Monday Update – February 18, 2019

Welcome to your weekly Title III update for February 18, 2019. This week’s news in PROMESA is dominated by the First Circuit’s reversal of Judge Swain’s opinion in the Aurelius-Utier litigation, which I discuss in a separate posting. Outside Aurelius, however, several things happened.   

On February 11, 2019, AAFAF filed a motion in the COFINA cases informing the Court of the following:

Bonistas del Patio, Inc. (“Bonistas”), is party to the Plan Support Agreement and has represented to AAFAF that it has incurred expenses in the aggregate amount of $7,000,000.00 for professional services rendered in connection with the development, negotiation, confirmation, and consummation of the Plan and the compromise and settlement of the Commonwealth-COFINA Dispute (such expenses, the “Bonistas Expenses”);

WHEREAS, Bonistas is not a Consummation Cost Party and is not a recipient of Consummation Costs under the Plan;

WHEREAS, Section 15.2 of the Plan provides that “all expenses . . . incurred . . . in connection with the development, negotiation, confirmation and consummation of the Plan and the compromise and settlement of the Commonwealth-COFINA Dispute shall be paid to the extent available from the funds distributable to the Commonwealth in accordance with the provisions of Sections 2.1 and 15.1 hereof and otherwise by the Commonwealth”;

WHEREAS, AAFAF wishes to stipulate and agree that the Bonistas Expenses are “expenses” within the meaning of Section 15.2 of the Plan and are payable by the Commonwealth on the Effective Date

Bonistas del Patio is local non-profit allegedly representing local jr. COFINA bondholders. This was the first time anyone heard of this agreement and the UCC quickly moved to oppose this “settlement,” requesting that the Court stop the stipulation pending the answer of the following questions:

 Is Bonistas contractually obligated to pay $7 million to its professionals?

 Has Bonistas made any payments to its professionals? If so, how much?

 What is the basis for the Commonwealth’s proposed $7 million payment to Bonistas?

 What consideration is the Commonwealth receiving (or has received) in exchange for making the proposed $7 million payment to Bonistas?

 Who are the ultimate recipients of the proposed $7 million payment?

 When did the Commonwealth agree to take on the obligation to pay $7 million to Bonistas?

 If such an agreement was made before February 11, 2019, why was this agreement not disclosed sooner?

Judge Swain ordered AAFAF NOT to pay the $7 million and to answer the UCC’s motion. AAFAF filed a response with a declaration by Bonistas’ attorney but did not answer the UCC’s questions, which prompted the Court to order the Committee to file a reply, which states, inter alia:

By and large, the AAFAF Response and the Declaration speak only in generalities,7 often fail to specify whether the work at issue was even connected to COFINA (or the Commonwealth-COFINA Dispute), or make other uninformative statements. Even the bullet point list in paragraph 9 of the Declaration falls short of justifying $7 million in fees and expenses—instead, again, resorting to vague and generalized descriptions of services purported provided by Bonistas and its professionals. In that regard, the claim that Bonistas needed to engage in solicitation efforts is particularly dubious given that the Commonwealth already incurred more than $25 million as a “Solicitation Fee” to certain dealer managers for their efforts in soliciting votes of COFINA bondholders. Moreover, the Committee strenuously disputes statements contained in the Declaration to the effect that Bonistas or its professionals were involved for hundreds of hours in the settlement of the Commonwealth-COFINA Dispute (which dispute dealt with the issue of which entity, as between the Commonwealth and COFINA, owned the Sales Tax). These settlement negotiations were handled by the Commonwealth Agent and the COFINA Agent, and not even the Oversight Board was involved. (Footnotes omitted)

The UCC motion also makes alarming allegations against Bonistas’ principals:

The Committee also takes issue with the entire narrative that Bonistas is a “notfor-profit” entity devoting itself pro bono for the good of the small island bondholders. While Bonistas may be, as a technical matter, a non-for-profit corporation, the two main principals of Bonistas, Mr. Rafael Rojo (President of Bonistas) and Mr. Jorge Irizzary (Executive Director of Bonistas), are not mere by-standers in these cases. Mr. Irizzary is a former president of the Government Development Bank for Puerto Rico (“GDB”) and a holder of Puerto Rico bonds. Furthermore, Mr. Rafael Rojo, also a holder of Puerto Rico bonds, has had dealings with the Government of Puerto Rico during these Title III cases. According to a published report (which quotes Mr. Rojo),  in November 2018, Mr. Rojo purchased, through one of his investment vehicles, a 90-acre property (known as the Río Bayamón Community) for $12 million from GDB—a property that, as recently as 2017, had been appraised at $19.6 million. This transaction closed on November 16, 2018, i.e., only a few days after this Court approved GDB’s Qualifying Modification. It is therefore clear that, while he was purportedly negotiating a resolution of the COFINA issues on behalf of on-island bondholders, he was also negotiating with GDB to close a transaction for his own pecuniary gain. What is not clear is what other involvements these two gentlemen may have in these Title III cases.

Unless this is properly explained, these allegations are serious and the UCC should be commended for bringing forth this information. And as the UCC pointed out in its February 12 motion, Bonistas has not complied with Bankruptcy Rule 2019 which requires the disclosure of the following:

(c) Information Required. The verified statement shall include:

(1) the pertinent facts and circumstances concerning:

(A) with respect to a group or committee, other than a committee appointed under § 1102 or § 1114 of the Code, the formation of the group or committee, including the name of each entity at whose instance the group or committee was formed or for whom the group or committee has agreed to act; or

(B) with respect to an entity, the employment of the entity, including the name of each creditor or equity security holder at whose instance the employment was arranged;

(2) if not disclosed under subdivision (c)(1), with respect to an entity, and with respect to each member of a group or committee:

(A) name and address;

(B) the nature and amount of each disclosable economic interest held in relation to the debtor as of the date the entity was employed or the group or committee was formed; and

(C) with respect to each member of a group or committee that claims to represent any entity in addition to the members of the group or committee, other than a committee appointed under § 1102 or § 1114 of the Code, the date of acquisition by quarter and year of each disclosable economic interest, unless acquired more than one year before the petition was filed;

(3) if not disclosed under subdivision (c)(1) or (c)(2), with respect to each creditor or equity security holder represented by an entity, group, or committee, other than a committee appointed under § 1102 or § 1114 of the Code:

(A) name and address; and

(B) the nature and amount of each disclosable economic interest held in relation to the debtor as of the date of the statement; and

(4) a copy of the instrument, if any, authorizing the entity, group, or committee to act on behalf of creditors or equity security holders.

Now that the Board has only 90 days to exist as presently formed, can Bonistas provide this information in such a time?

After the UCC filing, Judge Swain issued an order stating:

The Official Committee of Unsecured Creditors (the “UCC”) and AAFAF are hereby directed to meet and confer and to file a joint status report by February 21, 2019 at 5:00 p.m. (Atlantic Standard Time). Unless the UCC’s objections have been resolved, the joint status report must address whether both parties consent to the proposed March 13, 2019 hearing date, as well as the parties’ positions as to the requests for discovery and an appropriate timetable for any discovery. AAFAF shall also file a further separate brief by the same deadline regarding its positions on the contracting issues raised by the UCC if those issues have not been resolved consensually.

It is obvious from the order that Judge Swain understands there is prima facie validity to the UCC’s objections and is warning of this becoming a contested matter to be discussed during the March 13 hearing. We must stay tuned to this one.

The Board filed an adversary proceeding against the Senate to obtain information on its bank accounts. It attempted to do it via letter, but  President Rivera Schatz flatly refused the request by saying the Board was exceeding its bounds. The status of this proceeding is somewhat in the air due to the Aurelius decision.

Last week I reported that the Board was seeking discovery on certain information held by the monolines having to do, inter alia, with its reserves of funds due to the PREPA Title III. Assured and others filed an opposition saying the information is protected by privilege, including Bank Examiner Privilege and Confidentiality Statues. I believe this is protected and there will be a hearing before Magistrate Judge Dein on February 26. Will try to attend.

Finally, Judge Swain approved the Urgent Motion of (i) Financial Oversight and Management Board, Acting Through its Special Claims Committee, and (ii) Official Committee of Unsecured Creditors for Entry of Order, Under Sections 105(a) and 502 of the Bankruptcy Code, Bankruptcy Rule 3007, and Sections 301(a) and 310 of PROMESA, Establishing Procedures with Respect to Omnibus Objection to Claims Filed or Asserted by Holders of Certain Commonwealth General Obligation Bonds and Requesting Related Relief, having to do with the notice to GO bondholders. It is very detailed and not a bad order. Now with the Aurelius decision, the Special Claims Committee of the Board, comprised of Mr. Skeel, Ms. Matosantos and former Judge González is compromised and can only operate for 90 days. Moreover, the statute of limitations for filing claims such as the GO’s challenge expires in May 2019. Will there be enough time to do everything that needs to be done? Questions, questions.

As to the GO and PBA controversy, I strongly urge bondholders to retain counsel for this may end your right to payment. Remember what happened in COFINA. Band together and fight for your rights.

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.