Monday Update – February 4, 2019

Welcome to your weekly Title III update for February 4, 2019.  

On January 30, 2019, Judge Swain held an Omnibus hearing in the case. During the hearing, the lawyer in charge of investigating McKinsey’s alleged conflicts of interest, Michael Lusking, reported that it would have a report ready for publication by February 18. As to PREPA, the Board reported negotiations are continuing (more on that latter) and that they will announce the winner of the distribution contract in the 3rd quarter of this year. As to the Plan of Adjustment for the Commonwealth, negotiations will be in February/March, 2019, and it may be that some legal questions will be put to the Court.

When the main event, the procedures motion on the GO challenge came about, Judge Swain had several questions to all parties and it became obvious she was not going to sign the order as proposed. On the other hand, she did say she would issue some kind of order. Later in the week, she issued an Order Regarding Submission Of Revised Proposed Order Establishing Procedures With Respect To Omnibus Objection To Claims Filed Or Asserted By Holders Of Certain Commonwealth General Obligation Bonds, where she explained how she wanted the order to read. The parties are to meet and confer within 7 days for a proposed order reflecting the guidance issued by the Court. The notices to the bondholders must be written in English and Spanish with a view to clarity as to the potential consequences of movants’ success. The parties must have 60 days from entry of the order to file the Notice of Participation, and the notice must include that if not filed on time, a party may be precluded from participating in the litigation. The suggestions by the Court include what information participants may have to provide. The order continues with other suggestions. In essence, once the order is issued, all holders of GO’s of 2012 and 2014 should hire an attorney to represent their interests. COFINA jrs. are still kicking themselves for not having intervened in the case sooner. BEWARE.

Connected to this, Assured requested leave to intervene in the UCC adversary proceeding against the PBA’s. As Mark Stancil said during the Omnibus hearing, the PBA adversary proceeding and the UCC challenge are overlapping. We will see more on this later in the month.

In regards to COFINA, Judge Swain approved the COFINA-Commonwealth settlement today but she decided that she will address the Plan of Adjustment in a separate order. Swain argued that the court was “not required to decide the numerous questions of law and fact raised by [the objectors].” Rather, its task was to determine the “reasonableness” of the settlement agreement, which Judge Swain deemed was sufficient. Since the announcement came out today, I will provide a more thorough analysis next week.

Continuing with the developments, the First Circuit in the ERS bonds case reversed Judge Swain for the fourth time. In its opinion, the First Circuit stated:

We affirm the district court’s holding that the 2008 Financing Statements did not perfect the Bondholders’ security interest in the “Pledged Property.” We determine that the Bondholders met the requirements for perfection beginning on December 17, 2015, and so reverse the district court. PROMESA’s incorporation of the Bankruptcy code does not allow for the avoidance of perfected liens, and so we vacate the district court’s holding that the Bondholders’ security interest can be avoided under PROMESA. Concerning the district court’s dismissal of the Bondholders’ second and third counterclaims with prejudice, we vacate and remand to the district court for further consideration in light of this opinion. We affirm the district court’s dismissal of the Bondholders’claim regarding the January 2017 Stipulation.

The Third Cause of action mentioned above has to do with section 928 of the Bankruptcy Code, which is the subject of another appeal not yet decided by the First Circuit and argued on November 7, 2018. In addition, this case shows that in any litigation, there are winners and losers and you can never predict on which side you will end. I have won cases I thought I was going to lose and lost cases I swore I was going to win.

As to the PREPA receiver controversy, the parties were supposed to file an amended schedule for the resolution of the case on or before January 31, but that date passed without any filing. The Board could be negotiating a haircut deal with the monolines or agreeing to some type of receiver—or both. Hopefully we will know soon.

The Puerto Rico House of Representatives amended the public policy energy bill and the Senate did not agree. Further negotiations will ensue. Also, PREPA has reported that the Integrated Resources Plan will be filed in February. Seems to me that politicians really don’t want to sell PREPA. Hopefully, it will happen irrespective of political shenanigans.

In other news, the Board ordered the Commonwealth to file a new Fiscal Plan by February 22. The letter indicates that the plan is to certify a new Fiscal Plan by April 26, 2019. Moreover, the new budget must come by June of 2019. Given that the Plan of Adjustment must conform to the Fiscal Plan, this means that the former will not be filed until either summer or fall of 2019. This will also be dependent on the outcome of the GO challenge and other legal issues now being mediated.

In a separate letter, the Board sent a detailed letter as to the budget which must include:

Additional reductions based on U.S. mainland state benchmarks for the Legislative Assembly, applying standard executive branch right-sizing targets to the State Elections Commission, as well as a reduction to WIPR’s budget reflecting its privatization by the end of the third quarter of the fiscal year.

In other words, there will be more cuts to the Legislature, the CEE and the privatization of WIPR, which is a government TV station. Some have hailed this as a way for Government employees to receive wage increases but the letter explains it will; “[t]o the extent that applying these parameters results in reductions to appropriations beyond those contemplated by the Fiscal Plan, the Oversight Board will agree to reinvest those savings in the high priority areas of Public Safety and Public Education.” Hence, the Board wants further austerity. Not sure the Government will agree and not sure what the Board will do if it does not.

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.