Monday Update –October 2, 2017

Welcome to your weekly Title III update for October 2, 2017. Due to Hurricane María, I was unable to do the September 25 update. Fortunately, my family and I survived with no structural damage. We have water but no electricity or phone service and very limited internet service in the lobby of my condo.

As the last effects of María left the island, the First Circuit Court of Appeals made the Title III cases a lot more interesting. On August 10, 2017, Judge Swain issued an order denying the UCC’s motion to intervene in an Assured litigation. The UCC filed an interlocutory appeal and argued the case. On September 22, the First Circuit issued its ruling. At page 5-6, the Court stated:

“The UCC was appointed in June 2017. Such a creditors’ committee, the duties and powers of which are outlined by statute, see 11 U.S.C. § 1103(c), is intended to serve as “the primary negotiating bod[y] for the formulation of the plan of reorganization” representing the interests of the “class[] of creditors . . . from which [it was] selected.” H.R. Rep. No. 95-595, at 401 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6357. A creditors’ committee is ‘arguably the one party in interest that, for all practical purposes, typically represents stakeholders with the most interest in the outcome of virtually every proceeding.’”

Later, at page 12, the Court stated:

“We believe that the Second and Third Circuits have the better view and, accordingly, hold that the UCC was entitled to intervene under § 1109(b) and Rule 24(a)(1). The statutory language is, indeed, quite broad, providing that ‘a creditor’s committee . . . may raise and may appear and be heard on any issue in a case under this chapter.’”

Although the Circuit also opined that the District Court has discretion to limit the UCC’s participation, the decision definitely broadens its role in the Commonwealth’s bankruptcy. Moreover, the First Circuit mentioned (without a need to do so), that the UCC is a “primary negotiating bod[y] for the formulation of the plan of reorganization.” This means that the Board is not the only one who will be formulating the Plan of Adjustment pursuant to section 312 of PROMESA. The Board must be thrilled.

I must add that the Board stated that it would review the fiscal plan to determine whether there is a need to changes to the Fiscal Plan and the Title III cases. This brings us to an interesting crossroads in the case. Congress and the President have pledged to provide billions to Puerto Rico for its reconstruction, which begs the question of whether the Board will control this money. Section 204(d) of PROMESA states inter alia:

“IMPLEMENTATION OF FEDERAL PROGRAMS.—In taking actions under this Act, the Oversight Board shall not exercise applicable authorities to impede territorial actions taken to—

(1) comply with a court-issued consent decree or injunction, or an administrative order or settlement with a Federal agency, with respect to Federal programs;

(2) implement a federally authorized or federally delegated program;”

What this means is that the Board WILL NOT legally have control over any new money coming in from the Federal Government, but rather the Commonwealth government and Governor Rosselló will. Despite this, as we see recovery efforts ramp up, the Board, notwithstanding section 204(d), wants to be the administrator of the recovery funds and is even trying to lobby Congress to that effect. Further, section 203(e) of PROMESA states:

“TERMINATION OF BUDGET REDUCTIONS.—The Oversight Board shall cancel the reductions, hiring freezes, or prohibition on contracts and financial transactions under subsection (d) if the Oversight Board determines that the territorial government or covered territorial instrumentality, as applicable, has initiated appropriate measures to reduce expenditures or increase revenues to ensure that the territorial government or covered territorial instrumentality is in compliance with the applicable certified Budget or, in the case of the fiscal year in which the Oversight Board is established, the budget adopted by the Governor and the Legislature.”

Therefore, can the Governor argue to the Board that it has “increased revenues” with the addition of more federal funds and furloughs are not necessary? The Board seems to believe it can and announced Saturday, September 30, that there would be no discussion of furloughs until the summer of 2018.

Also, can Bondholders claim they should be paid more if the PR Government will receive greater amounts of federal funding? Questions, questions. What is clear is that the Board’s influence and power has been reduced since María came to PR.

Of lesser importance, although the Board requested that the October 4 hearing be postponed only until October 18, Judge Swain ordered that most of the motions will be decided without oral arguments and others postponed until the November 15 hearing. The Utier/Aurelius constitutional challenge briefing may also be moved. In addition, the Ad Hoc Group of PREPA Bondholders filed a notice of Interlocutory Appeal from Judge Swain’s denial of their request for lifting of the stay in order to request the appointment of a receiver. Let’s see what happens.

Finally, COFINA. COFINA money is currently being held by NY Mellon bank as per Judge Swain’s order. The Board, however, since June has been telling Judge Swain that the Government would likely need to borrow from COFINA come November/December. With the disaster left by hurricane María, not only will Judge Swain be inclined to allow such “borrowing”, she may also be further inclined to declare that COFINA is property of the Commonwealth as the UCC claims in its lawsuit. Trial in that case will be held from December 4-8 and could completely destroy COFINA claims in the amount of $17.6 billion. Would not be surprised to hear COFINA attempting to strike a deal to keep the entity in existence. Should the Government and the Board do a deal that keeps COFINA alive, surely it will set off numerous questions about the Commonwealth’s financial sustainability, whether this is just more of the same financial gimmicks and certainly more legal challenges. It would also likely result in the GO bondholders renewing their claims that COFINA is illegal and the funds are available resources for payment of their bonds.  Let’s not forget about the UCCs role here, too.

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.