Welcome to your weekly Title III update for January 14, 2019. This week all eyes are on the COFINA confirmation hearing on January 16 and 17. The future of the COFINA settlement and the COFINA Title III, hang on the balance.
The Board has the burden of proof as to the Plan of Adjustment. Confirmation of the plan is not regulated by the Bankruptcy Code but rather by section 314(b) of PROMESA, which states:
CONFIRMATION.—The court shall confirm the plan if—
(1) the plan complies with the provisions of title 11 of the United States Code, made applicable to a case under this title by section 301 of this Act;
(2) the plan complies with the provisions of this title;
(3) the debtor is not prohibited by law from taking any action necessary to carry out the plan;
(4) except to the extent that the holder of a particular claim has agreed to a different treatment of such claim,the plan provides that on the effective date of the plan each holder of a claim of a kind specified in 507(a)(2) of title 11, United States Code, will receive on account of such claim cash equal to the allowed amount of such claim;
(5) any legislative, regulatory, or electoral approval necessary under applicable law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval;
(6) the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan; and
(7) the plan is consistent with the applicable Fiscal Plan certified by the Oversight Board under title II.
These requirements mirror those of 11 U.S.C. sec. 943(b) except for 6 and 7.
PROMESA, however, adds a twist to this. The feasibility of the plan, which usually is limited to whether the municipality may fund the changes it has made, added a twist not found in the bankruptcy law, to wit, “whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” The Board’s position has been that the Court has only to look at said law—not give it any weight—but it has not put forward any precedent or legislative history to back this up. If one were to interpret it as written, the Court would have to consider whether creditors would be better off going to the state and federal courts instead of a bankruptcy like procedure.
In addition, the plan must comply with 11 U.S.C. sections 1129(b)(1), 1129(b)(2(A) and 1129(b)(2)(B), which state:
(1) Notwithstanding section 510(a)of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
(2)For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(A)With respect to a class of secured claims, the plan provides—
(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;
(ii) for the sale, subject to section 363(k)of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or
(iii) for the realization by such holders of the indubitable equivalent of such claims.
(B) With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan,equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.
Not only are these requirements difficult to achieve, but section 1129(a)(3) requires that the Plan of Adjustment be filed in “good faith and not by any means forbidden by law.” The case law on this is extensive and contradictory and cannot be discussed in this brief analysis. The same can be said of the requirement that the Plan of Adjustment be fair and equitable.
To date,there are 9 objectors to the Plan of Adjustment and they will be given a chance to argue their objections. In addition, the Board filed a motion stating that it will cross examine Dr. Alameda, Utier’s expert witness. On Saturday, the Board filed declarations by Ms. Jaresko and Mr. Brownstein from Citi. Objectors have until Monday to notice whether they are going to cross examine them. I don’t know what they will do but I would definitely do it. I must note that Mr.Brownstein’s declaration states as to the objection that subordinate bondholders were not present during mediation:
I understand that Assured, an insurer of approximately $274 million in “First Subordinate”Existing Securities, is aligned with the economic interest of the holders of“First Subordinate” Existing Securities and has no exposure, either through insurance coverage or beneficial ownership, to “Senior” Existing Securities. I am aware that Assured participated fully in litigation from the perspective of“First Subordinate” Existing Securities. Assured participated in Plan mediation and was a party to the A&R Plan Support Agreement.12 Additionally, retail COFINA bondholders were represented throughout the process by retail or mutual funds, representing the interests of mainland and “on-island” bondholders, and Bonistas, advocating for the interests of Puerto Rico resident bondholders, all signatories to the A&R Plan Support Agreement that included terms for the treatment of the holders of “Senior” and “First Subordinate” Existing Securities to settle the issues of the relative rights between such holders. This settlement was also subsequently incorporated into the Plan.
Although by no means is the Plan of Adjustment approved, it is clearly a done deal. Judge Swain already ordered the following:
In connection with the hearing to consider approval of the Third Amended Title III Plan of Adjustment of Puerto Rico Sales Tax Financing Corporation (Docket Entry No.4652 in Case No. 17-3283, and as may be further amended), counsel to the Financial Oversight and Management Board for Puerto Rico is hereby directed to file the form of proposed order, findings of fact and conclusions of law by Monday, January 14 at 3:00 p.m. (Atlantic Standard Time).
Enough said.
With the COFINA Plan of adjustment approved, it will make all other deals much easier to accomplish. Moreover, the Board filed an Omnibus answer to all objections, just 84 pages, where it provides Judge Swain with sufficient legal cover to approve the deal. I don’t agree with some of the Board’s arguments but without a doubt they are “plausible.” Also, the alternative to confirming the plan is the dismissal of the Title III via 11 U.S.C. § 930. Food for thought.
WARNING: Anyone thinking of appealing said approval of the COFINA Plan of Adjustment should be very familiar with the doctrine of Equitable Mootness.
As I mentioned last week, on January 7, 2019, at 9:30 am, the First Circuit held oral arguments on Altair Global Credit Opportunities Fund (A), LLC, et al. v. The Employees Retirement System as to liens. I listened to the oral argument and it seems Altair has the advantage, but not by much. If there is a reversal, it will be with specific instructions for findings. As to the Aurelius decision, it has not been announced yet, but the First Circuit states in its website that the Federal Court system has enough money to operate regularly until January 18, 2019. Hopefully, the decision will come out before that date but we don’t know. It would be stunning if it came out before the January 16th hearing, especially if it reverses Judge Swain and there is a stay of proceedings. The waiting continues.
In the PREPA Title III, the Puerto Rico Central Recovery and Reconstruction Office and the Puerto Rico Public Private Partnership Authority retained Cleary Gottlieb Steen & Hamilton, LLP (the previous Governor’s law firm) “to provide legal representation in connection with the above-captioned case now pending before the United States District Court for the District of Puerto Rico.” Does this mean that the PREPA sale will accelerate?
After Mr. Bienestock dropped the bomb that the Commonwealth Plan of Adjustment would probably be handled as a “cram down,” I decided to do some research on Board members publications and found that David Skeel has published Reflections on Two years of P.R.O.M.E.S.A.,87 Revista Jurídica de la Universidad de Puerto Rico 862-883, num 3 (2018). At page 880, he states: “[w]e are hopeful we can propose Plans of Adjustment for the Commonwealth and P.R.E.P.A. by early 2019, though we cannot yet tell if that is realistic.” Given the possibility of the First Circuit reversing Judge Swain in Aurelius and the expiration of the appointment of the current Board members, it seems they want to leave these two major plans in place before they leave. We will see.
In addition, the Board sent a letter to the Commonwealth and stated:
The Oversight Board is deeply concerned about the continued delays in the Commonwealth of Puerto Rico’s completion of its audited Basic Financial Statements and Required Supplementary Information.
On April 30, 2018, the Oversight Board asked that you provide a timetable for the issuance of the audited financial statements for FY2015, FY2016, and FY2017,respectively. On May 7, 2018, you provided the following estimated dates for completion of the audited financial statements: FY2015 by June 8, 2018; FY2016 by August 17, 2018; and FY2017 by December 31, 2018. While the FY2015 audit was completed in June 2018, both the FY2016 and FY2017 audit remain outstanding,despite your May 7, 2018 letter projecting that both would be completed by now.
Accordingly,pursuant to Section 104(c)(2) of PROMESA, please provide the following information by January 18, 2019:
an explanation for thedelays in issuing the 2016 and 2017 audits;
a detailed description of the pending items for completion of the 2016 audit;
updated estimated dates for completion of the 2016 and 2017 audits; and
an estimated date for completion of the 2018 audit
The Commonwealth has flaunted the Board’s deadlines on this issue before. What will happen if it does again? The Board has shown great reluctance in forcing the Commonwealth to do anything. In fact, the Commonwealth has been much more willing to take the Board to Court than the other way around. This year the pensions have to be reduced and that promises to be another big fight between the Board and the Commonwealth. Let’s see who takes who to Court first.
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.