Monday Update – August 20, 2018

Welcome to your weekly Title III update for August 20, 2018. Some important things came about inside and outside the case.

Previously, I discussed the UCC motion on the COFINA deal, which has not been answered by the Board as of Sunday, August 19. To that we must add that El Vocero reported on August 18 that due to demographic changes that seem to increase the number of inhabitants in the island, the Board requested that the Commonwealth amend its Fiscal Plan. El Vocero adds that there will be a greater need for medical services and hence less money for debt service. Given the Board’s alleged new deals of around 75% payment of bond debt, it behooves the mind that now these numbers may be reduced because the population will not decrease as much as expected. Constant changes in the Fiscal Plans do not make it credible and will undermine any plan of adjustment based on it. Seesaw on the Fiscal Plan helps no one.

The Board sent the Commonwealth a friendly reminder of the new perceived power schemes. Its letter says:

Pursuant to Section 204(b)(2), the Oversight Board established the rule, regulation, administrative order, and executive order review policy (the “Policy”) to require prior Oversight Board approval of certain rules, regulations, administrative orders, and executive orders proposed to be issued by the Governor (or the head of any department or agency) to assure that they “are not inconsistent with the approved fiscal plan.”

As relevant here, the Policy applies to any proposed rule, regulation, administrative order, or executive order in connection with (i) the establishment, governance, management, or operation of the Office of the CFO, and (ii) rightsizing of the Commonwealth or related to procurement, contracting policy, or employee compensation or benefits. The Policy states that any rule, regulation, administrative order, or executive order must be sent in English before issuance to the Oversight Board at [email protected] with an explanation of how the particular rule, regulation, administrative order, or executive order is consistent with the approved Fiscal Plan.

On August 13, 2018, the Department of Treasury submitted three letters in Spanish on Administrative Orders, without an explanation of how or whether the Administrative Orders were consistent with the applicable Fiscal Plan, that had been issued prior to the date of adoption of the Policy, and which the Oversight Board had not requested to review. Accordingly, no review or approval by the Oversight Board is required at this time. However, going forward, please abide by the Policy, including by submitting any rule, regulation, administrative order, or executive order in English, prior to adoption, and with an explanation of how it is consistent with the applicable Fiscal Plan.

Why the public reminder of what the governor must do? Simply because the governor said he was not going to comply with this “request.” This way, there can be no doubt the Board is bending over backwards to resolve any controversies with the governor in an “amicable” fashion while at the same time, publicly chastising him for not obeying. A very bad situation in my opinion.

The Board also sent the Commonwealth a letter requesting the submission “by the Department of Treasury of all the contracts, whether in the form of Tax Incentive Decrees or otherwise, that confer tax abatement or tax relief on a taxpayer, entered into since July 1, 2017 and henceforth.” As to each contract, the following information, inter alia, has to be provided:

Budget Questions:

a)Are the funds for the contract included in the budget? i) If yes, in which allotment? Please specify (A) the line item(s) in the budget that this contract will be funded from and (B) what other expenses have been committed or planned for that budget item.

b)Does the existing budget fully cover the cost of the contract? If multiple line items, please specify the amount against each budget line. i) If not covered in the budget, which allotments need to be reprogrammed?

c)If the contract extends past the current fiscal year, does the current budget line item include the full cost of the contract or only the portion applicable to the current budget time period? i) If only the portion applicable to the current budget, how much will be funded from the future budget? Are the budget line items the same and are there sufficient funds within those? Please provide supporting evidence.

Fiscal Plan Questions

a)Is the contract consistent with the applicable Fiscal Plan? Please provide some commentary on why or why not.

b)Does the contract constitute separate and additional disaster aid spending?

i)Will the contract be partially or fully federally funded?

  1. ii) RFP information

(1) Name:

(2) Issue date:

(3) Due date:

(4) Award date:

(5) Applicable RFP rules and regulations:

(6) Amendments (Yes or No):

(7) Description of efforts undertaken to advertise the RFP

Although this is clearly important information for the Fiscal Plan and budget, tax policy, tax assessment and tax abatement is one of the most important powers any government can wield. Although the information will probably be provided, what if the Board disallows any of these contracts? Will Governor Rosselló again mount Rosinante and attack the windmills of the Board? Questions, questions.

Also, at the end of the attachment to the letter, the Board requests a certification stating the following for each contract:

1.[Name of Agency], its officials and employees have complied with all applicable conflicts of interest laws, rules, regulations and policies in connection with the procurement and negotiation of the contract2.

2.To the best knowledge of the signatory (after due investigation), no person has unduly intervened in the procurement, negotiation or execution of the contract, in contravention of applicable law.

3.To the best knowledge of the signatory (after due investigation), no person has: (i) offered, paid, or promised to pay money to; (ii) offered, given, or promised to give anything of value to; or (iii)otherwise influenced any public official or employee with the purpose of securing any advantages, privileges or favors for the benefit of such person in connection with the contract.

4.To the best knowledge of the signatory (after due investigation), neither the contractor, nor any of its owners3, directors, officials or employees, or its representatives or sub-contractors, has required, directly or indirectly, from third persons to take any action with the purpose of influencing any public official or employee in connection with the procurement, negotiation or execution of the contract.

The above certification shall be signed by the head or general counsel of the agency submitting the contract for review.

In the event that the agency is not able to provide any of the above certifications, it shall provide a written statement setting forth the reasons therefor.

This smacks of the Board investigating whether these contracts are nothing more than favors to political contributors or obtained through fraudulent means. Again, this is a very reasonable request but will the governor comply? We will soon find out.

The GDB filed its “Solicitation Statement” for the Title VI it is attempting. The 300 plus document has this interesting tidbit:

In addition, the New Bonds are complex financial instruments with unique characteristics that are unlike many similarly named instruments. Because of the unique nature of the New Bonds, substantial uncertainty and risk exist with respect to the New Bonds that may not exist with respect to other debt instruments. For example, the Issuer is a newly formed statutory public trust and governmental instrumentality with no existing operations, and the New Bonds will be secured by, and payable solely from, Collections on certain assets of GDB that will be transferred by GDB to the Issuer on or after the Closing Date. Holders of New Bonds should not expect to receive payment in full in cash of principal and interest due on the New Bonds. While there are scenarios that may result in full payment of principal and interest on the New Bonds in accordance with their terms, there is considerable uncertainty as to whether the Restructuring Property will provide sufficient cash flow to pay interest in cash on the New Bonds and amortize the principal amount (and any PIK Amounts) thereof completely. In addition, if the Qualifying Modification is consummated and the Participating Bond Claims are mandatorily exchanged for the New Bonds, rights and remedies under the New Bonds will be dramatically different, and may be less favorable to holders of the New Bonds, than the rights and remedies holders of Participating Bond Claims currently have. For additional information on the New Bonds, see the Offering Memorandum attached hereto. At the same time, there is substantial uncertainty regarding the value of the Participating Bond Claims if the Requisite Approvals are not obtained or the Qualifying Modification is otherwise not consummated. GDB is insolvent and has operationally wound-down and substantially terminated its operations, other than the completion of the Qualifying Modification and the management of certain assets thereafter; the outcome of its liquidation or other resolution is highly uncertain. A holder of Participating Bond Claims could realize more or less value on its Participating Bond Claims in such a liquidation or resolution than in the Qualifying Modification.

In other words, if you vote for the Title VI qualifying modification, you may not be paid but if you don’t vote, we may go into Title III. Since the only asset that the GDB has is loans to public corporations and municipalities, the minute these stop paying, the GDB will not pay its bonds and there will be no recourse since that is the only source of payment. I have always said that this Title VI, if approved, would end in Title III. Might as well do it now with full value of your bonds than later when you have a 45% haircut.

On the litigation side, Judge Swain sided, once again, with the Board and decided that certain ERS bonds did not have a lien because the liens were not properly recorded. Although the Judge may very well be right, this case will be appealed and Judge Swain is 0-3 on appeals at this time.

In Assured v. Board, defendants had requested a stay of proceedings while the Ambac appeal (where Congressman Duffy filed his brie of Amicus Curiae) is decided. Judge Swain, unsurprisingly sided with the Board saying:

The issues on appeal in Ambac are sufficiently related to the issues presented by Plaintiffs’ complaint to warrant a limited stay of these proceedings. Through their complaint in this proceeding, Plaintiffs claim that the April 19, 2018 Fiscal Plan for Puerto Rico violates PROMESA §§ 201(b)(1)(B), 201(b)(1)(M), 201(b)(1)(N), and 407 and § 928 of the Bankruptcy Code; that the Fiscal Plan Compliance Law (Act No. 262017) violates PROMESA §§ 201(b)(1)(N), 201(b)(1)(M), and 201(b)(1)(B); and that the April 19, 2018 Fiscal Plan does not meet the definitions prescribed by PROMESA §§ 5(10) and 5(22). Plaintiffs contend that they are entitled to an order declaring that no plan of adjustment under PROMESA Title III can be confirmed based on the April 19, 2018 Fiscal Plan; that no confirmation hearing will be held on that plan; that a series of moratorium laws enacted by the Commonwealth and corresponding moratorium orders (“Moratorium Laws” and “Moratorium Orders”), the April 19, 2018 Fiscal Plan, and the Fiscal Plan Compliance Law violate the Contracts Clause, Takings Clause, and Due Process Clauses of the U.S. Constitution; that the Moratorium Laws, Moratorium Orders, Fiscal Plan Compliance Law, and the April 19, 2018 Fiscal Plan are preempted by PROMESA §§ 303(1)(3); and that if this Court determines that PROMESA bars review of the April 19, 2018 Fiscal Plan, Plaintiffs are entitled to a ruling that PROMESA violates the Due Process Clause of the United States Constitution and is an unconstitutional delegation of legislative power. See Dkt. No. 1.

In Ambac, Ambac Asssurance Corporation also questioned the legality of the Moratorium Laws, Moratorium Orders, the Fiscal Plan Compliance Law, and an earlier version of the Fiscal Plan for Puerto Rico. See Amended Adversary Complaint (Dkt. No. 35 in 17AP159). On appeal, Ambac Assurance Corporation presents eleven issues for the First Circuit to consider including, inter alia; whether the District Court erred in holding that the Moratorium Laws, Moratorium Orders, and the earlier Fiscal Plan do not qualify as laws preempted by PROMESA § 303(1); whether the District Court erred in interpreting the Contracts Clause and Takings Clause of the United States Constitution; whether the District Court erred in issuing an opinion on PROMESA § 106(e); and whether the District Court erred in interpreting PROMESA § 106(e) to preclude judicial review of the Fiscal Plan for compliance with the requirements of PROMESA § 201(b).

While this Court appreciates the distinctions and clear differences between Plaintiffs’ complaint here, and the claims brought in Ambac, many of the questions presented on appeal in Ambac either directly overlap with or significantly bear on the determinations this Court will have to make in deciding any dispositive briefing in this proceeding.

If there are “distinctions and clear differences between Plaintiffs’ complaint here, and the claims brought in Ambac” why grant the motion? For Judge Swain clearly states that is not the norm, especially when there are issues that will have to be decided in this case irrespective of what the First Circuit decides. My opinion, however, is of no importance. Judge Swain’s opinion is what counts.

On the Utier challenge to the Board’s appointment, essentially the same argument that Aurelius made, unsurprisingly Judge Swain dismissed the complaint. The next day, Utier filed their notice of appeal. I am sure the union’s counsel will hustle to see if it can join the Aurelius oral argument presently set for September 10, 2018. Irrespective, that is going to be an epic argument. Wish I were there.

In the Pinto Lugo v. USA, a hodgepodge of legal claims, the USA filed a motion to dismiss challenging standing and the actual causes of action, saying among other things that “[t]here Is No Private Right of Action under the Declaration of Independence.” I expect this complaint to be dismissed as it is another attempt by those who refuse to understand or accept Congressional power over Puerto Rico.

As expected the Legislature filed a notice of appeal from the dismissal of their complaint. Once this was done, Governor Rosselló, who is at odds with Senate President Thomas Rivera Schatz, vowed he would also appeal. As of August 19, 2018, he had not, nor requested leave to do so.

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

The COFINA Deal… on the Verge of Collapsing?

The Commonwealth Agent in the Commonwealth v. COFINA adversary proceeding – the Unsecured Creditors Committee (UCC) –filed an informative motion on Monday on the Oversight Board’s agreement with COFINA bondholders and monolines.

The motion states that the UCC-COFINA Agent deal was done with the May 2018 certified Fiscal Plan, meaning that the deal was feasible based on the numbers projected in that plan. On June 29, 2018, a new Fiscal Plan was certified with entirely different numbers and economic calculations. Instead of using those new numbers, the Board used the May 2018 to reach the COFINA deal.

The UCC claims a $28 billion cash flow deficit as a result of the deal.

Furthermore, the UCC claims in footnote 4 of their motion the following:

The Commonwealth Agent was not included in the negotiations between the Oversight Board, the COFINA bondholders, and monoline insurers regarding the terms of a COFINA plan of adjustment. In fact, the Commonwealth Agent only received a copy of the COFINA Plan Presentation when it was made public.

Right there, you know something is wrong.

The UCC negotiated the first agreement in principle but wasn’t included in the most recent COFINA deal orchestrated by the Board. Although the Board is obviously the one who deals with the Plan of Adjustment – where the payment of the debt is outlined – not having the Commonwealth Agent involved raises suspicions and with good reason.

Revisiting Conflicts of Interest

Moreover, if it is such a good deal for COFINA, it raises the significant, but dormant issue of potential conflicts of interest of the Board members.

To recap the potential conflicts of interest for new readers of the Control Board Watch, here they are. First, José Carrión’s relationship with Banco Popular, which had significant involvement with COFINA. Second, Carlos M. García, a former Santander executive and GDB President who issued a huge chunk of COFINA debt under former Governor Fortuño. Third, Ana Matosantos’s company, Matosantos Commercial Corporation, has a Banco Popular executive on its Board of Directors. And finally, José Ramón González, another Santander executive deeply involved with COFINA.

Is there a conflict of interest?

The motion continues stating:

The Oversight Board’s June 29, 2018 certified fiscal plan materially revised certain of the underlying assumptions that formed the basis of the May 30, 2018 certified fiscal plan, which was in effect when the Agents entered into the Agreement in Principle on June 5, 2018 and on which the Commonwealth Agent relied when entering into the Agreement in Principle.

In stark contrast to the cash flow projections in the May 30, 2018 certified fiscal plan, the revised assumptions in the June 29, 2018 certified fiscal plan result in a significant cash flow deficit (when including the COFINA debt service payments under the contemplated settlement) in the aggregate amount of approximately $28 billion (in nominal dollars), even assuming that the fiscal plan contemplated making no plan distributions to Commonwealth creditors. Obviously, assuming that there would be no payments to any Commonwealth creditors is unrealistic and would lead to an unconfirmable plan of adjustment for the Commonwealth.

Given that the Commonwealth Agent must consider the interests of the Commonwealth itself, the Commonwealth Agent does not believe that a settlement can be executed and/or consummated which would lead to a significant cash flow deficit (and thus the Commonwealth’s inability to pay current expenses) of approximately $28 billion (in nominal dollars). The Commonwealth Agent believes that this Commonwealth feasibility issue needs to be resolved prior to execution and/or consummation of a settlement agreement. It also does not appear that this issue was addressed in the COFINA Plan Presentation.

The UCC is warning that Puerto Rico cannot pay the COFINA deal with the currently certified Fiscal Plan. Of course, the Board has not answered this motion and may not do so since it is an informative motion, but it probably will.

In addition, the Board  may amend the current Fiscal Plan to conform it to this and future deals. As a matter of fact, the Board has already stated they may do so. If the Board does amend the Fiscal Plan, and does so in a manner that allows the COFINA deal to comply, is the Board greenlighting a sweetheart deal for COFINA for the benefit of certain interests, and possibly the conflicted Puerto Rican Board members?  Let’s see.

Nevertheless, the UCC’s warning is dire. The UCC is not only the Commonwealth agent in the aforementioned litigation but is also the official committee representing all non-secured creditors, who want to be paid. It cannot abide by a deal that will give all monies to one or more secured creditors and leave none for the non-secured creditors. To this effect, the motion also states:

Furthermore, under paragraph 4(i) of the Stipulation, any settlement requires the consent of at least one of the two Commonwealth Creditor Representatives. At the time of execution of the Agreement in Principle, only the Official Committee of Retirees (the “Retiree Committee”), which is one of the Commonwealth Creditor Representatives, had advised the Commonwealth Agent that it supported the Agreement in Principle. In connection with the negotiation of settlement documentation, the Retiree Committee has advised the Commonwealth Agent that it also views the resolution of the Commonwealth feasibility issue as a pre-condition to execution and/or consummation of a settlement agreement.

The Commonwealth Agent remains dedicated to attempt to resolve this issue to allow for a settlement to proceed, although it recognizes that the formulation and certification of a revised fiscal plan is completely outside of its control. Nevertheless, the Commonwealth Agent will proceed with its discussions of this issue with parties in interest and continue its collaborative process with the COFINA Agent in order to reach agreement on a settlement agreement that conditions consummation thereof on the Oversight Board having certified a fiscal plan that projects Commonwealth net cash flows (after measures) over the next 40 years in an amount not materially less than the net cash flows (after measures) projected in the May 30, 2018 certified fiscal plan.

The Commonwealth agent is saying that for the deal to go through, the Board and COFINA bondholders need either the UCC’s support or that of the Retirees’ Committee (who are owed over $52 billion and are non-secured creditors). Although the Retiree’s Committee is closer to supporting the deal, the UCC makes it clear that they still don’t have their support. Could it be that one of the two important deals the Board has achieved is slipping away?

Options for the GO’s

This development brings us to the another question, what will the GO’s do? Undoubtedly, the GO’s will want a good deal, better than that of COFINA. Question is, will the Board provide one? If the GO’s cannot get a deal, what can they do? There are many avenues. The Commonwealth v. COFINA litigation is stayed until September 13. With the UCC’s motion, it is obvious the deal is in peril. The GO’s were allowed to intervene in the Commonwealth v. COFINA litigation and filed dispositive motions expounding their views on the validity of these bonds. The GO’s may request that the Court decide on their arguments. If denied, they can file an adversary proceeding. Moreover, the GO’s may object to any COFINA Plan of Adjustment and we must remember that Judge Swain has said that at that stage she will be able to review the Fiscal Plan since the Plan of Adjustment must conform to the Fiscal Plan. If she decides that the UCC is right or that COFINA is not constitutional, she may deny the confirmation of the Plan of Adjustment. In addition, even if the GO’s are not allowed to object to the COFINA Plan of Adjustment, as part of the stipulation, the COFINA settlement must be approved in the Commonwealth Title III case, where undoubtedly the GO’s will have a say.

The UCC’s motion has thrown a monkey wrench into the COFINA deal, one which unless carefully explained by the Board could well derail it. Much more is to come. Stay tuned.

Monday Update – August 13, 2018

Welcome to your weekly Title III update for August 13, 2018. Many important things came about this week, but I discussed Judge Swain’s decision on the Commonwealth and Legislature’s complaints and the Commonwealth-COFINA deal in separate postings. The First Circuit, however, reversed Judge Swain in two cases and developments in and outside the Title III have developed.

In the first of the Circuit opinions, the Court (Judge Kayatta writing the opinion) decided that Peaje did not have a statutory lien—however, that did not end the discussion. The First Circuit affirmed Judge Swain’s determination not to allow evidence of any other type of lien in the adversary proceeding but hinted that if raised in another case, it could be litigated. In addition, Judge Kayatta reversed her findings, “that Peaje failed to establish irreparable harm and that defendants established adequate protection of Peaje’s interests.” Since the Court had already decided the main issue of the case, it did not have to analyze this topic. Nevertheless, anticipating further litigation, it reversed the “brief treatment” of these essential issues. I project either further litigation or a prompt settlement of these bonds by the Board.

In the second case where the Ad Hoc Group of PREPA bondholders requested the lifting of the stay to permit them to request from another court the appointment of a receiver, the First Circuit (Judge Kayatta also being the author) went one by one over Judge Swain’s reasons to deny the petition and reversed her on all of them. Of note is the following:

The Title III court did try to deflect these problems by stating that its refusal to lift the stay arose in the context of a request for a receiver, certainly a robust form of interference with the debtor’s finances and property. The implication – which the debtor’s brief makes express — is that perhaps the Title III court would lift the stay to allow another court to provide some other type of protection of collateral. But neither the Title III court nor the debtor points to any toehold in the language of Section 305 that would accommodate a distinction allowing the Title III court to lift the stay to allow another court to interfere with the debtor’s property sometimes but not others. Either Section 305 only bars the Title III court itself from interfering, or it bars that court also from lifting the stay to allow another court to do that which it cannot do. And it is only the latter, broader possibility that creates a situation in which the creditor is deprived of any means of protecting its property interest.

The Title III court also pointed out that Section 305 would not bar section 362(d) relief when the Oversight Board consents to the requested relief. But the principal aim of section 362(d)(1) is to protect the creditor when protection is needed, which is customarily when the debtor is not obliging. In short, saying that a creditor can get relief from the stay when the debtor’s representative consents effectively wipes out section 362(d)(1) precisely when it is most likely needed.

We also find no inconsistency between the apparent purpose served by Section 305 and a reading of that section as only barring the Title III court itself from directly interfering with the debtor’s powers or property. Like the Title III court, we read Section 305 as respectful and protective of the status of the Commonwealth and its instrumentalities as governments, much like section 904 of the municipal bankruptcy code respects and protects the autonomy of states and their political subdivisions. See 11 U.S.C. § 904. When a bankruptcy or Title III court acts directly, it impinges on that autonomy. But when it merely stands aside by lifting the automatic stay, it allows the processes of state or territorial law to operate in normal course as if there were no bankruptcy.

In addition, Judge Kayatta stated:

For these reasons, we hold that Section 305 does not prohibit as a matter of course the Title III court from lifting the stay when the facts establish a creditor’s entitlement to the appointment of a receiver in a different court in order to protect a creditor’s collateral should that protection otherwise be necessary and appropriate. Although we share the Title III court’s concerns about the deleterious impact that a robust receivership outside the Title III court’s control might have on the efforts of the Title III court to consolidate and adjust the debtor’s affairs, those concerns are best addressed in deciding whether, precisely to what extent, and for what purpose relief from the automatic stay might be granted. In other words, it might be possible to grant tailored relief for the creditor to seek a receivership provided that the receiver only take specific steps necessary to protect the creditor’s collateral. Further, concerns about moving the locus of the debtor’s protections outside the Title III court are greatly ameliorated by the fact that the Oversight Board itself can always, through consent, opt for a regime held more tightly within the federal forum’s direct control. (emphasis supplied)

To me, it is obvious the First Circuit is inviting Judge Swain to allow the receiver but to tailor what it can or cannot do. In their briefs and during oral argument, plaintiffs emphasized that this receiver would substitute the PREPA governing board and would not only be subject to the Board’s Fiscal Plan, but also to its budget and its general powers. Moreover, the last sentence above from Judge Kayatta hints that the Board could consent to a receiver with specific duties and responsibilities. After I heard the oral arguments in this case, I wrote that the First Circuit was likely to reverse Judge Swain. This may have been a catalyst for the Board’s agreement with PREPA bondholders. Food for thought.

José Ortiz, the new executive director of PREPA gave an interesting interview to Caribbean Business . Caribbean Business reports Ortiz admitted that the “Ad Hoc deal comprises $5 billion in unsecured debt. “And we negotiated with 35 percent of them [the creditors], or about $2.7 billion. The rest we are going to have to pay…that has not been said publicly,” he told Caribbean Business.’” Since the Board has admitted that this group does have a lien, I assume that Mr. Ortiz meant the insured bonds, which I pointed out before would probably get a better deal. Here, he is saying they will get paid in full and the only way this can be achieved is with an increase of the rates. WOW! So much for the Board’s insistence on a 20 cent per K/H rate!

Finally, on Friday, the Board sent a letter to Puerto Rico’s Secretary of Corrections, informing him that the Comprehensive Management Agreement with Correctional Health Services Corporation was in excess of $10 million, was not sent to the Board before signing, and hence was invalidated. Also, the letter states:

 Please be advised that the new contract, scheduled to commence October 1, 2018 with Physician HMO, Inc., must be submitted to the FOMB prior to execution and with sufficient time to review (e.g., two weeks minimum). It should be noted that given that the contract extension is expected to generate $840,000 in savings, it is the expectation of the FOMB that DCR must generate a further $4,159,731 of healthcare related savings through both procurement and personnel measures.

In addition, the submission from DCR, must answer the following questions:

  1. Are “difficult recruitment employees” (as such term used in the original documentation) covered under the new agreement?

  2. The Fiscal Plan requires that $3,309,151 savings be generated by the procurement of healthcare for inmates and a further $1,690,579 in personnel savings related to inmate healthcare for FY19. Please outline how you will achieve these savings – inclusive of the extension and new contract and other related contracts

  3. The savings for FY20 increase to $13,236,605 for procurement of healthcare services for inmates and $6,762,317 for personnel related to these healthcare services. Can you please provide the pathway to deliver these savings?

Right after the Board announced it was not going to appeal Judge Swain’s decision on Zamot but announced it would require new Fiscal Plans, I said the Board wanted to rule from the Fiscal Plan. After Judge Swain’s decision on the Commonwealth and Legislature’s challenges, that is exactly what it is doing. I frequently criticize the Board for its actions but it is trying to put some limits to political spending in Puerto Rico. Politicians continue to believe that they can spend without limit, without understanding that at some point in the near future, debt service will recommence. Then what?

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.


On August 8, 2018, the Commonwealth and COFINA Agents announced a new, more lucrative deal on COFINA.

In fact, this is a coup for the COFINA bondholders: the aggregate recovery is almost 75%, and a 93% for COFINA Seniors.

This is a stunning turn of events. COFINA faced months of heavy attacks both from the GOs questioning their constitutionality, and from the Governor, who wanted access to the lockbox monies.  Moreover, in April 2017, COFINA holders were offered a 39.2% recovery.

Deal Details

Essentially, 53.65% of the “Pledged Sales Tax Base Amount (“PSTBA”) cash flow through and including 2058 (40 years) is fully allocated to the New COFINA Bonds.” The Commonwealth will keep the remaining 46.35% of this PSTBA, plus any excess of up to 5.50% of the SUT, which the Board calculates will increase in value. Hence, the new bonds will be secured (senior pledge) but by a decreased part of the SUT. The Board still believes it is a large amount of money. Also, from the terms of the agreement, it seems the monolines are on board with the deal.

Interest rate as to CIB’s is Total/Avg $9,249,560,000.00 @ 4.543%, but which works out as follows (page 5):

2028 995,875,000.00    4.350%

2032 1,206,510,000.00 4.500%

2038 3,212,925,000.00 4.550%

2043 3,834,250,000.00 4.600%

Interest rate as to CAB’s is Total/Avg $2,697,682,642.20 $15,401,229,579.75 5.500%

2058 2,697,682,642.20 15,401,229,579.75 5.500%

The breakdown of the recovery is as follows (page 8):

Aggregate Par + BNYM Recovery (in %)

COFINA Sr. Recovery 93.000% COFINA

Sub. Recovery 56.399% RSA Acceptance Charge 2.000% Aggregate Recovery 74.505%

Looming Questions

This tentative agreement, however, leaves a lot of questions unanswered.

Is the deal a result of pressure from Congress?

Is the deal a realization that the Board and Governor lack credibility in Washington?

A big question will be what the GOs do, if anything? Can the Commonwealth afford such a sweetheart deal after 2 years of non-stop claims by the Board and Governor that Puerto Rico is broke, and unable to pay her debts?  We should assume the confirmation of the COFINA Plan of Adjustment will be challenged in the Commonwealth Title III confirmation hearing. Although I am sure Judge Swain will sweep aside any objections, the First Circuit may not.

The Commonwealth may believe it is entitled to a bigger part of the 5.5% of the pledged SUT. Will it insist on more? What will Judge Swain do?

Moreover, the GO’s were allowed to intervene in the Commonwealth v. COFINA litigation and to file a motion for summary judgment. What if they insist on having a determination on their claims? Seems easier to come up with a deal for them than to continue litigating.

Does the deal have the requisite 2/3 amount majority and 50 +1 number of creditors required by the Plan of Adjustment or are the parties still working on it?

Now that we have almost 75% recovery for COFINA and 77.5% recovery for PREPA, is this the new bench mark? It is true that the GDB agreement has only 55% recovery, but its law states that the Commonwealth is not liable for its debts and has no assets except loans. It is only reasonable to wonder if other bondholders will receive the same deal. If so, the Title III may be resolved quickly and cheaply, and we may have wasted hundreds of millions of dollars and precious time that the Board and Governor cannot bring back. Let’s see what happens.

Swain Decision on Government and Legislature’s Complaints

On Tuesday August 7, 2018, Judge Laura Taylor Swain decided the motions to dismiss filed by the Board against the Government and Legislature’s complaints due to the fiscal plan and budgets. Judge Swain surprised us all with a constrained interpretation on jurisdiction. She stated at pages 14-15 of her decision:

Although PROMESA grants the Oversight Board exclusive authority to certify fiscal plans and “also insulates the Oversight Board’s certification determinations . . . from challenge by denying all federal district courts jurisdiction to review such challenges,” Section 106(e) does not deprive the district court of jurisdiction to entertain all conceivable litigation touching on certified documents. See Ambac, 297 F. Supp. 3d at 283-84 (holding that PROMESA Section 106(e) did not preclude consideration of federal constitutional challenges to fiscal plan). Here, Plaintiffs seek determinations as to whether PROMESA grants the Oversight Board authority to promulgate certain provisions of the certified Fiscal Plan and Budget, and as to whether such challenged provisions of those documents are merely, as a matter of law, recommendations that the Governor and Legislature are free to ignore. There is a material difference between an action seeking review of the Oversight Board’s determination that a plan or budget meets the requirements for certification or is compliant with particular aspects of PROMESA Section 201(b) (specifying required features of a fiscal plan), and litigation seeking clarification as to the effect of particular provisions of a certified fiscal plan or budget on preexisting Puerto Rico law, or on the powers of the executive and legislative branches of the government of Puerto Rico. The questions before the Court implicate the impact, rather than the propriety, of the certification of the Fiscal Plan and Budget, and their determination is not precluded by Section 106(e).

As I said, a constrained interpretation indeed, which assures that the governor will go back every time he does not agree with some action by the Board.

Furthermore, Swain dismissed without prejudice claims as to agency consolidation, saying the Board argues the Fiscal Plan does not require it (page 16-17) and employee benefits reduction (pages 17-19) because the Fiscal Plan does not require hiring freeze or elimination of Christmas bonuses. This will come back if they are required but they may be specific recommendations by the Board, which will stick, as we will see later.

Judge Swain ruled that Board can impose rejected recommendations, and said at pages 25-26:

The power bestowed on the Oversight Board by Section 205(b)(1)(K) of PROMESA allows the Oversight Board to make binding policy choices for the Commonwealth, notwithstanding the Governor’s rejection of Section 205 recommendations. This power is consistent with PROMESA’s framework, particularly in light of (i) the mandate that the Oversight Board “provide a method for [Puerto Rico] to achieve fiscal responsibility and access to the capital markets” (48 U.S.C.A. §2121(a) (West 2017)), (ii) the Oversight Board’s “sole discretion” to certify fiscal plans and put budgets of its own devising into effect (id. §§ 2141, 2142), (iii) PROMESA’s preemption of laws inconsistent with its provisions (id. § 2103), and (iv) PROMESA’s prohibition of gubernatorial oversight and of implementation of any policy that would “impair or defeat the purposes of [PROMESA] as determined by the Oversight Board” (id. § 2128(a)(2)). “[A]ppropriate,” as used in Section 201(b)(1)(K), means appropriate in the judgment of the Oversight Board, which has sole discretion as to fiscal plan and budget certification and the determination of whether and to what extent policies would impair or defeat the purposes of PROMESA, as informed by the Governor’s articulated reasons for opposing the recommendation. Section 201(b)(1)(K) does not distinguish between recommendations that are ultimately approved by the Government and those that are rejected. Instead, Section 201(b)(1)(K) speaks only of recommendations that were “submitted” by the Oversight Board, regardless of whether or not they were rejected by the Government. Consistent with this structure, PROMESA also provides that a budget or fiscal plan that is certified by the Oversight Board is “deemed approved by” the Governor. Id. § 2141(e)(2). Something that is “deemed approved” by the Governor need not actually have been approved by the Governor.

That this powerful authority to make certain important policy determinations ultimately rests with the Oversight Board does not, however, render the elected Governor irrelevant or toothless. PROMESA requires the Oversight Board to look first to the elected government for fiscal plan and budgetary direction, and requires extensive and specific communications, with opportunities for revision of proposals, in the event the Oversight Board considers a proposed plan or budget violative of PROMESA or of the fiscal plan, as the case may be. The parties acknowledge that there were extensive discussions and negotiations prior to the Oversight Board’s certification of its Fiscal Plan and Budget, and it is a testament to their hard work and good faith that only five areas of disagreement are currently in contention. Indeed, as Plaintiffs’ counsel noted at the Hearing, the Fiscal Plan spans “113” pages, and a “tremendous amount of working together” and “of listening” has narrowed the current dispute to the five issues. (Tr. at 128:25-129:4.)

Any fiscal plan provision adopting a recommendation over the Governor’s objection can be certified only after the Governor has had a formal opportunity to make his objections public and, indeed, to communicate any such objections to Congress and to the President. Those bodies could take negative legislative action or exercise powers affecting the composition of the Oversight Board were they to believe that the Governor had the better of the argument. Furthermore, the Oversight Board, in adopting a policy over such objections, faces the challenge of managing implementation of the policy in a way that garners the genuine cooperation of Puerto Rico’s elected government and the citizens of the island who voted for them, as well as the confidence of stakeholders and potential new investors whose interest in doing business with the Commonwealth will be crucial to the Oversight Board’s ability to fulfill its charge of providing a method to achieve access to the capital markets.

This determination puts an end to the governor’s ridiculous proposition that the Board could not make “public policy” (we literally hear this from him every day…) and its recommendations were only that. End of the folly! Judge Swain, however, cautioned as to the imposition of recommendations and stated at page 27:

It is thus clear that the Oversight Board’s ability to impose a rejected policy is not one to be exercised lightly. Nor is it, as a practical matter, one that is unconstrained. Although a budget approved and adopted by the Oversight Board as compliant with a certified fiscal plan becomes law insofar as it is in full force and effect without further action on the part of the Governor or the Legislature, and inconsistent Commonwealth laws are preempted, the Oversight Board has not been given power to affirmatively legislate. Thus, with respect to policy measures that would require the adoption of new legislation or the repeal or modification of existing Commonwealth law, the Oversight Board has only budgetary tools and negotiations to use to elicit any necessary buy-in from the elected officials and legislators. Elected officials and legislators, on the other hand, have the ability to obstruct implementation altogether, or complicate it in such a way as to cripple Puerto Rico’s ability to use it to promote the needed return to fiscal responsibility and access to capital markets. PROMESA is an awkward power sharing arrangement and, as the Court noted in its decision rejecting the Oversight Board’s attempt to appoint a Chief Transformation Officer for PREPA, is “fraught with potential for mutual sabotage.” In re Fin. Oversight & Mgmt. Bd. for P.R., 583 B.R. 626, 637 (D.P.R. 2017). “These negative possibilities should,” as the Court stated in that opinion, “motivate the parties to work together, quickly, for positive change” within the statutory structure in which neither of them holds all of the cards. Id. (Emphasis supplied)

Key point: “statutory structure in which neither of them holds all of the cards.”  I hope that now the two sides can grow up and start acting like adults.  After all, this is what Chairman Bishop wants and has asked for.

As to reprogramming, which is if there is money left over in a budget, can the governor use it without seeking permission from the Board, importantly, the Judge at pages 31-32, stated that it could not.

The Judge did give the Government small, probably meaningless victory by not dismissing the claims that automatic budget reductions are not allowed by PROMESA but she did warn that sec. of PROMESA 203 provides for the appropriate process. For the discussion, see pages 32-34.

As to criminal liabilities, although the Board denied it had the power to accuse criminally anyone, at page 36, the Court said:

Sections 203 and 204 of PROMESA prescribe procedures and limited remedies in the event of noncompliance with certified budgets and fiscal plans. Neither authorizes the Oversight Board to write into the law of Puerto Rico a general declaration that violations of the provisions of the appropriations provisions of the budget are an independent violation of law and, while PROMESA specifies certain consequences upon the Commonwealth’s failure to correct a inconsistency of expenditures versus the budget, the statute itself does not impose affirmative obligations on the Commonwealth or any or its officers or agents to take corrective action. Nor does PROMESA, by virtue of its provision rendering an Oversight Board-certified budget effective, create new liability under Puerto Rico law for violations of the budget. Defendants disclaim any intent effectively to amend Act 230 (the criminal provision) or claim prosecutorial authority, asserting at oral argument that the resolutions merely state the Oversight Board’s position that a violation of the certified budget is a crime within the meaning of the statute. (See Reply § III.D; Tr. at 113:19-25.) Nonetheless, these provisions of the Resolutions, read in the light most favorable to Plaintiffs, appear to claim powers and impose consequences in excess of those authorized by PROMESA.

The Court did not dismiss paragraphs 89-90 of the Complaint so it is still alive, albeit for the automatic budget reductions and criminal liability. Small victory indeed.

As to the Legislature’s complaint, the Judge decided that the Board can reduce the budget of the Legislature and that the Board is who decides, which budget is in effect and not the Legislature. She then dismissed the complaint outright. In effect, without saying it, Judge Swain decided it is irrelevant within PROMESA.

Both the Government and the Legislature are hinting that they will appeal the decisions. While the Legislature can appeal, the Government’s complaint was not dismissed and hence will have to seek permission from Judge Swain to do so. In the meantime, as long as these issues are alive, there can be no plan of adjustment. Welcome to Puerto Rico, the intersection of Macondo with the Twilight Zone.

A Short Legal Review of the Latest PREPA RSA

Well, here we go again. Another day, another PREPA RSA.  We’ve had almost a week to digest the RSA and listen to the myriad of press conferences on whether this will or won’t lead to higher electricity prices.

But here is the most important question we should be asking: Will this time be any different than the previous RSAs?

In the almost 2 years since the Oversight Board came into existence and Governor Rosselló walked backed his campaign pledge to do deals, one thing has become patently obvious: the credibility of these parties is as bankrupt as Puerto Rico.

The Oversight Board and Governor Rosselló need to show progress and to regain credibility. They are also worried about federalization.

To start, the agreement is not much different from the RSA previously rejected by the Board in June of 2017. Nothing in this RSA accomplishes the Board’s original vision when they decided to rebuke the will of Congress, and take PREPA to Title III.  This included wiping out PREPA’s lien and erasing the entirety of the contractual debt of PREPA, raising the specter of a Takings Clause claim. With this RSA, none of that gets accomplished and there is no Taking Clause claim.

Whose In, Whose Out

The bondholders that own or control at least 2/3 of the dollar amount of the outstanding non-insured bonds, section 10.02(a)(vi). Hence, the agreement is not with the insurance companies or the fuel line banks. Like the previous RSA’s, its members cannot transfer (sell) their bonds to any other entity than those involved in it, section 5. The agreement, at Section 8, states:

Without limitation to the provisions of the Term Sheet, the reasonable fees and reasonable expenses of the members of the Ad Hoc Group incurred in connection with the RSA, the Definitive Restructuring Support Agreement, and any documents and transactions (including a plan of adjustment) relating to or implementing the foregoing on or after July 23, 2018, limited to one (1) primary law firm, one (1) municipal bond counsel law firm, one (1) Puerto Rico law firm, one (1) financial advisor, and one (1) utility consultant, shall be reimbursed by PREPA on a monthly basis within forty-five (45) days following submission of an invoice and redacted time detail summary to counsel to the FOMB, PREPA and AAFAF.

Section 10 notes that the agreement may be terminated by mutual consent, or by a breach of the agreement. The only remedy for a breach is the termination of the agreement as listed in section 11.13. In addition, section 10.02(b) says the agreement ends on August 27, 2018, at 5 pm, New York City time, but can be renewed through another agreement. Moreover, New York state law on contracts applies and jurisdiction for any disputes is the Title III court, section 11.03, and the parties obligations are several, not joint and several, as stated in section 11.14.

Economic Terms (i.e. – Electricity Prices)

Where things get interesting is in the economic terms of the agreement, which start at page 33 of the PDF file. It states, inter alia:

 The members of the Ad Hoc Group and any other holders of PREPA Bonds subject to the RSA (the “Supporting Holders”) shall commit to exchange all of their uninsured bonds for Securitization Bonds (as defined below) on the terms and in the manner set forth below.

 The Puerto Rico Electric Power Authority Revitalization Corporation or a new bankruptcy-remote special purpose vehicle as may be agreed upon shall issue Tranche A and Tranche B Securitization Bonds, secured by the Transition Charge.

This is the same system of the rejected RSA. The economic agreement also states as to the bonds:

 The Transition Charge allocable to the outstanding power revenue and revenue refunding bonds issued by PREPA under the 1974 Trust Agreement shall be set at the following levels:

– 2.636 c/kWh for Years 1-5

– 2.729 c/kWh for Years 6-10

– 2.868 c/kWh in Year 11

– Starting year 12, annual 2.500% increases over the prior year’s Transition Charge

 The Transition Charge allocable to the outstanding power revenue and revenue refunding bonds issued by PREPA under the 1974 Trust Agreement shall be capped at 4.348 c/kWh

Similar to the previous RSA, there will be an additional charge for consumers but Governor Rosselló and José Ortiz have claimed, and then backed off, that there will be no increase because the switch to gas will lower rates by 6 cents by kWh. This is difficult to believe for the switch to gas will take time. Moreover, if the agreement is approved as part of the plan of adjustment, it would only start next year. The exchange rate will be as follows:

 67.5% of PREPA Bonds to Tranche A Bonds

 10.0% of PREPA Bonds to Tranche B Bonds

 Tranche A Bonds will extend beyond the stated maturity if not paid in full on the stated maturity, until paid in full, including unpaid interest.

 Unpaid interest on the Tranche A Bonds will accrete.

 PIK interest to accrue annually starting in Year 1.

 Tranche B Bonds shall receive 100% of total excess cash flow after repayment of the Tranche A Bonds. Potential recovery on the Tranche B Bonds shall be capped at the exchange amount, plus PIK interest.

 Tranche B Bonds will mature at stated 45 year maturity, and all unpaid debt service will expire unpaid.

 Tranche A Bonds: 40 year stated maturity, subject to early mandatory redemption from sweep of Transition Charge cash flow (35 year expected maturity under Oversight Board’s May 2018 projections, which may change)

 Tranche B Bonds: 45 year stated maturity

 Tranche A Bonds: 5.25% cash interest

 Tranche B Bonds: 7.00% PIK interest / 8.75% PIK interest to the extent the Tranche B Bonds are not tax-exempt (solely for portion that is not tax-exempt)

According to sources I consulted, this deal gives bondholders a 22.5% discount (67.5 + 10), which is 2.25% more than the rejected RSA from last June. It also extends the life of the bond for many years, with Tranche A being further extended if one year’s payment cannot be made in full. Also, the interest rate for Tranche A is competitive with a securitized instrument. Not bad. In addition, the agreement states:

 No default on either Tranche A or Tranche B Bonds for failure to pay scheduled debt service, so long as full amount collected under the Transition Charge (minus administrative fees) is used to pay debt service. Interest shall continue to accrue (and pay-in-kind, as applicable) and accrete at the original Coupon rate.

 The Transition Charge shall extend, and interest shall continue to accrue (and pay-in-kind, as applicable) at the original Coupon rate, until the later of (1) the date necessary to pay the Tranche A Bonds in full, even if past their stated maturity, and (2) the earlier of (i) the stated maturity of the Tranche B Bonds, and (ii) the date on which the Tranche B Bonds are paid in full.

 Remedies will be mutually agreed upon and will include, at a minimum, the right to replace the Transition Charge servicer and the right to enforce the Securitization Bonds’ trust agreement, the servicing agreement, and non-impairment covenants. Requirements for replacement servicer to be mutually agreed upon as part of Definitive Documentation.

Again, not a bad deal for bondholders. Finally, there is a mention of other creditors:

The Ad Hoc Group shall not object if other legacy debt holders (including fuel line lenders) receive the same treatment with the same terms as the Ad Hoc Group is receiving, so long as such treatment does not adversely affect the Ad Hoc Group’s recoveries. Adjustments to coupons and par are authorized, so long as total cash flow payable each year remains the same (with proportional adjustments for the varying claim sizes of varying legacy debt claims), and so long as such treatment shall not adversely affect the Ad Hoc Group’s recoveries.

In other words, the deal for the insured bondholders may be better as long as the amounts to be received by the non-insured’s does not change. That also applies to the fuel line lenders who are owed around $700 million. Hence, the haircut per bond may decrease further, taking it closer to the 20% of the rejected RSA. In addition, the monolines could get other valuable considerations, as Syncora did in the Detroit bankruptcy (i.e., a parking lot concession worth millions). On July 31, Assured Guarantee rejected the agreement, insisting in the previous RSA they claim is grandfathered. Don’t doubt they will insist on getting a better deal than the non-insured.

Reality Setting In

This deal begs the question, what happened?

Up until recently, the Board and the government were claiming that PREPA bondholders only had a net lien, meaning that the utility’s expenses were paid first. If there was anything left over, only then were the bonds paid–hence they had no collateral. Now, it is given new collateral and will increase the rate consumers pay for electricity. What changed? I think the Board and the government are worried about Congress taking over PREPA in one way or another and want to show that they can get the job done in a way that is very similar to the previous RSA, which Chairman Bishop insisted should not have been rejected. With the COFINA deal pending, this would show that the Board and governor are serious about doing deals.

One of the many unanswered questions is whether this deal will make it more difficult to privatize PREPA. I have mentioned before that I don’t think the politicians in the island want to sell it, not even the generation part, but the Board was insistent on it. We will see.

The PREPA unions and the PDP have already voiced opposition to the deal. Very likely they will sue to block it. The next few months are going to be very interesting indeed.

Monday Update – July 30, 2018

Welcome to your weekly Title III update for July 30, 2018. Again, a lot happening both in and out of the Title III.

The most important development was the July 24, 2018 Omnibus hearing. The Board made a report stating that 172,000 claims were filed in the Title III cases, of which 45,000 had been categorized, totaling $32 Trillion. Yes, trillion. Obviously there is a lot of overlap but the Title III debts may exceed the often repeated $72 billion. The Board reported that it is working in a mediation process for resolving these claims and that procedures will be presented for the Court’s approval. It is difficult to imagine, however, a plan of adjustment being presented without the process being approved and having resolved most, if not all, the controversies involving the claims. In a normal case, the debtor may object claims it does not agree with and pursuant to Bankruptcy Rule 9014, it becomes a contested matter – basically a mini lawsuit. This would be impossible to administer here. Let’s hope mediation, etc., reduces them to a manageable number.

As to PREPA, the Oversight Board again said the utility will not need to borrow money from the government. This puts in question the Board’s past projections as to the utility and the government in general. The Board reported that it had completed and reviewed the market sounding process and that there is an interest in the private sector to purchase PREPA. It reported that the Integrated Resources Plan was being prepared by Siemens (Ankura, the government’s consultant, is also working on an IRP) and that the Board was working on PREPA’s budget and hoped to have it certified by the end the month. This begs the question –  who is in charge of PREPA? More on this latter.

As to the Siemens v. HTA, it is intertwined with the GDB, the Judge will stay the proceedings and entertain objections in the latter’s Title VI proceeding. Hence, this proceeding will also involve litigation, to which it seems to be no end.

The ERS bondholders’ motion for lifting of the stay was denied, pending final determination in the next Omnibus hearing of September 12, date that may be changed. It seems the Judge does not believe the bondholders have a lien. Let’s see what happens.

The UCC’s objection to the investigators exit plan were denied and the August 15 date for the report may be moved by a day or two. In essence, we have to wait for the report to see what the Board and the UCC will do. My bet is that the Board will do nothing and the UCC will have to request leave to file any complaints pursuant to 11 U.S.C. § 926. Let’s see what happens.

In the afternoon, the Court heard oral arguments on the Commonwealth and Puerto Rico’s legislature’s complaints to amend the fiscal plan and the budget. At the start of the oral argument, it seemed Judge Swain was inclined toward the Commonwealth’s position in her questioning of Martin Bienenstock, the Board’s attorney. The Judge suggested that section 205 of PROMESA was a precondition to imposing recommendations via section 201(b)(1)(K), which the Board acknowledged and mentioned the dates in which this was done. The Judge also asked about criminal charges at the end of the Board’s budget and Bienenstock explained that this was pursuant to state law and all budgets contained such provision but the only one who could bring criminal charges is the Commonwealth.

The UCC used its time to remind the parties that the issues should be resolved quickly since any plan of adjustment would be dependent on said budgets and powers. That is, in my opinion, the problem with these complaints; until they are solved, and it is likely that the loser will appeal, there can be no plan of adjustment, further lengthening this procedure and increasing its costs.

Peter Friedman very ably argued for the Commonwealth and tried to set the case as one where the Judge Swain had to balance the role of both sides. He argued, quite correctly, that the Board could not legislate and that criminal law was the purview of the Commonwealth. He also argued that the Board could tell the Commonwealth what was the budget, but not tell it how to spend it. Friedman also argued that the Board was placing recommendations in the fiscal plan but Judge Swain then mentioned that there was section 201(b)(1)(K) of PROMESA, which states that the fiscal plan shall “adopt appropriate recommendations submitted by the Oversight Board under section 205(a).” If PROMESA states that the fiscal plan shall adopt these Board recommendations, why can’t the Board do exactly that.Very telling.

When it was the Legislature’s turn to argue, you could see a change in Judge Swain’s countenance. The Legislature’s complaint asks the Court to reject the Board’s budget and then certify the budget it approved. Judge Swain asked what part of PROMESA gave her the power and Claudio Aliff (who argued for the PR Senate) answered that the PR Constitution allowed the use of the previous year’s budget. Judge Swain just said that that was not in the complaint. A lawyer for the House of Representatives argued that the legislature was ok with repealing law 80 prospectively but the Board would not hear it, to which Judge Swain answered that the Board would say its economic advisors told them the law must be eliminated and what part of PROMESA prohibited the Board from requiring this?

In rebuttal, Mr. Bienenstock effectively argued that section 4 of PROMESA preempted any Puerto Rico law that was contrary to PROMESA and since it gave the Board the power over budgets, any law that allowed the Governor not to comply with it would be invalid. At the end, Judge Swain asked if they were waiving the jurisdictional argument, to which Bienenstock very wisely said no. She then took the issue under advisement.

Seems to me Judge Swain may decide she has no jurisdiction to review the certified fiscal plan and budget; or she may go down the list of alleged Board wrongdoings and say it may do this but it may not do this; or, which is what I think more likely, list the alleged wrongdoings, explain why the Board may do so and finally say, “in any event, I cannot review the Board’s certifications.” I am inclined towards the last alternative since that will put a stop to the Commonwealth coming to the Court every time it does not like something the Board does, but, I may be wrong as I was about Mr. Zamot. Hopefully we will soon find out.

After the hearing, several PDP legislators and mayors filed an adversary proceeding against the Board claiming the appointment of the members violated the appointments clause and that the powers it were conferred violates the separation of powers doctrine, which they claim must be applied to the territories. Although I do not believe the arguments will prosper, it is another attempt to rid Puerto Rico of the Board. Ironically, it is done by members of the party that went to Washington and accepted its imposition. I must note, however, that if the complaint as to the separation of powers prospers, it would mean that Title I and II of PROMESA would be unconstitutional, and pursuant to section 3 of the law, so would Title III. Then the bankruptcy that has allowed the government to pay the retirees would cease. Food for thought.

In addition, the employees union of the State Insurance Fund (CFSE) and the Doctor’s union of the agency, filed a complaint against the Board stating that the budget and fiscal plans of the Commonwealth were unconstitutional. The complaint seeks:

  1. An order declaring that the CFSE is a protected essential public service.
  2. An order declaring that Act 66-2014, Act Num. 3-2017, Act Num. 8-2017, and Act Num. 26-2017, violate the Contract Clause of the U.S. Constitution.
  3. An order declaring that Act 66-2014, Act Num. 3-2017, Act Num. 8-2017, and Act Num. 26-2017, violate the Right to Collective Bargaining of the Commonwealth’s Constitution.
  4. An order declaring that the New Fiscal Plan is unconstitutional and that the FOMB shall not file a plan of adjustment of debt until the New Fiscal Plan is totally recast to comply with the Contract Clause of the United States Constitution and Article II, Section 17 of the Commonwealth Constitution.

Again, I do not think this complaint will prosper but shows that the unions in the Government will do anything in their power to stop the curtailment of their interests by the Board or the Commonwealth. Let’s see what happens.

The UCC had renewed its Rule 2004 request for discovery as to documents presented to the Investigator and Judge Dein ruled last week and said:

  1. The Government Development Bank of Puerto Rico (“GDB”) shall continue its privilege review of the GDB board minutes, as represented in open court, and shall produce unprivileged documents to both the Official Committee of Unsecured Creditors (“UCC”) and the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (“Retiree Committee”) (collectively with the UCC, the “Committees”) as soon as possible. Any documents, or portions thereof, withheld on the basis of privilege shall be listed on GDB’s privilege log.
  2. The Committees’ additional requests for director and officer liability documents and documents from investigations by regulatory agencies are denied without prejudice to the Committees’ renewing their requests after receipt of the Independent Investigator’s report.
  3. The Renewed Motion remains open such that requests may be made pursuant to it after the publication of the Independent Investigator’s report.

Clearly the Investigator’s report will be key in these issues. Hopefully, it will not be a whitewash of what happened in the debt crisis.

In other news, two independent sources have confirmed that the Commonwealth-COFINA deal is very close to completion. If the deal, however, does not include the Government of Puerto Rico or the GO’s, it will be objected and we will see more litigation, to which there seems to be no end.

During the court hearing, Congressman Bishop held a hearing of the House Natural Resources Committee as to PREPA. I will deal with this in a separate posting this coming week but suffice its importance by saying that Congress is very likely to introduce important changes in PREPA.

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

Monday Update – July 23, 2018

Welcome to your weekly Title III update for July 23, 2018. A lot happening both in and out of the Title III cases.

Although the Legislature filed a complaint against the Board for allegedly taking away its constitutional prerogative to legislate the budget, the PDP minority members of the House filed a motion to intervene in the case. The intervention is accompanied by a complaint, which does not adopt the allegations of the Legislature’s complaint but rather seeks the following:

Plaintiffs respectfully request the issuance of a declaratory judgment holding that the Oversight Board appointment provisions contained in PROMESA are in violation of the Appointments Clause or, in the alternative declaratory judgment be entered decreeing the delegation of executive and legislative authority to the Oversight Board is in violation of the Separation of Powers doctrine or, in the alternative, issue a declaratory judgment decreeing that the Board’s exercise of authority over budgeting to compel the adoption of its public policy constitutes an impermissible interference with federally-protected legislative autonomy.

In other words, the minority leaders are invoking the Aurelius claims, which were dismissed by Judge Swain and the separation of powers in the Federal Constitution, as causes of action. Meanwhile, the Separation of Powers argument seems elegant at first glance but in Luther v. Borden, 48 U.S. 1 (1849), the Supreme Court made it clear that the extent of the separation of powers was entrusted to Congress and the President, not the Courts. Hence, there is no cause of action as averred by the PDP minority. Moreover, the minority did not file a separate complaint but rather sought intervention. Why? There is a debate amongst scholars whether Rule 24 requires standing. To me, it is clear the minority does not have said standing. Interestingly, the Legislature opposed the request for intervention by claiming (surprise, surprise) no standing. The Board did not raise the issue of standing but said that the requirements of Rule 24 were not met since the causes of action of both parties were different. They also added that the Legislature could of course file its own complaint.

If the minority legislators probably do not have standing or actually a cause of action, why did they file it? Politics. Although the PDP legislators are represented by counsel Martínez Luciano and Rodríguez Conde, both experienced and capable attorneys, well versed in federal litigation, the complaint was also signed by Aníbal Acevedo Vilá, former PDP governor. Furthermore, they sided with Aurelius. Cheeky. Or just simply politics, nothing more. In any event, Judge Dein denied the intervention on Saturday, stating that what was being claimed was new allegations and that could not be done in an intervention under Rule 24(a). Thus, she denied intervention via Rule 24(b), as is her discretion. Obviously, she did not want to deal with this distraction.

AAFAF opposed the Board’s motion to dismiss the complaint but stated something that could mean its dismissal: The governor and AAFAF, however, seek declaratory and injunctive relief to halt the enforcement of only a handful of specific recommendations that the elected Government duly rejected under PROMESA section 205 . . .

If the Court were to grant the relief that the elected Government requests, the Court would not have to decertify any fiscal plan or budget. The fiscal  plan’s revenues and expenses, for example, would not need to change. The Board and the elected Government could proceed with the existing fiscal plan and budget without any alteration other than being relieved of the obligation to comply with the particular, defined recommendations that exceed the Board’s statutory power. The Board would merely be barred from enforcing recommendations that it never had the power to impose in the first place.30

Plaintiffs do not contest that the Board can certify a fiscal plan that includes recommendations under PROMESA section 205, as the Board has done here. The sole issue presented by this action is the effect of certifying a fiscal plan that includes recommendations the elected Government had the power to reject. If PROMESA made the Board the sole arbiter not only of whether to certify a fiscal plan or budget but also on the effects such certification would have, the Board’s power over the Commonwealth and its elected Government would be limitless. For example, if the Board recommended that Saturday be a mandatory work day for all public employees in Puerto Rico and then included such a recommendation in the fiscal plan or budget, against the elected Government’s objection, there would be no means for the elected Government to contest, or for the Court to review, the Board’s conduct. The Board’s interpretation makes such absurd results permissible.

AAFAF’s argument is bipolar and inconsistent. It makes no sense to say you can alter a little of the Fiscal Plan and say you are not violating sec. 106(e). In it’s reply, the Board points this out. Also, if AAFAF gets away with this, all creditors will do the same. I expect Judge Swain to politely listen to arguments on July 25 and then say she has no jurisdiction to grant a remedy. If she grants any remedy, it is unlikely a confirmable Plan of Adjustment can be presented and Title III would have to be dismissed.

Bettina Whyte, the UCC and the Retirees Committee all filed motions requesting payment as per the Court’s orders. AAFAF filed an opposition stating that it expected to pay them by July 25 and that it is working on a procedure for the reimbursement of the retained taxes. Why is there a delay in payment from a government flush with cash? Why has a procedure not to retain any taxes taken so long to develop? Either it was done purposely or it is another example of government incompetence.

Lord Electric requested the $1,000,000 plus it is owed for helping PREPA reconstruct the grid. AAFAF answered that it was willing to pay Lord Electric when FEMA reimbursed it or when funds were available. What doesn’t make sense is that PREPA has paid all other companies involved in the reconstruction and still has $346 million left over in cash. I wonder if Lord Electric is owned by PDP sympathizers?

As to the Motion of Certain Secured Creditors of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico for Relief from the Automatic Stay, which was opposed by the Board, the Court issued an order stating:

For the reasons that will be explained on the record at the Omnibus Hearing scheduled for July 25, 2018 at 9:30 a.m. (Atlantic Standard Time) (the “July Omnibus Hearing”) the oral argument on the Motion scheduled for the July Omnibus Hearing will be a preliminary hearing pursuant to section 362(e)(1) of title 11 of the United States Code. A final hearing on the Motion will be held at the Omnibus Hearing scheduled for September 12, 2018 at 9:30 a.m. (Atlantic Standard Time).

It will be interesting to hear their argument. Also in the July 25 hearing, the UCC’s Rule 2004 request will be discussed. With the weighty issues to be discussed there, the hearing may take more than a day.

At PREPA, things could not be worse. José Ortiz was appointed as the fifth Executive Director in 8 months. He quickly began promising the impossible, such as lowering the electric bill in 120-days and ridding PREPA of Title III and then selling it. Mr. Ortiz also made claims regarding the selling of certain PREPA installations and the creation of new generation plants. All this resulted in Congressman Bishop, head of the House Committee on Natural Resources, calling for a hearing on July 25th called the “Management Crisis at the Puerto Rico Electric Power Authority and Implications for Recovery.” Chairman Bishop sent Governor Rosselló a letter inviting him to the hearing and mentioned that due to “continued disfunction at PREPA” the Committee is interested in hearing on how the Governor intends “to provide for the depoliticization of PREPA and a credible plan for the utility’s transformation that can garner the confidence of the island’s residents, federal taxpayers, and future private investors.” Someone using the Committee’s handle, tweeted the letter saying, “Governor, call your office.” The tweet was soon after deleted, but set the Governor and his team off. CBS reporter David Begnaud asked the Committee why the tweet was deleted and the Committee responded that the governor’s office requested it. Then, PRFAA’s account said the governor did not do that even though a person in charge of the House Natural Resources Committee’s account said Rosselló’s office requested it. On Friday, the governor reacted enraged, saying the hearing was a trap and intimating he would not attend or send anyone. Seems to me the governor senses that its all falling apart around him, that Congress could file legislation for a federal takeover of PREPA or give the energy commission broader federal powers, which he will vehemently oppose and is posturing for the voters.

This brings us to a letter from Assured Guarantee and National, among others, dated July 16, 2018, directed to the Board. The letter states:

Following preliminary discussions with your advisors, we write on behalf of National Public Finance Guarantee Corp. to urgently seek to work together with the Oversight Board in addressing PREPA’s governance crisis and lack of political independence, which directly contravene Commonwealth law. . .  

For these reasons and as we have discussed with your advisors, it is National’s objective to work together with the Oversight Board to ensure that PREPA is governed by qualified, politically independent leadership, which will facilitate debt restructuring and other positive developments. We request to discuss with the Oversight Board how best to achieve this objective for the good of the island—through the receivership statute or other agreed-upon means. Without emergency measures now, PREPA’s problems will grow worse and long-term solutions will become more difficult to achieve. PREPA’s leadership must be able to operate the utility for the benefit of all stakeholders, insulated from politically motivated threats and ultimatums such as those seen in recent days.”

Are these insurers asking the Board to name a CEO in PREPA? Judge Swain has already said  no, but in her decision on the Ad Hoc Group of PREPA bondholders attempt to lift the stay to have a receiver appointed, she states on pages 10-11:

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

What if the bondholders consented to have Zamot be the receiver appointed by the Court and the Board allowed the lifting of the stay for this purpose? Given what has been going on in PREPA, it is not that farfetched. Let’s see what happens.

In other news, Politank, a local lobbying firm, sued several of the COFINA creditors for moneys allegedly owed. What is interesting is the following:

The Agreement also provided for a success fee under the following terms:

5.2 If the CLIENT or the COFINA GROUP enters into a consensual plan for COFINA that limited the impairment of the face value of the bonds, or the COFINA GROUP achieves a similar economic outcome through a means other than a consensual plan, the COFINA GROUP will pay to the CONSULTANT a success fee based on [the Recovery Value1 of the Senior COFINA bonds] as follows:

Recovery Value Success Fee

≥ 95% $3,000,000.00

92.5% $2,500,000.00

90% $1,275,000.00

87.5% $750,000.00

85% $500,000.00

82.5% $250,000.00


The success fee will be due and payable to the CONSULTANT within thirty (30) days of the execution of any consensual plan or such any other means which achieve a similar economic outcome.

If on/or before May 31, 2018, the CONSULTANT becomes entitled to the payment of a success fee, as set forth above, the CONSULTANT’S success fee shall be increased by an additional TWENTY PERCENT (20%) of the otherwise payable success fee.

Interesting indeed how lobbying works. The timing is even more interesting: just days before the Agent’s Agreement was reached.

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

Monday Update – July 16, 2018

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

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

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

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

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

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

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

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

The Court continues its explanation:

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

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

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

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

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

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

In summary, Congress has plenary power under the Territories Clause to establish governmental institutions for territories that are not only distinct from federal government entities but include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States. It has exercised this power with respect to Puerto Rico over the course of nearly 120 years, including the delegation to the people of Puerto Rico elements of its plenary Article IV authority by authorizing a significant degree of local self-governance. Such territorial delegations and structures may, however, be modified by Congress. John R. Thompson, 346 U.S. at 109. Congress purported to do so in creating the Oversight Board as an entity of the territorial government of Puerto Rico. (emphasis supplied)

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

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

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

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

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

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

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

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

Importantly, Judge Branden stayed the case stating:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hammering at the Fiscal Plan, the Board states:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday Update – June 25, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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