Aurelius Oral Arguments Update – December 5, 2018

Yesterday, Judges Torruella, Kayatta and Thompson heard oral arguments on Aurelius’ appeal on the Board’s appointment. In terms of prior issue exposure, Torruella and Thompson heard oral arguments on two other appeals on November 5 and Judge Kayatta actually authored a couple of PROMESA opinions.

Former Solicitor General Ted Olson argued for Aurelius. Judge Torruella inquired about the appointment of the DC Board and Olson said that they were minor officials, unlike the PR Board members. Judge Kayatta asked if it would be a problem if Congress gave the Governor of PR the power to put the island into bankruptcy. Olson explained that it would. Olson explained that the issue was not so much where the power came from, but what type of power was exercised: state or federal.

In regards to PROMESA stating that the Board is a local entity, Olson stressed that it was not important. Torruella then asked about what the Judges should look at to determine if the Board was a state or federal entity. Olson kind of skirted the answer but Aurelius’ brief discusses the factors and he cited all the pertinent Supreme Court tests.

When Utier, who also claims the Board’s appointment was unconstitutional, began its argument, it was obvious it was arguing for the reversal of the insular cases, to the extent that Judge Torruella reminded the lead counsel that the First Circuit did not have the power to do so, and Judge Thompson joined in this point. Clearly, Utier’s arguments had no impact on the Judges.

Former Solicitor General Verrilli argued for the Board. Torruella quickly challenged him on the argument that governors of the territories are appointed without Congressional approval, saying the statute was clear that this was temporary. Verrilli’s theme was that Congress’ actions showed it was not concerned with the Appointments Clause or the separation of powers. Torruella, who has written extensively on the Constitutional history of PR, challenged him again on the appointment of federal officials in PR before 1917. Clearly, Judge Torruella is not buying the argument that Congress was never concerned about the Appointments Clause in the territories.

Judge Kayatta mentioned that the appointment of the Board and their removal was under federal, not PR law. It is important to note that during the Federal Government’s oral argument, Judge Kayatta told Mr. Wall that if a person is elected, he can be removed by the electors. However, if he is appointed by the President, he can only be removed by him. More on this later.

Judge Torruella asked Mr. Verrilli if DC is covered by the same constitutional provisions (it is not) as PR. Verrilli said they are different but Congress’ power is the same. Torruella then discussed the appointment of territorial judges, which prompted Judge Kayatta to mention that territorial judges for the most part interpret territorial law, but here federal law is involved. Judge Thompson chimed in mentioning that this is bankruptcy law, not territorial law.

Torruella then asked an important question, whether the Governors of Guam and Virgin Islands were appointments. Verrilli made a point to say yes to bolster his argument of inapplicability of the Appointments Clause to the territories.

Judge Torruella then asked whether Altair was the test for a federal/territorial Board and Verrilli said no, but Judge Torruella insisted. Verrilli answered that he had to ignore Altair. Kayatta asked Verrilli whether his argument was that Congress’ compliance with the Appointments Clause in certain territorial cases meant it had to be followed in all cases for the territories? Verrilli answered yes. It is important to note that at the end of Mr. Verrilli’s argument, he became more strident in his argument. More on this later.

Mr. Jeffrey Wall, Principal Deputy Solicitor General of the United States (shows you that the Administration put a lot of effort in this case) argued that the separation of powers does not apply to the territories in the same way as other parts of the Constitution (same old argument). Mr. Wall emphasized, as he did during his entire argument, that otherwise, home rule (electing governors and legislators) would be unconstitutional. Argument clearly intended to scare the Judges.

Judge Torruella then threw in the clincher, asking whether elections were different. This has been Aurelius’ argument from the beginning to forestall the home rule issue. Wall skirted the issue but Judge Thompson came back to it asking the same question. Wall then argued that elections did not change governor’s duties. Judge Kayatta interjected a different but related statement, by stating that Congress says elections are pursuant to state law but the finances are dealt with by our guys. He also mentioned the elections exemption. Very telling. Mr. Wall said that nothing in the cases made such a distinction. This begs the question, why not make the distinction here?

Mr. Wall continued his argument citing Sánchez Valle, which prompted Torruella to comment that the Supreme Court said the case was about double jeopardy. Wall said no, it was about a lot more. Torruella jokingly said, “I read a different case.”

Judge Thompson interjected a loaded question, “could Congress appoint the Board?” Judge Kayatta joined the question. Wall meekly said that would bring other complicated questions. Mr. Wall, hit from several sides with negative comments on his arguments, did what we all do, quoted cases, essentially telling the Judges their view were wrong. He then went into an impassioned plea that there be a stay of the Board’s mandate if the case is reversed, that the Board’s work cannot stop and that bondholders were poised to take the money the Federal Government had earmarked for PR and that (not legally possible in my opinion, rhetoric more than anything else)  they did not care about funding essential services (he did not mention that neither the Board nor PR Government have defined what those are). The end of his argument sounded desperate. Judge Thompson then asked: in the case that the Appointment’s clause had been violated, what authority would the Board have to act? Very important question. Wall insisted that before that is done, further briefing would be needed.

As previously mentioned, Judge Kayatta also asked whether Congress could appoint the Board, saying that Congress had come very close to actually doing so. Wall discussed other instances where the President would appoint from a list from Congress. Judge Torruella then asked whether the separation of powers applied or not to the cases in territories, Wall had to admit no. He also insisted on Altair not being applicable.

Judge Kayatta again discussed that one thing is the power of Congress and quite another how it can exercise that power in the territories. Kayatta said the question pivots on substance v. procedure.

Then came the PDP, represented by Hernández-Mayoral, who stated the party had no position as to the constitutionality of the Board (his party had passed a resolution on Sunday against the Board, go figure), even when Judge Thompson asked the question. He was there to tell them that SCOTUS and First Circuit had stated that Congress had relinquished its power over the internal affairs of PR and any statement to the contrary would be wrong. No use to the case, though.

The PPD legislature, however, by voice of Mr. Martínez Luciano, joined the voices that said that the Board was unconstitutionally appointed. He did a good job. Judge Thompson asked whether Congress could repeal the PR home rule. Martínez Luciano skirted by saying that if that happened, the officials would be federal officials.

Olson had reserved 5 minutes for rebuttal and was asked by Judge Kayatta whether USVI and Guam would survive a ruling using Aurelius’ standard of whether the Board was federal. Olson said that the answer to that was elections exemption. Kayatta was not comforted by the answer—there had been no mention of elections exemption up to that point. Judge Torruella asked about the Federal Government’s argument of chaos if they decided in Aurelius’ favor. Olson mentioned that a stay could be implemented and the Board could act but knowing that the new Board would review all of its decisions.

From my experience in the First Circuit, the questions posed by the Judges and the answers to the questions, I would say that Aurelius has a good chance of having Judge Swain reversed, although of course I may be mistaken. This would result in grinding halt of the Title III proceedings and the Board’s authority over the PR Government, who actually would be the only winner since no action could be enforced against it. Given that President Trump is not happy with PR and that the Senate controlled by the Republicans would have to confirm the new Board, there is a chance of not having the same members again. What would be the result is anyone’s guess.

Having said that, the Board’s actions yesterday confirm my suspicion. The oral argument went from 3-4 pm PR time, and at 5:19 pm, I received an alert of a letter from the Board to PR saying it had not been complying with the requirement of sending an impact report on the dozens of laws it had passed in the last few months. Shortly thereafter, it sent a tweet saying that it expected the First Circuit to confirm the well-reasoned opinion by Judge Swain. The Board had never sent a tweet on the previous appeals. Seems to me the Board’s lawyers saw the same thing I saw, a likelihood of reversal and are preparing for it.

It’s all quite ironic though, because before yesterday’s oral arguments, the FOMB counsel must have been feeling pretty confident about the enforcement of Judge Swain’s decision.  Au contraire, Mr. Bienenstock. He and his team might be in for a rude awakening. I am sure the Board’s lobbyists are working hard in the Senate and federal government at this time. Good luck. Again, I may be wrong, Verrilli and Wall did a good job but it was clear at the end of their arguments that they knew the Judges were not buying their claims.

Irrespective of this, the loser in the case will immediately request certiorari from SCOTUS, who sees less than 1% of the requests. With a judgment by January, it is totally possible to have briefing, oral arguments and a decision no later than June 30. Let’s see what happens.

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

Monday Update – December 3, 2018

Welcome to your weekly Title III update for December 3, 2018. Given that the only news for the week before was the approval of the disclosure statement, I decided not to publish it. This week, however, a few things have transpired.

Last Monday, the Board filed the second amended COFINA Plan of Adjustment with a few modifications. The Board also filed a proposed order approving the forms, both in English and Spanish, of the Omnibus objections to proofs of claim. Judge Swain later approved the order.

On Tuesday, the Board filed a motion to reject COFINA’s contract with Lehman Brothers Special Financing Inc. for the servicing of the debt. The rationale is that the bond exchange changes everything. In any event, it will probably be granted by the Judge.

The Court not only approved the COFINA disclosure statement but also fixed the voting record date for the plan, the Confirmation Hearing Notice, the contents of the solicitation package, solicitation of votes, etc. Two dates are very important; by January 2, 2019, objections to the COFINA Plan of Adjustment must be filed and by January 8, 2019, votes on the Plan of Adjustment must have been delivered.

As to the objections to the Fiscal Plan, none have been filed. Unions in the Puerto Rico government and utilities filed objections to the COFINA/Commonwealth settlement, albeit after the cut-off date, but no objections to the Plan of Adjustment. Moreover, since the unions are not creditors or bondholders of COFINA, it is questionable if they have standing pursuant to 11 U.S.C. § 1109(a), much less when considering Article III of the Constitution. Let’s see if they file objections.

On Tuesday, the Official Committee of Unsecured Creditors of all Puerto Rico Title III debtors filed a motion requesting “the production of documents concerning potential avoidance actions that may be prosecuted by the Debtors or by a trustee appointed by the Court pursuant to section 926 of title 11 of the United States Code.” The UCC motion also states as to the Kobre and Kim report:

The Final Report did not even address the question of whether any Avoidance Actions could be maintained by any of the Debtors. Indeed, these issues were carved out of the investigation, with the Investigator noting that it did not seek or obtain “comprehensive discovery” relating to prepetition transfers because “[w]e have not been tasked” with this analysis and the Investigator lacked a “solvency analysis.”

The UCC knows that the Board was in the process of hiring a law firm to find causes of action against potential defendants so it decided to put its foot forward into what the Final Report ignored—the transfer of monies from the Commonwealth defendants. The UCC also knows that the Board is unlikely to pursue all of the causes of action in the Kobre and Kim report and it will undoubtedly seek authorization to do so. This motion is a good start. I must point out that 11 U.S.C. § 926(a) gives any creditor the chance to be appointed to prosecute causes of action that a debtor will not. This includes unions, but I doubt if they will vie to do so. We will soon find out since the statute of limitations runs out between May and July, depending on the Title III debtor.

The Board announced on Thursday that it had hired the law firm of Brown Rudnick, LLP, at $790 an hour, to determine and prosecute causes of action on behalf of the Title III debtors. I found it ironic that the firm’s paralegals will bill at $270 an hour, which is more than what most lawyers in Puerto Rico bill. Oh well.

During a hearing in the U.S. Senate, FEMA stated that it had no confidence the PR electric grid could survive a hurricane today. Not only FEMA, but all Puertorricans doubt this. Of course, the Governor immediately differed from this opinion. Some things never change.

Today, Judges Torruella, Kayatta and Thompson are hearing at 2 pm the Aurelius appeal on the Board’s appointment. Torruella and Thompson heard oral arguments on two other appeals on November 5 and Judge Kayatta has actually authored a couple of PROMESA opinions. Given that the Aurelius challenge may impact the status of Puerto Rico, which Judge Torruella absolutely hates, he is the wild card on the argument. I hope to have some analysis by Tuesday.

Finally, the government and some of the municipalities have started to pay the Christmas bonus notwithstanding the Boards warnings that the Commonwealth would run out of money. Wonder what would happen if it actually did run out of money. Will the Board request control of the Commonwealth’s bank accounts? Who knows?

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

Monday Update – November 19, 2018

Welcome to your weekly Title III update for the November 19, 2018. Last week’s developments all lead up to Tuesday’s hearing on the COFINA disclosure statement.

There were only five objections to the COFINA disclosure statement, two from individuals, one from the Bank of New York Mellon, one from Lehman Brothers Holdings and one from four local credit unions, albeit this one was filed a day late. The Board filed its answer to said objections, including the credit unions objection, essentially saying that the disclosure statement filed on Friday, November 16, gave the requested information that objectors found lacking. As to the objections of individuals, the Board swept them away, not surprising since they were rather scatterbrained and filed pro se. It remains to be seen what Judge Swain will say tomorrow but I doubt she will reject the disclosure statement. At most, she may require more information.

The rest of the week not much happened. Judge Swain ordered debtor to provide a report “regarding the anticipated filing of any omnibus objections to the proofs of claim filed against the Puerto Rico Sales Tax Financing Corporation (“COFINA”). Specifically, Debtors’ counsel must address the anticipated timing of the filing of any omnibus objections, the estimated number of claims that will be the subject of such omnibus objections and the anticipated impact, if any, of the filing of such omnibus objection(s) on the solicitation and tabulation of votes.”

The American Federation of Teachers and the American Federation of State, County and Municipal Employees International Union, AFL-CIO, filed an adversary complaint against the Board, governor and Banco Popular de Puerto Rico, claiming that pursuant to Law 106-2017, the government was to segregate the retirement contributions of employees and they would have control of how they would invest it. The complaint avers that the money is deposited with Banco Popular and there is no interest paid on it. Interesting complaint if the facts alleged are true.

In addition, the Unión de Empleados de Oficina y Profesionales de la Autoridad de Edificios Públicos, Unión Insular de Trabajadores Industriales y Construcciones Eléctricas Inc., Unión Independiente de Empleados of the Puerto Rico Water and Sewer Authority, Unión de Empleados de Oficina Comercio y Ramas Anexas, Puertos, Unión de Empleados del Banco de la Vivienda, Unión de Empleados Profesionales Independientes, Unión Nacional de Educadores y Trabajadores de la Educación, Asociación de Inspectores de Juegos de Azar, Asociación de Jubilados de la Autoridad de Energía Eléctrica, and VAMOS, Movimiento de Concertación Ciudadana Inc., filed an objection to the Commonwealth-COFINA settlement. In a separate motion, Service Employees International Union (“SEIU”) and International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) filed another objection to the same settlement. PROSOL-Utier also filed an objection and the Federación de Maestros joined the objection. The Official Committee of Retired Employees of the Commonwealth of Puerto Rico filed a limited objection to the aforesaid settlement.

The objections to the settlement rest on the idea that Puerto Rico will pay too much in the COFINA settlement. Three problems with this idea. One, the objections are not accompanied by any economic analysis/expert report evidencing this deficit and two, if Puerto Rico cannot pay the COFINA settlement, what can it pay for debt? The third problem is that this settlement was, I stated in last week’s report, approved by Judge Swain on November 9. The motivations for filing these objections this late in the game are unclear to me, but I doubt they will sway Judge Swain from reconsidering her decision on the issue.

In addition, the Board requested until December 31, 2018 to oppose Peaje’s request for certiorari from the SCOTUS. Interesting, since statistically petitions where an opposition is filed have a higher granting of cert than those that are not opposed. In any event, the likelihood of it being granted is very low since the SCOTUS grants around 80 certs of the over 10,000 petitions it receives. Let’s see what happens.

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

Monday Update – November 12, 2018

Welcome to your weekly Title III update for November 12, 2018. Since I have already provided an update on some of the developments last Monday and Tuesday, I will concentrate on what occurred from Wednesday onwards.

On November 7, 2018, Judge Swain held the November Omnibus Hearing. The first order of business was the Board report by Mr. Bienestock. He explained that the Court wanted an update on the McKinsey issue (whether it holds or had held PR bonds while working for the Board) and explained that Proskauer represented this company so the Board hired an outside counsel. This counsel reported from NY that he was beginning his investigation and hoped to have a public report in a couple of months and that he had no substance to report. He then said that he hoped to have a report by the end of the year. So, either at the end of the year or two months from now we will have a report on this issue. Hopefully.

PREPA is doing well and does not need to borrow to cover its expenses. Mr. Bienestock made a distinction from operating expenses to the need to make further repairs. He also reported that PREPA was examining the answers to the request for proposals for the distribution of electricity. Later next year, those companies deemed eligible will be able to bid for a P3. He also mentioned that as to the generation, there was a need for companies to know how much of the debt they would have to carry, how much they would have to pay for the right to generate and the mix of the fuels. I would add that they need to know if they have to accept the union contracts.

Bienestock also said that on that same day there was mediation with the PREPA ad hoc group of uninsured  bondholders and one of the monolines was going to join. He hoped to continue discussions with other monolines. This adds to my theory that the monolines request for a receiver was an attempt to get better treatment in the RSA. On the other hand, PREPA bondholders have a real need to have responsible management and the government has shown time and again it is incapable of providing it.

The Board was very confusing when discussing when other Plans of Adjustment would be filed. Mr. Bienestock said that it was possible that another one could be filed in the summer (ERS?) but was not emphatic. He also mentioned the possibility of other Title III cases being filed, mentioning PRASA and the UPR, but making clear that the latter was more likely to be a Title VI. My view is that these two may go into Title III next year due to two issues: Union contracts and pensions. It is very doubtful that the PR Legislature would change these contracts or even would have the power to do so. Moreover, under in Bayron Toro v. Serra, 119 D.P.R. 605 (1987), the PR Supreme Court has stated that those pensioners who are receiving pension payments have a constitutional right to it. It behooves my mind that the Board can force said changes outside Title III. If it insists in those changes, Title III is the only recourse.

Mr. Bienestock also mentioned that he had information that the Legislature was about to approve a 29% retention of payment to all US lawyers that did work in the case outside PR. He made it clear that if faced with this, his firm would have to increase its fees, and obviously all others would. Judge Swain was dismayed and it was very telling that counsel for AAFAF had no information as to this according to Mr. Bienestock. Very bad news indeed. Let’s see what happens.

The Omnibus objections to proofs of claim was discussed and these will be the ones having to do with double filing of bond claims and others that did not belong in one case or the other. This should start at the end of the year. The UCC mentioned that it had been discussing the way in which the proofs of claims of unsecured creditors would be resolved. Mr. Despin mentioned mediation and a short discovery and hearings. Although a good idea, we need more information as to how this will work.

The rest of the week not much happened. Judge Swain approved the settlement between the Commonwealth and COFINA in the Commonwealth Title III case. Also, the Legislature passed the COFINA bill required by the agreement. Many PPD politicians and radio analysts objected to the deal but none had filed any objection, not even an amicus brief. Moreover, they did not offer any alternative to the deal. Those type of objections are easy to do, but no Court will pay them any heed.

In an interesting development in the Assured, et al request for lifting stay for the naming of receiver for PREPA, the parties further extended the deadlines in that issue. Instead of having to oppose the request by December 3, the schedule states:

  1. November 21, 2018: Parties to complete rolling document productions;

  2. December 21, 2018: Parties to exchange preliminary will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

  3. January 4, 2019: Parties to file opposition brief and supporting declarations;

  4. January 14, 2019: Parties to exchange final will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

  5. January 24, 2019: Movants to file reply brief and supporting declarations;

  6. January 30, 2019: Parties to complete expert discovery and depositions;

  7. January 30, 2019: Parties to file exhibit lists;

  8. January 31, 2019: Parties to designate deposition testimony; and

  9. February 2, 2019: Parties to cross-designate deposition testimony.

The Parties further propose that a hearing on this Motion take place on February 5, 2019 in New York, or on February 6, 2019 either in New York or San Juan.

What this shows is that the Board does not have to make public whether it will oppose the request until January 4, 2019, a full month’s extension. Since there are persistent rumors the Board is considering joining the Assured request, this will give it more time to ponder the issue. In addition, since I think this motion is a ploy of the monolines to obtain better treatment in the PREPA RSA, this will give the parties time to negotiate. We will see.

Talking about PREPA, the Board, PREPA and AAFAF filed a Joint Informative Motion of a Request for Qualifications for the Transmission and Distribution System. The Request for Qualifications has 38 pages and no newspaper reported it. I will not go through it all here, but I highly recommend its reading for anyone interested in this issue. For starters, this is a P3 proceeding, where the ownership of the transmission and distributions system remains with PREPA. The procedure is as follows:

October 31, 2018 – Date of issuance and first publication of public notice of RFQ by the Authority.

November 14, 2018 – Deadline for submission of Requests for Clarification with respect to this RFQ by prospective Respondents (“RFC”).

November 20, 2018 – Deadline for the Authority to release responses to RFCs.

December 5, 2018 – Deadline for submission of SOQs (no later than 5:00 pm AST).

January 16, 2019 – Estimated date for notification of Qualified Respondents.

All SOQs must be submitted by no later than December 5, 2018 at 5:00 pm AST (the “Submission Deadline”) in the manner set forth in Section 4 of this RFQ.

Other highlights are:

This RFQ is being issued to identify those Respondents that meet the minimum requirements necessary to carry out the Project in compliance with Act 120 and the PPP Act, in particular those Respondents that demonstrate:

experience operating a large electric utility;

financial strength and capital resources, with significant access to the capital markets; and

strong technical expertise, with a track record of high-quality operations.

These requirements eliminates the possibility of the much touted energy cooperatives in PR, of which there are none, to compete, unless they partner with large stateside groups. In fact, this requirement eliminates any locals, except if they partnership with outside companies. Other highlights are:

As currently envisioned, a single Private Partner will assume all rights and responsibilities related to the operation, maintenance and management of the T&D system. These rights and responsibilities are expected to include, among other things:

operation and maintenance of the T&D assets and system, including street lights and meters;

control center operations, including generation scheduling and economic system dispatch;

integration of renewable generation and distributed energy resources;

power procurement;

end customer metering, service and support (including billing and collections);

new service requests for secondary and primary connected customers;

outage management and restoration;

coordination of emergency planning and storm restoration and recovery;

interfacing with regulators, including with respect to environmental compliance;

general system planning, including sourcing, designing and implementing system growth and improvement;

acting as a servicer in connection with any charges imposed in respect of legacy obligations; and

ongoing public reporting.

First thing to note is that as Mr. Bienestock told Judge Swain, the issue of how much of the PREPA debt will be taken over by the buyers or lessees of PREPA is still an open question. In addition, the monopoly will continue, at least in regards to the transmission and distribution, since a single company will be in charge of buying power and billing customers. This entity will probably be the most important entity in the whole system but we still do not have the Energy Policy bill or PREPA’s Integrated Resources Plan. Hence, I see it difficult for the new entity and the P3 Government agency to comply with the timetable. We will see.

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

Monday Special Update on Appellate Oral Arguments –November 5, 2018

Welcome to a special edition of the Monday update on the two oral arguments today before the First Circuit.

Today, two different decisions by Judge Swain were argued on appeal before Judges Torruella, Howard and Thompson of the First Circuit. In the first case, Aurelius appealed the dismissal of its request for a declaratory judgment that it had a lien. Right at the start of the GO group’s oral argument, Judge Torruella asked whether this issue was not better left for the Plan of Adjustment. Judge Thompson then joined Torruella in her question. Mr. Robbins, arguing for GO’s, said it was not and that Bankruptcy Rule 7001 allowed it to be done that way. Later, Judge Torruella asked whether the Judge was in the best position to determine when to litigate this issue. Robbins tried to wiggle out of the discretionary function of the question by pointing out that Judge Swain had ruled she was constrained by Article III of the Constitution requirement of a case or controversy and had not even discussed discretion. Judge Thompson followed up by asking whether Judge Swain had said discretion and Robbins had to say yes—but that if that were the issue, appellants would detail why the discretion would require a declaratory judgment. Judge Howard then asked whether the declaration would affect the behavior of the parties. He was told yes since the declaration would not force the Commonwealth to act but would tell it what the law was. Judge Torruella then said a declaratory judgment could change behavior. Robbins quoted the PREPA case to which Judge Howard, who sat in that panel, distinguished the case. When the Board came to argue, the Judges only asked one question and it was at the end. When the Retirees Committee argued, there were no questions.

Based solely on the questions posed by the panel, it is unlikely Judge Swain will be reversed on the merits. She could be reversed by a decision in which the Circuit states that the declaratory judgment was not barred by Article III but with instructions to determine in her discretion whether to grant said declaratory judgment. Given Judge Swain’s inclinations, it is likely she will decline to decide at this juncture.

The second case was Assured Guarantee v. Commonwealth, a case involving sections 922 and 928 of the Bankruptcy Code. Judge Swain decided that section 922 did not require payment of a revenue bond but simply allowed the debtor to pay if it felt like it. This ruling has put fear into the muni world and from the start, I thought Assured had a good argument. A few minutes into Mr. Allenberg’s argument for Assured, Judge Howard asked whether 922 was not an option. After Mr. Allenberg explained his point, Judge Howard said, “You have not said anything to the contrary.” OUCH!!!

Mark Harris argued for the Board and the only question was from Judge Howard who asked to be provided with citations to some cases. Luc Despin argued for the UCC and got no questions.

Again, the questions were quite hostile to appellants but I think they have a good argument. If appellants lose, it is conceivable that due to the importance of the ruling, they may try for a certiorari from the SCOTUS. Let’s see what happens.

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

Monday Update – November 5, 2018

Welcome to your weekly Title III update for November 5, 2018. Interesting developments and more to come this week.

Last week the Retirees Committee filed a motion in the COFINA litigation requesting an extension to the time to object the settlement and Plan of Adjustment. The UCC joined the motion but Judge Swain denied the request. Any doubt that the Judge will bend over backwards to advance this settlement? What no one is talking about is the fact that the COFINA Plan of Adjustment requires the Puerto Rico Legislature to pass certain laws. Although the administration presented the bill, there has been no movement except it being sent to the different commissions. Even more importantly, the last day of the legislative session is next Thursday, meaning that it must be approved by that date. Unless the governor calls for an extraordinary session, the Legislature comes back on January 8, 2019, only 9 days before the hearing for the approval of the Plan of Adjustment.

Given that the Board informed the governor and the Legislature that the much announced tax reform is contrary to the Fiscal Plan, the following question arises: Will Senate President Thomas Rivera Schatz simply ignore the COFINA bill to pressure the Board to approve the tax reform? Your guess is as good as mine, but if the Legislature scuttles the COFINA deal, Judge Swain will not be amused. Since the only thing Puerto Rico’s politicians care about is reelection—and not what is best for the island—it is a distinct possibility.

In addition, the UCC—who had informed the Court that it did not believe the COFINA deal was feasible with the June Fiscal Plan—requested  an extension to continue negotiations with the Board, AAFAF and COFINA agent on whether it would object to the settlement it negotiated. The extension was granted and ends today. Weird, weird, weird but then again, this is Puerto Rico.

The Board also sent a letter to the Puerto Rico Government as to the use of tax credits:

Based on financial reporting provided to the Oversight Board, it appears the Government authorized a large amount of tax credit agreements to private companies in May, August, and September despite the Government’s continued tenuous fiscal position. The issuance of tax credits at this volume is concerning and, if continued, expenditures at this level would further exacerbate the fiscal challenges already faced by Puerto Rico’s economy. Indeed, I remind you that the Commonwealth is currently not paying most of its debt service and that the Government’s fiscal situation would be materially worse if there was not a stay on litigation in place from the Title III court. Moreover, there continues to be insufficient public disclosure and justification on the total amount of tax credits authorized and no disclosure of the return on investment from the tax credits being issued.

The amount of the credits from March-September of this year is a whopping $521 million! No wonder the Board wrote this letter. The governor responded by saying the Board members were “Excel technocrats.”

Also, today is the Aurelius appeal, not on the constitutionality of the Board but on certain liens. The constitutionality case will be heard on December 3, 2018 in Boston. Will be interesting. In addition, on Tuesday, November 6, there will be a GDB hearing and on November 7, the Omnibus.

Finally, some analysts and other persons are theorizing that the Board may not oppose the PREPA bondholders’ request for a receiver and may even join them! I have mentioned here the absolute silence of the Board as to this issue. The Board acquiesce would be an almost automatic lifting of the stay and would be a major blow to the Rosselló administration. It could mean responsible management at PREPA. Any opposition to the request for lift of the stay for the appointment has to be filed no later than December 3, 2018. Let’s wait and see.

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

Monday Update – October 29, 2018

Welcome to your weekly Title III update for October 29, 2018. Not much has happened in the case, but outside in the greater PROMESA world, it is in turmoil.

On October 23, 2018, the Board discussed and approved the new Fiscal Plans for the Commonwealth and the UPR. Although not much was new in the Commonwealth’s Fiscal Plan, the Puerto Rican government is once again decrying the “austerity” the Board is imposing and Governor Rosselló even vowed to appeal the plan in Boston (meaning the First Circuit). This is hard to do if you have not questioned the Fiscal Plan before Judge Swain. Of course, the Commonwealth got Judge Swain’s certification to appeal her decision as to the previous Fiscal Plan, and in fact, the notice of appeal was filed and docketed but the First Circuit has not ruled yet on whether it will allow it. However, given the other appeals, I doubt it will be denied.

As mentioned before, the new Fiscal Plans have new numbers as to migration and income but retained the need to reduce by millions of dollars “personnel savings,” including the Departments of Health, Education, Corrections and Police (more on this last one later). It also retains the cuts in pensions and does not provide for the payments of the Christmas bonus. Of course, the governor refuses to obey these decisions—traditionally the bonus is paid around the 15th of November, just in time for Black Friday. We will soon find out whether it will happen. Since I know that many parents in the government use this money to pay for their kids’ presents, it would be very sad if it does not happen.

The UPR Fiscal Plan is also very similar to the previous one, with increases in tuition and consolidation of campuses. Christmas bonuses are eliminated and pensions reduced. During the meeting, various university related groups and individuals voiced their concerns and displeasure with the Fiscal Plan—all done in an orderly and peaceful manner. Kudos to them.

One last thought as to the UPR pensions’ in Bayrón Toro v. UPR, 119 D.P.R. 605 (1987), the Puerto Rico Supreme Court held that persons who were receiving pension payments had a constitutional right under the Commonwealth’s constitution to receive said pension. Now in the Detroit and Stockton cases, the Court determined that state constitutional guarantees to pensioners do not trump federal bankruptcy law. The UPR, however, is not in Title III and hence I am not sure that the Board may alter Puerto Rico’s constitutional law with the stroke of a pen. Again, let’s see what happens.

Cathy Kunkel, an energy analyst at the Institute for Energy Economics and Financial Analysis published a column in The Hill titled, “Puerto Rico energy bill: A step toward renewables or another scandal waiting to happen?” The piece praises some parts of it but also argues strongly against it:

The design and negotiation of contracts will instead take place through a non-transparent process controlled by PREPA, the Puerto Rico Public-Private Partnerships Authority, and the Puerto Rico Fiscal Agency and Financial Advisory Authority, all effectively under the control of the governor. Given PREPA’s and Puerto Rico’s long history of politically-driven contracting scandals, this structure promises more of the same.

In short, the proposed new energy law appears to be setting in motion a process whereby the short-term push for natural gas and politically-driven contracts will come into conflict with the longer-term goals for renewable energy and energy efficiency. As a result, essential goals to reduce the fuel budget will not be achieved and the natural gas path will lead to costly litigation on energy planning and contracting that will likely take years to resolve.

A different approach is needed. Rosselló’s privatization model should be scrapped and replaced with a commitment to professional energy planning that prioritizes renewable energy, particularly distributed resources.

I agree that the privatization process is anything but transparent but I believe it is because politicians do not want to sell PREPA and are just going through the motions. Again, we will soon find out.

Many of you may not know but the Puerto Rico Police Department, as many other U.S. police departments, are under a consent decree with the U.S. Department of Justice since 2012. The reforms have been slow to be enacted, mostly due to a lack of funding. Federal Judge Gustavo Gelpí is in charge of the case and his patience finally ran out on October 25 and issued the following order:

The Court is aware that representatives of the Commonwealth and its Fiscal Board, USDOJ and Monitor will meet tomorrow to discuss the Reform budget. However, the scope of said meeting should go beyond said specific line item budget. A fully financed PRPB Reform Office, in and of itself, alone cannot achieve the goal the Commonwealth and United States governments agreed to, when in 2013 the Court approved the Police Reform Agreement.

In order for the Commonwealth police force to come into full constitutional compliance, as per the terms of the Agreement, the Commonwealth (Fiscal Board included) must adequately fund the PRPB, and not just the PRPB Reform Office.

Without law and order, no government within the United States — including that of a territory currently being subject to the plenary power of Congress — can function, even less reconstruct itself as contemplated under PROMESA.

This Court has an unflagging duty under Article III of the U.S. Constitution to guarantee the citizens of this jurisdiction a fully functional police department, as intended by the parties in the Agreement. As such, the Court will zealously overlook all fiscal matters that impact the Agreement itself, both directly and indirectly. The Commonwealth’s ability to adequately establish law and order in the form of constitutional policing cannot be impaired by a fiscal board, as long as this Reform Agreement is in place.

If the Commonwealth and its Fiscal Board stand in impasse as to this matter, the Court will not hesitate to entertain a request for any appropriate remedy from any of the above named entities, monitor excluded. (Bold added)

Judge Gelpí is openly saying that the Commonwealth and the Board have to come up with the money for the police reform or he will entertain motions by the parties, i.e., the Commonwealth or the DOJ. Judge Gelpí, who knows his business, knows that Section 7 and 204(d) prohibit PROMESA from interfering with federal programs dealing with safety or interfering with court issued consent decree. And knowing Judge Gelpí, he will not hesitate to act.

After the aforementioned meeting, the Board stated it was in full agreement with the police reforms but added that when it hammered the Fiscal Plan, it was given a higher number of police officers in the force and therefore, the Commonwealth had the money to fund the reform. The government is yet to put forward its position.

On October 25, the Board made public a letter calling for proposals for the following:

The Oversight Board has created a Special Claims Committee (the “Committee”) to further consider potential claims that might arise from the conduct described in the Report and is seeking submissions from interested parties to be retained to assist the Committee (“Claims Counsel”). The scope of the work should include (i) review and assessment of the Report and the factual materials that form the basis of the Report, (ii) legal research as necessary to advise the Committee regarding potential causes of action and (iii) initiation of any litigation arising from the conduct described and/or referrals to prosecutorial or regulatory bodies.

The Commonwealth Title III case was filed on May of 2017, hence, the statute of limitations to bring any actions against those causes of action mentioned above expires in May of 2019. To seek counsel to evaluate the myriad of documents Kobre & Kim needs to review and then file causes of action before May 2019 behooves the mind. The UCC has been chomping at the bit to do this job, it is willing and able and time is running out. This letter to me is incomprehensible.

In the Court scenario, the Retirees Committee filed a motion in the COFINA litigation stating:

The Retiree Committee requests that the Court change the Settlement Objection Deadline from November 16, 2018 at 5:00 p.m. (Atlantic Standard Time) to the same date and time as the deadline to be set by the Court with respect to the filing of any objections to the COFINA Plan of Adjustment, or alternatively, assuming the Court maintains the January 16, 2019 hearing date to consider confirmation of the COFINA Plan of Adjustment, December 31, 2018 at 4:00 p.m. (Atlantic Standard Time), in accordance with the Case Management Procedures, to provide parties in interest a sufficient and appropriate opportunity to respond to the Settlement Motion.

We must remember that the UCC filed a motion saying the COFINA settlement could not be funded with the June Commonwealth fiscal plan and mentioned that the Retirees’ Committee agreed. Seems they need time to analyze whether the settlement is feasible. We will see.

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

Monday Update – October 22, 2018

Welcome to your weekly Title III update for October 22, 2018. Not much happened last week but this time a lot has happened and most of it of great importance. On October 19, the Board filed the COFINA Plan of Adjustment (96 pages), Disclosure Statement (621 pages) and the Motion for Title III settlement pursuant to Rule 9019 of Bankruptcy Procedure (98 pages).

I will not discuss the Disclosure Statement much or go into much detail on the other motions. I will, however, discuss the salient parts of the settlement and the Plan of Adjustment (“Plan”).

The Disclosure Statement divides creditors:

Claims are classified as follows:

(a) Class 1: Senior COFINA Bond Claims

(b) Class 2: Senior COFINA Bond Claims (Ambac)

(c) Class 3: Senior COFINA Bond Claims (National)

(d) Class 4: Senior COFINA Bond Claims (Taxable Election)

(e) Class 5: Junior COFINA Bond Claims

(f) Class 6: Junior COFINA Bond Claims (Assured)

(g) Class 7: Junior COFINA Bond Claims (Taxable Election)

(h) Class 8: GS Derivative Claim

(i) Class 9: General Unsecured Claims

(j) Class 10: Section 510(b) Subordinated Claims

Section 23.2 defines impaired classes, which are:

Impaired Classes to Vote: The Claims in Classes 1 through 9 are impaired and receiving distributions pursuant to the Plan, and are therefore entitled to vote to accept or reject the Plan; provided, however, that, based upon the elections made on the Ballot/Election Form, Classes 4 and 7 are deemed to have accepted the Plan. The Claims in Class 10 are impaired and not receiving a distribution pursuant to the Plan and, therefore, Class 10 is deemed to have rejected the Plan.

Hence, only classes 1-3, 5, 6, 8, and 9 get to vote on the Plan of Adjustment but it seems there is one class that will not vote in favor of the Plan. If one class does not vote in favor of the Plan of Adjustment, the Plan is not approved unless Judge Swain does a cram down, which seems to be the strategy here. What are 510(b) claims?

Section 510(b) Subordinated Claim: Any Claim, to the extent determined

pursuant to a Final Order, against COFINA or its Assets arising from or relating to (a) rescission of a purchase or sale of an Existing Security, (b) purchase, sale or retention of such a security, or (c) reimbursement, indemnification or contribution allowed under section 502 of the Bankruptcy Code on account of such Claim.

In PROMESA a cramdown may occur pursuant to section 314(c) if:

(c) CONFIRMATION FOR DEBTORS WITH A SINGLE CLASS OF CLAIMS.—If all of the requirements of section 314(b) of this title and section 1129(a) of title 11, United States Code, incorporated into this title by section 301 other than sections 1129(a)(8) and 1129(a)(10) are met with respect to a plan—

(1) with respect to which all claims are substantially similar under section 301(e) of this title;

(2) that includes only one class of claims, which claims are impaired claims; and

(3) that was not accepted by such impaired class, the court shall confirm the plan notwithstanding the requirements of such sections 1129(a)(8) and 1129(a)(10) of title 11, United States Code if the plan is fair and equitable and does not discriminate unfairly with respect to such impaired class.

The Plan of Adjustment has also something interesting as to conditions precedent:



25.1 Conditions Precedent to the Effective Date. The occurrence of the Effective Date and the substantial consummation of the Plan are subject to satisfaction of the following conditions precedent:

(a) Satisfaction of Certain Settlement Agreement Conditions: The

satisfaction of the “Conditions to Effective Date” set forth in Section 4 of the Settlement Agreement.

(b) Fiscal Plan Certification: The Oversight Board shall have determined

that the Plan is consistent with COFINA Fiscal Plan and shall have certified the submission of the Plan, and any modifications to the Plan through the Confirmation Date, in accordance with Sections 104(j) and 313 of PROMESA.

(c) Entry of the Confirmation Order: The Clerk of the Title III Court shall

have entered the Confirmation Order in accordance with Section 314 of PROMESA and section 1129 of the Bankruptcy Code, made applicable to the Title III Case pursuant to Section 301 of PROMESA, which shall be in form and substance reasonably acceptable to the Oversight Board, AAFAF, COFINA, the PSA Creditors and Bonistas, and the Confirmation Order shall provide for the following:

(i) Authorize COFINA and Reorganized COFINA, as the case may be, to

take all actions necessary to enter into, implement, and consummate the contracts, instruments, releases, leases, indentures, and other agreements or documents created in connection with the Plan;

(ii) Decree that the provisions of the Confirmation Order and the Plan are

nonseverable and mutually dependent;

(iii) Authorize COFINA and Reorganized COFINA, as the case may be, to (1) make all distributions and issuances as required under the Plan and (2) enter into any agreements and transactions, as set forth in the Plan Supplement;

(iv) Authorize the implementation of the Plan in accordance with its terms.

(v) The COFINA Bonds and the covenants by COFINA Reorganized COFINA and the Commonwealth, as applicable, for the benefit of the holders of the COFINA Bonds and COFINA Parity Bonds (including the Sales Tax, non-impairment, substitution of collateral and tax-exemption covenants set forth in Article XVI hereof), as provided in the New Bond Legislation and the New Bond Indenture, constitute valid, binding, legal and enforceable obligations of COFINA, Reorganized COFINA and the

Commonwealth, as applicable, under Puerto Rico and federal law, and the COFINA Portion (and any substitution of New Collateral on the terms and conditions provided for herein) is the property of Reorganized COFINA, free and clear of all liens, claims, encumbrances, and other interests of creditors of COFINA, Reorganized COFINA, the Commonwealth, or any instrumentality of the Commonwealth, other than liens and claims afforded to holders of COFINA Bonds under the Plan and the Confirmation Order

and shall not be “available resources” or “available revenues” of the Government of Puerto Rico, as used in Section 8 of Article VI of the Puerto Rico Constitution or as otherwise used in the Puerto Rico Constitution (whether construed pursuant to the Spanish or English version of the Puerto Rico Constitution);

(vi) Pursuant to the New Bond Legislation, the COFINA Bonds and COFINA Parity Bonds have been granted and are secured by a statutory first lien as described in Section 16.2 hereof, which Lien shall remain in full force and effect until the COFINA Bonds and COFINA Parity Bonds have been paid or satisfied in full in accordance with their terms;

(vii) The statutory lien on, and pledges of, COFINA Pledged Taxes as provided in the New Bond Legislation and the New Bond Indenture, as applicable, and all other provisions made to pay or secure payment of the COFINA Bonds and COFINA Parity Bonds are valid, binding, legal, and enforceable; including, without limitation, covenants not to impair such property, maintain available tax exemption and provide for the conditions regarding substitution of New Collateral as adequate protection for the

property rights conferred under the Plan and the Confirmation Order;

(viii) New Bond Legislation has been enacted to amend (or repeal and replace) the existing COFINA legislation to, among other things, (i) establish the independent COFINA board of directors referred to in Section 28.3 hereof, (ii) permit the Sales Tax, tax exemption, substitution of New Collateral and non-impairment provisions referred to herein and (iii) grant such other authorizations, if any, which may be required to implement the transactions contemplated herein, including, without limitation, (a) a

determination that COFINA is the owner of the COFINA Portion under applicable law,  with respect to the COFINA Bonds and COFINA Parity Bonds, in whole or in part, or otherwise in accordance with the Additional Bonds Test, (c) enhanced financial reporting, (d) events of default and imposition of certain measures upon an event of default, (e) submission of any disputes under the New Bond Indenture to the jurisdiction of the Title III Court, and (f) other customary terms, conditions, and covenants for

similarly structured and supported municipal bonds that are acceptable to the PSA Creditors. To the extent applicable, the foregoing terms and such other terms as may be agreed upon shall be included in the New Bond Indenture;

(ix) The transfer of the COFINA Portion (and any substitution of New

Collateral on the terms and conditions provided for herein) pursuant to the Plan is appropriate and binding and specifically enforceable against Reorganized COFINA and the Commonwealth, their respective creditors and all parties in interest in accordance with the Plan, including, without limitation, because the transfer of the COFINA Portion created in Reorganized COFINA an ownership interest in such property (and any

substitution of New Collateral on the terms and conditions provided for herein) and is a valid provision made to pay or secure payment of the COFINA Bonds;

(x) The deemed acceleration of the Existing Securities on the Effective Date

(i) in connection with the treatment of Junior COFINA Bond Claims (Assured) and (ii) if requested by Ambac and/or National prior to the commencement of the Disclosure Statement Hearing, in connection with the Senior COFINA Bond Claims (Ambac) and the National Election, respectively; provided, however, that, such deemed acceleration shall not affect, nor shall it be construed to affect, any issues regarding the existence of a “default” or an “event of default” with respect to the Existing Securities which were pending prior to the Effective Date;

(xi) The Confirmation Order is full, final, complete, conclusive and binding

upon and shall not be subject to collateral attack or other challenge in any court or other forum by (1) COFINA, (2) Reorganized COFINA, (3) the Commonwealth, (4) each Person or Entity asserting claims or other rights against COFINA, the Commonwealth or any of its other instrumentalities, including each holder of a Bond Claim and each holder of a beneficial interest (directly or indirectly, as principal, agent, counterpart, subrogee,

insurer or otherwise) in respect of bonds issued by COFINA, the Commonwealth, or any of its other instrumentalities or with respect to any trustee, any collateral agent, any indenture trustee, any fiscal agent, and any bank that receives or holds funds related to such bonds,  whether or not such claim or other rights of such person or entity are impaired pursuant to the Plan and, if impaired, whether or not such person or entity accepted the Plan, (5) any other Person or Entity, and (6) each of the foregoing’s respective heirs, successors, assigns, trustees, executors, administrators, officers, directors, agents, representative, attorneys, beneficiaries or guardians; and (xii) The Plan is consistent with the COFINA Fiscal Plan and satisfied Section 314(b)(7) of PROMESA.

This section raises several questions. The Plan states that the Commonwealth cannot question the existence of COFINA again. However, what if ten years from now, the new government wants to use all of the COFINA funds and claims that the deal violates the Puerto Rico Constitution? Most specifically, Article VI, section 2, which was invoked by the UCC in its claim that COFINA is unconstitutional? What if in the future Picture Rico issues GO’s, it defaults, and then its bondholders claim that COFINA is unconstitutional for it violates Article VI, section 2, arguing that the sales tax is an available resource within the meaning of Article VI, section 8 of the Puerto Rico Constitution? These claims were made in the Commonwealth v. COFINA litigation and can be raised again.

Moreover, the Legislature needs to legislate certain laws in order for this Plan to work. With the Puerto Rico Legislature fighting both with the Board and the governor, will that happen? Will it refuse to surrender its power to tax, giving COFINA property rights to its portion of the SUT?

My point is that the Plan of Adjustment does not in and of itself bury claims against COFINA forever. There would be a judgment as to its validity but it is not a judgment by the Puerto Rico Supreme Court or even by the First Circuit, hence it is open to attack in the future. And this is only what I can think of. I am sure that many other ideas can be devised to question the decision if it so benefits lawyers’ clients.

In addition, on Wednesday October 17, the UCC filed an Urgent Motion Of Commonwealth Agent Requesting Entry Of Order Establishing Hearing Date And A Briefing Schedule For Motion To Enforce Stipulation And Order Approving Procedure To Resolve Commonwealth-Cofina Dispute In Title Iii CASE OF COMMONWEALTH OF PUERTO RICO. The UCC avers:

As the Commonwealth Agent repeatedly advised the Court and parties-in-interest over the last few months,4 the Agreement in Principle was approved by the Commonwealth Agent in reliance upon the May 30, 2018 certified fiscal plan. The Oversight Board revised the May 30 fiscal plan’s long-term projections materially downward in connection with its certification of the June 29, 2018 fiscal plan, thus rendering, in the opinion of the Commonwealth Agent, a settlement along the lines of the Agreement in Principle neither feasible nor desirable.

Indeed, after taking into account the COFINA debt service under the COFINA Settlement, the projected cash flows under the June 29, 2018 certified fiscal plan would reflect an approximate $28 billion (in nominal dollars) deficit for the Commonwealth and that deficit amount assumes that no Commonwealth creditor would receive a plan distribution. To add another point of reference, the June 29 certified fiscal plan reduced the 40-year cash flow as presented in the May 30 certified fiscal plan by an amount that is several billions of dollars more than the total proceeds to be received by the Commonwealth under the Agreement in Principle. The Commonwealth Agent, when determining the appropriate action with respect to the Commonwealth-COFINA dispute may “consider what result, through litigation, negotiation and mediation, will render [the Commonwealth” best able to achieve fiscal responsibility and access to capital markets, in the judgment of the [Commonwealth] Agent. Stipulation, ¶ 4g. Accordingly, the Commonwealth Agent believes that as long as the current fiscal plan is in effect (or a fiscal plan which suffers from the same deficiencies), neither a COFINA settlement based upon the Agreement in Principle nor the COFINA Settlement can be executed and/or consummated. . .

As set forth below, because the Oversight Board has no authority to proceed with the Rule 9019 Motion absent the Commonwealth Agent’s agreement to a settlement under the Stipulation, the issue of the Oversight Board’s violation of the Stipulation should be heard prior to the merits of the Rule 9019 Motion. . .

The Oversight Board does not have the authority to seek approval of a COFINA settlement in the Commonwealth’s Title III Case unless (1) the Oversight Board does so as part of confirmation of a Commonwealth plan of adjustment that incorporates such settlement, see Stipulation, ¶ 4.n, or (2) the settlement in question was negotiated by the Agents. See id. ¶ 4.j. Because the Oversight Board is not seeking confirmation of a Commonwealth plan of adjustment nor approval of a settlement negotiated by the Agents, the Rule 9019 Motion does not comply with the Stipulation.

Undeterred by the UCC’s motion, the Board filed a Motion Pursuant To Bankruptcy Rule 9019 For Order Approving Settlement Between Commonwealth Of Puerto Rico And Puerto Rico Sales Tax Financing Corporation. At footnote 2, it comes out swinging and says:

A debtor under PROMESA Title III is not required to seek court approval of settlements pursuant to Bankruptcy Rule 9019, and by filing this Motion, the Commonwealth does not waive any argument as to whether any other

settlement or compromise entered into by the Commonwealth is subject to the requirements of Bankruptcy Rule 9019. See In re City of Stockton, 486 B.R. 194, 195-200 (Bankr. E.D. Cal. 2013) (“11 U.S.C. § 904 gives a chapter 9 debtor freedom to decide whether to ignore or to follow the Rule 9019 compromise-approval procedure . . . .”); PROMESA § 305 (incorporating similar provisions as 11 U.S.C. § 904); see also In re City of Detroit, 524 B.R. 147, 198-99 (Bankr. E.D. Mich. 2014) (recognizing that “the City exercised its right under § 904 not to request Court approval of this memorandum of understanding.” (citing In re City of Stockton, 486 B.R. 194, 199 (Bankr. E.D. Cal. 2013)). The Commonwealth has elected to file this Motion to approve the Settlement as part of the orderly administration of the Commonwealth’s Title III Case, as a condition of the Settlement Agreement, and in conjunction with the Amended and Restated Plan Support Agreement for COFINA, dated as of September 20, 2018, where the Commonwealth agreed to seek approval of the Settlement Agreement contemporaneously with the confirmation of COFINA’s plan of adjustment.

I don’t think even the Board believes this one. This is the first settlement and it needs the Court’s imprimatur even if it is for appearances purposes. Further in the motion, the Board states:

On August 13, 2018, the Commonwealth Agent filed an informative motion indicating that it was not prepared to enter into a definitive agreement for the Agreement in Principle because the Oversight Board’s most recent certified Fiscal Plan for the Commonwealth was dramatically different than when the Agreement in Principle had been reached. Adversary Proceeding, ECF No. 540.

Based upon conversations with the COFINA Agent, the Oversight Board, as representative of the Commonwealth in its Title III Case pursuant to section 315(b) of PROMESA, pursuant to the Oversight Board’s authority to negotiate and mediate with creditor to achieve a Authority, Act 2-2017, negotiated and executed the Settlement Agreement with the COFINA Agent. settlement of the Commonwealth-COFINA Dispute pursuant to Paragraph 4(n) of the Procedures Order, together with AAFAF, as the entity authorized to act on behalf of the Commonwealth under the authority granted to it under the Enabling Act of the Fiscal Agency and Financial Advisory Authority, Act 2-2017, negotiated and executed the Settlement Agreement with the COFINA Agent.

In other words, the Board ignores the UCC motion and tells the Court, “I can settle this on my own.” Again we see the Board and the UCC butting heads. Of course, all this may be moot. On Tuesday October 23, the Board will certify a new Fiscal Plan for the Commonwealth and the UPR which could allay any fears the UCC may have had, but the tone of the motion negates this idea. In any event, we will know more on Tuesday. Given the importance of this first big settlement, I am sure the Board will fight tooth and nail to have it approved.

In addition, both COFINA and all other debtors in Title III filed a Motion for Entry of an Order (a) Approving limited Omnibus Objection Procedures, (b) Waiving the Requirement of Bankruptcy Rule 3007(e)(6), and (c) Granting Related Relief. The motion is very detailed and any creditor who filed a proof of claim in the cases MUST read it carefully. Prime Clerk received 165,333 claims and the Board is preparing the procedure to object to some (probably the majority) of those claims. Two things must be noted, however. Each Omnibus will include objections for 500 claims and if objections are not countered within 30 days, the objection may, and probably will, be granted by the Court. This procedure will probably be approved by the Court and one must look at it carefully.

Finally, there will be an Omnibus hearing on October 25, 2018. I will be there and if anything important transpires, will try to have a new posting.

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

Monday Update – October 15, 2018

Welcome to your weekly Title III update for October 15, 2018. This week very little has happened in or outside the Title III cases.

On Tuesday, October 9, 2018, Judge Swain granted the Commonwealth a certification to allow it to appeal her decision about the complaint it filed against the Board pertaining to the budget. That case, 18-AP-80, was not dismissed as was the one filed by the Puerto Rico Legislature. Since the decision on the Commonwealth case was not a final decision, a certification of appealability is required by PROMESA section 306(e)(3), which states:

The court of appeals for the circuit in which a case under this title has venue pursuant to section 307 of this title shall have jurisdiction to hear appeals of interlocutory orders or decrees if—

(A) the district court on its own motion or on the request of a party to the order or decree certifies that—

(i) the order or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the United States, or involves a matter of public importance;

(ii) the order or decree involves a question of law requiring the resolution of conflicting decisions; or

(iii) an immediate appeal from the order or decree may materially advance the progress of the case or proceeding in which the appeal is taken; and

(B) the court of appeals authorizes the direct appeal of the order or decree.

Judge Swain determined as follows:

Because the question of law for which Plaintiffs seek certification is not one that the Court addressed in its Opinion and Order, the Court denies Plaintiffs’ Motion. However, having found that issues addressed in the Court’s disposition of certain counts in the Opinion and Order involve related questions of law as to which there is no controlling authority, that those aspects of the Opinion and Order involve issues of public importance, and that immediate appeal of those aspects of the Opinion and Order may materially advance the progress of this adversary proceeding and the Title III cases, the Court on its own motion certifies for interlocutory appeal the Opinion and Order to the extent that it dismisses pursuant to Federal Rule of Civil Procedure 12(b)(6) Paragraphs 78 and 79 of Count I of Plaintiffs’ Complaint and Paragraphs 88 and 91 of Count II of Plaintiffs’ Complaint. (See Op. and Ord. at 29-37.)

This is the first step for the Commonwealth to join other appellants questioning Judge Swain’s ruling on the budget. Although the First Circuit still has to give its consent, given the importance of the case and the discussion of the issue in the Legislature’s appeal, it is likely it will be given.

What is amazing to me is the way the media reported the certification of the order. They made it seem as if Judge Swain was requesting an opinion from the First Circuit rather than a routine procedure akin to that of 28 U.S.C. § 1292(b). Seems that the press in the island needs to take a little course on federal jurisdiction and venue.

The second decision was the denial of remand of a case that was removed from state court. Plaintiffs had filed a complaint in state court challenging Governor Rosselló’s Executive Order on PREPA’s retirement fund. It is important to note, that they are seeking a declaration that the utility’s retirement fund is a separate entity from the Commonwealth. The Board removed the case and plaintiffs requested its remand to state court. Judge Swain determined that the dispute over the nature of the retirement fund could affect the Title III of the Commonwealth and PREPA and hence would be decided by the Federal Court rather than the state court. Hence, she retained jurisdiction over the case.

Upon review of the remaining adversary proceedings and other contested matters, there is still much to be resolved in the remaining Title III cases. Judge Swain has dismissed without prejudice a couple of cases dealing with whether certain bondholders have a lien; Judge Dein has recommended that certain claims as to dischargeablity be dismissed until the Plan of Adjustment; and the issues in a couple of the Utier cases are still pending. In addition, there are thousands of cases that were stayed by the Title III filings and are pending discovery, pretrial and trial. The Board mentioned that some discovery and then mediation may be used. All this takes time, hence, the resolution of the Title III cases, except for COFINA, will probably go well into 2021.

Finally, there is a rumor going around that GO’s have reached a deal with the Board for 83% recovery. Technically more that COFINA but seniors are getting 93%. But as I said, it is only rumors, so let’s see what happens.

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

Monday Update – October 1, 2018

Welcome to your weekly Title III update for October 1, 2018. Not much has happened this week but come Wednesday, things are getting interesting.

Utier, PREPA’s principal and most combative union, won a major victory in its battle against the Board. Judge Swain dismissed, as she has done in other cases, but without prejudice, claims that the Fiscal Plan and other actions by the Puerto Rican goverment and the Board constitute a taking without just compensation. Again, Judge Swain ruled that the claims have not matured and that Utier must wait for the Plan of Adjustment to raise this challenge. Judge Swain, however, did not dismiss the claims that the government’s actions were a violation of the impairment of contractual obligations. The Court did dismiss Utier’s claims arguing that the Fiscal Plan was not based on the Constitution. This decision may force PREPA and the Board to negotiate a solution to the impairment of contractual obligations, or not. Let’s see what happens.

In other developments, the UCC filed its reply to the Board, AAFAF and GDB in opposition to the GDB Title VI restructuring and its request for derivative standing. As usual, the UCC came out swinging:

Fundamentally, the GDB Restructuring is an attempt by hopelessly conflicted actors to liquidate GDB and extinguish rights and claims of the Title III Debtors against GDB in a manner that could never be accomplished pursuant to a Title III plan of adjustment or a lawful application of Title VI, which are the only two means of restructuring permitted by PROMESA. The GDB Restructuring could never be accomplished pursuant to Title III or a lawful application of Title VI because, among other things, all of GDB’s most valuable assets are being transferred to certain favored unsecured creditors while leaving the Title III Debtors holding a potentially empty bag. Even the proceeds of GDB’s claims against third parties such as the investment banks that facilitated and profited from the debt offerings orchestrated for the Title III Debtors by GDB are being excluded from what the Title III Debtors are receiving under the GDB Restructuring.

This absurdly lopsided asset allocation scheme is the antithesis of the “fair and equitable” treatment of creditors required by Title III and the pooling requirements of Title VI. While it is true that the Qualifying Modification for which GDB is seeking approval meets certain of the Title VI’s pooling requirements, this is only because the Qualifying Modification leaves the Title III Debtors’ claims against GDB completely out of the Title VI process. Had the Title III Debtors’ claims against GDB been included as part of the Qualifying Modification, they would have to have been included in the same pool as GDB’s favored unsecured creditors and their claims treated “fairly and equitably” as part of that same pool.

If the unfairness and inequity of the GDB Restructuring were not enough, the GDB Restructuring Act purports to deprive the Title III Debtors of any authority or standing to challenge the restructuring or any related transactions (which a Commonwealth law cannot do). Thus, the Committee is now all that stands in the way of this unlawful liquidation of GDB. Indeed, if the Committee is denied standing and the GDB Restructuring is approved, it will long be remembered as a notorious case in which, right under everyone’s noses, an insolvent entity was unlawfully liquidated pursuant to a territory law, all of its most valuable assets were used to pay a favored subset of unsecured creditors, rights and claims of potentially enormous value were released without any prior investigation, disfavored creditors were rendered powerless to do anything about it, and the parties ultimately harmed were not allowed to come forward and be heard. (Footnotes omitted, bold added)

The motion also discusses, in detail, the different causes of action the Commonwealth is abandoning against the GDB and how the balance cannot favor the latter. Moreover, the UCC points out shady dealings by the GDB. At pages 14-15 of its motion, the UCC states:

Among other things, as detailed in the Oversight Board’s investigator report, GDB abused its position as a lender to the Title III Debtors by increasing their debt load in a way that benefitted GDB as a creditor of the Commonwealth relative to other Commonwealth creditors. Around half of the entire proceeds from the 2014 GO Bond offering (approximately $1.6 billion) were earmarked to repay  Commonwealth and PBA lines of credit with GDB (and for PBA working capital). These repayments were ostensibly motivated by the GDB board members’ concerns over their own personal and criminal liability if GDB were insolvent. Indeed, accepting deposits while insolvent gives rise to criminal liability under Puerto Rico law.38 In short, the 2014 GO Bond offering was designed, in large part, to improve GDB’s balance sheet (for the benefit of GDB’s directors and officers) by hindering or delaying (if not defrauding) other Commonwealth creditors. (Bold in the original)

This allegation clearly raises a lot of questions. Did the García Padilla administration actually violate the law? Should Melva Acosta be indicted by the Puerto Rican government? The problem is that if the Commonwealth were to indict these officials, it would not be able to continue with the Title VI in the fashion it has done. Then, why is the Commonwealth, with the complicity of the Board, changing the GDB bondholders from non-secured to secured creditors? One answer could be that in this fashion it strengthens the bottom line of the credit unions–stated in Adversary Proceeding 18-0028, Cooperativa de Ahorro y Credito Abraham Rosa, et al. v. Commonwealth of P.R., et al.:

The Commonwealth of Puerto Rico and codefendants COSSEC, GDB and FAFAA were aware of Plaintiffs’ sound operations and safe financial conditions even in times of financial crisis. Maliciously, in a calculated way and under false pretenses, Defendants offered and sold to Plaintiffs unsound Puerto Rico Debt Securities availing themselves (Defendants) of the Cooperatives’ assets. This resulted in an undue concentration of bonds in the cooperatives’ portfolios and created a systemic risk for the Cooperatives.

The governmental entities with legal and fiduciary obligations to ensure the financial health of the cooperative system ignored their obligations and induced the offer and sale of the unsound debt securities. These entities incurred in the reckless disregard of the systemic risks to cooperatives and failed to comply with statutory mandates, and ministerial and fiduciary duties. As a consequence, Plaintiffs suffered material damages, which are claimed herein. Such actions preclude the discharge of Plaintiff’s claims under the regulations of the Bankruptcy Code.

The Adversary Proceeding claims monetary damages and rescission of the bond contracts but the Cooperativa has not filed an objection to the GDB restructuring, which would make any claim against the Commonwealth very difficult. Obviously, I am not their counsel.

Judge Swain stated in its denial of a declaration that the GDB Title VI restructuring that the UCC had standing but stopped short of determining it had prudential standing, I assume to leave it for this controversy. The Oral Argument hearing is to be held on October 3, 2018 with a possible continuation during the October 15 Omnibus. I doubt the Judge will rule on Wednesday but she usually gives us an idea of where she is going. I will try to attend the San Juan transmission of the hearing, which will be held in New York.

Since we are talking about the GDB restructuring,  National Public Finance Guarantee Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Ambac Assurance Corporation, which had filed notices of objections to the GDB restructuring, filed a notice of stipulation withdrawing said objections, essentially leaving the UCC as the only objector to the GDB restructuring. Another factor to consider when Judge Swain weighs the UCC’s request.

Finally, the director of the Commonwealth Office of Budget and Management could not say if the Government would have enough money to pay the Christmas bonuses and the payroll for the rest of the fiscal year. Board Chairman Carrión said earlier last month that if the Government paid the bonuses, it would not have enough money to pay the payroll. Seems he was right. Since the payment of the Christmas bonus is a political issue, I am sure Governor Rosselló will do everything in his power to pay them and not furlough or fire any employees. Will be interesting to see what happens.

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