Welcome to your weekly Title III update for July 30, 2018. Again, a lot happening both in and out of the Title III.

The most important development was the July 24, 2018 Omnibus hearing. The Board made a report stating that 172,000 claims were filed in the Title III cases, of which 45,000 had been categorized, totaling $32 Trillion. Yes, trillion. Obviously there is a lot of overlap but the Title III debts may exceed the often repeated $72 billion. The Board reported that it is working in a mediation process for resolving these claims and that procedures will be presented for the Court’s approval. It is difficult to imagine, however, a plan of adjustment being presented without the process being approved and having resolved most, if not all, the controversies involving the claims. In a normal case, the debtor may object claims it does not agree with and pursuant to Bankruptcy Rule 9014, it becomes a contested matter – basically a mini lawsuit. This would be impossible to administer here. Let’s hope mediation, etc., reduces them to a manageable number.

As to PREPA, the Oversight Board again said the utility will not need to borrow money from the government. This puts in question the Board’s past projections as to the utility and the government in general. The Board reported that it had completed and reviewed the market sounding process and that there is an interest in the private sector to purchase PREPA. It reported that the Integrated Resources Plan was being prepared by Siemens (Ankura, the government’s consultant, is also working on an IRP) and that the Board was working on PREPA’s budget and hoped to have it certified by the end the month. This begs the question –  who is in charge of PREPA? More on this latter.

As to the Siemens v. HTA, it is intertwined with the GDB, the Judge will stay the proceedings and entertain objections in the latter’s Title VI proceeding. Hence, this proceeding will also involve litigation, to which it seems to be no end.

The ERS bondholders’ motion for lifting of the stay was denied, pending final determination in the next Omnibus hearing of September 12, date that may be changed. It seems the Judge does not believe the bondholders have a lien. Let’s see what happens.

The UCC’s objection to the investigators exit plan were denied and the August 15 date for the report may be moved by a day or two. In essence, we have to wait for the report to see what the Board and the UCC will do. My bet is that the Board will do nothing and the UCC will have to request leave to file any complaints pursuant to 11 U.S.C. § 926. Let’s see what happens.

In the afternoon, the Court heard oral arguments on the Commonwealth and Puerto Rico’s legislature’s complaints to amend the fiscal plan and the budget. At the start of the oral argument, it seemed Judge Swain was inclined toward the Commonwealth’s position in her questioning of Martin Bienenstock, the Board’s attorney. The Judge suggested that section 205 of PROMESA was a precondition to imposing recommendations via section 201(b)(1)(K), which the Board acknowledged and mentioned the dates in which this was done. The Judge also asked about criminal charges at the end of the Board’s budget and Bienenstock explained that this was pursuant to state law and all budgets contained such provision but the only one who could bring criminal charges is the Commonwealth.

The UCC used its time to remind the parties that the issues should be resolved quickly since any plan of adjustment would be dependent on said budgets and powers. That is, in my opinion, the problem with these complaints; until they are solved, and it is likely that the loser will appeal, there can be no plan of adjustment, further lengthening this procedure and increasing its costs.

Peter Friedman very ably argued for the Commonwealth and tried to set the case as one where the Judge Swain had to balance the role of both sides. He argued, quite correctly, that the Board could not legislate and that criminal law was the purview of the Commonwealth. He also argued that the Board could tell the Commonwealth what was the budget, but not tell it how to spend it. Friedman also argued that the Board was placing recommendations in the fiscal plan but Judge Swain then mentioned that there was section 201(b)(1)(K) of PROMESA, which states that the fiscal plan shall “adopt appropriate recommendations submitted by the Oversight Board under section 205(a).” If PROMESA states that the fiscal plan shall adopt these Board recommendations, why can’t the Board do exactly that.Very telling.

When it was the Legislature’s turn to argue, you could see a change in Judge Swain’s countenance. The Legislature’s complaint asks the Court to reject the Board’s budget and then certify the budget it approved. Judge Swain asked what part of PROMESA gave her the power and Claudio Aliff (who argued for the PR Senate) answered that the PR Constitution allowed the use of the previous year’s budget. Judge Swain just said that that was not in the complaint. A lawyer for the House of Representatives argued that the legislature was ok with repealing law 80 prospectively but the Board would not hear it, to which Judge Swain answered that the Board would say its economic advisors told them the law must be eliminated and what part of PROMESA prohibited the Board from requiring this?

In rebuttal, Mr. Bienenstock effectively argued that section 4 of PROMESA preempted any Puerto Rico law that was contrary to PROMESA and since it gave the Board the power over budgets, any law that allowed the Governor not to comply with it would be invalid. At the end, Judge Swain asked if they were waiving the jurisdictional argument, to which Bienenstock very wisely said no. She then took the issue under advisement.

Seems to me Judge Swain may decide she has no jurisdiction to review the certified fiscal plan and budget; or she may go down the list of alleged Board wrongdoings and say it may do this but it may not do this; or, which is what I think more likely, list the alleged wrongdoings, explain why the Board may do so and finally say, “in any event, I cannot review the Board’s certifications.” I am inclined towards the last alternative since that will put a stop to the Commonwealth coming to the Court every time it does not like something the Board does, but, I may be wrong as I was about Mr. Zamot. Hopefully we will soon find out.

After the hearing, several PDP legislators and mayors filed an adversary proceeding against the Board claiming the appointment of the members violated the appointments clause and that the powers it were conferred violates the separation of powers doctrine, which they claim must be applied to the territories. Although I do not believe the arguments will prosper, it is another attempt to rid Puerto Rico of the Board. Ironically, it is done by members of the party that went to Washington and accepted its imposition. I must note, however, that if the complaint as to the separation of powers prospers, it would mean that Title I and II of PROMESA would be unconstitutional, and pursuant to section 3 of the law, so would Title III. Then the bankruptcy that has allowed the government to pay the retirees would cease. Food for thought.

In addition, the employees union of the State Insurance Fund (CFSE) and the Doctor’s union of the agency, filed a complaint against the Board stating that the budget and fiscal plans of the Commonwealth were unconstitutional. The complaint seeks:

1. An order declaring that the CFSE is a protected essential public service.
2. An order declaring that Act 66-2014, Act Num. 3-2017, Act Num. 8-2017, and Act Num. 26-2017, violate the Contract Clause of the U.S. Constitution.
3. An order declaring that Act 66-2014, Act Num. 3-2017, Act Num. 8-2017, and Act Num. 26-2017, violate the Right to Collective Bargaining of the Commonwealth’s Constitution.
4. An order declaring that the New Fiscal Plan is unconstitutional and that the FOMB shall not file a plan of adjustment of debt until the New Fiscal Plan is totally recast to comply with the Contract Clause of the United States Constitution and Article II, Section 17 of the Commonwealth Constitution.

Again, I do not think this complaint will prosper but shows that the unions in the Government will do anything in their power to stop the curtailment of their interests by the Board or the Commonwealth. Let’s see what happens.

The UCC had renewed its Rule 2004 request for discovery as to documents presented to the Investigator and Judge Dein ruled last week and said:

1. The Government Development Bank of Puerto Rico (“GDB”) shall continue its privilege review of the GDB board minutes, as represented in open court, and shall produce unprivileged documents to both the Official Committee of Unsecured Creditors (“UCC”) and the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (“Retiree Committee”) (collectively with the UCC, the “Committees”) as soon as possible. Any documents, or portions thereof, withheld on the basis of privilege shall be listed on GDB’s privilege log.
2. The Committees’ additional requests for director and officer liability documents and documents from investigations by regulatory agencies are denied without prejudice to the Committees’ renewing their requests after receipt of the Independent Investigator’s report.
3. The Renewed Motion remains open such that requests may be made pursuant to it after the publication of the Independent Investigator’s report.

Clearly the Investigator’s report will be key in these issues. Hopefully, it will not be a whitewash of what happened in the debt crisis.

In other news, two independent sources have confirmed that the Commonwealth-COFINA deal is very close to completion. If the deal, however, does not include the Government of Puerto Rico or the GO’s, it will be objected and we will see more litigation, to which there seems to be no end.

During the court hearing, Congressman Bishop held a hearing of the House Natural Resources Committee as to PREPA. I will deal with this in a separate posting this coming week but suffice its importance by saying that Congress is very likely to introduce important changes in PREPA.

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.