Monday Update – November 13, 2017

Welcome to your weekly Title III update for November 13, 2017. This week and last several motions and incidents of great importance have occurred.

Today, Judge Swain heard oral arguments regarding the Board’s urgent motion to appoint a Chief Transformation Officer for PREPA. After arguments, Judge Swain not only ruled against the Board from the bench, but made important findings in favor of a limited view of the Board’s power. She said nowhere in Title I, II or III of PROMESA was there basis for the appointment of Mr. Zamot. She insisted that PROMESA required that the Puerto Rican Government act first and then the Board could react.

Judge Swain also denied that the Board could impose the recommendations it made in the Fiscal Plan if the Government rejected the recommendations, which puts into question the Board’s power to impose furloughs or pension reductions. Judge Swain mentioned that in the DC Board statute, there was the power to appoint an emergency manager and that this was not included in PROMESA. Moreover, Section 204 of PROMESA does not give the Board power to review all contracts, as it previously claimed. She also mentioned that Section 108(a) does not give the Board power to conduct day-to-day management of recovery efforts. Important, the Board cannot unilaterally borrow money in the name of the Government of Puerto Rico and any feasible Plan of Adjustment must take into account the Government of Puerto Rico. Both the Board and Puerto Rican Government are partners to achieve the dual goals of PROMESA.

All this essentially puts Governor Rosselló and his administration on equal footing with the Board. One cannot do things without the other. It remains to be seen if the Board will appeal this decision or if it will simply seek these prerogatives from Congress.

Finally, I want to make clear that I do not support the Board. I think it has exercised its powers to the detriment of Puerto Rico. It was my professional opinion that PROMESA, as written, gave the Board the powers it was invoking and as is the case in every piece of ongoing litigation, the Judge had the last word unless her decision is appealed. Let’s see how this new balancing of powers works out for Puerto Rico.

Last week, the Asociación de Profesoras y Profesores del Recinto Universitario de Mayagüez, Inc., a professorial association of employees of UPR Mayagüez Campus, filed an amended complaint challenging the UPR fiscal plan as unconstitutional. The problem with the complaint is that the professors lack standing since the reduction in funds to the UPR does not necessarily entail injury to them. Without standing, this challenge will likely fail.

The QTCB Noteholder Group filed a notice of intervention in the Commonwealth v. COFINA dispute to request that the UCC’s Eight Cause of Action be stricken. This cause of action claims that any security interest of COFINA is subordinate to the rights of the Oversight Board as trustee.” COFINA creditors have been filing answers to the complaint aside from what the COFINA agent has done so Judge Swain will have many arguments to sift through.

Two weeks ago, the UCC filed a motion to conduct discovery on the Whitefish contract and quickly several bondholders joined the request. Both PREPA and Whitefish were willing to provide the documents they would provide to Congress. After a short delay, they came to a stipulation to provide documents to the UCC. As the stipulation was filed, the Court cancelled the November 13 afternoon hearing. There will be a hearing on November 15, however, for the myriad other Rule 2004 requests for discovery that have been pending for a while. These requests include requests by bondholders on information as to the financial condition of the Commonwealth. On November 15, Judge Dein will hear further argument in the Siemens Transportation, National Public Finance Guarantee Corp., Ambac Assurance, UCC and GO, Assured Guaranty & Mutual Fund Group Rule 2004 motions. It will be interesting to see whom and to what extent Judge Dein will allow to conduct discovery.

Also, on November 6, the Board announced its policy on the Puerto Rican Government review. PROMESA gave the Board this power but it was only during its October 31 meeting that it decided to utilize this power. Extremely convenient, given the Whitefish contract controversy. The document states:

“This Policy applies to any contract that is proposed to be entered into by the Commonwealth or any covered instrumentality. As used in this Policy, “contracts” also applies to grants and sub-grants. This Policy applies to all contracts in which the Commonwealth or any covered instrumentality is a counterparty, including those with the federal government, state governments, private parties, and nonprofit organizations.”

So much for the Board recognizing the limitations of section 204(d)(2) of PROMESA or the democratically elected government of Puerto Rico.

In addition, Ambac Assurance objected to the Board’s request for an extension to the period to determine whether to reject or adopt unexpired contracts. Understandable, but it is unlikely Judge Swain will not grant the extension.

The saga of Elías Sánchez v. the UCC continues. The UCC amended its motion for Whitefish discovery to acknowledge that Mr. Sánchez denied the allegations but refused to withdraw its statement that former Governor Acevedo Vilá in his radio show claimed Mr. Sánchez was involved in the Whitefish contract. Mr. Sánchez filed a reply but it is unlikely Judge Swain will strike a statement of fact that Mr. Acevedo Vilá made the claim.

The US Government, although asking to be heard via motion, was absent from today’s hearing, putting into question its support of the Board.

The Board also took off the gloves with AFFAF in another issue. AFFAF requested leave to intervene in the Utier challenge to the constitutionality of the Board appointment. The Board objected but said at page 4:

“Defendants support AAFAF’s intervention as a party in interest pursuant to 11 U.S.C. § 1109 (“Section 1109”), consistent with Dkt. 75 in 17-ap-189, and Dkt. 38 in 17-ap-219. Under Section 1109, AAFAF “may raise and may appear and be heard” on issues in this adversary proceeding, including the Motion to Dismiss the complaint. Accordingly, AAFAF should be permitted to file briefs stating its position on issues raised in this adversary proceeding and subject to such notice or other requirements as the court may impose, and be heard at arguments concerning issues raised in this adversary proceeding. AAFAF does not have the right, and should not be afforded the right, to control, appeal, or settle causes of action.”

In other words, AFFAF can state its position and be heard but nothing more. Sort of a permanent Amicus Curiae. Again the Board brushes aside the Government of Puerto Rico. And speaking of the Utier complaint, the union filed an amended complaint cutting 25 pages of its previous motion. It seems that a review of the Aurelius complaint was persuasive.

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.