Monday Update – May 7, 2018

Welcome to your weekly Title III update for May 7, 2018. We have news from the Court, as well as outside the Court.

On May 8, 2018, the Senate’s Committee on Energy and Natural Resources will hold a hearing on The Current Status of Puerto Rico’s Electric Grid and Proposals for the Future Operation of the Grid. The witness list is very interesting: Bruce Walker
Assistant Secretary, Office of Electricity Delivery and Energy Reliability, U.S. Department of Energy and Charles R. Alexander, Jr., Director, Contingency Operations and Homeland Security U.S. Army Corps of Engineers for the Federal Government. From Puerto Rico, Christian Sobrino-Vega, President of the Government Development Bank and Chairman of the Board of the Fiscal Agency & Financial Advisory Authority, Government of Puerto Rico; Mr. Walter Higgins, Chief Executive Officer Puerto Rico Electric Power Authority; Mr. José H. Román Morales, PE Acting Associate Commissioner for the Puerto Rico Energy Board and Mr. Rodrigo Masses, President Puerto Rico Manufacturers Association. Maybe during this hearing we will know who will actually be in charge of planning the PREPA electric grid and the utilities sale, and understanding some more about the recent blackouts.

Now that we are discussing PREPA, Bloomberg interviewed Mr. Walter Higgins, who said some interesting things. He said that PREPA would decide in 18 months how the sale would occur and the request for proposals will be done in 12-18 months. The leasing of the transmission will take up to two years, or at least that is what Higgins said. Interesting, since the legislature said it wanted a public private partnership, but has yet to actually approve the legislation. Moreover, El Vocero reports that the legislators dealing with the bill to sell PREPA are not clear on what mechanism Governor Rosselló will use. Seems politicians have no intention of selling the utility.

Continuing with the Congressional drama, Rob Bishop, Chairman of the House Energy Committee, arrived in Puerto Rico and was met by Resident Commissioner Jenniffer González. Governor Rosselló, however, said his agenda was too full to meet with Chairman Bishop. Local press later reported that Governor Rosselló was paddle boarding. Great way to make friends in Congress. Also of interest is that Chairman Bishop stated that Representative Don Young’s bill on the sale of PREPA “is there. It’s one of the things we have to look at.” Further clarification would be nice. In another interview Congressman Bishop stated “[o]bviously any efforts you can [take] to reinsure creditors that they will be paid, and in a timely manner, will not only calm down past concerns but reinsure future investment.”

On Friday May 4, the Commonwealth handed the Board its proposed budget as was required. The budget, since it does not conform to the haircuts in pensions and other areas required by the certified fiscal plan, will be declared non-confirming and sent back. Due to this, included with the budget is a letter that must be carefully examined:

“PROMESA section 202(a), titled “Reasonable schedule for development of budgets,” requires the FOMB to “consult with the Governor and Legislature in establishing a schedule.” 48 U.S.C.A. § 2142(a) (emphasis added). To my knowledge, the FOMB did not consult with the Governor or Puerto Rico’s legislature in devising the schedule. The FOMB’s proposed schedule is too compressed for the many tasks necessary to complete the budget. We are nevertheless submitting with this letter a General Fund budget draft that may require revisions, in view of the obstacles described below, and we reserve the right to submit amended and supplemented versions of the budget as we work through additional issues.

The Commonwealth’s annual budget process takes months to complete and involves revising approximately 130 different individual department, agency, and instrumentality budgets to arrive at a consolidated budget. We have been working on this process since last year, and the Board is now asking us to substantially revise months’ worth of work in only eight days. This is not sufficient time for the task.

Furthermore, the FOMB has imposed additional procedural requirements that complicate the Government’s effort to revise its budget. On May 1, 2018, the FOMB requested that the Government use new reporting templates that are inconsistent with the Commonwealth’s past practices. The following day, the FOMB asked the Government to meet additional requirements that must now be incorporated into the Government’s budget submission. These new requirements differ materially from the Government’s historic practices. As a result, OMB’s systems cannot provide the requested information in many instances, at least in the format that the FOMB has requested. For these reasons, the elected Government’s budget submission today is consistent with its historic practices.

In light of these facts, the proposed schedule is so unrealistic that it suggests this timeline was designed to set up the Government for failure so that the FOMB can swiftly impose its own budget on the Commonwealth. The Government nevertheless has done its best to meet the FOMB’s deadline and reserves the right to continue to revise and supplement this budget to meet these critical goals.”

This is nothing more than the Commonwealth trying to document the Board’s “arbitrary and capricious” actions for the moment of confrontation before Judge Swain. Moreover, the Board required the Commonwealth’s legislature to approve the labor reform by May 31, 2018. Since the legislature has already said it will not, sometime in June, the Board will start by reducing the Commonwealth’s budget to force it to comply. When the Commonwealth continues to refuse, the Board will have to go to Judge Swain for an order.

The interesting thing about all these news is their interconnectivity. Seems to me that Governor Rosselló is putting roadblocks on the execution of the certified fiscal plan on purpose to prevent the Plan of Adjustment based on the fiscal plan from being seriously discussed. It seems Governor Rosselló believes that Congress will turn Democrat in November and that he will receive control of the Title III process. Even if Democrats win  Congress, any PROMESA amendment will need the signature of President Trump, who has not been inclined to change this legislation. Hence, his tactics will only prolong the Title III process and increase its cost.

Last week, David Skeel was at the University of Puerto Rico Law School on May 3, 2018 as part of a panel “Viability of PROMESA: Restructuring of the Debt and Economic Revitalization” and was asked about the allegations of Ana Matosantos’ conflict of interest concerning PREPA. He said

“…We look into them carefully, we have our lawyers look at them and we fully investigate them. Our lawyers have done that with Ana Matosantos and have concluded that there are not conflicts for the purposes of the decisions that we are making, again we take those concerns seriously and if new information would arise that would be problematic, we would look into it carefully. Our lawyers have looked into it and they have concluded that the concerns, they are not problems.”

Again, this raises more questions than answers. What allegations have been investigated? Who investigated them, Mr. El Koury and other Board retainers or independent counsel? What conclusions did they reach? Did these “attorneys” write reports (knowing lawyers, they did)? Was any branch of the federal Executive or Congress copied on these reports? All these questions need answering. The Board’s continued assurance that the conflicts do not exist smack of the old saying “Trust me, I am from the Government, I am here to help.” Transparency and good faith require the release of those ethics reports.

The Matonsantos controversy, being one of transparency, becomes even more important given a recent setback suffered by the Board. On May 4, 2018, Judge Jay García of the Federal District Court for the District of Puerto Rico, in the case of Centro de Periodismo Investigativo v. Financial Oversight Board, 17-1743, issued an important Opinion and Order. Plaintiff is seeking several documents pursuant to the PR Constitution and at page 4 of his opinion, Judge García stated:

“The Board argues that dismissal is warranted based on two grounds. First, it argues that this Court lacks subject matter jurisdiction under the Eleventh Amendment. Docket No. 22 at 10. Second, even if this Court has jurisdiction, the Board argues that the right to access public documents pursuant to Puerto Rico’s Constitution is preempted by PROMESA. Id. at 14. For the reasons stated below, the Court holds that: (1) Congress waived the Board’s sovereign immunity; (2) in the alternative, the Board’s sovereign immunity was abrogated by Section 106(a) of PROMESA; and (3) the right to inspect public documents pursuant to Puerto Rico’s Constitution is not preempted by PROMESA.”

Judge García continued at page 22:

“Here, Section 4 does not preempt Puerto Rico disclosure law. Similar to the Bates case, where the federal statute expressly prohibited state law imposing labeling and packaging requirements that are “in addition to or different from” FIFRA, Section 4 of PROMESA supersedes Puerto Rico laws only if they are inconsistent with the Act. As PROMESA was enacted to restructure Puerto Rico’s debt, and not to dictate the way Puerto Rico’s government discloses information to the public, Puerto Rico law requiring disclosure of public information cannot be said to be inconsistent with PROMESA.

Congress could have added language specifically preempting Puerto Rico law on disclosure, but opted not to do so. However, Congress did use clear preemptive language in other sections of PROMESA. For example, PROMESA § 303(3) preempts the Commonwealth government from enacting restructuring laws or issuing “unlawful executive orders that alter, amend, or modify the rights of holders of any debt of the territory or territorial instrumentality, or that divert funds from one territorial instrumentality to another or to the territory.” Similarly, Section 504 preempts Puerto Rico laws or regulations concerning the approval process for critical infrastructure projects. Id. § 504(b), (e). Congress, however, did not include specific preemptive language referring to disclosure of information.”

At page 24, Judge García continued his analysis:

“First, the right to access and inspect public documents in Puerto Rico is not an area where the federal government has played a large role. Field preemption is reserved for areas of the law and public administration where the federal government has traditionally held exclusive authority like, for example, immigration, foreign policy, or bankruptcy. Accord Hines v. Davidowitz, 312 U.S. 52, 74 (1941) (immigration); Am. Ins. Ass’n v. Garamendi, 539 U.S. 396, 420 (2003) (foreign policy); Franklin Cal. Tax-Free Tr., 136 S. Ct. at 1947 (bankruptcy).

In contrast, access to public information has been traditionally a local affair. See Bhatia-Gautier v. Rosello-Nevares, 2017 TSPR 173, 2017 WL 4975587 at *10 (P.R. 2017) (“Bhatia”).17 Thus, as an area that normally is reserved to the states, and in this case, the territory of Puerto Rico, the Court shall not assume that a federal statute has supplanted Puerto Rico law in this matter unless Congress makes such an intention “clear and manifest.” N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995) (quoting Rice, 331 U.S. at 230) (internal quotation marks omitted). The Board has not shown this to be the case here. Congress has not expressed a desire, neither in PROMESA nor in its legislative history, to have federal law be exclusive in the area of disclosures by the Board. As stated above, PROMESA’s purpose is to help Puerto Rico achieve fiscal responsibility and access to capital markets. To achieve this, Congress created the Board, but did not choose to shield it from all local laws.” (footnotes omitted)

At page 28, Judge García opined:

“The Court finds no conflict between Puerto Rico’s law on disclosure of public documents and PROMESA. It is possible for the Board to comply with both sets of law. The Board assumes PROMESA’s disclosure provisions dictate the only way that the Board can publicly disclose information. However, Puerto Rico law can supplement the Board’s disclosure requirements. While PROMESA requires certain documents and meetings to be publicly disclosed, it does not prevent additional disclosures by the Board.”

Continuing at page 31:

“The fact that it may be somewhat costly or inconvenient to comply with the disclosure requirements does not make the Board’s task to enforce PROMESA impossible. The Board is an entity of the Commonwealth paid for by the Puerto Rican people and, as such, must comply with Puerto Rico law that is not inconsistent with its mandate. PROMESA § 4. Congress, pursuant to its plenary powers, could have drafted PROMESA in many ways. However, it chose to create the Board as an entity within the Commonwealth and, therefore, it must be treated accordingly.

Finally, a citizen’s right to access public documents goes hand in hand with PROMESA’s purpose. When enacting the Act, Congress expressed concern with Puerto Rico’s lack of transparency and unaudited financial information. PROMESA’s provisions and its legislative history are evidence of this concern. See PROMESA §§ 204(b)(3), 405(m)(1); see also H.R Comm. on Natural Resources, Puerto Rico Oversight, Management, and Economic Stability Act, H.R. Rep. No. 114-602, at 40-46 (2016) (finding that PROMESA was a necessary legislation “[d]ue to the realities facing the island, and the inability of its local politicians to bring order and transparency.”). Thus, Puerto Rico disclosure law actually helps PROMESA’s legislative purpose by shining light into the Board’s dealings with the government of Puerto Rico. After all, “[s]unlight is said to be the best of disinfectants.” L. Brandeis, Other People’s Money 62 (1933).” (footnotes omitted)

Given the above, there is no doubt in my mind that if a citizen, either private or the press, may seek the information on Ms. Matosantos’ conflict of interest. Of course, the Board may “deny access to others explaining the basis for the denial pursuant to applicable privilege and confidentiality laws. . .  If unsatisfied with the Board’s reasoning for denying the requested documents, the requesting party may seek judicial review.” Page 29 of the opinion. Given PR and Federal Court’s rulings on access to public records and the need to be transparent, it would be a good idea for the Board to release the Matosantos documents forthwith. A protracted fight over them would bring about the shadow of “traqueteos” (shenanigans) being conducted behind closed doors.

For the third straight year, Puerto Rico failed to comply with the disclosure of its Comprehensive Annual Financial Report (CAFR). It has now accumulated three fiscal years without providing accurate information on the state of the Treasury, its debt levels and the condition of its assets. This is probably a breach of 17 CFR 240.15c2-12-Municipal securities disclosure of the SEC, as reflected in a notice filed last Wednesday by AAFAF before the Municipal Securities Regulatory Board.

On the legal front, Judge Swain will hear the oral argument on the COFINA motion to certify the Commonwealth v. COFINA question to the Puerto Rico Supreme Court. Each party will have 45 minutes to argue. Unfortunately, I have previous appointments and will not be able to attend.

Also, on May 21, Judge Dein will hear the oral argument on GO’s and others request for an order for production of documents pursuant to February 26, 2018 order. I expect an order soon for the production of most, if not all, of the requested documents.

On June 5, the First Circuit will hear oral arguments on the Ad Hoc PREPA bondholder’s appeal from Judge Swain’s denial of their motion to appoint a receiver for the utility. Not sure if I will be able to attend.

Siemens Transportation Partnership Puerto Rico, S.E.’S filed a Motion “To Preserve Funds Held In Escrow And Request For Discovery In Aid Of Any Hearing Deemed Necessary By The Court last week. The complaint “seeks the release of funds held in a GDB escrow account established for Siemens‘ benefit in connection with a Settlement Agreement between Siemens and HTA.” Plaintiff claims that under applicable law, the Escrow Account and the Escrowed Funds are Siemens property. Clearly, the Board and the Commonwealth will oppose the request.

In 2017, Altair and others sued the United States of America in the Federal Claims Court arguing that PROMESA constituted a taking without just compensation. Of course, the U.S. moved to dismiss the amended complaint and the briefing has been completed. We now await the Court’s decision. If the case is not dismissed, this could completely change the course of the PROMESA Title III since I doubt Congress believed the U.S. could be held liable for bondholder’s losses. Let’s see what happens.

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.