As of this writing, the PR Supervisory Board insists on having a fiscal plan approved on or before January 31st. This gives the new administration, which will bear the brunt of the start of the fiscal plan, very little time to contribute to the final version. Today, new Governor Ricardo Rosselló has asked the Board to extend both its deadline for the fiscal plan and the PROMESA stay, which is set to expire on February 15 as things stand.

To me, the governor’s request makes perfect sense. It’s also perfectly in line with what PROMESA actually says. Why should the Board rush to have the Fiscal Plan in place, without giving the new administration time to assess the situation and weigh in? After all, Congress has made clear that the true goal of PROMESA is to promote and facilitate consensual negotiation between the government and its many creditors – something that would be made all the more difficult if that government is rushed to adopt a plan with which it is not comfortable.

Though I have heard some say the Board wants a Fiscal Plan in place BEFORE it can seek an extension of the stay, this is contrary to the clear language of PROMESA.

Section 405(d) of PROMESA states:

(CONTINUATION OF STAY.—Except as provided in subsections (e), (f), and (g) the stay under subsection (b) continues until the earlier of—
(1) the later of—
(A) the later of—
(i) February 15, 2017; or
(ii) six months after the establishment of an Oversight Board for Puerto Rico as established by section 101(b);
(B) the date that is 75 days after the date in subparagraph (A) if the Oversight Board delivers a certification to the Governor that, in the Oversight Board’s sole discretion, an additional 75 days are needed to seek to complete a voluntary process under title VI of this Act with respect to the government of the Commonwealth of Puerto Rico or any of its territorial instrumentalities; or
(C) the date that is 60 days after the date in subparagraph (A) if the district court to which an application has been submitted under subparagraph 601(m)(1)(D) of this Act determines, in the exercise of the court’s equitable powers, that an additional 60 days are needed to complete
a voluntary process under title VI of this Act with respect to the government of the Commonwealth of Puerto Rico or any of its territorial instrumentalities; or
(2) with respect to the government of the Commonwealth of Puerto Rico or any of its territorial instrumentalities, the date on which a case is filed by or on behalf of the government of the Commonwealth of Puerto Rico or any of its territorial instrumentalities, as applicable, under title III.

From reading this section it is clear that it is the Board who, in “its sole discretion” (more on this later) determines whether to extend the stay, but only if it is need to “complete a voluntary process under title VI.” This also explains why the Board has not yet extended it; PR has not conducted yet any good faith negotiations with its creditors since PROMESA was enacted. Conscious of this, the Board has notifiedcreditors in a letter of December 20, 2016 “it will start coordinating good faith conversations with creditors…”
Why is all this important?
Section 206 of PROMESA states:

(a) REQUIREMENTS FOR RESTRUCTURING CERTIFICATION.—The Oversight Board, prior to issuing a restructuring certification regarding an entity (as such term is defined in section 101 of title 11, United States Code), shall determine, in its sole discretion, that—
(1) the entity has made good-faith efforts to reach a consensual restructuring with creditors;
(2) the entity has—
(A) adopted procedures necessary to deliver timely audited financial statements; and
(B) made public draft financial statements and other information sufficient for any interested person to make an informed decision with respect to a possible restructuring;
(3) the entity is either a covered territory that has adopted a Fiscal Plan certified by the Oversight Board, a covered territorial instrumentality that is subject to a Territory Fiscal Plan certified by the Oversight Board, or a covered territorial instrumentality that has adopted an Instrumentality Fiscal
Plan certified by the Oversight Board

The Fiscal Plan must be in place BEFORE PR or its instrumentalities go into Title III Bankruptcy and they must have negotiated in good faith. Take note that the statute says “the entity” which means the Government of PR. Moreover, section 405(n) states of the purposes of the stay:

PURPOSES.—The purposes of this section are to—
(1) provide the Government of Puerto Rico with the resources and the tools it needs to address an immediate existing and imminent crisis;
(2) allow the Government of Puerto Rico a limited period of time during which it can focus its resources on negotiating a voluntary resolution with its creditors instead of defending numerous, costly creditor lawsuits

As you can see, sections 206(a) and 405(n) require PR, not the Board, to use the stay to conduct good faith negotiations to reach voluntary resolutions with its creditors. What would be the impact of the Board doing the negotiating and not PR when the Rosselló administration, who has signaled it is willing and able to come to agreements with the island’s bondholders? Let us see.

The language of sections 206(a) and 405(n) are quite plain. As the Courts frequently say, “[i]f the statute’s language is plain, “‘the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.’ ” Lamie v. United States, 540 U.S. 526, 534, (2004), quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, (2000) and In Re Rudler, 576 F.3d 37, 44 (1st Cir. 2009). Although the certification by the Board that PR can go into Title III is not subject to District Court review, see section 106(e) of PROMESA, section 206(a) does not mention certification with respect to good faith negotiations, only that it is in the Board’s sole discretion. In ERISA cases, the First Circuit has found that the language “in the sole discretion” means that the review of these cases is under the standard of “arbitrary and capricious.” See, Denmark v. Liberty Assurance Co. of Boston, 481 F.3d 16, 27 (1st Cir. 2007) and Denmark v. Liberty Assurance Co. of Boston, 566 F.3d 1 (1st Cir. 2009). What does arbitrary and capricious mean? “The operative inquiry under arbitrary, capricious or abuse of discretion review is ‘whether the aggregate evidence, viewed in the light most favorable to the non-moving party, could support a rational determination that the plan administrator acted arbitrarily in denying the claim for benefits.’” See, Wright v. R.R. Donnelley & Sons Co. Grp. Benefits Plan, 402 F.3d 67, 74, quoting Twomey v. Delta Airlines Pension Plan, 328 F.3d 27, 31 (1st Cir.2003), citing Leahy v. Raytheon Co., 315 F.3d 11, 18 (1st Cir.2002)). In addition, the decision must be “reasoned and supported by substantial evidence.” Gannon v. Metro. Life Ins. Co., 360 F.3d 211, 213 (1st Cir. 2004).

The next question is what could happen if a federal court decides that the Board’s determination that PR has conducted good faith negotiations was arbitrary and capricious? Good faith negotiations is a requirement of 11 U.S.C. § 109(c)(5)(B), but this section was not adopted by section 301 of PROMESA. Hence, one has to conclude that the good faith negotiations requirement of section 206(a) is equivalent to 109(c)(5)(B). If that were the case, the lack of good faith negotiations could entail dismissal of the case since section 304(b) of PROMESA states that “[a]fter any objection to the petition, the court, after notice and a hearing, may dismiss the petition if the petition does not meet the requirements of this title” And obtaining the certification of section 206 is a requirement of Title III, see section 302 of PROMESA. In bankruptcy, if the Municipality does not comply with 109(c)(5)(B), the case is dismissed, see, In Re New York Off-Track Betting Corporation, 427 B.R. 256 (S.D. N.Y. 2010).

Since there are only two things that require the Fiscal Plan to be in place, to wit, the approval of the budget (section 201(c)(1)) and the use of Title III Bankruptcy, the haste in which the Board is signaling seems to signal a willingness to send PR into this abyss is perplexing, if  not alarming.

Bankruptcy should be the last resort, not the first option in PR’s road to recovery.
We must have consensual negotiations and those negotiations must be based off of a Fiscal Plan that the Rossello Administration is comfortable with – not a hastily edited version of the Garcia Padilla Administration’s plan, which would undermine the entire process.  For that, it seems clear that more time is needed.  Governor Rosselló is off to the right start.