Monday Update – September 11, 2017

Welcome to Monday Title III update for September 11, 2017. Although Hurricane Irma rightfully drew attention away from the proceedings, several important things happened. Judge Swain issued the Peaje decision, holding that it had not shown during the August 8, 2017 injunction hearing a likelihood of success in its claim that its bonds had a statutory lien over the HTA toll revenues. Judge Swain opined on page 13 of the opinion that:

“Rather, the HTA Enabling Act provides that a ‘contract’ between HTA and a third party may contain a lien, which consensual lien would be enforceable assuming that it satisfied certain conditions. In this respect, the HTA Enabling Act is not meaningfully different from Article 9 of the Uniform Commercial Code, which is a model statutory provision that defines certain conditions under which a lien becomes enforceable. That a lien arising under Article 9 is enforceable does not, however, make that lien a statutory lien under Section 101(53) of the Bankruptcy Code; similarly, that HTA linens trace their validity to the HTA Enabling Act’s grant of authority to create liens does not make liens that HTA subsequently decided to create statutory in nature.”

Judge Swain also decided that Peaje had failed to show that the 1968 Resolution was a law of the Commonwealth or that it would suffer irreparable damage. She determined that Peaje’s expert testimonies by Dr. Hildreth and Thomas Stanford were not credible. On the other hand, she gave credibility to HTA Executive Director González. Hence, even if Judge Swain’s legal conclusions regarding the Peaje lien were reversed on appeal, it is highly unlikely that her decision on the issue of irreparable harm would. A judge’s factual determinations based on testimony she heard are reviewed for clear error and that almost impossible to reverse.

Judge Swain’s decision is consistent with what I have mentioned time and again, she adheres to the letter of the law. If the HTA statute said that a bond created a lien, she would have decided in favor of Peaje, but since it did not, she decided in favor of the Board. This brings us to another important consideration: Judge Swain will give government witnesses great weight. Hence, opponents must come loaded for bear against them. It does not suffice to make them look silly.

Of course, this does not mean Peaje will not try to review her decision but may have to wait until the end of its case since this was only the denial of the injunction. Without a doubt, however, this is a victory for the Board’s continuous effort to destroy all bondholder liens in PR.

I would like mention an article that came out in Bond Buyer, a publication that I follow, and find very informative. There is a new litigation between the Commonwealth v. COFINA (not GO’s v. COFINA) which was filed on Friday, September 8 (more on that later). Judge Swain, however, has not put anything on hold, as evidenced by the Peaje decision. Moreover, although the Board has requested that Judge Swain decide the issues in the case by December 15th, this is unlikely to happen. She has set evidentiary hearings on the issues for December 4-8th. In the Peaje case, after one day of hearing, the post hearing motions extended until August 28th and she decided the issues 11 days later. The issues in COFINA are far more complex and I doubt the decision will come down before January-February.

Another interesting development is the Board’s Informative Motion to Set Briefing in the Aurelius and UTIER constitutional challenge. Plaintiffs’ claim that the Board members’ appointment violates the Appointment’s Clause of the US Constitution. This challenge signals the Board has taken this motion seriously and notified the Court it would hire Donald B. Verrilli, Jr., Obama’s former Solicitor General. Also, in this motion the Board seeks to extend the time to answer the complaints. It stated at page 4 of its motion:

“On the current schedule, the parties to each case will have completed their entire briefing before the Government is required to notify the Court of its plans to intervene or not. That leaves limited time for the parties to consult and exchange views with the Government before making their submissions. That consultation is a standard and important practice in a case like this one, as it involves a challenge to the constitutionality of a federal statute and implicates the significant interests of a broad range of government agencies.”

Although this is true, it seems to me the Board wishes to make sure the Trump administration does not pull the rug out from under it, which is certainly possible. Consider that if the Board was illegally appointed, President Trump would have the right to name all 7 Board members with only the consent of the Senate. That could be a huge difference in these cases.

In another interesting development, although the Unsecured Creditor’s Committee had requested and been denied intervention in the Mellon Bank interpleader COFINA litigation, it again requested leave to intervene and surprise, surprise, the Board, who claims it has no position on the COFINA issues, supported the request. It is quite clear that the Board wants to destroy the COFINA lien to use those proceeds to continue funding the PR Government as it has until now. Any claim to the contrary is pure hogwash. It goes without saying all COFINA creditors oppose the intervention.

The Unsecured Creditors’ Committee filed its complaint against COFINA in representation of the Commonwealth of Puerto Rico at 11:22pm Friday, September 8th. The 44 page complaint is a smorgasbord of lamentations against COFINA with 13 causes of action. The causes of action claim, inter alia, that the Commonwealth did not transfer to COFINA ownership of future SUT revenues; that Act 91 did not assign to COFINA any “right to receive” future SUT; that COFINA has no enforceable security interest in future SUT revenues; that any unperfected security interest COFINA may have in SUT receivables is voidable; that any security interest of COFINA revenues is subordinate to the rights of the Board as Trustee; that the commencement of the Title III case cut-off any security interest; that post-petition transfer of SUT revenues to non-Commonwealth entities violates the automatic stay, etc.

Obviously, the complaint takes the shotgun approach: If I don’t hit you with one barrel I’ll get you with the other, but there a few surprises. For example, the Fifth and Sixth Causes of Action states that if the Court determines that any interest of COFINA in SUT revenues is not a security interest or it was unperfected, it may be voidable pursuant to 11 U.S.C. § 544, § 547 or § 548. This would mean that depending on the section of the Bankruptcy Code that the UCC invokes, it could collect COFINA payments from bondholders as far back as two years or as early as 90 days before the filing of the petition. I imagine Mr. Kirpalani burst a vein when he read that.

In addition, the UCC claims in cause of action Twelve and Thirteenth that COFINA is unconstitutional pursuant to the Puerto Rico Constitution, which is a more likely case. Interestingly, the UCC states at page 33, paragraph 146:

“Puerto Rico’s constitution also prioritizes the payment of the Commonwealth’s public debt over all other debts and expenses in the event of a revenue shortfall (the “Constitutional Debt Priority”)”

At page 34, paragraph 147 it continues stating:

“There can be no dispute that, prior to the Commonwealth Petition Date, the SUT revenues dedicated to COFINA would, but for their dedication to COFINA, be “available revenues” of the Commonwealth (which would first be paid to the holders of lawfully issued Commonwealth public debt).52 Accordingly, the dedication of SUT revenues to COFINA reduced the revenues that would otherwise be available to the Commonwealth to pay its creditors.”

Does this mean that the Board, through its agent the UCC, recognizes that the money from COFINA belongs to the GO bondholders? Very much doubt it since the Board has said GO bondholders have no priority. Time will tell.