Monday Update –November 27, 2017

Welcome to your weekly Title III update for November 27, 2017. This Thanksgiving week very little transpired in the case.

Judge Houser was not amused by the parties discussion of what documents, or lack thereof, were provided during mediation during the oral arguments of Rule 2004 discovery. She filed a notice of breach of confidentiality and promptly Judge Swain issued an order that what goes on in mediation cannot be discussed in the main case. If a party still thinks it must make reference to something that happened during mediation, it must first request to file a motion under seal. I foresee this will happen with some frequency.

Judge Dein issued an order that if any party wanted to file a Rule 2004 motion, it would be “limited to no more than 20 targeted requests” which the Board had to answer. After the Board filed its opposition, the parties have to meet to see if they can come to agreements. Since the party is given up to 20 requests, there can be more than one motion. I foresee this happening with frequency.

The issue of the mediation and the Rule 2004 motions are closely linked. Several parties are seeking information on how the information used to prepare the Fiscal Plan and its economic models therein. Movants made a valid point that this information is vital to understand the future plan of adjustment which must be consistent with the fiscal plan. Hence, if you don’t understand how the Fiscal Plan is made, you will not be able to understand the Plan of Adjustment. The Board insisted it was providing the documentation in a special data room for those who were involved in the mediation but movants denied this.

Since the days of Alejandro García Padilla, the Government of Puerto Rico has resisted being open as to its finances. Since its first meeting, the Board has resisted being open as to where the Fiscal Plan assumptions and data come from, what they were and how its economic models worked and were devised. These actions by the Government of Puerto Rico and the Board are clearly against PROMESA.

Section 201(b)(1)(F) states that the Fiscal Plan must “improve fiscal governance, accountability, and internal controls.” In addition, section 405(m)(1) states as a finding of Congress that “[a] combination of severe economic decline, and, at times, accumulated operating deficits, lack of financial transparency, management inefficiencies, and excessive borrowing has created a fiscal emergency in Puerto Rico.” Clearly, Congress believed that transparency and accountability are of great importance but neither the Board nor the Government of Puerto Rico have heeded this admonishment. By denying these requests to do discovery, the Court has only helped the Board and the Government of Puerto Rico to perpetuate its lack of transparency.

Also closely related is the UCC request to conduct discovery as to the validity of the debt. The UCC has repeatedly pointed out the conflicts of interest of the Board as to the issuance of debt but the Court has preferred to allow it to take point, albeit with input from the Committee. Again, the Court has given the Board the benefit of the doubt but it seems to me that eventually, it will have to come out, and that will unfortunately likely be later rather than sooner.

This lack of transparency is critical not only to the Title III litigation but the entire PROMESA scheme. If Congress has found that lack of financial transparency was a factor in the island’s fiscal emergency, why has the Board gotten away with obfuscation of the truth? Given this lack of transparency, why has Congress not acted? Why can the  Board get away with telling the Court and all of those us who attended the hearing that there would be no money for debt service in the next 5 years without the corresponding documentation to support it? What is the Board’s agenda that requires that it have no transparency? Questions, questions.

The Mellon Bank interpleader as to COFINA is moving along with summary judgments, etc. It is an open question if the Court will decide the issues via motion, have a trial and or postpone decision until the Commonwealth v. COFINA case is decided. Having mentioned this case, the Court has allowed motions to intervene by all COFINA bond representatives, AFFAF and the GO Bondholders in this case. This is important since Judge Swain had denied intervention to the GO Bondholders and others in the Mellon Bank Interpleader.

The Commonwealth v. COFINA controversy will determine the ownership of the COFINA funds. If the funds belong to the COFINA bondholders, there will be less money for all other bondholders. On the other hand, if the SUT funds belong to the Commonwealth, will it have unfettered use of them? Will GO Bondholders have dibs on them or, as the Board claims, do they not have priority over these funds? This litigation may decide around $36 billion of the $72 billion of Puerto Rican debt when finished. Let’s see how Judge Swain plays it out.

I took a look at the PREPA Ad Hoc appeal, docketed on November 6, 2017, and it still does not have a briefing schedule. Neither party has requested expedited consideration of the matter although PROMESA requires that matters be expedited by the Courts.

A new adversary proceeding was filed that claims that Plaintiffs are owed “for services provided in furtherance of the Commonwealth’s Medicaid program,” a grant jointly supported by the federal government and the Commonwealth.  They also state that this debt is non-dischargeable and that the debts are otherwise unimpaired by PROMESA or the Commonwealth’s filing of Title III proceedings under such Act. Since one of my clients is involved in this, I will not comment as to the merits but those interested should read section 7 and 304 of PROMESA. Suffice it to say there are millions of dollars in judgments that plaintiffs have not been able to collect in state court.

On related matters, allegedly PREPA had stopped paying Whitefish due to Arc American, Inc. having sent it a letter claiming it had not been paid. On November 22, 2017, Whitefish, a Montana corporation with its principal place of business in that state, sued Arc, a Florida corporation, in the 11th Judicial District Court at Flathead County in Montana for several causes of action and an injunction, even though their contract calls for disputes to be arbitrated. It is a very weird procedure and it is doubtful Montana courts have long arm jurisdiction over Arc.  The case could easily be moved to federal court. To add to the confusion, PREPA paid Whitefish $2.7 million for work already done, so it is questionable whether the Montana litigation will continue.

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.