Monday Update –November 6, 2017

Welcome to your weekly Title III update for November 6, 2017. This week several motions and incidents of great importance have occurred.

Whitefish continues to dominate in the news and in the Court. The UCC filed a motion requesting leave to conduct Bankruptcy Rule 2004 on the Whitefish contract. The motion, which is a superb summary of all the facts and allegations surrounding the Whitefish contract, states that at page 15:

“The only way to address these concerns through the lens of the stakeholders in these Title III Cases is through discovery under Bankruptcy Rule 2004. As the official committee appointed to represent all of the unsecured creditors in PREPA’s title III case, no party stands better suited to investigate and evaluate these issues than the Committee.”

The UCC mentioned that former Governor Aníbal Acevedo Vilá, during one of his daily radio shows, alleged that Elías Sánchez, former Governor Rosselló representative before the Board, was involved with Whitefish, as an example of possible corruption or wrongdoing. Mr. Sánchez was not amused and filed a motion to strike the statement and included a statement, under penalty of perjury, stating he does not represent Whitefish or any of its principals nor have any contracts with PREPA. Judge Swain issued an order that the UCC “shall file an opposition, if any, by November 7, 2017. Mr. Sánchez shall file a reply by November 9, 2017 at 1:00 p.m.” Never a dull moment in Puerto Rican politics!

Related to the Whitefish contract and PREPA, much to my surprise, several parties filed objections to the Board’s request to appoint Mr. Zamot as the Chief Transformation Officer. For example, the Ad Hoc Group of PREPA Bondholders filed a motion claiming that PROMESA does not explicitly allow the Board to appoint Mr. Zamot. The Ad Hoc Group, however, retained an expert that evaluated the grid and found that:

While Hurricane Maria undeniably inflicted substantial damage, ample evidence demonstrates that the vast majority of the assets of the PREPA generation, transmission, and distribution system are substantially intact and could be restored expeditiously if appropriate and competent measures were implemented.” (page 1 of the motion)

The Ad Hoc Group’s motion details the decades of mismanagement of PREPA and specifically, the mismanagement of the corporation under the Rosselló administration. For example, the motion mentions that “on October 31, AAFAF publicly presented a liquidity update that showed that PREPA has had, and was projected to have, over $500 million from July 7 through September 22; by October 20, PREPA’s liquidity balance had decreased only to $471 million.” (Page 5) Moreover, the Ad Hoc Bondhholders filed a declaration by Derek HasBrouck (required reading for all residents of Puerto Rico), which excoriates PREPA for lack of preparedness and total mismanagement in the Hurricane María emergency. Although these bondholders do not support Zamot saying he has no experience in electrical grids, they renew their call for a receiver that would respond to a court (not Judge Swain) to manage PREPA. Fat chance that will happen unless the First Circuit reverses Judge Swain’s decision on the Ad Hoc bondholders’ request.

National filed a short motion objecting to the permanent appointment of Mr. Zamot but stated it “supports the entry of an appropriately tailored order, pursuant to section 105 of the Bankruptcy Code (made applicable to this Title III case by section 301 of PROMESA), authorizing Mr. Zamot to oversee the immediate repairs to the island’s electric power grid on an interim basis for a period of 120 days. Given the extenuating circumstances on the island, such limited relief is both warranted and urgent. National respectfully requests, however, that the Court deny the remainder of the relief requested or, alternatively, defer consideration of it until a later date.” (Page 8)

The Puerto Rican Energy Commission, supposedly PREPA’s regulator, filed a motion saying it took no position as to the Board’s motion but requested from the Court that it “(a) state explicitly that any approval of the CTO Motion does not preempt the Commission’s authority; and, regardless of how this Court rules on the CTO Motion, (b) direct counsel for FOMB and the Commission to develop, for this Court’s approval, a set of protocols ensuring that the actions of each entity are coordinated and mutually supportive, and not in conflict.” (Page 1) No idea how Judge Swain or the Board will handle this.

Obviously, AFFAF, representing PREPA, opposes the Zamot designation, repeating that PROMESA does not authorize the Board to do what it wants done. However, it seems to me its explanation of what the Board may or may not do pursuant to Section 305 of PROMESA ignores the fact that it clearly states that the Court cannot interfere with the local government’s power unless the Board agrees. Since the Board does agree with this interference with local authority, I fail to see how Judge Swain will not find for the Board. Also in disagreement was Scotiabank de Puerto Rico (“Scotiabank”), as administrative agent for PREPA’s “Fuel Line Lenders”. The motion repeats that the Board does not have the authority to appoint Zamot but without that authority it has ample authority to oversee PREPA’s recovery efforts. Scotiabank stated:

“To the extent the Oversight Board wishes to engage a CTO or other individuals to fulfill its statutory oversight role, the Fuel Line Lenders have no objection. In particular, if the Oversight Board has concluded that a CTO will add value in supervising the power restoration process (including through review and approval of contracts), the engagement should go forward on that basis.

The appointment of a long-term chief executive to take over PREPA’s management is completely different. As noted, the Oversight Board has no authority to supplant PREPA’s management. But if PREPA itself were to supplement its senior leadership, the utility would need to undertake an organized process to attract the best available individuals. A standard approach would be to engage an independent search firm (such as Russell Reynolds, which identified candidates to serve on PREPA’s board of directors) to search for individuals, inside or outside PREPA, with significant knowledge of the utility industry and experience managing a large utility such as PREPA. Scotiabank, as agent for the Fuel Line Lenders, stands ready and willing to participate in any such process along with PREPA, the Commonwealth, the Oversight Board, and other stakeholders.” (Page 10)

It is clear to me that creditors do not believe PREPA is capable of bringing electricity to Puerto Rico in a quick fashion, but they also do not trust the Board to be in complete control of the agency. Moreover, as Puerto Rico’s representative to the Board has said, if this remedy is granted, what would prevent the Board from appointing a CTO for the Government of Puerto Rico? Time will tell.

In addition, the PREPA Board of Directors filed a short objection and the U.S. Bank National Association, in its capacity as successor trustee under the PREPA Trust Agreement dated as of January 1, 1974, joined the Ad Hoc Bondholders motion.

Also on Friday November 3, several parties filed objections to Aurelius motion to dismiss the Title III filing for violating the appointments clause. Donald J. Verrilli issued a strong defense of the Board’s appointment, which it is to be expected as he was President Obama’s Solicitor General when PROMESA was enacted. Aurelius will reply soon and oral arguments are to be held in January 2018. If, however, President Trump’s Solicitor General decides not to support the PROMESA appointment process, which is unlikely, Mr. Verrilli will have an uphill battle. The Official Committee of Retired Employees of the Commonwealth of Puerto Rico also filed a motion in opposition to the Aurelius motion to dismiss, giving reasons why supposedly Congress has the authority to limit presidential power to appoint in territories. This has not been the practice in the past, however.

On the other hand, the American Federation of State, County and Municipal Employees, who also filed an objection to the Aurelius request for dismissal of the Title III proceeding, claims that it “opposes dismissing this Title III case based on the Appointments Clause unless, at a minimum, the offensive doctrine of territorial incorporation is completely overruled.” What does that doctrine have to do with Presidential powers is beyond me, but there it is. Obviously, this argument is made because the only one who can reverse the doctrine of territorial incorporation is the Supreme Court of the United States. I find this motion lacking but lets see what Judge Swain decides next year. In an interesting twist, the American Federation of State, County and Municipal Employees filed a motion to intervene in the Utier request for declaration of unconstitutionality of Board appointments to seek the dismissal of the complaint. It seems this group believes it is better off in a bankruptcy proceeding. Also, the GO bondholders joined the Aurelius request for dismissal in a short motion.

In addition, Judge Swain issued an order, pretty much agreed upon by the parties after extensive negotiations, granting Bettina Whyte, the COFINA agent:

“The protections of 48 U.S.C. § 2125 (“Immunity Protections”) shall apply to the COFINA Agent, the Commonwealth Agent (together with the COFINA Agent, the “Agents”) and their respective professionals and employees with respect to all actions of the COFINA Agent or Commonwealth Agent, as applicable, taken in good faith to carry out their duties under the Stipulation and Order; provided, however, that the foregoing shall not prohibit the Oversight Board or any other party in interest from asserting that a claim, counterclaim or defense asserted by an Agent in the Commonwealth-COFINA Dispute, or any other action of an Agent, is outside of the scope of the authority delegated by the Oversight Board to the Agents or otherwise set forth in the Stipulation and Order (a “Scope Objection”), and if the Court enters an order that (i) sustains a Scope Objection or (ii) otherwise rules that the Agents do not have the authority to take an action or litigate a claim, counterclaim or defense (a “Scope Order”), then the Immunity Protections shall not apply to any further actions by the Agents, their professionals or employees to continue to litigate such claim, counterclaim or defense, except that the Immunity Protections shall apply to any appeal of a Scope Order and to any actions taken in mediation with respect to such claim, counterclaim or defense prior to appeals being exhausted.” (Page 2-3)

In addition, the order states that COFINA will pay Ms. Whyte’s fees from the account it has with BPPR and if there is not enough money, then from the NY Mellon Bank account. Loss for AFFAF.

The UCC filed on Friday, November 3, an informative motion as to the issues of Rule 2004 discovery and informed Judge Dein, The Creditors’ Committee’s position has not changed, and the Creditors’ Committee respectfully requests a ruling on its pending Bankruptcy Rule 2004 Motion after oral argument on November 15, 2017.” (Page 1) In addition, the UCC stated that John Couriel’s investigation on behalf of the Board is different from the one it seeks to conduct:

“[T]his investigation as intended not to identify culpable third parties or potential claims but instead “sole[ly] [] to find facts” related to, among other things, “the factors contributing to Puerto Rico’s fiscal crisis” and its debt issuance.5 However interesting this effort may be in developing a historical record of the financial foibles of various Commonwealth actors, the Creditors’ Committee’s interest is rather different. Because it represents the interests of creditors holding billions of dollars in claims that will be satisfied only partially, its intent is in determining whether claims exist that might benefit these creditors. Mr. Couriel is not pursuing that end.” (page 2 of the motion)

If Judge Dein recommends the UCC proceed, this will throw a monkey wrench into the Board’s plans of total control of the Title III proceeding. In the HTA case, the parties also failed to reach an agreement as to Siemens’ request for Rule 2004 discovery.

On the subject of Rule 2004 discovery, an Omnibus motion by different creditors and debtors was filed, essentially stating that no agreement has been reached. Also, the UCC partially joined National’s request for Rule 2004 discovery. All these issues will be discussed during the November 15 hearing.

The Board also opposed the Aurelius motion to lift the stay and the UCC requested leave to argue during the hearings on several motions to dismiss adversary proceedings. The UCC also opposed bondholders’ request for a 90 day stay in the case, as did the Board.

Finally, the Board had a meeting on Tuesday, October 31. I attended the meeting and quite a bit of new information came out. The Board wants a new fiscal plan for the Commonwealth to be provided by December, with a projected approval for February. As to the fiscal plan, Ms. Jaresko and members of the Board warned the Government that with a population reduction since the hurricane of 15% (gasp!) and a projected 40% plus reduction in income, it had to consider what essential services it could provide. This is nothing more than an even more aggressive employment and pension reduction. During the meeting, Ms. Jaresko announced, upon the suggestion of the settlement team, that all stakeholders have an opportunity to comment on the new fiscal plan. Also, the Board will now review any contract of the Commonwealth and its instrumentalities of $10 million or more before it can be approved. The Board will also review, at random, contracts that have been granted, including the Whitefish contract, in particular. Considering that after María the Puerto Rican government has granted 1,600 contracts, this is a herculean task.

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.