Welcome to your weekly Title III update for April 8, 2019. This was a busy week.

On Monday, April 1, 2019, Judge Dein listened to arguments on discovery disputes in the ERS case. It seems she was not happy with the Board and its attorneys and their objections were mostly denied. Judge Dein ordered that the parties meet and resolve disputes. On Friday, April 5, a stipulation was filed by AAFAF, the Board and ERS bondholders purportedly resolving most of the disputes. This discovery dispute is part of the ERS bondholders request to be named Trustee of the agency. Difficult, but we will see.

On Tuesday, the Ad Hoc Group of General Obligation Bondholders filed a “Conditional Objection” to “Claims Filed Or Asserted By The Public Buildings Authority, Holders Of Public Buildings Authority Bonds, And Holders Of Certain Commonwealth General Obligation Bonds.” This objection states that the Board and UCC’s objections are wrong BUT, if they are right, they have to sue many other groups of bonds since the claims in the objection are also valid for a series of bonds. The statement is totally true and I assume was intended to put pressure on the Board to stop its actions since the statute of limitations runs out for the Commonwealth on May 2, 2019. That same day, however, the Board filed a motion requesting the equitable tolling of the statute of limitations for actions against bonds and intimated that it could included other GO, PBA, ERS, HTA bonds, among others.

The Board, quoting Pace v. DiGuglielmo, 544 U.S. 408, 418 (2005), states that “[f]or those statutes of limitation to which equitable tolling applies, a litigant who seeks tolling must establish at least two elements: (1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstances stood in his way.” The motion makes a very self-serving discourse of the Board’s actions, which is not exactly true. I explain.

On May 2, 2017, the Board authorized the Commonwealth to file for Title III protection. This means that the possibility had been considered for months before and Proskauer Rose, the Board’s attorneys, were hired on November 25, 2016. Moreover, Proskauer was not a stranger to the Commonwealth Government for it has contracts with Puerto Rico in the García Padilla administration and allegedly was the author of the Recovery Act that was invalidated by the District Court, Appellate Court and later the Supreme Court.

More importantly, as any seasoned bankruptcy lawyer knows, one of the first things you start looking into a case is what causes of action, if any, there are for in the fog of litigation, the two-year statute of limitations runs out quickly. Given this, did the Board diligently pursue the claims? Not really. As I mentioned, the Commonwealth Title III was filed on May 2, 2019. During May, June and July of 2017, not a peep from the Board on any causes of action to be filed. The first time the issue comes out is on July 21, 2017 motion, not by the Board but by the UCC, who argued that there were causes of action against, among others, Banco Popular Securities and Santander Securities and requested leave to conduct discovery via Rule 2004 of the Bankruptcy Rules.  On July 28, 2017, Santander and BPPR filed oppositions and on July 31, 2017, AAFAF also filed objections. All three argued that the Board was entrusted under PROMESA to do so, which is true BUT, there had been no attempt to do at the time. On August 3, 2017, the Board filed its opposition claiming it had the right to do so under PROMESA. On August 2, 2017, it had announced a request for proposals for the investigation, on August 8, 2017 created a special committee for said claims and on September 13, 2017, hired Kobre and Kim to conduct it. The Board’s tolling motion does not mention the UCC’s motions questioning the methods of Kobre and Kim, the lack of access to documentation, the limitations on the access to said documents and the fact that the interviews conducted were no under oath. In fact, many of the “extraordinary circumstances” claimed by the Board were foreseen by the UCC in the several motions it filed on said investigation. Seems to me that any opponent to the Board’s motion can find a lot more detail on these “circumstances” than the one’s I can recollect. In fact, the Board’s motion, at page 8, paragraph 23, states:

The Final Report [of Kobre & Kim] was not intended to identify Avoidance Actions and other potential claims the Commonwealth and its instrumentalities might hold against individuals and entities involved in the Commonwealth’s financial transactions.

In other words, the Board did nothing to look into these claims until very recently. Also, the Board’s motion is much more than an equitable tolling issue. At page 13, paragraph 34, it states that not only are the GO bonds objected to invalid and do not have to be paid, but that it will seek the clawback payment of whatever the Commonwealth gave bondholders. In other words, the Commonwealth committed fraud against the bondholders, will not pay its obligations and will get back whatever it paid. Then at page 19-20, paragraphs 52-53, the Board pontificates that defendants have had to defend these cases and having the Board sue everyone would be an undue burden on these poor souls and it would be better to toll the statute of limitations to see if the Board is successful. In other words, all those that may potentially be sued by the Board must patiently wait for the resolution of a case in which they are not involved but whose outcome will determine if they will be sued in the future. Talk about a Damocles sword.

The extension of the statute of limitations would be 90-days after the ruling on the claims objection or 90 more days to finalize the investigation on the “Challenged Board Avoidance Defendants.” Even with what I have said, there is little doubt Judge Swain will grant the Board’s request and toll said statute of limitations. What the First Circuit will say about this is anyone’s guess.

On the same vein, the HTA and Commonwealth filed a stipulation to toll the statute of limitations between them. Similar motion was filed with other instrumentalities. In an adversary proceeding of seven credit unions v. the Board and Commonwealth, 18-0028, plaintiffs requested and were granted leave to amend the complaint, which now, inter alia, claims:

After having taken plaintiffs’ capital and liquid resources through a fraudulent scheme and dereliction of its duties, the government’s lack of honesty was continued and aggravated by its failure to mitigate the risks and losses caused by it, a failure ever graver in light of the responsibilities inherent to the government’s role as financial regulator and insurer of member shares and deposits.

The claims here go back to the Fortuño administration but it is emblematic of the view many of us have of the Commonwealth’s Government. The complaint also claims that once discovery commences, they will sue “Securities firms A–Z, which acted as underwriters, underwriting syndicate member, selling group manager, selling group member, broker and/or dealer, financial advisor, or in any other capacity in relation to the Puerto Rico Debt Securities,” and “[l]aw firms and counsel who acted as advisors and/or legal representatives to defendants identified in the preceding paragraphs and/or to issuers of Puerto Rico Debt Securities, with respect to said Puerto Rico Debt Securities and/or with regards to policy actions and omissions related thereto,”  and “[a]ccounting and/or auditing firms which made audits or financial analysis or reports, or that acted in any other capacity in relation to the Puerto Rico Debt Securities, as defined hereinafter.”  The Amended Complaint also claims violations of the Act Against Organized Crime and Money Laundering of the Commonwealth of Puerto Rico, a sort of local RICO Act. Corruption galore!

Add to this President Trump’s “Rebuilding Puerto Rico Efficiently and Accountably” of April 4, 2019, that discusses Puerto Rico’s many cases of governmental corruption, both at the Commonwealth and Municipal levels. Moreover, the Grand Jury investigation on the Commonwealth’s Department of Education and purportedly also of its former Secretary, Julia Keleher, adds to the uncertainty.

This uncertainty can be seen in President Trump’s lack of urgency in sending the reappointment of the Board’s members to the Senate with only 38 days left of the 90 day stay granted by the First Circuit. When will these appointments be sent to the Senate? Will the Supreme Court issue a stay? Since the Board’s appointment expires on August 30, 2019, one can argue that even if the Supreme Court were to grant a certiorari, it would be moot once these appointments are made. On the other hand, if the SCOTUS grants the certiorari and the Senate confirms the Board, what happens to the reappointment? PROMESA requires that any Board member to be reappointed must be done in the same way he/she were originally appointed. If the SCOTUS say that the original appointments were valid, any Senate consent and advice would be contrary to PROMESA and we would have to go through the same maelstrom. Hence, it all depends on what the President and the SCOTUS will do. In any event, given that President Trump seems poised to reappoint the same members of the Board, Aurelius and Utier must change the dynamics of their message. Let’s see what happens.

A case that seems to be forgotten since it is not one in the PROMESA litigation but that is intimately related is Altair Global v. USA, before the US Court of Federal Claims, where the insurer wants the Federal Government to pay, as a taking without just compensation. The Judge assigned to the case denied the Federal Government’s request for dismissal but stayed the case until the Aurelius decision came down. Subsequent to the stay, the Judge was changed (Court of Federal Claims is not an Article III Court and hence Judges do not have the usual District Judges protection). After the Aurelius decision came down, the new Judge, issued the following order:

Accordingly, the court LIFTS the stay of proceedings and will proceed to resolve defendant’s motion to dismiss in its entirety. To facilitate its resolution, the court requests that the parties submit supplemental briefing in accordance with the schedule set forth below. The briefing shall address the following legal issues:

• Does the First Circuit’s ruling in Aurelius have any effect on the arguments advanced by the parties in their briefing and oral argument on defendant’s motion to dismiss or the rulings made by the Honorable Susan G. Braden in her July 13, 2018 Memorandum Opinion and Order? If the answer is “yes,” then what is that effect?

• Does the First Circuit’s ruling in In re The Financial Oversight and Management Board for Puerto Rico, 914 F.3d 694 (1st Cir. 2019), have any effect on the arguments advanced by the parties in their briefing and oral argument on defendant’s motion to dismiss or the rulings made by the Honorable Susan G. Braden in her July 13, 2018 Memorandum Opinion and Order? If the answer is “yes,” then what is that effect?

• Have any binding, precedential decisions issued since July 13, 2019, that would affect the arguments advanced by the parties in their briefing and oral argument on defendant’s motion to dismiss or the rulings made by the Honorable Susan G. Braden in her July 13, 2018 Memorandum Opinion and Order? If the answer is “yes,” then what are those decisions and what is their effect?

• Are there any arguments––not previously raised by the parties in their briefing and oral argument on defendant’s motion to dismiss––that the parties wish to make in support of or in opposition to defendant’s motion?

Defendant USA must file by April 29, plaintiffs by May 30 and the reply brief by June 13. This case, if won by plaintiffs, has the potential of derailing PROMESA for ever since I doubt that Congress would want to pay for any monies that Puerto Rico does not pay.

National, the Oversight Board, and Citigroup filed a stipulation in the PREPA lifting of stay for appointment of receiver case, resolving their discovery disputes, and Judge Dein denied the Board’s reconsideration of her order denying certain discovery it requested. In addition, the Board and plaintiffs requested and obtained an order from the Court moving the date for the hearing to May 15, one day before the stay expires, in order to continue settlement negotiations. I have said many times that I view this litigation as a tool by plaintiffs to obtain a better settlement than other bondholders but this could also be a way for the parties to stipulate the lifting of the stay for the appointment of a particular receiver. We will have to keep an eye on these developments since the stipulation before May 15 would be valid as per the First Circuit’s ruling, but will be strongly challenged by Utier, who insists, with good reason, that the Board’s actions are illegal.

Peter Hein, a COFINA and GO bondholder, filed a motion for the appointment of a GO bondholder official committee of holders of $2.5 million or less. Judge Swain denied without prejudice his first request, directing him to the US Trustees Office, who essentially denied his request. His point, which is not without merit, is that Puerto Rico is spending millions to invalidate bonds it issued and should pay for the representation of these bondholders. I sympathize with him but doubt that the Court would grant it given the lack of support by the US Trustees office. Again, I urge GO bondholders to unite and retain counsel.

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.