Monday Update – February 11, 2019

Welcome to your weekly Title III update for February 11, 2019.  

On February 4, 2019, Judge Swain approved the COFINA plan of adjustment and later filed an amended order. After the Board made it clear that the rejection of the plan of adjustment would lead to no deal, Judge Swain ran roughshod over all the objections filed by different bondholders and politicians. As a result, COFINA is the owner of part of the SUT and these funds are not “available resources” for payment of other public debt. One has to congratulate the legal representation of the COFINA Seniors Coalition who are the big winners here. Not only do they get less than 7% haircut, but they get some of the attorney’s fees back for their work.

Judge Swain’s rational for the deal can be seen at paragraph 171, page 74 of the order:

Confirmation of the Plan demonstrates that Puerto Rico is taking the steps necessary to enable its return to the capital markets. The restructuring of the COFINA debt under Title III of PROMESA is expected to act as a catalyst for other restructurings, setting the stage for Puerto Rico’s emergence from bankruptcy and reducing costly litigation.

In other words, one deal done and the rest will line up. Let’s see if it happens. In addition, Judge Swain dismissed the Municipality of San Juan’s belated effort to file a brief of amicus curiae by saying at footnote 10:

Because the arguments untimely raised in the proffered amicus brief will not provide “supplementing assistance” to existing counsel, and because the Autonomous Municipality of San Juan has not established that it has a “special interest in this case” that justifies the filing of an amicus brief at this juncture, the San Juan Motion is hereby denied.

In a similar fashion, Judge Swain dismissed the PDP senate minority objections by saying at footnote 14:

Additionally, in its amicus brief, the PDP argues that the New Bond Legislation impermissibly restricts the ability of a successor Legislative Assembly to exercise its exclusive taxing, spending, and police powers. PDP’s position is unfounded. Although the New Bond Legislation sets forth procedures that must be met before any amendments to the New Bond Legislation can become effective, the procedures do not preclude the possibility of future alterations. The New Bond Legislation merely clarifies

the means by which the Legislative Assembly’s taxing power may be exercised in the future without impairing COFINA’s interests.

This is especially important for some of the senators saying that Judge Swain has given them leave to amend the COFINA deal in the future. Actually, former Governor García Padilla again showed his ignorance of these matters by saying that the COFINA deal was to be revisited and payments reduced. It is very clear from this footnote and the order itself, that Puerto Rico may alter the New Bond Legislation but cannot impair “COFINA’s interest.”

Also, Judge Swain dismissed VAMOS and Puerto Rican Rep. Natal’s objections by saying at footnote 14:

The VAMOS objectors argue that a pending adversary proceeding challenging the constitutionality of the New Bond Legislation must be resolved prior to confirmation of the proposed COFINA Plan. (See VAMOS Obj. at 2-6.) These objectors contend that the New Bond Legislation is unconstitutional under both the United States and Puerto Rico Constitutions because Representative Natal-Albelo was prohibited, in violation of the rules of the House of Representatives, from participating in the legislative process leading up to the House of Representatives vote on the New Bond Legislation. Plaintiffs also assert that both the original COFINA legislation and the New Bond Legislation violate the Constitution of Puerto Rico because borrowing authorized there under allegedly exceeds the limits on“public debt” set forth in Sections 2 and 7 of Article VI of the Constitution of Puerto Rico (which sections respectively limit the amount and duration of direct obligations of the Commonwealth backed by a pledge of the full faith and credit and taxing power of the Commonwealth, and provide that appropriations for a fiscal year shall not exceed total estimated revenues for the year absent the imposition of taxes to cover the shortfall). Plaintiffs’ arguments regarding an alleged violation of the rules of the Commonwealth House of Representatives are non justiciable and are therefore overruled insofar as they are raised as objections to the Plan. See Noriega Rodríguez v. Jarabo, 136D.P.R. 497 (P.R. 1994); Silva v. Hernández Agosto, 118 D.P.R. 45, 18 P.R. Offic.Trans. 55 (P.R. 1986). Furthermore, arguments regarding the Commonwealth’s “public debt” limit have been resolved as part of the 9019 Settlement Agreement between the Commonwealth and COFINA insofar as they relate to the statutory authorization of the existing COFINA bonds. The New Bond Legislation, which is presumptively valid and not facially inconsistent with the cited Puerto Rico constitutional provisions,clearly provides that Reorganized COFINA is a “corporate and political entity independent and separate from the Government of Puerto Rico,” that Plan of Adjustment Bonds shall be payable solely from COFINA Revenues, and that the “COFINA Revenues do not constitute ‘available resources’ or ‘available revenues’ of the Government of Puerto Rico as used in Section 8 of Article VI of the Puerto Rico Constitution.”

As mentioned before, Judge Swain also decided the PROSOL-Utier objection and repeated the rational at footnote 16:

The Court precluded the tender of an economist’s declaration concerning future Commonwealth finances because its proponent, PROSOL-UTIER, lacks standing as a non creditorof COFINA. (Docket Entry No. 4848 in Case No. 17-3283, January 16, 2019 Hearing Transcript, 130:8-132:11.) PROSOL-UTIER also argued that the Plan’s proponents had a burden to tender expert economic evidence. The Court finds the declaration of Brownstein, an experienced municipal finance professional who participated in the formulation of the COFINA Fiscal Plan, sufficient to carry the Plan proponents’ burden as to feasibility.

On the other hand, I do not believe the Court properly addressed the claim of violation of the Takings Clause of the Constitution. She stated:

Considering the first factor, the Court notes that the actions challenged by the objecting parties will not result in the total destruction of the value of the liens securing the existing bonds. Pursuant to the terms of the Plan, bondholders will receive substantial value in new secured bonds and, in some cases, cash. Furthermore,based upon the record before it, the Court finds that the resolution of substantial legal challenges to the structure underlying the existing COFINA bonds provides significant value to the bondholders. Second, although the proposed treatment of bondholders’ claims may interfere with certain bondholders’ subjective investment expectations, bondholders’ reasonable expectations must take account of the claims and potential claims that have been the subject of the substantial litigation that the Settlement Agreement and the Plan, which were negotiated with the assistance of the Mediation Team,propose to resolve. Third, the character of the governmental action strongly supports the Court’s conclusion that the Plan and Settlement Agreement do not result in an unconstitutional taking. The challenged proposals are not physical invasions of property by the government. Rather, the restructuring of the relationships between the Commonwealth and COFINA, and between COFINA and its bondholders, using the powers established by Congress in PROMESA is a quintessential example of a “public program adjusting the benefits and burdens of economic life to promote the common good.”

Judge Swain seems to be saying that there is no violation of the taking clause because bondholders will recover some of their bond’s value. In any event, she argues, they could have ended up recovering zero principal. With all due respect to Judge Swain, I don’t think that is the measure of whether a taking violates the Constitution. In any event, some bondholders claim they will appeal. I won’t go into details but appealing the approval of a plan of adjustment creates special problems as the General Motors case showed. Let’s see what happens.

In the PREPA receiver litigation, the Board filed a motion to compel discovery it believes is connected directly to the issue of the value of bondholders’ lien. It claims that the value of the lien is zero and hence, there is no need to provide adequate protection. The problem with this argument is that movants want a rate increase so that their lien will have value. This motion shatters the possibility I posited of the Board agreeing to the receiver but does not eliminate the possibility of negotiations to resolve the monolines’ haircut. We shall know more by the end of February when Judge Dein will deal with this.

A few months ago there was mention of a Federal overseer of aid to Puerto Rico. This idea has been revived after the Resident Commissioner visited acting Chief of Staff Mick Mulvaney at the White House. It is being called a Federal Coordinator of federal funds. The Resident Commissioner is ok with the idea but Governor Rosselló, as usual, opposes any challenge to what he perceives as his authority. It is interesting to note that there is no mention of using the Board for this purpose. Also, there are rumors of disagreement between the Board and the Commonwealth on the definition of essential services. Given that the Board wants to file a plan of adjustment for the Commonwealth sometime this year, this is an important undertaking. I bet the Board wants to cut around 30% of employees or furlough them and the Commonwealth insists that each and every one of them is indispensable. Dying to find out.  

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.