Welcome to your weekly Title III update for October 1, 2018. Not much has happened this week but come Wednesday, things are getting interesting.

Utier, PREPA’s principal and most combative union, won a major victory in its battle against the Board. Judge Swain dismissed, as she has done in other cases, but without prejudice, claims that the Fiscal Plan and other actions by the Puerto Rican goverment and the Board constitute a taking without just compensation. Again, Judge Swain ruled that the claims have not matured and that Utier must wait for the Plan of Adjustment to raise this challenge. Judge Swain, however, did not dismiss the claims that the government’s actions were a violation of the impairment of contractual obligations. The Court did dismiss Utier’s claims arguing that the Fiscal Plan was not based on the Constitution. This decision may force PREPA and the Board to negotiate a solution to the impairment of contractual obligations, or not. Let’s see what happens.

In other developments, the UCC filed its reply to the Board, AAFAF and GDB in opposition to the GDB Title VI restructuring and its request for derivative standing. As usual, the UCC came out swinging:

Fundamentally, the GDB Restructuring is an attempt by hopelessly conflicted actors to liquidate GDB and extinguish rights and claims of the Title III Debtors against GDB in a manner that could never be accomplished pursuant to a Title III plan of adjustment or a lawful application of Title VI, which are the only two means of restructuring permitted by PROMESA. The GDB Restructuring could never be accomplished pursuant to Title III or a lawful application of Title VI because, among other things, all of GDB’s most valuable assets are being transferred to certain favored unsecured creditors while leaving the Title III Debtors holding a potentially empty bag. Even the proceeds of GDB’s claims against third parties such as the investment banks that facilitated and profited from the debt offerings orchestrated for the Title III Debtors by GDB are being excluded from what the Title III Debtors are receiving under the GDB Restructuring.

This absurdly lopsided asset allocation scheme is the antithesis of the “fair and equitable” treatment of creditors required by Title III and the pooling requirements of Title VI. While it is true that the Qualifying Modification for which GDB is seeking approval meets certain of the Title VI’s pooling requirements, this is only because the Qualifying Modification leaves the Title III Debtors’ claims against GDB completely out of the Title VI process. Had the Title III Debtors’ claims against GDB been included as part of the Qualifying Modification, they would have to have been included in the same pool as GDB’s favored unsecured creditors and their claims treated “fairly and equitably” as part of that same pool.

If the unfairness and inequity of the GDB Restructuring were not enough, the GDB Restructuring Act purports to deprive the Title III Debtors of any authority or standing to challenge the restructuring or any related transactions (which a Commonwealth law cannot do). Thus, the Committee is now all that stands in the way of this unlawful liquidation of GDB. Indeed, if the Committee is denied standing and the GDB Restructuring is approved, it will long be remembered as a notorious case in which, right under everyone’s noses, an insolvent entity was unlawfully liquidated pursuant to a territory law, all of its most valuable assets were used to pay a favored subset of unsecured creditors, rights and claims of potentially enormous value were released without any prior investigation, disfavored creditors were rendered powerless to do anything about it, and the parties ultimately harmed were not allowed to come forward and be heard. (Footnotes omitted, bold added)

The motion also discusses, in detail, the different causes of action the Commonwealth is abandoning against the GDB and how the balance cannot favor the latter. Moreover, the UCC points out shady dealings by the GDB. At pages 14-15 of its motion, the UCC states:

Among other things, as detailed in the Oversight Board’s investigator report, GDB abused its position as a lender to the Title III Debtors by increasing their debt load in a way that benefitted GDB as a creditor of the Commonwealth relative to other Commonwealth creditors. Around half of the entire proceeds from the 2014 GO Bond offering (approximately $1.6 billion) were earmarked to repay  Commonwealth and PBA lines of credit with GDB (and for PBA working capital). These repayments were ostensibly motivated by the GDB board members’ concerns over their own personal and criminal liability if GDB were insolvent. Indeed, accepting deposits while insolvent gives rise to criminal liability under Puerto Rico law.38 In short, the 2014 GO Bond offering was designed, in large part, to improve GDB’s balance sheet (for the benefit of GDB’s directors and officers) by hindering or delaying (if not defrauding) other Commonwealth creditors. (Bold in the original)

This allegation clearly raises a lot of questions. Did the García Padilla administration actually violate the law? Should Melva Acosta be indicted by the Puerto Rican government? The problem is that if the Commonwealth were to indict these officials, it would not be able to continue with the Title VI in the fashion it has done. Then, why is the Commonwealth, with the complicity of the Board, changing the GDB bondholders from non-secured to secured creditors? One answer could be that in this fashion it strengthens the bottom line of the credit unions–stated in Adversary Proceeding 18-0028, Cooperativa de Ahorro y Credito Abraham Rosa, et al. v. Commonwealth of P.R., et al.:

The Commonwealth of Puerto Rico and codefendants COSSEC, GDB and FAFAA were aware of Plaintiffs’ sound operations and safe financial conditions even in times of financial crisis. Maliciously, in a calculated way and under false pretenses, Defendants offered and sold to Plaintiffs unsound Puerto Rico Debt Securities availing themselves (Defendants) of the Cooperatives’ assets. This resulted in an undue concentration of bonds in the cooperatives’ portfolios and created a systemic risk for the Cooperatives.

The governmental entities with legal and fiduciary obligations to ensure the financial health of the cooperative system ignored their obligations and induced the offer and sale of the unsound debt securities. These entities incurred in the reckless disregard of the systemic risks to cooperatives and failed to comply with statutory mandates, and ministerial and fiduciary duties. As a consequence, Plaintiffs suffered material damages, which are claimed herein. Such actions preclude the discharge of Plaintiff’s claims under the regulations of the Bankruptcy Code.

The Adversary Proceeding claims monetary damages and rescission of the bond contracts but the Cooperativa has not filed an objection to the GDB restructuring, which would make any claim against the Commonwealth very difficult. Obviously, I am not their counsel.

Judge Swain stated in its denial of a declaration that the GDB Title VI restructuring that the UCC had standing but stopped short of determining it had prudential standing, I assume to leave it for this controversy. The Oral Argument hearing is to be held on October 3, 2018 with a possible continuation during the October 15 Omnibus. I doubt the Judge will rule on Wednesday but she usually gives us an idea of where she is going. I will try to attend the San Juan transmission of the hearing, which will be held in New York.

Since we are talking about the GDB restructuring,  National Public Finance Guarantee Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Ambac Assurance Corporation, which had filed notices of objections to the GDB restructuring, filed a notice of stipulation withdrawing said objections, essentially leaving the UCC as the only objector to the GDB restructuring. Another factor to consider when Judge Swain weighs the UCC’s request.

Finally, the director of the Commonwealth Office of Budget and Management could not say if the Government would have enough money to pay the Christmas bonuses and the payroll for the rest of the fiscal year. Board Chairman Carrión said earlier last month that if the Government paid the bonuses, it would not have enough money to pay the payroll. Seems he was right. Since the payment of the Christmas bonus is a political issue, I am sure Governor Rosselló will do everything in his power to pay them and not furlough or fire any employees. Will be interesting to 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.