Monday Update – April 1, 2019

Welcome to your weekly Title III update for April 1, 2019. Things are speeding up.

Andrew Scurria of the Wall Street Journal reported that President Trump would nominate the present Board members for confirmation by the Senate. Subsequently, two independent sources confirmed this information. Given the Board’s actions, there will be opposition on both sides of the isle in the Senate but some democrats may think it is better than a bondholder-friendly appointees. The PPD minority leader in the Puerto Rico’s House of Representative has already signaled his opposition to the appointments and the Commonwealth is complaining that the Board is using Puerto Rico’s money to lobby in DC for their reappointment. In any event, with only 46 days left in the 90-day stay period, the schedule is very tight for confirmation.

On March 25, the UCC filed a motion requesting that the Board inform them by April 1 of the avoidance actions it intends to file and requested an expedited consideration of their request. It also requested that the Court consider naming it Trustee pursuant to 11 U.S.C. § 926 to file any actions the Board would not. Not surprisingly, the Board opposed the motion and said that, if anything, it should be considered during the April 24 Omnibus hearing. The problem is that on May 2, 2019, the statute of limitations runs out to file said actions by the Commonwealth. Seems Judge Swain understood very well and ordered the Board to give the UCC a preliminary list by April 5. “The Committee and the Oversight Board shall promptly meet and confer regarding the contents of the Oversight Board’s preliminary list and anticipated allocation of litigation responsibilities. The Oversight Board shall thereafter provide to the Committee its final list of Commonwealth Avoidance Actions, including the aforementioned designations” by April 10. I think this means Judge Swain envisions the UCC and Board either dividing work on the avoidance actions or filing joint complaints. The order continues stating that the UCC could file a motion to be appointed Trustee by April 12 and the Board must file opposition by April 15. Court will hear argument during the April 24 hearing. This is clear victory for the UCC and only the third time Judge Swain has not sided with the Board on important issues. Moreover, given the timetable, no other party will be able to file a section 926 motion in time. Hence, if there is the appointment of said Trustee, it will be the UCC.

The UCC also filed an objection to the PREPA bondholders request for the lifting of the stay to appoint a receiver along predictable lines. Time for the Board and AAFAF to file was extended by Judge Swain, although many believe there will be some kind of settlement beforehand. Let’s wait and see.

Utier, PREPA’s union, filed a motion opposing the lifting of the stay and appointment of the receiver. What is different is that Utier calls instead for the appointment by the Court of an Independent Private Sector Inspector General and even if a receiver is appointed, to also have this “Inspector General.” The problem with this request is that the First Circuit, in FOMB v. Ad Hoc Group, 899 F.3d 13, 19 (1st Cir. 2018), made clear that Judge Swain cannot interfere with PREPA’s use of its property pursuant to section 305 of PROMESA without the Board’s consent. Since it is obvious the Board will not consent, this request will go nowhere.

The ERS dispute discovery dispute continues and will be argued on April 1 before Magistrate Judge Dein. I am sure that both sides have valid points and Judge Dein will have a reasonable solution to the disputes.

In the PBA adversary proceedings, Defendants-Intervenors /Counterclaim Plaintiffs Assured Guaranty Corp. and Assured Guaranty Municipal Corp. answered the complaint and filed  counterclaims against FOMB and the UCC. The counterclaims are for:

(b)enter judgment in favor of Assured declaring that the Leases are non-severable and valid leases under Commonwealth law and are unexpired leases of nonresidential real property for the purposes of Bankruptcy Code section 365(d)(3);

(c) enter judgment in favor of Assured declaring that, pursuant to Bankruptcy Code section 365(d)(3), the Leases give rise to administrative expense claims for all postpetition amounts that remain due and owing by the Debtors under the PBA Leases, as well as any amounts that may accrue moving forward until such Leases are assumed or rejected by the Debtors;

(d) enter judgment in favor of Assured declaring that PBA is entitled to a priority administrative expense claim under the Leases pursuant to Bankruptcy Code sections 503(b)(1) and 507(a)(2), and that any such claim filed or asserted against the Debtors shall be allowed in full

The PBA/GO’s litigation is not going to be simple or short. Hence, I agree with Ms. Jaresko that the Commonwealth Plan of Adjustment will probably be filed at the end of this year or later. Especially if Judge Swain has not decided the PBA/GO’s issue.

Finally, there was an interesting twitter exchange between Cate Long and David Skeel on Sunday. Cate wrote:

I think Puerto Ricans and creditors would find this statement more credible if PR govt had not issued +1,900 advertising contracts since the start of the fiscal year (July 1, 2018). OBoard never required an identification of “essential services” as Promesa requires

To which Skeel responded “[a]s you know, @cate_long , PROMESA requires @FOMBPR to “ensure the funding of essential public services.” That’s exactly what we’re trying to do.” Section 201(b)(1)(C) of PROMESA requires that the Fiscal Plan “ensure the funding of essential services.” The mere fact that it is not services but ESSENTIAL services that need to be funded makes it clear that not all services provided by the Government are essential, as we saw during the Federal Government’s shutdown. The PR Government, however, has refused to downsize except through attrition and the Board, despite Judge Torruella and Judge Lynch separate opinions on the Board’s powers, has refused to force the Government to cut back in contracts, funding of useless government agencies (WIPR TV station and the State Elections Commission not in election years come to mind) or furlough employees. Moreover, the Board has even refused to define what is an essential service and so has the Commonwealth. Hence Cate’s comment. This lack of action by the Board will become important when the Commonwealth’s plan of adjustment is presented, which according to Mr. Skeel, is this month.

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.