Monday Update – October 30, 2017

Welcome to your weekly Title III update for October 30, 2017. This week is dominated by the Whitefish scandal, which will undoubtedly affect the PROMESA litigation and the Board’s roll vis-à-vis the Puerto Rico government.

Whitefish is a recently incorporated Montana-based company with only two employees and reported sales of $1,000,000. The company has no history of mayor reconstruction work, yet, somehow, landed a $300,000,000 contract to reconstruct the PREPA grid. Ricardo Ramos, PREPA’s executive director, said right after Hurricane Irma that the utility had sufficient supplies to repair itself – a claim later debunked. Mr. Ramos stated later that if another hurricane came he would call the American Public Power Association, which would provide its crews for the reconstruction of the power grid. When the APPA crews did not appear, he first said that he had called the association for assistance but received no answer. When the APPA chairman said he had not called, Ramos changed the tune to say they were asking for millions in deposit, something Whitefish did not.  There was no bid for the contract. The contradictions were many and Congressional cries to investigate were loud. Moreover, the contract became public but rather than answer questions it created more. Paragraph 59 reads, “[i]n no event shall PREPA, the Government of Puerto Rico, the FEMA administration, the Comptroller General of the United States, or any of their authorized representatives have the right to audit or review the cost and profit elements of the labor rates specified therein.” This section reeks of bad faith and lack of transparency. Further, in any event would be void as contrary to the law, moral and public order, both in Common Law and Puerto Rico’s Civil Law.  FEMA will have to decide soon whether it will reimburse PREPA for the Whitefish contract – a question sure to be raised when FEMA Administrator Brock Long testifies before Congress this week.   Now, it’s reported the Federal Bureau of Investigation is investigating the Whitefish contract.

Further, on October 26, 2017, Congressman Rob Bishop, chairman of the House Natural Resources Committee, requested from Ricardo Ramos a series of documents pertaining to the adjudication of this contract. Congressman Bishop, in a not very subtle tone, made clear to Mr. Ramos to preserve all communications with Whitefish, which include emails, phone calls, and Linked In messages – the method a Whitefish spokesperson claims is how he first contacted Mr. Ramos. In what seems like a coordinated action with Chairman Bishop’s Committee, the Board announced on October 25, 2017, the designation of Mr. Noel Zamot as the Chief Transformation Officer for PREPA. The next day, the Board filed a motion with Judge Swain in the PREPA Title III proceeding asking for Mr. Zamot to be appointed as CTO, whose duties and responsibilities makes him PREPA’s new CEO, see motion at page 2. The motion, at page 17, states as follows:

“Section 305 of PROMESA provides that, “notwithstanding any power of the court, unless the Oversight Board consents or [the debtor’s Title III] plan [of adjustment] so provides, the court may not by any stay, order or decree, in the case or otherwise, interfere with –(1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.” PROMESA § 305. As this Court reasoned in its rejection of the lift stay motion, a receiver could not be appointed because “permission to require the appointment of a receiver to manage PREPA’s operations and seek the approval of rates higher than those PREPA has thus far chosen to charge – is facially inconsistent with Section 305 of PROMESA [and cannot be ordered by the court] absent the Oversight Board’s consent, which has not been given here.” Order Denying Receiver Motion at 10–11. It follows that, to the extent it is argued that the CTO would necessarily exercise or interfere with political or governmental powers in carrying out its responsibilities, the Court may order the appointment of the CTO provided the Oversight Board consents. The Oversight Board’s consent is given through this Urgent Motion, and it respectfully requests appointment of the CTO with the powers and authority described herein.”

Moreover, at page 19 of the motion, the Board states “[n]othing herein shall prevent the Oversight Board from seeking an order from the court to amend, alter, expand, or limit the Powers and Authority vested in the CTO by any order of the court.” Hence, the Board may seek even more powers for the CTO. This begs the question; can the Board obtain the appointment of a CTO for the Commonwealth Government at some time to eclipse Governor Rosselló? The government has vowed to oppose this latest Board action but I see little chance it may succeed. Judge Swain on Friday ordered the government to oppose the Board’s motion no later than November 3, any reply by November 8 and the oral argument will be on November 13, at 11 am. Fireworks are to be expected unless Governor Rosselló relents.

Why is the Board moving for the Zamot designation? Mostly because it wants to control the María recovery funds, something that is barred at this time by PROMESA section 204(d)(2), and to prove that it is a useful oversight authority rather than simply a tool rip up contracts with Puerto Rico’s creditors. As I said, Judge Swain is very likely to side with the Board since sections 305 and 315 of PROMESA allow the Board to do so.

On Wednesday October 25, the Court held the hearing on the recovery funds motion by the Board and surprisingly, loans were removed by AFFAF from the definition of recovery funds. The language was negotiated between the parties for as I said, there was no real opposition to the Board’s motion, only to some of the language. Also, the UCC said that it expected to settle the COFINA v. Commonwealth litigation, hastily adding that litigation was very costly. Undoubtedly, over 90% of federal cases are settled, but any settlement here that does not involve 100% of COFINA funds for the Commonwealth will be challenged by the GO bondholders, leading to even more litigation.

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.