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. 26‐2017) 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 17‐AP‐159). 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.