Monday Update – March 25, 2019

Welcome to your weekly Title III update for March 25, 2019. A few things of import happened this week.

Noel Zamot, former revitalization coordinator for the Board, made some public statements blaming the Rosselló administration for the failure of PROMESA’s Title V. Five seconds later, the Commonwealth blamed Zamot for its failure and went to the extent of charging him with dubious actions. This being Puerto Rico, any of the two versions or both could be correct. What is important is that the Commonwealth Department of Justice sought Zamot’s information to subpoena him, the Board first demurred and later relented, but reserved the right to question the subpoena. The Commonwealth Department of Justice and other officials warned the Board that it could not interfere with a criminal investigation. The question is, can the Board do so? Section 108(a) of PROMESA states that neither the governor nor the Legislature may impede the Board’s work but the statute does not say if this includes Commonwealth criminal investigations. The US Supreme Court in Younger v. Harris, 401 U.S. 37 (1971) made clear that federal courts may not interfere with state criminal prosecution and investigations, except when the prosecution is in bad faith, harassment, or the prosecution is clearly unconstitutional. At first glance, it would seem the Commonwealth is correct but the question is whether Congress withdrew the Commonwealth’s power to investigate the Board via section 108 since the power to pursue criminal prosecutions emanates from said Congress? See, Puerto Rico v. Sanchez Valle, 579 U.S. ___ (2016). Personally, I doubt it but it is something to consider.

AAFAF and the Board filed a joint motion to inform the Court of the situation in PREPA. It gave a short overview of the P3 procedures for the Transmission and Distribution lease, and the generation deals. What is very curiously missing from the motion is any mention of a sale of PREPA’s generation. I have said time and again that the politicians in PR do not want to sell PREPA for they would lose a way of placing their cronies in cushy jobs. Seems the Board is in agreement. Oh, well.

Assured opposed the Board’s motion for reconsideration of discovery order. More money wasted in my opinion. Also, ERS bondholders and the Board are duking it out on discovery disputes and a hearing will be held on April 1 in Boston. More waste of money.

The PBA Funds, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and

QTCB Noteholder Group, filed a motion for judgment on the pleadings (essentially a motion to dismiss) in the PBA case where the UCC is asking the Court to declare that these bonds are not really GO’s. It is highly technical and will not bore you with the details. Suffice it to say that is well written and questions the UCC’s standing to claim against the bonds. I am sure that the UCC will file a good opposition and would be very surprised if Judge Swain dismisses the complaint, but the standing questions is interesting for other reasons. If the UCC has no standing, this would leave only the Board with standing to question the PBA bonds and it can only act, to this point, until May 16. What will happen to this challenge if President Trump does not appoint a new Board by that time and there is no extension to the stay? Questions, questions.

Continuing with the Aurelius decision, Utier filed a reservation of rights motion in the PREPA Title III, saying as to the opinion:

This determination gives the opportunity to the President to nominate, and the Senate to confirm, a new Oversight Board compliant with the established constitutional requirements of the Appointments Clause. This does not mean that the Oversight Board’s actions, after the First Circuit’s decision cannot be subject to invalidation. Nor does it mean a “green light” for the Oversight Board, during this period, to make decisions about Puerto Rico with the full knowledge that they do not have the legal authority to do so. UTIER reiterates the importance of such actions on Puerto Rico, which may cause irreparable damages and harmful consequences to UTIER and the people of Puerto Rico. In fact, as UTIER has alleged, with its actions the Oversight Board has already impaired UTIER’s labor rights. The Supreme Court has established that “[a]n unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it had never been passed.”) See Norton v. Shelby Cty., 118 U.S. 425, 442 (1886). For this reason, we maintain our position that an illegally constituted Board, can only make unconstitutional actions and decisions. . .

UTIER reserves the right to challenge any and all actions taken by the Oversight Board, since it is unconstitutionally constituted. This includes not only actions taken by the Oversight Board in the past, but also, any actions taken by the Board on or after February 15, 2019, since, if its members hold a position without legal authority, his previous and future actions are void. See Norton v. Shelby Cty., 118 U.S. 425, 442 (1886). Any participation by UTIER in the Title III proceedings should not be interpreted as conceding the validity of any Board actions or decisions. UTIER will also object to any substantive actions of the Oversight Board as they arise.

The same day, Aurelius filed a similar motion and said:

To be sure, the First Circuit stayed its mandate for 90 days so that the President and Senate could “validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause.” Aurelius, 915 F.3d at 863. But it is incorrect to assert, as the Board recently did, that because of this stay, the Board’s “actions, at least until May 16, 2019, are not null and void.” Board Reply in Support of Its Motion to Dismiss, Adv. Proc. No. 18-41-LTS in 17-BK-3283-LTS, Dkt. 71, at 3 (Mar. 18, 2019). Similarly, the United States is wrong in urging this Court not to “halt the debt readjustment negotiations and the ongoing bankruptcy proceedings under Title III of PROMESA” in light of the First Circuit’s decision in Aurelius. U.S. Reply in Support of Its Motion to Dismiss, Adv. Proc. No. 18-41-LTS in 17-BK-3283-LTS, Dkt. 72, at 1 (Mar. 18, 2019). The sole purpose of the First Circuit’s limited stay of the mandate was to allow the President and the Senate time to remedy the constitutional defect, not to permit an unconstitutionally appointed Board to exacerbate the prejudicial effects of its unconstitutionality by rushing to take significant extra-constitutional actions in the interim, with no apparent effort being made even to attempt to appoint Board Members consistent with the requirements of the Appointment Clause. See Aurelius, 915 F.3d at 863. Nor, for that matter,  could the First Circuit permissibly declare that unspecified future actions of an unconstitutionally appointed Board are valid. To the contrary, there is no longer any doubt that all actions undertaken by the invalid Board after February 15, 2019 are at risk of being invalidated. The Board proceeds in this period at its peril, and so do those who rely on its actions.

Aurelius accordingly reserves its rights to challenge actions taken by the unconstitutionally appointed Board in the Title III action as void ab initio. This may include not only actions taken by the Board in the past, but also, in particular, any actions taken by the Board on or after February 15, 2019. Any participation by Aurelius in the Title III proceedings should not be interpreted as conceding the validity of any Board action. Aurelius will also object to particular substantive actions of the Board as they arise.

Although I sympathize with Aurelius and Utier, the fact is that the First Circuit, at page 54 of its opinion clearly stated, “[d]uring the 90-day stay period, the Board may continue to operate as until now.” Difficult to go against this statement but it also reflects the fact that they will argue to SCOTUS that all of the Board’s actions were illegal.

The battle between the Board and the Rosselló administration continues. The former sent the latter a letters stating that it had failed to provide section 204 information on several laws enacted and the governor called it silly. Expect more sparing when the Board certifies a new fiscal plan which will include a cut on pensions and possible firings. Never a dull moment in Puerto Rico.

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.