Monday Update – April 30, 2018

Welcome to your weekly Title III update for April 30, 2018. This week, we do have news from the Court, as well as outside the Court.

On Monday April 23, 2018, Judge Swain cancelled the April 25 Omnibus hearing after the COFINA agent made the request on Sunday evening. The Court ordered the Board to submit on that date a report on the status of the case. Interestingly, on the subject of mediation, the Board stated “[m]ediation efforts continue and are currently focused on resolution of the Commonwealth-COFINA dispute regarding ownership of sales and use taxes.” The COFINA agents said that they wished to concentrate on mediation. Does this means there would be some sort of settlement in COFINA? Who knows?

Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corporation, the Ad Hoc Group of PREPA Bondholders, Syncora Guarantee Inc., and U.S. Bank National Association, in its capacity as PREPA Bond Trustee, joined the Motion to Compel Compliance with February 26, 2018 Order and For Entry of a Protective Order of Ad Hoc Group Of General Obligation Bondholders, Ambac Assurance Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., the Mutual Fund Group, and National Public Finance Guarantee Corporation to compel production of documents. This is an important issue, especially since on April 24, 2018, Judge Swain partly reversed Magistrate-Judge Dein’s decision on discovery. Judge Swain stated:

“The memoranda of law did not treat the deliberative process issues in any great detail, and included only conclusory arguments regarding the effect of the involvement of consultants and different government entities in communications and document preparation. Much of the argumentation focused on whether Respondents should be required to produce a categorical log of materials withheld on the basis of the privilege, should they be permitted to assert the privilege in the first instance. There was no particularized argumentation regarding procedures for determination of the applicability of the privilege and Bhatia-Gautier v. Roselló-Nevares, 2017 TSPR 173, 2017 WL 4975587 (P.R. 2017) (“Bhatia-Gautier I”), the September 2017 decision of the Supreme Court of Puerto Rico concerning access to public documents under the constitution and laws of Puerto Rico that is cited extensively in the Objection, was not mentioned in any of the January 2018 submissions.

The February 26 Order, like the parties’ submissions, treats the deliberative process privilege issues in conceptual rather than specific terms, directs the preparation of a categorical privilege log, and contemplates particularized scrutiny of privilege claims in connection with objections to privilege log entries. . .

Given that Judge Dein does not appear to have been asked to address the status of factual elements of Pre-Decisional Fiscal Plan Documents and did not have the benefit of the extensive briefing that the parties have submitted to this Court, the Court remands this matter for further consideration by Judge Dein in the first instance and any necessary clarification of the February 26 Order. . .

Again, it does not appear that the parties made anything more than conclusory arguments concerning the questions of whether communications among Commonwealth Entities and between the Oversight Board and such entities can be protected by the deliberative process privilege, and whether the involvement of Respondents’ professional advisors in the preparation or review of Pre-Decisional Fiscal Plan Documents renders the privilege inapplicable. Bhatia-Gautier I decision, which features prominently in Objectors’ procedural and substantive arguments to this Court, was not even mentioned in the briefing to Judge Dein, and Bhatia-Gautier II postdates the February 26 Order. The Court concludes that, since the able Magistrate Judge did not have the opportunity to address the legal and factual particulars of the issues that are now being argued to this Court, the record is insufficient to enable this Court to apply appropriately the review standards. On remand, Judge Dein may determine in the first instance whether additional or different procedures and proceedings should be undertaken in light of the Bhatia-Gautier decisions and the particular roles and responsibilities of the Commonwealth Entities, the Oversight Board and their respective professionals in developing positions and taking actions on behalf of the Commonwealth under PROMESA in determining whether the deliberative process privilege should be analyzed on an entity by entity or other basis in this context. . .

The February 26 Order is silent in this respect and does not explicitly apply a balancing test, perhaps because the two-stage procedure it contemplates provides opportunities for narrowing of controversies and further input prior to final disclosure decisions. On remand, the Court may consider when, and in what manner, the balancing test is to be applied.”

Given Judge Swain’s courteous and respectful style, the order is clearly sending a message to Magistrate-Judge Dein to closely look at what the Commonwealth Courts have done with the invoked privileges. Although Magistrate-Judge Dein will have to take a fresh look at these issues, the Commonwealth Court decisions were much in favor of transparency and against the invoked privileges. Magistrate-Judge Dein moved quickly on the issue and ordered:

“At the conclusion of the hearing on the Motion to Compel (Dkt. No. 2865) currently scheduled for May 21, 2018 at 1:30 p.m. in Boston, Massachusetts, the parties to the Renewed 2004 Motion should be prepared to discuss a process and schedule for addressing any challenges to claims of deliberative process privilege. Towards this end, the parties shall submit a joint status report, not to exceed 5 pages, addressing these issues by Monday, May 14, 2018.”

I think we can expect a Report and Recommendation that will further open the information floodgates. This will bring much needed transparency to the case.

In a similar issue of Rule 2004 discovery, the American Federation of State, County and Municipal Employees International Union, AFL-CIO, American Federation of Teachers, AFL-CIO, and Service Employees International Union have been negotiating with the Board and AAFAF and are close to coming to an agreement. No later than May 16, 2018, the parties will let the Court know the status of any such agreement and there will be a hearing before Magistrate-Judge Dein on June 22, 2018.

On April 24, 2018, a local attorney, Rene Pinto Lugo (former president of the Puerto Rico Civil Rights Commission), unions and non-profits, filed an adversary proceeding, 18-0041 against the government of the United States of America, the Board for Puerto Rico and the Governor. The law suit seeks the following:

“The present action seeks injunctive and declaratory relief, including the determination that certain provisions of PROMESA, 48 USC 201 et.seq., are unconstitutional because they violate Plaintiffs’ fundamental rights as protected by the First, Fifth, and Fourteenth Amendments of the Constitution of the United States of America, hereinafter USA, the Declaration of Independence of the USA and other statutes and international covenants that bind de USA. Plaintiffs represent a wide and inclusive cross section of individual residents of Puerto Rico, and other legal representative entities that have been, are being, and will continue to be directly and dramatically affected by the implementation or lack of implementation of certain provisions of PROMESA in the jurisdiction of Puerto Rico and abroad. In particular, the constitutionality of the establishment of a Financial Oversight Management Board, hereinafter FOMB or the Board, with executive and legislative powers over the Government of the Commonwealth of Puerto Rico, its democratically elected officials, and the residents of Puerto Rico is contested. As an additional claim and/or in the alternative, it is contended that the conflict of interests of various of the members of the FOMB renders them unqualified to remain in the Board, and it prevents any and all attempts to pursue the objectives of PROMESA and further constitutes a violation of the constitutional right to due process of law of the Plaintiffs and the People of Puerto Rico. Moreover, even the appearance of conflict of interest in the acts or omissions of those members of the FOMB can render any and or all acts of the Board null and void. Furthermore, we argue that the unique and novel nature of PROMESA does not render it exempt from constitutional and fiscal scrutiny and as such cannot be construed to preclude this Court from considering and resolving the constitutional matters presented by Plaintiffs, particularly so after the economic and social devastation caused by hurricanes Irma and María in Puerto Rico and the way the Government of Puerto Rico has mishandled the socioeconomic and health crisis that arose afterwards.

We also petition an order to perform an urgent integral, legal, and forensic audit of the public debt which is fundamental to transparency and constitutes an essential fiduciary and statutory duty of the FOMB and the Government of Puerto Rico. We affirm that further delaying the audit will only aggravate the socio-economic crisis of Puerto Rico and impede the fair and equitable fiscal reorganization and equitable and sustainable development and quality of life of the Plaintiffs and the People of Puerto Rico, which is, at least in paper, an integral part of the legislative intent of PROMESA.

The evident unwillingness and failure to perform an integral and forensic audit (as defined hereinafter) by the FOMB and the Government of Puerto Rico to deconstruct all the details of an illegal, damaging, and unprecedented issuance of public debt, requires a judicially ordered mandate to pursue it. The failure is more evident and suspicious given the decision not to perform the public audit after the existing Government of Puerto Rico set aside in the year 2017 the Commission created by statute4 in the year 2015 to undertake the audit. The Commission created by law 97 had issued two preliminary reports that revealed violations of law in borrowing practices by the Government of Puerto Rico and private parties and entities. Such forensic and legal audit is further needed to account for the extent of the potential wrongdoings, fraud, and corruption over the public debt of the Government of Puerto Rico, and to specifically identify wrongdoers (persons and legal entities) that should be held liable for the issuance of the debt. The lack of action in performing the audit will impede the compliance with the ultimate goal of a bankruptcy process which is supposed to provide a “fresh start”, “rehabilitation,” and sustainable development of the “debtor”. In the absence of the aforementioned audit, it is inappropriate and premature to consider, prepare, and adopt any fiscal plans for Puerto Rico within the scope of the PROMESA Act to move forward and to adopt measures for an equitable, sustainable development, and improved quality of life for the Plaintiffs and the people residing in Puerto Rico. Furthermore, it would operate against the ultimate purpose of any bankruptcy procedure, including PROMESA Title III proceedings, in which the present and the future of the Petitioners and the People of Puerto Rico is at stake.

This action is also pursued because of the existing and untenable state of control and submission in the socioeconomic and political relationship to which the Government of the USA has subjected the Plaintiffs and the People of Puerto Rico, relationship that is supposed to adhere to the democratic principles and rights that peoples and individuals of the world are entitled to as fundamental human rights. The neglect of those duties by the USA require to be confronted immediately and affirmatively rectified “with all deliberate speed”.”

Moreover, as part of its remedies, the complaint states:

“To include the government of the USA as a party to this case to not only assume a position with respect to the constitutional claims made by the Plaintiffs, but also to answer the allegations of the complaint, and to assume any and all constitutional and legal liabilities it should be compelled to assume over the public debt of the government of Puerto Rico and the illegal and unconstitutional imposition of the FOMB over the Plaintiffs, Puerto Rico, and its residents.”

With all due respect to the parties and attorneys, this is nothing more than a wishful thinking attempt to do things the way they think is right. None of these causes of action have much of a chance of succeeding and the last one ignores 48 U.S.C. § 795, which states:

“All expenses that may be incurred on account of the government of Puerto Rico for salaries of officials and the conduct of their offices and departments, and all expenses and obligations contracted for the internal improvement or development of the island, not, however, including defenses, barracks, harbors, lighthouses, buoys, and other works undertaken by the United States, shall, except as otherwise specifically provided by the Congress, be paid by the treasurer of Puerto Rico out of the revenue in his custody.”

But if one of these causes of action does prosper, it could change the whole Title III case and the US-PR power relationship.

In another adversary proceeding, the Commonwealth removed a case that was filed by the PREPA Retirement Board against the Governor where he ordered that it provide certain information in order to finalize the Commonwealth audited financial statements. Hence, until this issue is resolved, we can forget about the audited financial statements. We will probably see the Plan of Adjustment before we see the audited financial statements of the Commonwealth.

Finally, Mr. José Carrión was interviewed by Jay Fonseca and they had the following exchange:

Jay Fonseca: But you draw a line. You say that states pay between 4 and 9%, with Connecticut being the highest, and you are saying that you are not going to pay more or less than 1% of this range—8% perhaps. Here, we would be talking about a 90% cut of the debt or between 85 and 90%–from $100 billion to $20 billion. Is this the number you are talking about?

José B. Carrión: Jay, I congratulate you for having read the fiscal plan, there are not many of them. The reality is that I can’t express anything else in addition to what you just said.”

Is the Board actually trying to cut the PR debt by between 85%-90%? Will it succeed? The answer is complicated.

While undoubtedly the Board is negotiating with bondholders, it is unlikely they would willingly accept such deep cuts. If they do, fine and dandy; if they don’t, we will have to wait to the Plan of Adjustment, which is to be filed sometime this year after the May 29 bar date. The Plan of Adjustment, which is filed by the Board, not Puerto Rico, divides creditors in classes and states what the impairment, if any, of its claims will be. The classes that are impaired then get to vote and if a majority does not approve it, the only other way it can be approved by the Court is through a cramdown. Section 314(b)(6) of PROMESA, however, requires in a cramdown that “the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” Not likely in a scenario where secured creditors such as bondholders receive a bigger haircut than non-secured creditors, i.e., pensioners receive no cuts or only a 10% haircut.

More importantly, if the Plan of Adjustment cannot be approved, the Title III case must be dismissed pursuant to 11 U.S.C. § 930, adopted in PROMESA by section 301. Of course, Judge Swain may ask the parties to go back to negotiating and come up with a new Plan of Adjustment as was done in San Bernardino, which took four years and an equal number of Plans of Adjustment to end that case. In that scenario, as Mr. Carrión has suggested, pensions could be further cut.

As you can see, many things have to occur in order for Mr. Carrión’s scenario to actually happen. Also, it will take months before the Plan of Adjustment is either approved or rejected. Many things remain to be decided and mediation has yet to achieve a single success, although the GDB and PRSA may eventually end in Title VI. Let’s see what happens.

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