Earlier this week, the Board, the COFINA agent and the Commonwealth agent filed an urgent motion announcing a settlement in principle in case 17-257 and requested 60-days to finalize their agreement. Contrary to what has been reported, this is not a COFINA-GO deal. Although the motion cautioned that there were still many details to be discussed and it could all fall through, Judge Swain was obviously pleased and praised the parties at the start of the Omnibus hearing noting, “I am pleased with the settlement agreement… It is an enormous significant development.” She granted until next Monday to specific objections to the COFINA motion and replies by next Wednesday.

Later in the morning, the UCC mentioned that the COFINA deal would be done within the Plan of Adjustment and the Board lawyers assured the Judge that they would endeavor to the have issued resolved before the 60 day period end. The UCC also mentioned that they will have to deal with the COFINA acceleration claims and the COFINA Juniors.

I always had the sense that the COFINA Seniors wanted to make a deal for they believed they would lose the litigation. Why settle if they were absolutely sure they had an ironclad lien?

Moreover, the Board desperately needed a creditor whose claim was impaired in order to have a cramdown, see PROMESA section 314(c), 11 U.S.C. sections 1129(b)(1), 1129(b)(2(A) and 1129(b)(2)(B). The settlement with one class that is impaired, be it only COFINA Seniors or all COFINA bondholders, will ensure, in the Board’s view, a cramdown by Judge Swain. This view, however, may be premature. As the UCC has said, there are several issues to smooth out with the COFINA bondholders, and the agreement has not even been made public, yet. If and when they are smoothed out, Judge Swain will have the deal made public (at least to parties in interest), there will be a hearing where anyone who objects, will. It seems likely the GO’s would object since any COFINA deal will involve the Commonwealth accepting they have a right to a part of the SUT. It will be interesting to see if the Governor, who desperately wants the SUT for the General Fund, will object. Depending on the deal, Junior COFINA holders could object to the deal since the COFINA Seniors claim they get paid first.

Also, although the UCC is party to the deal, any unsecured creditor could also object claiming that the COFINA structure, as the UCC claimed in its court documents, is illegal and hence it is not bond debt. Whether any of the challenges will succeed in derailing any agreement is open to question, but the effort will almost surely be made.

The Board’s attorneys presented an update of the situation in the cases and discussed the certification of the Fiscal Plans, the oral argument on the Peaje and PREPA lifting of stay, that to date there were 17,000 proofs of claim, which will be subject to objections with a procedure with low discovery and low litigation as to the claims to be put in the Plan of Adjustment. Once the objections are made, it becomes a contested matter pursuant to Bankruptcy Rule of Procedure 9014 and becomes a mini-trial. Hence the low discovery and low litigation. I will have to examine the procedure to know.

AAFAF presented an update on the GDB Title VI procedure, stating that it had secured the approval of slightly more than half the creditors and $2.6 billion of the $4.5 billion of outstanding debt. Title VI needs 2/3 of the amounts and 51% of the number of creditors for it to be approved. The debt will be exchanged for new bonds for approximately 55% of the debt. One of the problems, however, is that some of the money from which the bonds will be payed include a GDB proof of claim for $905 million loan (after set-offs for deposits) against the Commonwealth. Wonder how this will work. In addition, the Legislature still has to approve legislation dealing with this transaction. Solicitations for votes will begin in July 5, 2018.

The Court informed AAFAF that it would not be available for a hearing on the last week of August, so it will have to be scheduled for later in September. The September Omnibus hearing could be used but there is a need for a proposed timetable for either a contested matter with discovery and hearing or a confirmation hearing with discovery. The UCC, however, stated that it needed more information on the role of the GDB and Government and could object to the Title VI and challenge the proceeding. Interesting. Of course, AAFAF questioned the standing of the UCC but the gauntlet has been dropped.

Siemens has an adversary proceeding against the GDB claiming it is the owner of some money held by the bank. It wants the issue resolved in the adversary proceeding not in the Title VI hearing. The issue has been taken under advisement. Judge Swain reminded everyone there is only one of her. It is very true but she has several hot topics to decide, including Aurelius challenge to the Board appointment, review of the Fiscal Plan and others.

PREPA reported that it does not foresee the need for a loan for the time being. What a surprise. Judge Swain asked about efforts to strengthen PREPA’s response to future hurricanes. The answer was that PREPA was coordinating with FEMA and USACE. Is this accurate? Each week the Governor complains about the USACE, and then gives new contracts to PREPAs favored contractors. The Judge was right to ask this question, but the Court should not be satisfied with the response.

The Fee Examiner, the entity that makes sure the lawyers and experts do not overcharge debtors, had a presentation. During the presentation, the Fee Examiner and the Court reminded the parties to file joint motions on that in which they agreed. Good point. The Court suggested that there be a presumptive fee for attendance to mediation hearings and if the party exceeded that, it would have to file a confidential memo with the Fee Examiner to justify it. Electronic research has decreased in costs but users should explain if providers charge them a flat fee and what percentage of the flat fee is the research done. The Court approved the Fee Examiner’s adjusted fees and allowed him to look at previous bills to see if the changes suggested had been made.

The Fee Examiner suggested that McKenzie’s fees be reviewed and approved by the Board since no agreement could be reached. The Judge demurred and said she could not delegate that authority to the Board, citing sections 316 and 317 of PROMESA. She insists there must be metrics to be reviewed by the Fee Examiner.

PREPA requested that it be allowed to remove cases from state court all the way to the Plan of Adjustment. Again, the Court demurred but gave them 180-day extension until November 30, 2018. If PREPA needs more time, it could seek an extension at the November Omnibus.

Next, the Court heard the Retirees’ Committee motion requesting that a committee for PREPA retirees be appointed or its authority expanded to do so. The US Trustee’s office had no position but the PREPA Retirement Board objected, saying it was doing the job. After hearing the argument, Judge Swain cautioned that there were serious retiree issues, but denied the motion without prejudice. She asked the parties to monitor the situation and if they thought it was needed to file again.

In the afternoon, Judge Dein heard arguments on the UCC’s renewed motion for Rule 2004 discovery on the origins of the debt crisis. The UCC stated, quite correctly, that the Investigator appointed by the Board had said that it was not going to point fingers at anyone, but to make recommendations so there was not a repeat of the crisis.

In addition, the UCC said that it was receiving documents from BPPR and Santander but nothing from the GDB or third parties. That is when things got hairy. Although counsel for AAFAF had made a presentation from NY about the GDB agreement, during this issue, other counsel for AAFAF claimed they did not represent the GDB and that they had nothing to do with GDB documents. Judge Dein was obviously confused and not happy. From what I saw, this does not seem to be something the lawyers staged but that there is a conflict as to how to deal with these issues between the GDB, presided by one Government official and AAFAF, presided by another Government official. A very embarrassing situation.

I am not going to bore you with the legal gerrymandering. Suffice it to say that Judge Dein said very clearly those documents would be produced. Trying to save the rapidly deteriorating situation, the Board’s lawyers read a statement from the Investigator which stated the August 15 report will identify claims and avenues for recovery. This is a good idea since Judge Dein agreed with the UCC that a statute of limitations could run out come May 2019. The UCC wants to review all the documents the Investigator received in order to question the legality of various bond issues. If they were illegally issued, the money would still have to be paid, minus principal and interest paid, but there would not be any lien or Constitutional priority. It would just be another non-secured debt.

Judge Dein insisted she did not want this discussion on the documents being provided to the UCC on August 15, as the Board insisted, but rather right now. She issued an order today that states, inter alia:

“1. The Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) shall submit a status report to the Court on or before June 13, 2018 addressing the Independent Investigator’s position with respect to the issues addressed in the Renewed Motion including, without limitation, a. the Independent Investigator’s position with regard to the disclosure of search terms and custodians to the Official Committee of Unsecured Creditors of all Title III Debtors (other than COFINA) (the “UCC”) and the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (the “Retiree
Committee”);
b. the status of the availability of any production to the UCC and Retiree Committee of documents produced by parties to the Independent Investigator other than the Government Development Bank of Puerto Rico (“GDB”), Santander 2 and the Popular Entities3;
c. a description of the exit plan to be submitted by the Independent Investigator identified by the Oversight Board at the June 6, 2018 hearing. A schedule for the submission of the exit plan will be addressed at the continued hearing scheduled below.
2. The Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) shall submit a status report to the Court on or before June 13, 2018. Therein, AAFAF shall update the Court on:
a. The status of the production of documents from the GDB to the UCC and Retiree
Committee of those documents provided by GDB in the course of the ongoing independent investigation, including any privilege logs if necessary. This should include the parties’ progress on any relevant non‐disclosure agreement.
3. The Court will hold a continued hearing on the Renewed Motion in Boston,
Massachusetts on June 18, 2018 at 2:00 p.m. A representative with full settlement authority from GDB must be present at the hearing. A formal procedures order for the hearing will follow.”

Again, the Puerto Rico Government’s obfuscation is being eroded. A big win for the UCC and transparency. Let’s see what comes of it.