Monday Update – August 27, 2018

Welcome to your weekly Title III update for August 27, 2018. Important things came about inside and outside the case.

Unbeknownst to most of us, the GDB and AAFAF filed case, 18-1561, on August 10, 2018 for the approval of its RSA on the agency’s debts. The case was not filed in the PROMESA docket but rather in the Puerto Rico Federal District Court and was assigned to Judge Swain. What is surprising is the number of entities that notified the Court their intention of objecting to the agreement. The Federal Government, Siemens Transportation, Fundación Biblioteca Rafael Hernández Colón, Bank of New York Mellon, Fidelity & Deposit Co. of Maryland, Zurich American Insurance Company, National Public Finance Guarantee Corporations, Adsuar, Muñoz, Goyco, Seda & Pérez-Ochoa and the Unsecured Creditors Committee, all filed a notice of intent to object to the agreement. In addition, Ambac reserved its rights to file a notice as well.

The UCC took it up a notch and filed in the Commonwealth Title III case an Urgent Motion Of Official Committee Of Unsecured Creditors, Pursuant To Bankruptcy Code Sections 105(A) And 362, For Entry Of Order Enforcing Automatic Stay And Court’s June 29, 2017 Order Confirming Application Of Automatic Stay With Respect To GDB Restructuring.” In this motion, the UCC argues, with good reason, the following:

Indeed, current and former GDB insiders are now (i) board members of the Oversight Board, (ii) officers of AAFAF, (iii) managing directors of AAFAF’s financial advisor, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called “Bonistas Del Patio”)

These individuals would prefer that this Court “bury” GDB before the Committee and other interested parties have the opportunity to perform the autopsy. To that end, GDB commenced a judicial proceeding that is premised on multiple violations of the Title III automatic stay. That judicial proceeding – the GDB Restructuring – proposes, among other things, to (a) offset the public funds deposited with GDB by the Title III Debtors against GDB’s alleged outstanding loans to the Title III Debtors, (b) transfer all of the valuable assets at GDB (much of which consists of deposits of public funds held in trust or in a fiduciary capacity) to the Recovery Authority (as defined below) for the exclusive benefit of GDB’s bondholders, (c) release GDB and its current and former directors, officers and other representatives from any claims that could be brought against them by the Title III Debtors, and (d) burden the Commonwealth with the obligation to repay hundreds of millions of dollars on account of federal funds deposited with GDB.

The UCC believes the Title III debtors may have causes of action against the GDB and that other third parties may have claims against it as well. Moreover, the Kobre report seems to support this idea. In essence, the motion requests:

[T]he entry of the Proposed Order, substantially in the form attached hereto, pursuant to sections 105(a) and 362(a), enforcing the automatic stay against GDB and AAFAF by declaring that (a) the GDB Restructuring violates the automatic stay under section 362 of the Bankruptcy Code and the Stay Order, (b) any limitations on claims that have been or may be asserted by the Title III Debtors against GDB or related third-parties are void, and (c) any transfer or “shielding” of assets pursuant to the GDB Restructuring that could have been used, prior to the implementation of the GDB Restructuring, to satisfy claims of the Title III Debtors by GDB, is void.

Given that so many parties have notified their intent to object to the Title VI agreement, including the UCC and the Federal Government, the hearing may not be on November 7 after all. If this Title VI agreement does not garner sufficient votes or if the Court were to agree with some of the objections, the GDB may join other Title III agencies. Hard to tell at this stage. In any event, the UCC, in concurrence with AAFAF and the Board, asked for an order that any objections be filed by August 29 and reply by September 6. This would leave the issue ripe for adjudication during the September 13 Omnibus.

On Monday, the Board presented the Independent Investigator’s Final Investigative Report, consisting only of 608 pages. Coincidently, I was trying a case last week that ended in a favorable jury verdict for my clients on Thursday. Coincidently, the trial was a fraud claim against a pair of swindlers involving several contracts. On Friday, I read the Executive Summary and the 97 page “Overview of Potential Causes of Action,” many having to do with the claim of fraud. Aside from the fact that this report says everything went wrong but no one is at fault, I was appalled at the incorrect statements of the law in the report. For example, at page 494 of the Report, it states, “Both Puerto Rico and New York impose statutes of limitation on intentional fraud and misrepresentation claims. In Puerto Rico, the applicable statute of limitations is one year from when the plaintiff becomes aware of the injury and the party that caused it.” Footnote 117 states, “Ocaso, S.A., Compania De Seguros Y Reaseguros v. Puerto Rico Mar. Shipping Auth., 915 F. Supp. 1244, 1258 (D.P.R. 1996) (statute of limitations for fraudulent misrepresentation same as tort—one year).” That, however, is not what the case states. At page 1258, the case states:

All actions which result in injuries arise from two categories of conduct: (1) the failure to abide by a pact or (2) an activity separate from any previous legal relationship between the wrongdoer and the victim. Ricardo de Angel Yágüez, La Responsabilidad Civil 21 (1988). In the first instance, the duty to indemnify arises from another duty, the duty to comply with obligations engendered by a contract which has been infringed upon, that is, a contractual responsibility. Id. at 22. In the second scenario, the obligation to indemnify arises by the mere fact of having caused damages because the wrongdoer has infringed upon the general norms of respect towards others imposed by society, i.e. civil responsibility. Id.

In contract infringement cases a previously existing relationship between the parties is present whereas in torts, the duty to plaintiff commences at the time of the injury. Jaime Santos-Briz, Derecho de Daños 13-14 (1963).

Consonant with this line of reasoning, we conclude that the conduct charged in the FIRST CAUSE OF ACTION of the complaint must fall within the torts ambit since any liability arising from the alleged misrepresentation is not premised on any contractual obligations the contract had not yet materialized but on a general obligation to negotiate in good faith. IV-II José Ramón Vélez Torres, Curso de Derecho Civil 61-67. The obligation to negotiate in good faith is based on a general duty pervading in society whereas objective responsibility is limited to those situations expressly identified in a statute. 64-65.

Moreover, fraud or deceit as the Puerto Rico Civil Code calls it in English, may occur at the onset of the obligation or during the performance of the obligation, see, Pérez Rosa v. Morales Rosado, 172 D.P.R. 216, 229 (2007). Moreover, if we are dealing with bonds, the Puerto Rico Uniform Securities law has a two-year statute of limitations, not one year, nor fifteen years as for other contractual obligations in the Civil Code, see, Olivella Zalduondo v. Seguros de Servicios de Salud de Puerto Rico, Inc., 2013 TSPR 2 and PaineWebber, Inc. v. First Boston, Inc., 136 D.P.R. 541 (1994). Moreover, in cases of malpractice, although there may be a contract between the parties, the statute of limitations is one year, see, Colon v. Geigel, 115 D.P.R. 232 (1984)(legal malpractice).

Although the document clearly says not to rely on its legal assessment, it is obvious the Investigator did not do its job and relied instead on only reading the notes of federal cases, not the actual Puerto Rico Supreme Court cases. In any event, it is to be seen what actions, if any, the Board will take with respect to the report. Finally, at page 27, the Report states:

In keeping with the structure and spirit of the Investigative Subpoenas Resolution, we attempted first to interview all witnesses voluntarily, with the aim of seeking testimony under oath only if voluntary interviews were refused, or if any specific circumstances warranted testimony under oath. Further, in consultation with the Special Investigation Committee, we determined that it would be sufficient for the specific purposes and goals of the investigation, as outlined in PROMESA, for us to formulate our conclusions and recommendations on statements made by witnesses substantiated, wherever possible, by documentary evidence. For those reasons, and because the Independent Investigator conducted a voluntary interview with each individual and entity witness for which an interview was sought, we did not take testimony under oath, nor were the interviews transcribed.

In other words, the Board told the Investigator that if the witnesses came voluntarily, they would not be under oath and therefore they could lie to their hearts content. Moreover, if there is no transcript of the interview, unless they were recorded, it becomes you said/he said. UNBELIEVABLE!

In other news, the Board sent its favorite whipping boy, the Legislature, a letter requiring the following:

 (1) A point of contact for all relevant matters at the Legislative Assembly;

(2) A monthly cash and liquidity report;

(3) A monthly budget to actual report;

(4) A monthly report of employee attendance;

(5) A monthly reconciliation of bank account balances.

Both Thomas Rivera Schatz and Johnny Méndez roared that they would not obey. How dare the Board request that they show their attendance record (which the Board did not require). The Board said it would do everything in its powers to obtain the information. Again a legal confrontation that will be paid by the Puerto Rico taxpayers.

In addition, Mr. Christian Sobrino from AAFAF said the Commonwealth would not provide the information the Board requested on the tax agreements since 2017. Probably another confrontation paid by taxpayers. And, speaking of legal confrontations, the Commonwealth and the Board informed the Court they were close to an agreement which would allow the Commonwealth to dismiss the rest of its case over the Fiscal Plan so there could be a final judgment and it could appeal Judge Swain’s decision. Important that the Board stated it would otherwise oppose any interlocutory appeal.

The Board also sent the Commonwealth a letter requiring that a new Fiscal Plan for COFINA be presented, all in preparation to the possible filing of the corporation’s Plan of Adjustment. Moreover, the Government filed a new Fiscal Plan for the Commonwealth, reducing the amount of money available for debt service, although its share of the SUT will increase. Who understands the Government’s logic?

Finally, the Board recommended to the Commonwealth that it rescind the Executive Order Governor Rosselló issued increasing the minimum wage for workers in the construction industry from $7.25 to $15. Although the Board quoted that the median construction wage in the US was $8.69 and gave the Governor 90-days to answer, he immediately rejected the recommendation. Another legal confrontation that will be paid by the Puerto Rico taxpayers.

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.