Monday Update – October 16, 2017

Welcome to your weekly Title III update for October 16, 2017. Again, this week not much happened in the Court but other developments were of great importance.

Judge Swain granted the Board’s extension of the time to meet and discuss lifting of the stay in those case where the time expired on September 19 on, as well as the time for Puerto Rico to respond to motions to lift stay. Delay seems to be the name of the game.

On October 12, Judge Swain ordered the Board to “submit a revised proposed order to the Court that includes a procedure for retroactive Court approval of any automatic stay modifications. For example, such procedures may provide the following:

(a) The Debtors, in their discretion, and without immediate leave of Court, may (i) enter into stipulations modifying or lifting the automatic stay and (ii) agree to modify or lift the automatic stay with respect to any prepetition ordinary course civil action against a Debtor;

(b) The Debtors must file Omnibus Lift Stay Motions, every sixty (60) days, identifying each automatic stay modification agreed to by the Debtors during the relevant period and seeking that the Court approve such modifications nunc pro tunc to the relevant modification date; and

(c) Each Omnibus Lift Stay Motion must include personalized information for each automatic stay modification including, as applicable, a brief description of the modification, case information (including case number and court), and counterparty.

Seems the Board wants to further remove the Court’s control over certain proceedings but Judge Swain seems reluctant. Let’s see what happens.

The Board had also filed a motion to set the last date for filing proof of claims but on October 13, withdrew the motion, allegedly due to Hurricane María. This means that there is no bar date for filing of proofs of claim at this time in any of the Title III cases. To this we have to add the withdrawal of the Board of its motion in the PREPA case to establish a procedure to cancel power purchasing agreements.

In the Commonwealth v. COFINA case, the UCC continues serving subpoenas to different parties. In addition, Judge Swain has ordered the parties that no later than October 20, “a proposed revised schedule to govern the remaining briefing and discovery deadlines in the Commonwealth-COFINA Dispute. Such proposal may not include any deadlines starting prior to October 25, 2017.” This may move the Court to continue the December 4-8 hearings for a later date, further delaying decision in the controversy.

Governor Rosselló sent a letter to the Secretary of the Treasury and stated, inter alia:

“Without immediate access to a significant federal liquidity facility, we will be unable to provide essential services to our citizens, such as paying the salaries for teachers and first responders, providing healthcare, and paying pensions.”

“Personnel and advisors from the Government of Puerto Rico and the Fiscal Oversight and Management Board for Puerto Rico (“FOMB”) have been working closely with your staff to provide estimates on the magnitude of the shortfall. This shortfall results primarily from large declines in government revenues and operating deficits at PREPA and PRASA in addition to the need to fund near term recovery efforts.”

In addition, the Board sent a letter to Secretary of the Treasury and stated, inter alia:

 “The Government of Puerto Rico’s ability to provide essential services, such as paying the salaries for teachers and first responders, providing healthcare, and paying pensions, is in jeopardy unless Puerto Rico is given immediate access to a significant federal liquidity facility.”

“This proposal has the flexibility to provide Puerto Rico with the cash that it will need to operate core government services and its disaster response efforts in the near term, in addition to being integrated with PROMESA, its monitoring mechanisms, its fiscal reform goals, and the prehurricane certified fiscal plans.”

The obvious question is what proposal is the Board talking about? I have not seen it and neither has anyone in Puerto Rico, outside the Board and some government officials. Maybe the Centro de Periodismo Investigativo is finding out. I am sure everyone in Puerto Rico and the US want to know.

Congress responded by approving a $36 billion plus aid package with $4.9 billion, supposedly for loans, according to the Governor, who claims most of the monies will go to Puerto Rico.

In other news, the Board hired Williams and Jensen PLLC for $720,000 a year and Off Hill Strategies, LLC, for $180,000 a year to lobby in Congress and the Executive. Before you tell me María has made this necessary, the hiring was effective August 14, 2017, more than a month before the hurricane’s visit. Obviously, this hiring was done to protect the Board from any Congressional attempt to curtail its prerogatives. Power is very beguiling.

Also, the Board officially hired Donald Verrilli, Obama’s Solicitor General, as its attorney in the Aurelius and Utier constitutional challenge. At least five lawyers will be working on the case, at $1,225, $800, $735, $660, and $600 an hour. Clearly, contrary to what some analyst opine, the Board is taking this challenge very seriously. The next step is to wait for the US Solicitor General to announce whether he will defend the law. The Solicitor General usually defends Congressional laws but the Solicitor General asked for an extension to announce its determination.

Finally, to complicate my already complicated life, on Sunday October 15, the Board and AAFAF filed a motion entitled Urgent Joint Motion of the Commonwealth of Puerto Rico, Puerto Rico Highways and Transportation Authority, Puerto Rico Electric Power Authority, and the Puerto Rico Fiscal Agency and Financial Advisory Authority For Order Concerning Receipt and Use of Anticipated Federal Disaster Relief Funds and Preserving Rights of Parties, seeking an:

“. . . order confirming that with respect to the Commonwealth and its instrumentalities’ receipt and use of anticipated Federal Disaster Relief Funds: (i) the Commonwealth and its instrumentalities, including public corporations, will deposit Federal Disaster Relief Funds into new, segregated, non-commingled, unencumbered accounts held in the name of the instrumentality to whom the funds have been allocated according to a governing Project Worksheet or otherwise under applicable law (the “Disaster Relief Accounts”); (ii) no liens, encumbrances, priorities, or other claims by pre-existing creditors of the Commonwealth or Non-Federal Entities in any form whatsoever, shall be asserted against such Federal Disaster Relief Funds, Commonwealth Disaster Relief Advances, or the Disaster Relief Accounts; (iii) such funds shall be applied only to pay or reimburse parties for expenditures within the scope of work identified on a FEMA Project Worksheet or otherwise in accordance with federal law or regulation, and shall not be considered available funds, resources, or revenues for any other purpose in connection with any restructuring proceeding under PROMESA; (iv) no other party in interest shall be permitted to interfere with the transfer of Federal Disaster Relief Funds to Disaster Relief Accounts or parties entitled to payment; and (v) to the extent any Federal Disaster Relief Funds become disobligated, the Commonwealth, as recipient of such funds, shall have a superpriority administrative expense claim against any Non-Federal Entity that is a debtor in a case under Title III of PROMESA to which it transferred such funds.” (Pages 10-11 of the motion)

At pages 7-8, the motion states “[u]nder the FEMA Agreement, the Commonwealth is designated as the sole recipient of all Federal Disaster Relief Funds provided by FEMA. The Commonwealth is then responsible for administering subgrants and transferring Federal Disaster Relief Funds to Commonwealth instrumentalities, public corporations, municipalities, and other eligible non-federal entities, as determined under applicable law, including HTA and PREPA (“Non-Federal Entities”).” This means, as I have mentioned before, that Puerto Rico, not the Board, will handle the relief money, giving Governor Rosselló much needed independence from the Board.

In addition, there is no need to state this since it is clear law. Why did the Board do so? No creditor has claimed that the relief money belongs to them and I doubt any will. What’s even stranger, as a result of federal relief monies, it’s likely Puerto Rico won’t necessarily be required to tap its own resources to pay for the relief effort. Conversely, the Board has also already stated it will review the Fiscal Plan and will likely reduce available monies for debt service to zero. This is despite withdrawing the adversary proceeding to force the Commonwealth to implement the furloughs, and pension reforms, which are being paid out of the Commonwealth Budget. Something doesn’t add up. The Board must do more to reconcile where the revenue from the Treasury is going if it isn’t sending it to bondholder payments nor recovery efforts.

It will be important to watch out for the relief money, FEMA direct payments and insurance payments will pour into the island in early 2018, like it did after Hugo (1989) and Georges (1998). If history is any indicator, the economy will grow and it will be difficult to justify the continued payment of pensions and employees and yet zero debt payment with this economic growth. This will be a big row once the Board “reveals” its new fiscal plan.

Also, at page 5, the Board states that PRASA also suffered damages due to María. Since PRASA has no income at the moment, it remains to be seen if there is Title III in the future for the agency.

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.