Monday Update – January 7, 2019

Welcome to your weekly Title III update for January 7, 2019.  After a two-week hiatus to give my readers a respite during the holidays, unfortunately we must now face the realities of PROMESA, Title III and the Board.

On December 19, 2018, Judge Swain granted the Board’s motion to reject the Debt Service Deposit Agreement with Lehman Brothers Special Financing Inc., which was to be expected. In addition to the Omnibus objections to duplicative proofs of claim, the Board started to file individual objections to specific proofs of claim. Important to remember that those specific objections must be answered quickly.

On December 21, 2018, the parties in the PREPA bondholders’ request for lifting of the stay to allow for the appointment of a receiver again amended the schedule of the case in the following manner:

The Revised Scheduling Order is amended to revise existing deadlines as follows:

a. January 7, 2019: Parties to exchange preliminary will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

b. January 29, 2019:Respondents to file opposition brief and supporting declarations;

c. February 20, 2019:Parties to exchange final will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

d. February 25, 2019:Movants to file reply brief and supporting declarations;

e. March 1, 2019:Parties to complete expert discovery and depositions;

f. March 5, 2019:Parties to file exhibit lists;

g. March 5, 2019:Parties to designate deposition testimony; and

h. March 8, 2019: Parties to cross-designate deposition testimony.

In addition, the Court will hold a hearing on the motion on March13, 2019, at 2 pm to be continued on March 14, in San Juan. Seems to me that the requested extensions pertain more to negotiations to end this issue as well as to bringing the monolines to the prospective settlement of the PREPA claims,which may include the Boards agreement to the lifting of the stay for said appointment. In addition to this, on December 21, 2018, the Board issued a new directive that states, inter alia:

This FOMB Policy (the “Policy”) is established pursuant to Section 204(b)(4) of PROMESA to require prior FOMB approval of certain rules, regulations, administrative orders, and executive orders proposed to be issued by the Governor (or the head of any department or agency) to assure that they “are not inconsistent with the approved fiscal plan.” This Policy shall also apply as provided in Section 204(b)(5). . .

Any rule,regulation, administrative order, or executive order that is issued in connection with the PREPA Transaction, whether by the Public-Private Partnership Authority or the Partnership Committee, as contemplated by Act No.120-2018.

Seems that the Board is very concerned about governance in PREPA and a receiver upon which they would have input, could be of use. It must be remembered, however, that any receiver appointed by the Court would substitute both PREPA’s governing Board and its Executive Director, but would still be subject to the Board’s directives. Balancing this, the receiver would still respond to the Judge that appoints him. Interesting turn of events if it were to happen.

On December 21, 2018, the Service International Union filed an objection to the COFINA Plan of Adjustment that simply says they adopt the objection they made to the settlement in COFINA. Since this objection does not deal with PROMESA sec. 314 of Bankruptcy section 1129, it is unlikely it will have any impact.

On December 21, 2018, the Board and the UCC filed an adversary proceeding challenging the PBA bonds as invalid. It argues:

PBA is an instrumentality of the Commonwealth created to issue bonds (the “PBA Bonds”) to finance the acquisition, construction and/or improvement of office space and other facilities (collectively, the “PBA Facilities”) used by departments,agencies, instrumentalities, authorities, public corporations, and municipalities of the Commonwealth (the “Public Occupants”) for government operations and providing essential services to the public. Currently, more than $4 billion in aggregate principal amount of PBA Bonds remain outstanding. PBA also enters into purported leases (the “Leases”), pursuant to which it ostensibly leases the PBA Facilities to the Public Occupants (the “Lessees”). In reality, however, the Leases are not arm’s length rental transactions designed to grant the Public Occupants temporary use of the PBA Facilities; rather, the sole purpose of the Leases is to provide a vehicle for the Commonwealth to repay the PBA Bonds through the Lessees’ purported “rent” payments. . .

Consistent with the economic reality of the Leases, this adversary proceeding seeks a declaratory judgment that the Leases are not “true leases,” but, rather, disguised financing transactions. As a result, PBA has no right under PROMESA or the Bankruptcy Code to receive post-petition rent payments from the Debtors or administrative claims against the Debtors. In addition, this adversary proceeding seeks a declaratory judgment that certain of the Leases do not give rise to administrative claims against the Debtors because the Lessees are non debtor entities.

As I have said many times, the audit of Puerto Rico’s debt is being done in federal court, not a kangaroo commission as the island’s left favors.

On December 26, 2018, the GMS Group, LLC, who had objected to the COFINA Plan of Adjustment and had latter withdrawn it, filed an amended objection. It claims the Plan of Adjustment violates the takings clause, that the plan has not been proposed in good faith, the plan improperly releases non-debtors, and that the plan is unfair and inequitable and thus fails to comply with section 1129. With one exception, this objection has little chance of succeeding. More on this latter.

 The Department of Justice requested an extension to file objections to the COFINA deal but the Court only gave it until January 4, 2019. No objection was filed.

On December 27, 2018, Luskin, Stern & Eisler LLP, the law firm selected by the Board to investigate McKinsey & Company, Inc., filed a motion informing the Court of the following:

At the November 7, 2018 omnibus hearing, LS&E informed the Court that the FOMB had retained LS&E to (i) investigate certain allegations concerning potential conflicts of interest of McKinsey & Company, Inc., Washington D.C. (“McKinsey”) and(ii) issue a written report detailing its findings. At the hearing, LS&E stated it would attempt to complete its investigation and to issue its written report by December 31, 2018. LS&E has determined that it will not be able to complete the investigation by that date and submits this informative motion to provide the Court an update on the status of its investigation.

Since the November 7,2018 hearing, LS&E has completed its initial round of interviews and its initial review of documents and has begun to draft its report. However, based on information obtained to date, LS&E has determined that follow-up(additional document requests and additional witness interviews) will be necessary, and its investigation will, therefore, continue into January 2019.

LS&E will provide an update to the Court in advance of the January 30, 2019 omnibus hearing.

In other words, we will know nothing on McKinsey’s conflicts of interest but it continues advising the Board. Makes no sense to me but I just report the facts, I don’t make policy.

On December 28, 2018, Peter C. Hein, who claims to own COFINA bonds, wrote a very cogent pro se objection to the plan of adjustment. He claims the Plan of Adjustment discriminates against non-Puerto Rican residents, that the plan cannot be confirmed unless the issue of the validity of COFINA is decided (not very likely), that there is no justification to give subordinate COFINA bondholders less than seniors, that it violates the contracts (it does not), that it violates the takings clause (maybe), violates due process, equal protection and immunities clauses of the US Constitution, and that the objection process violates due process and fairness, etc. Good job for someone who says is not a lawyer.

On December 31, 2018, the Board filed supplemental documents for COFINA, but the date for objections remained the same. Interesting.

On January 2, 2019, PRO SOL-Utier, filed an objection to the COFINA Plan of Adjustment, and included an expert report by a doctor in economics who is a professor in UPR at Mayagüez. Well done by Utier. The only problem is that I don’t think the union has standing. However, as their attorney Mr. Rolando Emmanuelli told me, the Board did not raise standing when it replied to the objection filed to the COFINA deal. Irrespective of the objection, this means that the Board will have to sit its own experts to say the deal is a good idea.

On January 2, 2019, Mark Elliot, individually and D/B/A/ Elliot Asset Management, claiming to be a COFINA bondholder also filed an objection pro se. He claims that the plan ignores the threshold question of what is available resources, that there are better remedies for creditors pursuant to 314(b)(6)(important in my opinion), the plan deprives Jr. bondholders of important rights without compensation, Jrs. and Seniors are treated differently although there is money to pay both, the Senior COFINA mediating team that allegedly mediated for Jrs. was conflicted (maybe), and that the plan will have bad consequences for the muni market, etc.

Lawrence B. Dvores also filed a pro se objection (so many people do not want to hire a lawyer). His objection basically says that the settlement is grossly unfair to Jr. bondholders and repeats the issue of preferential treatment to locals and that Jrs were not involved in negotiations. Except for the discrimination claim, it will not go far.

Cooperativa de Ahorro y Crédito de Rincón, Cooperativa de Ahorro y Crédito Dr. Manuel Zeno Gandía, Cooperativa de Ahorro y Crédito del Valenciano and Cooperativa de Ahorro y Crédito de Juana Díaz also filed an objection. This group has an adversary proceeding which includes COFINA as a defendant and they complain that the Plan of Adjustment does not mention their complaint. Of course it does not, they are getting nothing. Again, very unlikely this will succeed.

Puerto Rico Representative Natal, who has left the PDP, joined forces with several groups and unions requesting that the COFINA plan hearing be postponed or that the approval be rejected. Their claim is that Mr. Natal was not given a chance to debate one of the measures in the House and therefore it is unconstitutional as per the case filed in the island’s courts. Also, they claim COFINA is unconstitutional. Not very likely this claim will have any impact.

Given the fact that by the time of the January 16, 2019 hearing on the Plan of Adjustment we will have the vote tally and it very likely be in favor, there are a couple of objections that I think have merit. As long as COFINA is valid, all bondholders have a lien on the SUT. Undoubtedly, you can alter a lien if the lienholders agree, but doubt it can be done if the decision is not unanimous. A couple of the objections claim this. Also, there are claims that the Plan of Adjustment discriminates between Puerto Rico and US bondholders, hence violating the Equal Protection clause of the US Constitution. These two are difficult to circumvent, although I am sure the Board has thought of an answer. In addition, PROMESA 314(b)(6) states that the Court must find, in order to approve it, that “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.” Although the Board claims that the Court only needs to look at the available resources, not consider them, I think otherwise. In any event, I am sure Judge Swain will bend over backwards to approve the plan of adjustment since otherwise the Title III would have to be dismissed as per 11 U.S.C. § 930. Which by the way, those in the left in Puerto Rico have not explained what will be done if the Title III is dismissed. Food for thought.

Also, the Court issued an order where individuals may request time to be heard and up to 24 persons, selected by the Judge, will be given supposedly 5 minutes, to voice their frustration. It is great for venting these frustrations but that will lengthen the hearing. Oh well. This could mean that the hearing may extend over to January 17 and it is unlikely Judge Swain will immediately rule on the plan and may take a few days to write the opinion. We will see.

In other news, on December 27, 2018, the Board essentially put on hold the new PR Tax law by requesting more information that had to be provided by January 4, 2019. Hopefully this week we will know if this tax law will be put into effect or not.

Governor Rosselló now claims he wants new Board members, which he will get either sooner (Aurelius appeal reverses Judge Swain) or later when the three year period expires. In any of the two events, it is unlikely he will get what he wants. As to the Aurelius appeal, we are still waiting for a decision, which may come next week since the website for the First Circuit states they will continue working until January 11, 2019. Finally, on January 7, 2019, at 9:30 am, the First Circuit will hold oral arguments on Altair Global Credit Opportunities Fund (A), LLC, et al. v. The Employees Retirement System as to liens. Let’s see what comes out.

The new Democratic majority in the House is making noises that it will make changes to PROMESA, just like Congressman Bishop did for two years. Doubt much will be done but there will be hearings upon hearings filled with hot air. Oh well.

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.