Monday Update – June 11, 2018

Welcome to your weekly Title III update for June 11, 2018. This week, many things happened in the case and outside the case.

This week, we had the Omnibus hearing, which I reported on and the Commonwealth and COFINA agents presented their draft settlement agreement. More on this later, but what no one in the press even mentioned is that on June 5, 2018, the First Circuit listened to oral arguments on the PREPA bondholders request for lifting of the stay to appoint a receiver and the Peaje request for adequate protection, and surprise, surprise, things may change. The oral argument were with Judges Howard, Kayatta, and Torresen (District Court Judge from Maine). Judges Howard and Kayatta were two of the three judges in the Peaje First Circuit decision of January 11, 2017. Continuity seems to be important in PROMESA.

During the oral argument, the Judges had difficulty understanding what bondholders collateral was. The Board’s position was that it was movant’s fault, but then one of the Judges asked “how can you do the balancing of interests [in the lifting of stay] if you don’t know what the collateral is?” The Board did not provide a satisfactory answer to the question.

The Judges also asked whether Judge Swain could attack the adequate protection issue if she can’t touch the revenues as she interprets sections 305 and 315 of PROMESA unless the Board agrees to it. The Board’s answer was very surprising: Mr. Bienenstock stated unequivocally that if movant’s 5th Amendment rights were impaired, Judge Swain could dismiss the Title III case, but she cannot micromanage the Board. The Judges asked, her leverage is I am out of here? Answer, yes that is what the movants want. Difficult to swallow, in my opinion.

Another of the Judges questions to the Board was what protects movants’ property interests? Answer, PREPA’s transformation, better fuel mixture which will bring fewer costs. The most movants can hope for is for a plan that will change PREPA. In order words, trust us, we are the Board. I would definitely not trust the Board.

In rebuttal, movants emphasized that the receiver does not raise rates – that is the Energy Board’s job. The Board does not manage PREPA, that is the PREPA Board’s job and the receiver would substitute this Board, subject to the Oversight Board’s powers and of course, the Court’s powers.

All during this oral argument, the Judges kept hammering as to what was the security interest; whether the Judge could do the balancing act required by the petition to lift the stay if she did not know what the actual collateral was. Moreover, at the end of movant’s argument, Judge Torresen said she still had many questions and repeated this same statement at the end of movants’ reply. Given this, I would not be surprised if the First Circuit reverses Judge Swain with detailed instructions on the actual questions they have. This would require an evidentiary hearing and another round of appeals for whomever loses. More expenses in the case.

Things were a little different in the Peaje oral argument. There was a repeat of questions pertaining to the Judges power pursuant to section 305 of PROMESA. Seems they have difficulty wrapping their heads around what Judge Swain decided. They questioned movants if they had a lien opposable to third parties, in other words, if their collateral was sent to a third party, could Peaje collect from them. The answer was yes.

The Board argued that Judge Swain saw this case ending in two more years, which would be in 2020. The Board also argued that no lien rights can be affected until the Plan of Adjustment but in the case of Peaje, it did not have a lien. The Judges asked the amounts of the lien and the Board said the lien, if it existed, was limited to the amount in the account at the time of Title III, no more. But the Judges said you pledged your revenue stream and special revenues can be more than revenues with a lien. Another question was how can you balance injury (important in the injunction stage) or relief of stay without knowing which is which, in clear reference to whether there is a lien. This case, given there was a full evidentiary hearing, will be less probable to be remanded for further consideration but the issue of the lien and pledge looms large and it is definitely possible the Judges would like further clarification.

At the end of the arguments, the Judges said they were aware of their obligation and decided to expeditiously the issues and would endeavor to do so. I foresee a quick resolution of the issues but not necessarily in a manner that will satisfy the Board.

On May 7, 2018, Gerardo Portela, Executive Director of AAFAF, sent the Board a letter in which he assured it the audited financial statements for the year 2015 would be completed and issued by June 8, 2018. As usual, this did not happen. The Puerto Rico Treasury Secretary said the Commonwealth sent the financial statements to its auditors the previous week. Difficult to see how something so large and complicated could be completed in one week, but what do I know? There is no timetable for their completion.

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.