Monday Update – November 20, 2017

Welcome to your weekly Title III update for November 20, 2017. This week several motions and incidents of great importance have occurred. Aside from the blockbuster and, to me, surprising decision by Judge Swain to deny the Board’s unilateral appointment of Noel Zamot as PREPA CTO and essentially put the Government of Governor Rosselló on equal footing with the Board, other interesting things transpired. Even still, it remains to be seen if the Board will appeal Judge Swain’s ruling.

The Board filed a motion essentially stating that the COFINA and Commonwealth agents exceed its authority in the Commonwealth v. COFINA dispute. It states at page 2 of its motion:

“[B]oth the COFINA Agent and Commonwealth Agent have exceeded the scope of their respective agencies by making claims and seeking relief that go beyond the narrow issue for which they were appointed to resolve—the Commonwealth-COFINA Dispute. The Oversight Board thus seeks an order confirming the scope of the tasks it expressly assigned to its Agents, so the Agents can answer the single question posed to them, through litigation or authorized settlement, and the Oversight Board can then use that answer to carry out its duty to restructure the debts of the Commonwealth and COFINA.”

As to the Commonwealth Agent, to wit the UCC, the Board objects to Count III that states “the Commonwealth Agent hereby indicates its intent to breach, revoke, and/or reject that unsecured promise” that sales and use tax (“SUT”) “revenues would be transferred to COFINA in the future.”

As to the COFINA agent, the objections are to these causes of action:

“Count II: Declaration that the “Commonwealth’s misappropriation of the Pledged Sales Tax and/or Dedicated Sales Tax” constitutes a violation of the U.S. and Puerto Rico Constitutions.

Count III: Declaration that the “Commonwealth’s misappropriation of the Pledged Sales Tax and/or Dedicated Sales Tax through the Compliance Law” constitutes a violation of PROMESA.

Count VII: Permanent Injunctive Relief against the Commonwealth, preventing the Commonwealth from “interfering” with the Funds.

Count VIII: Declaration that “the GO Bonds, PBA Bonds and Other Debt Issued in Violation of the Debt Limit” Are Not Entitled to Priority under the Constitution.” (Board motion pages 6-8)

The Board motion also argues that the interveners’ motions exceed the scope of the intervention. These objections are much more numerous than the COFINA and Commonwealth Agent objections. The motion specifically objected to several causes of action by Ambac, COFINA Senior Bondholders, Mutual Fund Group/Mutual Fund Group and National.

Irrespective of the merit of these objections, and some are quite meritorious, it is clear that the Board wants to tightly control the Commonwealth v. COFINA litigation. To what extent it will be allowed by Judge Swain, we will soon find out.

Related to the Commonwealth v. COFINA dispute, several motions to strike claims were filed this week. Ambac filed a motion to strike the UCC’s causes of action (claim 12 and 13) claiming COFINA is unconstitutional – which I believe is the strongest claim — and the avoidance claims (claims 4-11). As you can see, Ambac wants to strike the bulk of the UCC’s claims against COFINA. Another party trying to control the scope of inquiry in the Commonwealth v. COFINA dispute.

Judge Hausser, in charge of the mediation team, made some remarks during the November 13, hearing but recognized that “no major breakthroughs had been achieved.” As to the UCC’s motion to conduct discovery as to the legality of PR debt, Judge Dein denied it without prejudice and conditioned any new motion on the UCC confirming:

  1. “that it has entered into a mutually agreeable nondisclosure agreement with the investigator appointed by the Oversight Board (the “Investigator”) or has been unable to do so despite its good faith efforts;
  2. that it has submitted targeted discovery requests for information from the Financial Institutions to the Investigator; and
  3. that the Investigator has failed to seek this information from the Financial Institutions within a reasonable time or has otherwise been unable to obtain this information within a reasonable time.”

The clear message to the Board and its investigator is to take the UCC’s views seriously.

The QTCB Noteholder Group filed a motion requesting that the UCC’s Eight Cause of Action against COFINA be stricken. This cause of action claims “that any security interest of COFINA is subordinate to the rights of the Oversight Board as trustee.”

Also, the GO Ad Hoc Committee filed a motion to strike the following in the Commonwealth v. COFINA litigation:

“a. The Second, Third, Fourth, Seventh, and Eighth Causes of Action asserted in the Amended Answer, Defenses, and Counterclaims of the Appointed Agent of the Puerto Rico Sales Tax Financing Corporation (COFINA) (Dkt. No. 75 ¶¶ 73-102, 117-128);

b. The Third Counterclaim asserted in the Mutual Fund Group’s and Puerto Rico Funds’ Answer and Counterclaims (Dkt. No. 88 ¶¶ 73-80);

c. The Second, Third, and Fourth Causes of Action asserted in the Answer, Affirmative Defenses, and Counterclaims of National Public Finance Guarantee Corporation (Dkt. No. 93-1 ¶¶ 70-102);

d. The First, Second, Third, Fourth, Fifth, Sixth, and Seventh Counterclaims for Relief asserted in Intervenor-Defendant and Counterclaimant Ambac Assurance Corporation’s Answer and Affirmative Defenses to the Unsecured Creditor Committee’s Amended Complaint and Counterclaims Against the Commonwealth (Dkt. No. 94 ¶¶ 56-111); and

e. The Second, Third, Fourth, Fifth, Sixth, Seventh, Tenth, Fourteenth, Fifteenth, Seventeenth, Eighteenth, Nineteenth, Twentieth, and Twenty-first Causes of Action asserted in the Answer in Intervention and Counter and Crossclaims of the COFINA Senior Bondholders’ Coalition (Dkt. No. 90 ¶¶ 69-122, 137-141, 161-175, 182-207)”

Clearly, the Commonwealth v. COFINA controversy is much larger than it seems.

Judge Dein heard argument on several motions for Rule 2004 discovery. She granted Siemens right to request documents and take on deposition on “whether or not the funds identified in the Motion are being held in an escrow account.”

The former representative of the Puerto Rico Government to the Board, Mr. Elías Sánchez, had filed a motion to strike his mention in the UCC request to conduct discovery on the Whitefish contract. Although the UCC amended its motion to reflect the fact that he denied any involvement, Mr. Sánchez insisted in striking any mention of himself. As I predicted, Judge Swain denied the motion to strike.

The UCC and PREPA reached written stipulation on the inquiry as to Whitefish. Maybe at some time we will know the truth behind this scandal.

Aurelius filed a reply to motion to dismiss by the Board and to the Board’s objection to the lifting of the stay. These issues which surround the Constitutionality of the appointment of the Board members is in full fledged briefing schedule. In December, the Solicitor General of the US will file his opposition to Aurelius and Utier and oral arguments are to be held in January 10, 2018. The issue is likely to reach the US Supreme Court.

The Official Committee of Retired Employees of Puerto Rico was allowed to intervene in a limited fashion in the adversary proceeding of the ERS v. Altarir where the validity of certain liens is being challenged.

Lastly, the American Federation of State, County and Municipal Employees filed a reply to Utier’s opposition to their intervention in its constitutional challenge of the Board appointments.

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.