US any lien. Even with this guarantee, it is questionable if Puerto Rico could pay the Federal Government and GO’s. In addition, the Federal Government could claim a lien on the SUT, angering the COFINA bondholders who claim they have a lien and to which there is ongoing litigation.

None of the Board’s dire predictions, made both to Congress and Judge Swain, has been proven true. In December, AFFAF and the Board stated that each would hire an auditor to determine, what, if anything of those $6.875 billion could be used. But neither had done so. Moreover, AFFAF and the Board knew about these funds since July 2017. Why didn’t they hire an auditor then? Probably because they would have to change the Fiscal Plan and would change the nature of the mediation talks. This lack of transparency has consequences. If a federal judge thinks you lied to them once, it will never again believe a word you say. This applies to Judge Swain and the six federal judges in the mediation team.

Moreover, if the Commonwealth is to lend to PREPA, it also needs to enact new legislation authorizing it to do so and would have to again go through Judge Swain in order to secure a lien. This is not something that can be done in a couple of days and the legal storm will be severe.

In addition, any audit will take time, at least 60-90 more days. This means the middle of March or April before Puerto Rico could come out and seek a CDL loan. It would then have to wait for the FEMA bureaucracy, slow at its best, to disburse the money. Puerto Rico, far from being a pauper, has enough money to operate and lend to its public utilities, if it has not already done so. Not a good scenario for the Governor and the Board.

During the weekend, the Governor Rosselló announced he would address the people of Puerto Rico via TV, later today. The topic will be the CDL, fiscal plan, etc. It is clear the Board will move quickly to approve either the Governor’s plan or its own, probably by February. It will then file the Plan of Adjustment to forestall the economic growth that insurance and FEMA money always brings after a hurricane. In addition, this plan will not reflect any CDL loans or any Medicaid/Medicare future funds. That way, the Board will be able to argue to Judge Swain that PR cannot pay a penny in debt service.

The problem with this scenario is that the audit of the “discovered” accounts will not be finished by the end of February since neither the Board nor the Commonwealth have hired the firms to perform it. Nevertheless, Mr. José Carrión admitted that the Fiscal Plan was a changeable document. Hence, if in June new money comes into PR, the Fiscal Plan should reflect it and more importantly, the plan of adjustment must be consistent with the Fiscal Plan. See PROMESA section 314. The Fiscal Plan may vary but the Plan of Adjustment and the Disclosure statement that accompanies it, should not be changed every couple of months. A quick approval by the Board of an incomplete fiscal plan will underscore their approach is not serious, and further erode what’s left of their credibility before the Court.

In any event, a Plan of Adjustment that has no debt service for 5 years, and even then only growth bonds, is highly unlikely to be approved by creditors. The Board will then request from Judge Swain that she cramdown the plan as in the best interest of creditors. Given the situation, I find that unlikely, although clearly it has been the Board’s plan from the beginning. If Judge Swain does not cramdown the plan, the Bankruptcy would have to be dismissed pursuant to 11 U.S.C. § 930. Then what? PR would not have the automatic stay to hide behind and would be faced by very angry bondholders who have not been paid in two years. That’s why Congress envisioned Title VI as the best option but the Board and Governor Rosselló preferred bankruptcy over negotiations.

Turning now to the actual litigation, the American Federation of State, County and Municipal Employees International Union, AFL-CIO (“AFSCME”) and the American Federation of Teachers, AFL-CIO (“AFT”), International Union sought an order to lift the automatic stay to continue all the labor arbitration that were initiated before the filing of the petition. The Service Employees International Union (“SEIU”) and International Union, United Automobile, Aerospace and Agricultural Implement Workers of America joined the petition. Seems to me a fair request but the Commonwealth is sure to oppose it.

National filed a Rule 2004 request for discovery for the following purposes:

“National seeks authorization to take discovery of the Government Development Bank for Puerto Rico (“GDB”) regarding the existence, historical treatment, and status of a State Infrastructure Bank (“SIB”) trust account (the “PR SIB Trust Fund”) created at GDB for the benefit of Puerto Rico Highway and Transit Authority (“PRHTA”) bondholders pursuant to an agreement (the “Puerto Rico Infrastructure Bank Agreement” or the “Bank Agreement”) between the Puerto Rico Department of Transportation and Public Works (“the Department”), PRHTA, and GDB on June 12, 1998 and to conduct examinations of designated representatives of GDB.”

The Court has been changing its view on Rule 2004 discovery and may very well grant this but likely with limitations. Let’s see what happens.

The Ad Hoc Group of PREPA Bondholders, National Public Finance Guarantee Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Syncora Guarantee Inc., and U.S. Bank National Association and PREPA came to a stipulation pertaining to Rule 2004 discovery and presented it to Judge Swain. Good to see some good faith cooperation.

As I suspected, Judge Swain granted the UCC’s leave to file amended constitutional claims against COFINA and said:

“The twelfth and thirteenth causes of action, as amended, plead plausibly claims that can properly be litigated in connection with the determination of the binary asset ownership issue framed by the Stipulation. Although they also implicate issues that may be relevant to other, out of scope, questions that were raised in the pleadings filed in this adversary proceeding, such potential overlap is not preclusive of in-scope consideration of the claims.”

The UCC promptly filed its amended complaint and this could be a game changer in the Commonwealth v. COFINA challenge. As we discussed before, not only does the UCC claim the COFINA transfer is unconstitutional but so do the GO bondholders. And if indeed COFINA is unconstitutional, the full SUT would belong to Puerto Rico and the GO’s would be in a perfect position to argue via an adversary proceeding or contested matter, that these funds must be used to pay their bonds. Let’s see what transpires.

The Board filed its motion requesting the entrance of an order as to proof of claim bar dates. The proposed date is May 29, 2018. This is a long motion which must be examined by anyone that has a claim in the case. Those who do not already have one, please hire an attorney. The Board also filed a motion to extend the time to accept or reject leases.

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 – January 8, 2018

Welcome to your weekly Title III update for January 8, 2018. After a short vacation, we are back to discuss the happenings in PROMESA. While not much happened, much will happen soon.

Foremost for this week, and even for this year, is the oral argument of the Aurelius and Utier constitutional challenge to the appointment of the members of the Board. Aurelius’s Objection and Motion to Dismiss presents a single yet fundamental question: Whether the members of the Board should be secretly hand-picked by four members of Congress or selected by the President and publicly confirmed by the Senate.

After a lengthy delay, the US Office of the Solicitor General informed the Court that it would defend the PROMESA appointments’ clause. Nothing surprising there since the office of the Solicitor General defends the overwhelming majority of constitutional challenges to acts of Congress. The last time I remember the Solicitor General deciding not to defend a law was when President Obama changed his mind about the Defense of Marriage Act.

The US Solicitor General wisely steered as far away as it could from the “Insular Cases,” especially the racist piece of resistance, Downes v. Bidwell, deciding instead in concentrating on cases before the 1898 dawn of the Imperial American Age.

The Board and AFFAF, however, in their motions reinforced the Territorial Clause of the US Constitution and Downes, which is the basis for Congressional discrimination against Puerto Rico in most federal programs. The Board claimed in its opposition to Aurelius motion that “[i]n a series of cases, the Court recognized that the U.S. Constitution applies ‘only in part in unincorporated Territories.’” The reference ends with a footnote citing Downes for the proposition that the Appointments Clause of the US Constitution does not apply to PR as an unincorporated territory. This probably explains why AFFAF did not argue in its brief that PR is an incorporated territory as Judge Gelpí decided in Consejo de Salud de Playa de Ponce v. Rullan. It seems that “[i]n the eyes of the Board and Governor Rosselló, it is better to have 100 more years of colonialism and discrimination than to have to pay the island’s debt.” See my Caribbean Business column, http://caribbeanbusiness.com/column-et-tu-ricky-and-jose/. Interestingly, Aurelius’ argument did not make any mention of the Territorial Clause.

Contrary to what some commentators believe, this challenge is important enough for the Board to have hired Donald Verrilli, President Obama´s former Solicitor General to argue its case and even used a reply to the US Solicitor General’s brief to further snipe at Aurelius, forcing the Court to allow the latter for file an unusual sur-reply. Anticipating the importance of the case, Aurelius hired Ted Olsen, George W. Bush’s Solicitor General and Matthew McGill, who successfully argued the Franklin California challenge to the Puerto Rico Recovery Act.

In addition, some of the same commentators that argued that the Aurelius challenge was not to be taken serious now claim that to grant the bondholder’s request would mean the dismissal of the Title III cases. In its reply to the Board’s motion to dismiss, Aurelius made clear how it envisioned the result of its successful challenge:

“In fact, the Opposing Parties agree with Aurelius that the proper remedy here is narrow andeminently practical: The Court should simply sever the offending portions of Section 2121(e). Board Opp. 34–35. That would cure the constitutional problem by allowing the President to decide for himself, with the Senate’s consent, who is best suited to serve on the Board. The parties also agree that the Court has procedural tools to ensure an orderly transition from the current Board to one that complies with the Appointments Clause. See, e.g., Dkt. 1627 (“GO Bondholders’ Stmt.”) at 2–3; see also Board Opp. 34; Dkt. 1629 (“Retiree Comm. Opp.”) at 35; Dkt. 1640 (“AAFAF Opp.”) at 31; Dkt. 1631 (“Unsecured Creditors Opp.”) at 28. In particular, this Court could simply stay its order of dismissal pending appeal, and the First Circuit, following appellate review, could stay its mandate pending the nomination and confirmation of a new Board. The Opposing Parties’ prophecies of disaster are belied by their own view of the remedies. They are also revealing. The Opposing Parties presuppose that the President would not select, or the Senate would not confirm, the same people who currently occupy the Board’s seats—even if that were necessary to prevent the sky from falling in Puerto Rico. If the President did determine that the current members are unworthy of their offices or not capable of discharging the Board’s important responsibilities in the wake of the hurricanes, and the Senate did not disagree, that would be to the good. There is no legitimate reason to shield the Board from this public scrutiny.”

The oral argument is going to be epic and lengthy. Judge Swain has allotted 90 minutes for each side. Argument starts at 11 am AST and 10 am EST in New York. Given the importance of the issue, I have no doubt Judge Swain will decide quickly and any appeal to the First Circuit will be expedited

The Aurelius constitutional challenge, however, is not the only thing in the agenda. At 3 pm AST and 2 pm EST, there will be the consideration of the UCC’s request for reconsideration on Judge Swain’s dismissal of some of its causes of action for allegedly going beyond the scope of its appointment in the Commonwealth v. COFINA case. Specifically, the UCC, quite correctly, points out that although its causes of action challenging the constitutionality of the COFINA structure were struck down, similar causes of action presented by the Ad Hoc Group of GO bondholders and Bettina Whyte as COFINA agent were not. Let’s see what Judge Swain decides.

In addition, several bondholders had filed requests for Rule 2004 discovery and the Court signaled its agreement to it subject to specific objections. The parties filed a report informing the Court where they agree and where (surprise surprise) they did not and subsequently, the Ad Hoc GO Group filed a motion objecting to following:

“Some of these Fiscal Plan Development Materials—such as the live model that underlies the Commonwealth Fiscal Plan, certified in March 2017—were provided to Movants in the “data room.” Those data room materials are subject to the strict constraints of an NDA (or in some cases, the mediation agreement), which prohibits their use in any way in the litigation. Among other things, they cannot be used as evidence-in-chief or for impeachment purposes, nor can they ever be shown to the Court. As for the rest of the Fiscal Plan Development Materials—such as versions of the new fiscal plan submitted to (but not certified by) the Oversight Board—Respondents refuse to produce them at all. Joint Rpt. at 3. Either way, Respondents, who continue to tout their “commitment to transparency” (Dkt. 1928 at 1), insist that these Fiscal Plan Development Materials must never see the light of day.”

As I have mentioned many times before, the Board is anything but transparent and will fight to the end to continue obfuscating the truth. Some Supervisory Board!

Also this past week, Gregorio Igartua, who has filed many cases to get Puerto Rico to vote for President, filed a petition for permission to file a brief of amicus curiae and included it with his pleading. In essence, it requests:

“As it can be seen, for Federal Courts to follow the Insular Cases, the case of Balzac, and/or the case of Harris v Rosario to legally support Puerto Rico’s special relation with the U.S. as a non-incorporated territory is today legally unfounded and incorrect. The practice of treating Puerto Rico as a non-incorporated territory where constitutional dispositions do not apply, and as an incorporated for others, must end.”

Finally someone arguing what the Government of Puerto Rico should have argued, for example, that Puerto Rico is an incorporated territory and the full power of the Constitution applies to it. Too bad that this is too little, too late.

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.

Weekly Update – December 22, 2017

Welcome to your weekly Title III update for December 22, 2017. Due to the Holidays, decided to do the update this Friday and adjourn until January 8, 2018 and maybe take a little vacation. Again, not much happened, but what did happen was of great importance.

Many filed requests for interim payments with the Court last week and continued this week. I will not bore you with the details, but will just mention that the Board’s lawyers filed an emergency motion, later joined by the UCC, for a declaration that any insurance proceedings to PREPA not be used for debt payment. It seems that PREPA has a $250 million property insurance policy and the Board and AFFAF seem to want the Court to know they don’t want creditors claiming that money.

Additionally, O’Melveny & Myers LLP, filed a request for interim payment in the PROMESA case as lawyers of AFFAF, for the meager amount of $9,990,147.15 of which $8,993,939.50 have been paid. Unbelievable.

On December 19, one day before the Omnibus hearing, AFFAF filed a motion to inform the Court that, OOPS, we found 800 government accounts we knew nothing about with $6.85 billion. AFFAF said:

“Indeed, both restricted and unrestricted cash accounts as encompassed in the Initial Report indicates that a significant portion of the funds either have or will likely have limitations and restrictions on use (including various accounts containing federal funds designated by law solely and exclusively for use on specific federal programs). Notwithstanding the foregoing, completion of Independent Review Process Steps 2 and 3 will provide a definitive determination concerning limitations and restrictions on all bank accounts.”

The Oversight Board has announced they will be hiring a forensic analysis team to “carry out an investigation into the liquidity of the Puerto Rican Government.” Well, aren’t we a little late? After almost a year-and-a-half on the job, the Board still does not know how much money the government has in its accounts, or this is one big cover-up effort by the Board? Either way, I suspect this is not the last we’ve heard of this issue, and it could be an inflection point. I believe this could have significant ramifications going forward, including how much money Congress gives Puerto Rico in the next supplemental and what happens to those Community Disaster Loans.

On December 20, Judge Swain held an Omnibus hearing on the case. Judge Houser of the mediation team gave a short presentation stating that the process would restart early 2018 and she hoped a plan of adjustment would be presented that same year. Martin Bienestock, the Board’s counsel, stated that they believed it would indeed be presented then.

Mr. Bienestock then gave a presentation on the issue of the bar dates. He said that the Board would be presenting a motion in January with a proposed bar date for May. The proof of claim would be in both English and Spanish and could be sent via U.S. Mail. Judge Swain suggested that during the period there will be reminders of the need to file the proof of claim and the possibility of moving the date if electricity was not reestablished to all of PR soon.

Judge Swain also approved the Joint Motion on PREPA insurance proceeds but for future payments established a protocol where the utility must notify the “Official Committee of Unsecured Creditors appointed in this case, the Oversight Board, the Trustee under the Trust Agreement, National, Assured, Syncora, and the Ad Hoc Group” of the new information and the group may object. If objections are not resolved, not all of the order will apply to it. Obviously, this was a stipulated order. Let’s see if any problems arise.

Ambac and AFFAF informed Judge Dein that they had reached an agreement in principle as to documentation discovery pertaining to the SUT since Maria. They were ordered to present a motion by January 5, 2018, explaining the status of those negotiations. Seems AFFAF knew the Judge is leaning toward Rule 2004 discovery.

There was oral arguments as to the adequate protection payments to the ERS bondholders that had been stipulated before Judge Besosa in April of 2017 and later ratified in June of 2017 by Judge Swain. AFFAF was arguing that its obligation to pay interest on the bonds expired on October 1, but it paid the November payment to the Trust agent who paid bondholders. Then AFFAF demanded repayment from the Trust agent. The ERS bondholders requested an order from the Judge for payment of said interest. AFFAF argued that since there was a dispute as to the validity of the liens, there was no need for the adequate protection. Judge Swain ruled from the bench and ordered the renewal of the interest payment.

Question is, is this a harbinger of her ruling on the validity of the ERS lien? Why order payment if there is no lien? On the other hand, there was a stipulation of payment of the interest until she decided the issue of the validity of the lien. Hopefully, we will soon find out.

In other news, the Board granted a short extension to the Government of Puerto Rico on the presentation of the fiscal plans. Instead of December 22, the plans will be presented on January 10, 2018. This is not much of an extension given that the supplemental aid package approved by the House will not go to the Senate until 2018. In addition, there is no clarity, as mentioned above, as to when the CDL loans will be disbursed or under what conditions, no clarity on Medicaid/Medicare funding, and there is the issue of the secret bank accounts.

Why then rush the fiscal plan? Simple, the Board does not want to factor in those billions of dollars in aid in their plan and since the plan of adjustment must be based on the fiscal plan, it wants to have the numbers to argue for no debt service for five years as Bienestock advanced in November.

Obviously, there will be objections to any disclosure statement based on these premises which will lead to questioning of the plan of adjustment. The board will then argue, the plan of adjustment is based on the fiscal plan and you cannot question the fiscal plan. Perfect tautology to prevent scrutiny of both plans which will force creditors to object to the plan and then Judge Swain will have to decide how best to proceed. Let’s see what happens.

In any event, Happy Holidays to all of my readers. Not all in life can be work. Have fun and remember those who love you.

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 – December 18, 2017

Welcome to your weekly Title III update for December 18, 2017. The decision by Judge Dein on the Rule 2004 could turn out to be a pivotal moment in Puerto Rico’s bankruptcy.

GO’s, Ambac, the UCC and others had sought a separate Rule 2004 discovery on several issues and the Board opposed the request. Judge Dein granted the requests and said the following in her order:

“The Joint Motion is allowed only as to the 17 requests made in Schedule A to the Joint Motion, and without waiver of any objections the Respondents may have to specific categories or documents. . . Respondents contend that no Rule 2004 order is needed in light of their voluntary production. While the Court recognizes Respondents’ efforts to produce information voluntarily, there is a need in this Title III proceeding under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) for formal and controlled discovery related to the Commonwealth of Puerto Rico’s financial condition. This Court encourages the voluntary disclosure of documents between the parties and allows this motion to exercise its supervisory role over a finite set of document requests.”

Judge Dein further ordered that:

“Movants and Respondents shall submit a joint report on or before Friday, December 22, 2017 at 3:00 p.m. Atlantic Standard Time (2:00 p.m. Eastern Standard Time), which shall address, but need not be limited to, the following:
a. any agreed upon release from existing use restrictions for documents produced or to be produced in accordance with this order;
b. any areas of disagreement regarding the restrictions on the usage of documents produced or to be produced in accordance with this order and a proposal for dealing therewith; and
c. the format of a privilege log to be used in connection with productions pursuant to this order.”

Even with this order, I doubt this will be the end of disputes as to document production. The Board and the Commonwealth have amply demonstrated their lack of commitment to transparency.

Interestingly, and quite suspect, the government “found” $6.8 billion in bank accounts belonging to the Commonwealth and instrumentalities just days after the Rule 2004 decision. Now, the Board is going to “investigate,” but they have been in place for 16 months with little progress to show. It also raises questions about what they knew, when they knew, how they came to know it, etc. Same goes for the Governor.

The UTIER, PREPA’s main union, filed an amended complaint that essentially requests that the utility sign its union contract and that its Fiscal plan be disallowed.

The Board filed an emergency motion, later joined by the UCC, for a declaration that any insurance proceedings to PREPA not be used for debt payment. It seems that PREPA has a $550 million property insurance policy and the Board and AFFAF seem to want the Court to know they don’t want creditors claiming that money.

On Saturday December 16, 2017, the Ad Hoc Group of PREPA Bondholders and others filed an opposition to the Board’s motion. Although they “fully support the efforts of the Oversight Board and AAFAF . . . to collect Insurance Proceeds for damage caused to PREPA’s System by Hurricanes Irma and Maria and to apply them to repairs and prompt restoration of power to the Island,” they nevertheless opposed the motion as filed. They state that “[c]ontrary to the assertions in the Motion, the Objecting Parties do have a secured property interest in the Insurance Proceeds. Pursuant to section 701 of the Trust Agreement, the proceeds of insurance on the System are Revenues that have been pledged.” The Ad Hoc group argues that the PREPA Trust Agreement has “clear and definitive provisions governing PREPA’s right to receive and use proceeds of insurance policies notwithstanding that such funds have been pledged to support payment of the Bonds.” Let’s see what Judge Swain decides on this issue.

On December 12, 2017, the Board sent the Governor a letter as to PREPA’s transformation. Most specifically, it stated that the new Fiscal Plan must include:

“Governance: The Fiscal Plan should contain a clear plan for enhanced management capabilities to deliver a successful restoration and transformation and ensure PREPA management is de-politicized and able to make independent technical and operational decisions in a governance structure consistent with attracting private investment.

Private investment and partnerships: The Fiscal Plan should explicitly provide a plan for the private sector to invest to develop new infrastructure, upgrade existing infrastructure, and realize operational excellence.”

Those of us who live here know that the main problem with PREPA is that politics and politicians dominate its decision making. By stressing improving its governance and requiring private investment, plus Mr. José Carrión’s repeated cries for the sale of the utility and the Governor’s preference for public-private entities, it is clear that another confrontation between the Board and Commonwealth is inevitable. Let’s see who wins this time.

On December 13, 2017 at 11 EST, the Court heard oral argument as to Motion for Summary Judgment of Employees Retirement System of the Government of Commonwealth of Puerto Rico and ERS Bondholders’ Motion for Summary Judgment on Issues Relating to Perfection and Application of Section 552 of the Bankruptcy Code. Both motions seek to show that bondholders of the Retirement System have no lien. Judge Swain asked both parties pointed questions and took the submissions under advisement. Let’s see what she decides.

During December 14-15, 2017, the different attorneys and experts filed their fee applications to the Court. In bankruptcy, the Court passes judgment as to the payment of the debtors’ lawyers and experts and they make applications for payment. I will not comment as to the propriety of these application but just mention what they are. I will only include the name of the movant and its relationship with Puerto Rico, the attorneys fee requested, the expenses requested, the attorneys fees paid to date. Expenses have, for the most part, been paid and the time period the fee request covers.

MOVANT FEE REQ EXP REQ FEE PAID TIME PERIOD
Bettina Whyte $264,460.00 $21,392.86 $238,014.00 8/3 to 9/30/17
Willkie Farr & Gallagher LLP counsel  for Bettina Whyte $4,661,711.75 $158,974.01 $3,789,638.26 8/3 to 9/30/17
Klee, Tuchin, Bogdanoff & Stern LLP municipal counsel for Bettina Whyte $533,434.50 $11,133.88 $533,434.50 7/31 to 9/40/17
Proskauer Rose LLP, as counsel for Board in PREPA $989,899.20 $67,275.25 $989,899.20 7/2 to 9/30/17
Proskauer Rose LLP, as counsel for Board in ERS $1,427,540.40 $24,131.76 $1,427,540.40 5/21 to 9/30/17
Proskauer Rose LLP, as counsel for Board in Commonwealth $6,369,303.60 $233,148.09 $6,369,303.60 5/3 to 9/30/17
Proskauer Rose LLP, as counsel for Board in HTA $4,035,404.70 $154,512.19 $4,035,404.70 5/21 to 9/30/17
Proskauer Rose LLP, as counsel for Board in COFINA $1,505,471.40 $16,605.84 $1,505,471.40 5/5 to 9/30/17
O’Melveny & Myers LLP, for AFFAF $2,028,863.49 $67,533.13 $1,827,719.83 5/21 to 9/30/17
O’Melveny & Myers LLP, for AFFAF, for HTA $1,272,965.00 $19,854.00 $1,149,595.03 5/21 to 9/30/17
Greenberg Traurig, LLP for PREPA $1,356,635.10 $57,025.81 $0.00 7/2 to 9/20/17
Ernst & Young LLP Board Expert $1,169,699.80 $4,910.69 $0.00 5/3 to 9/30/17
Luskin, Stern & Eisler LLP, counsel for the Board $$297,054.45 $2,172.59 unknown 5/3 to 9/30/17
McKinsey & Company, Inc. experts for the Board $5,120,000.00 $0.00 $0.00 7/1 to 9/30/17
Phoenix Management Services, LLC, experts for mediation team $774,101.00 $28,561.25 unknown 8/4 to 10/1/17
Deloitte Financial Advisory Services LLP, advisors to Commonwealth $6,647,370.29 $441,830.04 $6,647,370.29 5/3 to 9/30/17
FTI Consulting, Inc., experts  Committee of Retired

Employees

 

$660,431.00 $5,298.34  unknown 6/27 to 9/30/17
Jenner & Block LLP, counsel for Committee of Retired

Employees

$2,051,975.37 $60,916.21 $0.00 6/16 to 9/30/17
Segal Consulting, expert actuaries for Committee of Retired

Employees

$223,475.00 $5,305.47 $0.00 6/27 to 9/30/17
Greenberg Traurig, LLP, AFFAF counsel in PREPA $2,037,466.72 $23,832.82 $0.00 7/2 to 9/30/17
Zolfo Cooper, LLC, financial advisor to UCC $2,641,266.75 $38,372.69 unknown 6/27 to 9/30/17
Paul Hastings LLP counsel for UCC $$4,868,107.00 $133,270.22 $0.00 (of this application) 6/26 to 9/30/17
Ankura Consulting Group, LLC, financial advisors to PREPA $2,260,252 $129,303.57 unknown 7/2 to 9/30/17

Anyone who wants to can do the math. This proceeding is costing Puerto Rico enormous amounts of money. In addition, local entities to which the Commonwealth owes money are also spending money they could better use on lawyers and experts. The cost is mindboggling.

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 – December 11, 2017

Welcome to your weekly Title III update for December 11, 2017. Not much happened but certain issues are looming large.

Ambac had sought a separate Rule 2004 discovery on the SUT after María, but this week joined GO and others’ petition requesting discovery as to other aspects of the Commonwealth’s finances. As was expected, the Board opposed the request for discovery and all eyes will be in Judge Dein’s courtroom on December 14 to see what will be decided. Irrespective of the decision, it is profoundly disturbing that at this stage, over a year from PROMESA’s enactment, the Board and PR continue being opaque about its finances.

The United States Solicitor General filed its opposition to the Aurelius and Utier motion regarding the unconstitutionality of the PROMESA members’ appointment. Surprisingly, the U.S. Government relied much less on Downes v. Bidwell, 182 U.S. 244 (1901), the racist basis of the so-called “Insular Cases,” than the Board or AFFAF/Governor Rosselló did, relying more on older case law. This is something that few have focused on, but something I will be exploring in further detail. The January 10 oral argument will be very interesting.

On December 13, at 11 EST, the Court will hear oral argument as to Motion for Summary Judgment of Employees Retirement System of the Government of Commonwealth of Puerto Rico and ERS Bondholders’ Motion for Summary Judgment on Issues Relating to Perfection and Application of Section 552 of the Bankruptcy Code. Both motions seek to show that bondholders of the Retirement System have no lien. Interesting to watch Judge Swain’s reaction.

The Asociación de Profesoras y Profesores del Recinto de Mayagüez, Inc., had sued the UPR, the Board, etc. trying to invalidate the UPR’s fiscal plan. The parties, however, agreed to stay the litigation until the new plan is approved. Let’s see what happens.

All this leads us to the December 20 Omnibus hearing which will also decide several issues. More on this next week.

Finally, during the Board’s hearings last week, its Executive Director, Ms. Jaresko, made it clear the Board would exercise its prerogatives pursuant to Sec. 207 of PROMESA to review prior to approving or denying any action by the Commonwealth to “issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to its debt.” Given the above, the Board will be able to veto any federal loans or any conditions demanded by the Treasury Department. This would include the $4.9 billion in community disaster loans from the funds approved by Congress that in order to be utilized require sign-off from FEMA and the US Treasury as well as the White House.  In addition to this approval by the Board, Judge Swain, pursuant to 11 U.S.C. § 364(c), would have to approve the loan if it is going to be more than a non-secured loan or administrative expense. This means that even if the Board approves, Judge Swain would have the final word. Will the Board have final say over these funds given the involvement from FEMA and the White House? We’ll see. Let’s see what the conditions of the loan will be.

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 –December 4, 2017

Welcome to your weekly Title III update for December 4, 2017. As I predicted last week, the parties have not rested the Rule 2004 requests for production of documents. On November 28, 2017, the GO Bondholders, Ambac Assurance Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., the Mutual Fund Group, and National Public Finance Guarantee Corporation filed a joint motion seeking documents on the financial condition of the Commonwealth.  The GO Bondholders seek discovery on the following:

Requests 1 through 7 seek reports regarding the Commonwealth’s revenues, expenditures, liquidity, receipt of federal funds, and debt burden—all of which directly evidence the financial condition of the debtor.” 

“Requests 8 through 10 seek information relating to the Commonwealth’s macroeconomic projections, which will form the basis for the Commonwealth’s projection of its future financial condition, and the impact of any financial measures, in the revised fiscal plan. Specifically, these requests seek documents explaining testimony provided by, and models produced by, two Commonwealth consultants—Andrew Wolfe and DevTech—neither of which is on-island.”

“Requests 11 and 12 seek documents relating to fundamental expense projections that must be contained in the contemplated revised fiscal plan: “essential services,” and medical expenses. Because the Commonwealth necessarily must evaluate what constitutes an essential service, and projected medical expenses, production of documents containing such analysis should not be burdensome.”

“Request 13 seeks production to all Movants of documents that have already been produced to other parties, in order to put all creditors on the same playing field.”

 “Requests 14 and 15 seek documents relating to revenues that have been or are subject to being “clawed back” from certain Commonwealth agencies for purposes of paying the Commonwealth’s general obligation debt, as well as documents relating to special taxes dedicated to paying such debt.”

“Request 16 seeks copies of the forthcoming submissions of the fiscal plans of the Commonwealth or any instrumentality to the Oversight Board, as well as documents necessary to understand the live model of the Fiscal Plan for Puerto Rico certified on March 13, 2017 and the Puerto Rico Electric Power Authority Fiscal Plan certified on April 28, 2017. Movants believe that such information will be necessary to understand and analyze the revised fiscal plans.”

“Request 17 seeks documents related to the analysis that led to the creation of a $600 million “Reconciliation Adjustment” in the Fiscal Plan certified on March 13, 2017, which is layered onto projected expenses each year, and serves to wipe out the effect of the Commonwealth’s proposed financial reform measures.” 

On that same date, Ambac sought a separate Rule 2004 discovery on the SUT after María. On Saturday, December 2, 2017, the UCC filed a limited joinder to the GO Bondholders and Ambac’s request.  Judge Dein has ordered a hearing on the subject for December 14, 2017, at 12:30 pm EST in Boston. Given that bondholders continue to complain about lack of financial information from the Board and from AFFAF, it seems that Judge Dein will have to either shut the door on Rule 2004 or allow it. Let’s see what happens.

Judge Swain issued a further order extending the time to assume or reject leases and gave the Commonwealth “until the earlier of (i) January 1, 2019, (ii) the date of expiration or termination of such leases pursuant to their own terms, or (iii) the date on which a plan of adjustment is confirmed for each Debtor, without prejudice to (x) the Debtors’ right to seek further extensions as contemplated by Bankruptcy Code section 365(d)(4)(B)(ii), or (y) the right of any party in interest to object to such requested extensions.”

As to “Real Property Leases for which the respective landlords have been sent a request for a consensual extension” the extension is “until the earlier of (i) January 1, 2019, (ii) the date of expiration or termination of such leases pursuant to their own terms, or (iii) the date on which a plan of adjustment is confirmed for each Debtor, without prejudice to (x) the Debtors’ right to seek further extensions as contemplated by Bankruptcy Code section 365(d)(4)(B)(ii), or (y) the right of any party in interest to object to such requested extensions, and subject to a reservation of the rights of each landlord on Exhibit B to assert that its consent was not validly provided.” Now the Commonwealth has ample time to decide which leases to reject and “convince” others to give it substantial rent reductions.

This is crunch time for motions for summary judgment in the New York Mellon Bank interpleader. Several motions have been filed but COFINA has yet to decide which it will answer. The time to file said answers has been extended to December 8, 2017 and replies to January 5, 2018, which  means that a decision could come as early as February 2018, but could be contingent on what is decided in the Commonwealth v. COFINA adversary proceeding.

Also, the issue of the scope of the Commonwealth v. COFINA disputes, oppositions to the motions as to the dispute must be filed by December 4, 2017 and replies by December 11. The oral argument will be heard during the December 20 Omnibus hearing. Also, summary judgment motions, the Commonwealth and COFINA have suggested January 31, 2018 with a March 2018 trial date. Let’s see what Judge Swain determines.

The Utier constitutional challenge continues its movement with the American Federation of State, County and Municipal Employees, which was allowed a limited intervention, filing a motion for the Court not to dismiss the Utier complaint for lack of standing. What behooves the mind is that this party opposes the Utier complaint and supports the Board’s request for dismissal, but not on standing grounds. Go figure.

 The Aurelius constitutional challenge motions continue to be filed as the January 10, 2018 oral argument looms. The hearing promises to be lively with veterans of United States Supreme Court arguments leading the way. Hope one of my clients wants me to attend.

In the Commonwealth v. COFINA litigation, the GO bondholders answered the UCC’s complaint, the COFINA counterclaims, answered COFINA Senior Bondholders answers in intervention and defenses and the Mutual Funds. This is another litigation that one should keep an eye on for it has the potential of deciding half of the bond debt.

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.