Welcome to your weekly Title III update for April 15, 2019. This was a busy week.

On Monday, April 8, 2019, and as part of the effort to justify its lack of effort to file causes of action against all possible invalid bonds, the Board filed an urgent motion for entry of an order under bankruptcy rules 1007(i) and 2004 authorizing discovery and compelling disclosure of lists of security holders. The UCC filed a motion in support of the request. The motion is directed to several banks, including Bank of NY Mellon, Bank of America and others to obtain information on the past payment of GO bonds. This is part of the insane effort to claw back amounts paid on the allegedly illegal bonds issued by Puerto Rico. Later in the week, U.S. Bank National Association and U.S. Bank Trust National Association filed an objection to this motion’s timetable and the confidentiality of the information sought. Bank of NY Mellon filed a much stronger opposition and said;

The Motion ignores legal requirements that compel BNYM to maintain the confidentiality of the information the Oversight Board seeks by this Motion. Nor does the Oversight Board allow for a necessary process by which BNYM can provide its customers with notice and an opportunity to object to the Oversight Board’s request. These failings alone warrant the denial of the motion. . .

This Court should deny the motion. Alternatively, and in light of the various legal claims that might be asserted against BNYM for complying with the Oversight Board’s request should this Court grant the motion and order BNYM to produce some or all of the requested information, as well as the financial expense BNYM will incur in collecting and producing the information, BNYM needs this Court’s protection. The Court should provide in any Order that:

(1) No action taken by BNYM pursuant to or in compliance with such order shall subject BNYM to any liability whatsoever;

(2) BNYM shall, prior to producing documents to the Oversight Board, notify its customers of the request to disclose their information and provide reasonable time for customers to object to the production, or, in the event that the Court does not grant BNYM’s request to notify its customers of, and/or to serve its customers with, the Court’s Order, then BNYM is relieved from any obligation to so notify and/or serve its customers, for good cause shown;

(3) The Oversight Board shall indemnify and hold BNYM harmless against any claims, whether direct or indirect, arising from BNYM’s compliance with the Court’s Order;

(4) The deadline for BNYM to comply is no earlier than April 30, 2019, which deadline may be extended for reasonable cause, and BNYM shall not be subject to sanctions for any failure to meet such deadline if it is attempting in good faith to comply;

(5) The Oversight Board shall maintain the confidentiality and security of any customer information BNYM produces in response to the discovery request; and

(6) The Oversight Board must bear the fees, costs, and expenses, including, without limitation, the fees and costs of internal and external counsel, research costs, and production costs, for conducting the requested search and production.

In addition, Bank of America filed an objection, also requesting payment or sharing of costs and stated;

The Oversight Board’s requested Rule 2004 discovery is premature at best, unduly burdensome and potentially unnecessary, as it may be obviated (a) by the adjudication of the Joint Claim Objection, ERS Bond Objection, and Ad Hoc Objection (collectively, the “Bond Objections”), and (b) at least in part by the information received from DTC which the Oversight Board “expects [] will identify with reasonable accuracy” certain of the Participant Holders. The Oversight Board acknowledges that its request is premature, by stating in its Motion that its need to identify the holders of Challenged Bonds is “depend[ent] on the outcome of the Joint Claim Objection, ERS Bond Objection and Ad Hoc Objection.” See Motion ¶ 3. Furthermore, should the Court rule in the Oversight Board’s favor and grant the relief sought in the Equitable Tolling Motion, the Oversight Board’s relief requested here would not be urgent or necessary at this time.

Moreover, the Oversight Board’s overbroad and patently burdensome requests in the Motion exceed the scope of Rule 2004. Instead of utilizing the discovery expected from DTC to narrow by date and purported holder its overly broad requests to BANA, the Oversight Board’s discovery requests relate to multiple BANA entities, seeking information pertaining to what could be thousands of transactions, contained on what could be different platforms and/or systems at BANA and/or another Bank of America entity. Indeed, at this stage, BANA has not yet been able to confirm that BANA is the correct repository and/or entity for the information sought. The information sought is expected to take significant time to identify and retrieve, let alone review with an eye for production. 

The objections on confidentiality and costs are very valid and may force Judge Swain to establish procedures for payment and even for notice of the clients subject to the search to see if they want to object. This will further delay proceedings, which may be the reason for the filing of the motion, i.e., to bolster the tolling request by the Board to the SCOTUS. Speaking of said motion, the oppositions began. Andalusian Global Designated Activity Company and others, all ERS bondholders, represented by Jones Day’s Bruce Bennett stated in their opposition:

It has been over twenty-two months since the Board commenced Title III proceedings on behalf of ERS. The Board has therefore nearly exhausted the two-year period that Congress provided for the commencement of avoidance actions under the Bankruptcy Code. See 11 U.S.C. § 546(a); see also 48 U.S.C. §2161(a) (rendering § 546 applicable to Title III proceedings). In all this time, the Board has done essentially nothing to investigate or pursue possible avoidance actions against holders of ERS Bonds. In fact, the Board admits it has not even determined what information it needs to identify the historic owners of ERS Bonds, much less begun the process of obtaining that information. See Motion ¶ 48.

 The sole avoidance action against ERS Bondholders that the Board addresses in its motion is based on the argument that ERS’s issuance of its ERS Bonds was an ultra vires act. Yet the Board’s extreme delay in raising this claim is not because the Board only just learned of this theory. In fact—while the Board emphasizes that the Unsecured Creditors Committee (the “Committee”) only recently filed a claim objection to the ERS Bonds on this basis—the Board fails to inform the Court that this very ultra vires argument was first raised and briefed in November 2017 in two adversary proceedings to which the Board itself is a party. Yet the Board inexplicably did nothing in the intervening seventeen months to investigate this argument or pursue related avoidance actions.

You may remember on my last entry on April 1, I mentioned the several motions by the UCC requesting discovery on these issues and time and again the Board and the Court said stop. What will Judge Swain will do is anyone’s guess but there is clear evidence of the Board’s lack of interest in these actions. If Judge Swain agrees to the extension, as I believe she will, then those affected will have to wait to a case being filed against them, or at best, an appeal to the First Circuit, which has not been kind to her rulings.

All this has other implications. It seems the Trump administration is poised, sometime, to re-nominate present Board members to a three-year term. Should the President do this given the Board’s lack of interest in the Commonwealth’s causes of action? Can Democrats and leaders like Chairman Raul Grijalva support the current Board if they have ignored suing BPPR and Santander, among other banks, for their involvement in Puerto Rico’s debt? After all, Chairman Carrión and Carlos Garcia benefited from the actions of their respective banks. This is not me speaking, the UCC since early summer of 2017 has been insisting in conducting discovery on these issues but has stymied by the Board and the Court. Has the Board shown any respect to the “the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act” as per section 201(b)(1)(N) of PROMESA? Has it instituted the structural changes that Puerto Rico needs as per sections 201(b)(1)(F) and 405(m)(4) of PROMESA? We must remember that it has failed to define essential services, which is the first step in ensuring “the funding of essential public services” as per section 201(b)(1)(B) of PROMESA? Any observer of the Board’s acts and omissions would have to say no. As of today, 31 days remain of the 90-day period provided by the First Circuit. What will happen is anyone’s guess.

The Ad Hoc Group of GO Bondholders filed a limited objection to Mr. Peter Hein’s request for an official Committee for GO’s. The motion states:

In the GO Group’s view, Mr. Hein’s alternative request—for the appointment of a committee comprising both small and large holders of GO Bonds—would more appropriately address the important concerns he has identified than would the appointment of a committee representing only bondholders with more modest holdings. As a matter of statute, the ordinary approach for formation of official committees is that the largest claimholders are selected as members. Legally, the claims of small and large GO Bondholders are the same. Moreover, a more broadly defined membership would help to ensure that the new committee possesses a diversity of perspectives and should also allow the committee to take advantage of the expertise that larger holders of GO Bonds have developed over the course of this matter. Indeed, Mr. Hein himself implicitly acknowledges the value of that expertise by noting (Memo. 7) that any new official committee “should coordinate with the efforts of major holders and their ad hoc committees.”

 Mr. Hein’s Motion is premised on the assumption that a “commonality of interests” among all GO Bondholders should lead them to vigorously resist efforts to invalidate their claims. Memo. 7. Recent experience, however, suggests that this assumption may be mistaken. For some GO Bondholders, with holdings weighted toward unchallenged GO Bonds, a shortsighted pursuit of a more favorable recovery may lead them to join with the Oversight Board and the UCC in their meritless attempt to jettison the Commonwealth’s binding commitments to (certain of) its bondholders. The GO Group therefore respectfully submits that the membership of any official committee representing GO Bondholders should be limited to those individuals and institutions with holdings of GO Bonds weighted toward the series of GO Bonds that the Oversight Board and UCC have targeted for invalidation—either expressly or implicitly. While some modest degree of cross-holdings should be permitted, the U.S. Trustee should be directed to ensure that the committee’s membership is consistent with its mission of facilitating GO Bondholders’ defense to the Selective Claim Objection. (Bold added)

The Board opposed the Hein motion and stated:

First, consistent with the Court’s findings attendant to prior requests, adequate representation of the interests of GO Bondholders, as defined below, is provided through the zealous representation of GO Bondholders by ad hoc groups formed over the past two years. Second, appointment to the UCC would disrupt the Title III process and present a direct conflict. Specifically, as the UCC is party to the GO Related Objection, as defined below, having GO Bondholders seated on the UCC would generate internal conflicts and cause paralysis.

 The UCC also filed an opposition for similar reasons. As I have said in the past, I doubt Judge Swain will appoint such a Committee but it is important to note the mention of “a shortsighted pursuit of a more favorable recovery” in the Ad Hoc Group which is a clear reference to the newly formed Lawful Constitutional Debt Coalition, which (more on this latter) has thrown the gauntlet to challenge the 2012 and 2014 GO bonds. Since the Lawful Constitutional Debt group is represented by the same firm which successfully negotiated the Senior COFINA deal, one has to wonder if their stance in the GO litigation has to do with that advantageous deal.

In a motion that passed without notice by the local press, the Puerto Rico Funds, bondholders of ERS, filed a motion to vacate the appointment of the Official Committee of Unsecured Creditors in the Employees Retirement System of the Government of the Commonwealth of Puerto Rico Title III case. The reasons is alleged conflict of interests:

By design, the Post-Petition Legislation effectively turned the Commonwealth into ERS’s creditor. The UCC’s members are almost exclusively composed of unsecured creditors of the Commonwealth, and none are creditors of ERS. This creates a real and impermissible conflict of interest because the UCC cannot properly represent both ERS creditors and Commonwealth creditors at the same time—as the assets and future income ERS would use to pay its creditors were stripped and sent to the Commonwealth, which will use those same assets to pay its own creditors. As such, each member of the UCC has a significant conflict of interest with the unsecured creditors of ERS, whose interests the UCC is charged to represent.

 To make matters worse, the UCC does not adequately represent ERS unsecured creditors because not a single UCC member filed a claim against ERS. Moreover, the ERS unsecured creditors, consisting of a significant amount of retirees and pensioners, already have adequate representation through the statutory Retiree Committee (defined below), making the UCC duplicative and unnecessary for the ERS case. For these reasons and as set forth herein, the Court should vacate the appointment of the UCC as the creditors’ committee in the ERS case.

This motion shows the high stakes in the ERS bond litigation. The UCC is challenging these bonds as illegally issued and the PR Funds is going against the legitimacy of the UCC as to ERS. Although the motion has merit, we have to examine the UCC’s response and in any event, I doubt Judge Swain would grant this motion.

The PR Funds also filed a limited objection to the “Motion of Official Committee of Unsecured Creditors, Under Bankruptcy Code Sections 105(a) and 502 and Bankruptcy Rule 3007, Establishing Procedures with respect to Objections to Claims Asserted by Holders of Bonds Issued by Employees Retirement System of Government of Puerto Rico and Requesting Related Relief.” The motion requests the Court hold in abeyance the UCC’s motion until it decides the vacatur motion as to the Committee. Again, procedural tactics in this high stakes litigation.

Ambac filed its position as to the objections to claims filed by the Board and the UCC. It argues that the PBA leases are true leases, not disguised financings but believes the bonds should be included in the constitutional debt limit calculation. The motion, however, reserves Ambac’s right to settle claims while at the same time it claims the Board and the UCC “are motivated by different interests and objectives in the Title III cases. In particular, they may have different views on whether, and on what terms, to compromise or dismiss the GO Claim Objection.” In a similar vein, the Lawful Constitutional Debt Coalition filed its position also stating that PBA bonds are valid leases but that they must be included in the debt ceiling calculation. The Coalition also states that the 2012 and 2014 GO bonds are invalid but deviates from the Board and UCC position by saying “[w]hether or not such GO bonds and guarantees have any allowable claim, they clearly are not entitled to any lawful priority under Commonwealth law.” At footnote 19, it also states “The LCDC submits that any dispute concerning the appropriate remedy, if any, for holders of unlawful 2012 and 2014 GO bonds and guarantees should be deferred until the appropriate court determines the proper construction of the Commonwealth Constitution-a pure question of Commonwealth law.” (bold added, more on this later)

The Coalition also filed an objection to the Ad Hoc GO’s request for procedures (docket 6104), and state:

By the Conditional Procedures Motion, the GO Group asks the Court and hundreds of creditors to undertake an unnecessary months-long process for litigating its Conditional PBA Claims Objection, an objection that seems more interested in influencing public opinion than presenting a justiciable case or controversy.

The Coalition wants the litigation to be divided in two, to wit, (a) litigation involving the interpretation of the Constitutional debt limit and (b) a determination of what remedies, if any, that holders of the 2012 and 2014 may have against the Commonwealth. Interestingly, at footnote 18 of this motion, the Coalition states that during the first phase “parties may wish to move the Court to certify the issue of the interpretation of the Puerto Rico Constitution to the Supreme Court of Puerto Rico. If so, the Court may consider whether certification is warranted and appropriate under the circumstances.” (bold added) What does this mean? Two things, as I have argued, the invalidation of GO bonds does not mean there is no debt as per the Puerto Rico Civil Code. Second, the Coalition is giving notice that, as I have mentioned in the past, the Board and UCC objections to the GO’s is purely a Commonwealth law dispute. The attorneys for the Coalition were the same attorneys who joined Bettina Whyte in requesting that the District Court certify to Puerto Rico Supreme Court several issues (see, COFINA docket 332). Hence, we will soon see a motion to certify the questions to the Puerto Rico Supreme Court, which has merit but would deprive the District Court of control over this important litigation. Food for thought.

The Coalition also objected to the Board’s motion to toll the statute of limitations, calling it “inappropriate, unjustified and ill-timed.” The motion argues that the tolling must be used sparingly, that the Board has not “undertaken the requisite due diligence necessary for invoking” the doctrine and that it “has not identified any ‘extraordinary circumstance” beyond its control that made it impossible to filed the Challenged Bond Avoidance Actions.” The QTCB Noteholder Group filed a motion for reservation of rights as to the tolling, agreeing to a six-month tolling but not to any further extension.

The Commonwealth and HTA had agreed to extend time to file avoidance claims but FGIC filed a limited objection. It believes that HTA has avoidance claims against the Commonwealth and wants to be part of the stipulation. The Board said no and hence the objection. The UCC also filed an objection and said:

The Stipulation—which the Oversight Board negotiated and filed without consulting at all with, or even providing advance notice to, the Committee—tolls the time in which avoidance actions must be brought by the Commonwealth against the HTA, or vice versa. That aspect of the Stipulation is obviously not problematic. Critically, however, the Stipulation also allows the Commonwealth or the HTA—but only the Commonwealth or the HTA—to terminate, or indefinitely extend, the tolling period, including the No Suit Provision. Moreover, the Stipulation provides that it is binding on “any trustee which may be appointed pursuant to section 926 of the Bankruptcy Code.” In other words, while ostensibly engaging in a meet and confer process with the Committee as required by the Procedures Order, the Oversight Board was simultaneously agreeing to a Stipulation that effects exactly the result the Committee, in those same negotiations, had advised was unacceptable. . .

 At the very least, the Court should not decide whether it is appropriate to approve a Stipulation that binds a Section 926 Trustee and allows the Debtors and/or the Oversight Board to indefinitely extend a tolling agreement until there is clarity as to how the section 926 process will unfold and whether, as stated in the Joint Motion, the Committee and the Oversight Board are able to reach a consensual resolution obviating the need for any Section 926 Motion.

The section 926 issue is important. The UCC has informed the Court it may ask to be appointed as trustee under said section to pursue actions that the Board may not want to take. The Committee asked for an extension until today to file such a motion. This undoubtedly will bring conflict with the Board.

In PREPA, the Board and some monolines agreed to further extend the time for the lift stay hearing, having come to certain agreements but Syncora and National objected. Judge Swain extended the period since she prefers everything to be settled, as every judge I know prefers. The hearing, if actually undertaken, is set for May 29, 2019. Another issue to be presented to the SCOTUS when the Board requests a stay on the First Circuit Aurelius decision.

Also, PREPA bondholders filed an urgent motion objecting a privilege log and lack of timely production of documents and seeking “for an immediate status conference, to take place on Friday, April 12, 2019, or on the earliest other date and time that the Court can reasonably accommodate.” Obviously, the Board opposed the motion. Finally, PR Senate Bill 1121 was signed by the Governor, the public energy policy. As an example, we will have 40% renewable energy by 2025. If you believe that one, I have a little bridge in Brooklyn you can buy.

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.