Weekly Update – May 29, 2018

Welcome to your weekly Title III update for May 29, 2018. This week many things have happened both inside the Courtroom and outside.

As I mentioned in last Tuesday’s update, Magistrate Judge Dein granted, subject to a confidentiality order, discovery as to previous fiscal plans. Unfortunately, I failed to mention that on May 15 the UCC had filed a renewed motion to conduct discovery as to Puerto Rico’s financial institutions, such as but not limited to Banco Popular of Puerto Rico, Popular Securities and Santander Securities, even though the Board hired an investigator to conduct such discovery. The UCC motion states:

“As the Investigator has acknowledged on multiple occasions, his aim is not to advance any particular claims or causes of action. See, e.g., Ex. B, October 30 Report, ¶ 4 (“The Independent Investigator understands its mandate to include maintaining the thematic focus of the investigation on the issues identified by the Special Investigative Committee and statute, and maintaining the independence of the investigation from biases that may arise from participating as a litigant in this or any other litigation involving the matters under investigation.”). For example, the Investigator’s original “Work Plan” was specifically edited to remove a mandate to identify claims, leaving the focus on policy fixes or suggestions for the Commonwealth’s future issuances in the capital markets. See Redline to Investigator’s Work Plan, attached as Exhibit B to Creditors’Committee’s Status Report on 2004 Motion [Docket No. 1284-2] (Oversight Board’s redline of draft work plan removing language regarding the regarding the Investigator’s responsibility to identify “whether there was any misconduct relating to disclosure, selling practices, or use of proceeds in connection with the issuance of debt . . . including the identification of any potential claims . . . as well as the targets of those claims”).”

Obviously, the UCC, who are no fools, believes that there are some bonds that were issued illegally and that Puerto Rico’s financial institutions exerted undue pressure for the Commonwealth to issue bonds. This is exactly the type of “debt audit” that should be performed, not the “ñoñería” (idiomatic expression, akin to nonsense) that certain groups in PR advocate. The Board opposed the motion in a partially sealed and redacted motion, essentially saying that the investigators report would be due in July 2018, that the UCC has participation rights in the investigation (which the UCC denies), that the independent investigator is better situated to do a cost efficient investigation and that at best, the Committee’s request is premature.

Santander Securities filed similar objections. The problem with these and other objections is that the UCC quite correctly has pointed out that Board Chairman José Carrión has familial and business ties with Banco Popular and Carlos García and José Ramón González used to be with Santander Securities. Seems to me that a proper investigation should NOT be directed by the Board. Since I am not able to see all of the Board and UCC’s arguments I cannot in good conscience make a prediction but seems to me both Judges are realizing the need for greater transparency in the proceedings.

On May 22, Magistrate Judge Dein issued her order as to the discovery of fiscal plan materials. It states:

1. The parties to the Motion to Compel shall file a proposed protective order with this Court by May 30, 2018.

2. The 47 documents identified in Exhibit B to the Motion to Compel are hereby ordered produced under Federal Rule of Bankruptcy Procedure 2004 and pursuant to the protective order agreed upon by the parties. As confirmed by the Movants in open court, these 47 documents complete the production of outstanding fiscal plan development materials that existed in the data room as of the filing of the Motion to Compel on April 9, 2018. Movants will not seek to classify as fiscal plan development materials any additional documents which existed in the data room as of that date, and which have not otherwise been deemed produced.

3. The 7 documents identified in Exhibit A to the PREPA Motion are hereby ordered produced under Federal Rule of Bankruptcy Procedure 2004 and pursuant to the existing protective order between the parties to the PREPA Motion. See Dkt. No. 708 in 17BK As confirmed by the PREPA Movants in open court, these 7 documents complete the production of outstanding fiscal plan development materials that existed in the data room as of the filing of the PREPA Motion on April 23, 2018. The PREPA Movants will not seek to classify as fiscal plan development materials any additional documents which existed in the data room as of that date, and which have not otherwise been deemed produced.

4. Respondents the Puerto Rico Fiscal Agency and Financial Advisory Authority, the Financial Oversight and Management Board for Puerto Rico, and PREPA have not waived their right to object to the admissibility of any document produced pursuant to this order.

5. Consistent with the procedures discussed at the hearing, the parties shall submit a proposed process for the production of fiscal plan development material identified after the filing of the Motion to Compel and PREPA Motion. The parties shall do so on or before June 4, 2018.

On May 23, 2018, Assured and other monolines insurers filed an Adversary Proceeding (the complaint has 101 pages) in effect challenging the Fiscal Plans and making some very interesting statements. For example, it challenges the Fiscal Plans’ statement that Puerto Rico has greater debt service that the states since Puerto Rico does not pay federal taxes but the states do. Assured calls many of the Plans’ projections “unreliable” and points out that with the “discovered” $6.85 billion, the Commonwealth could do debt service since it has good liquidity and it has failed to pay $2.9 billion in GO bonds. Moreover, Assured suggests:

“Rather than support the consummation of the PREPA RSA, FOMB decided to reverse course in favor of a scorched-earth strategy that prioritized non-consensual Title III debt adjustment over consensual arrangements with creditors. Such an approach was then, and is today, by no means necessary to maintain sufficient liquidity and “breathing room” to implement financial and structural reforms. Many levers remain available to the parties to ensure the Commonwealth maintains adequate liquidity, while still meeting mutually-agreed-upon, restructured obligations to creditors. Not surprisingly, many of these levers are the same as those agreed to in the PREPA RSA, including haircuts, deferral of principal and interest—whether on all or certain credits—and securitizations to obtain lower-cost financing, including new money investments for growth. In exchange, the Commonwealth could provide current interest, validation of liens and pledges, or other forms of consideration that would not unduly pressure liquidity and that would protect creditors.

202. As a purely illustrative example, the Commonwealth and creditors could agree to a consensual debt restructuring that resets debt service to levels that the Commonwealth can support even based on conservative economic assumptions. For instance, through constructive negotiation, the parties could agree to material accommodations including a principal debt service holiday, an exchange of existing debt for new securities with a long-dated tenor, the use of capital appreciation bonds, and the structuring of an overall limit on debt service set as a percentage of the Commonwealth’s “own source” revenues. . .

203. The following analysis shows that, based on Defendants’ projections in the Revised Fiscal Plan and assuming that the federal government provides at least 40% of Medicaid funding (which is a conservative assumption), there would be sufficient cash available over the next five years to pay an agreed level of contractual debt service. Thereafter, based on Fiscal Year 2023 estimated cash for debt service, the same, reasonable federal Medicaid assumption, and a reasonable assumption of a long-term 2.5% growth rate, the Commonwealth could support over $50 billion of debt at a 5% interest rate and 2053 final maturity. This implied debt capacity exceeds the estimated total Commonwealth claims currently outstanding.”

Subsequently, the complaint gets to the gist of the problem; if the fiscal plan is not in compliance with PROMESA, the Plan of Adjustment based on said fiscal plan cannot be confirmed. It specifically states:

“238. Given that it is already clear that no plan of adjustment based on the Revised Fiscal Plan could be confirmed, the Court should exercise its statutory and equitable powers to declare that the Revised Fiscal Plan is unlawful and unconstitutional, and to further declare that the Court will not hold a confirmation hearing on any plan of adjustment issued under the Revised Fiscal Plan. To the extent necessary, complementary injunctive relief should be granted.

239. Notably, Section 312 of PROMESA provides that only FOMB may file a plan of adjustment. However, where, as here, FOMB fails to file a plan of adjustment with the petition, Section 312 of PROMESA also gives this Court authority to “set” the time at which FOMB “shall file a plan of adjustment.” PROMESA § 312(b). The Court therefore may, and should, exercise its authority under Section 312 to order that FOMB may not file a plan of adjustment until it has approved and certified a fiscal plan that complies with PROMESA and the U.S. Constitution.”

Anyone familiar with PROMESA knows that section 106(e) states that the District Court does not have jurisdiction to review the fiscal plan. Assured states:

“242. Defendants may attempt to point to Section 106(e) of PROMESA as a purported barrier to judicial review. But Plaintiffs do not challenge the Board’s certification decisions; they challenge the violation of multiple independent statutory provisions that require any fiscal plan to adhere to the requirements of Section 201(b), and that impose additional statutory limits on a fiscal plan.

  1. In any event, courts have long held that “even when the statutory language bars judicial review,” an exception exists for claims—like those raised in this Adversary Complaint—that an “agency exceeded the scope of its delegated authority or violated a clear statutory mandate.” Hanauer v. Reich, 82 F.3d 1304, 1307 (4th Cir. 1996) (emphasis added); see also Leedom v. Kyne, 358 U.S. 184, 188 (1958) (applying this principle to vacate a determination made by the National Labor Relations Board “in excess of [the Board’s] delegated powers and contrary to a specific prohibition in the [National Labor Relations Act]”).
  1. Furthermore, Section 106(e) of PROMESA poses no impediment to the Court’s review of Plaintiffs’ claims that the Revised Fiscal Plan violates Sections 303 and 407 of PROMESA and Section 928(a) of the Bankruptcy Code, because FOMB has never made a “certification determination” with respect to Section 303 or Section 407 of PROMESA or section 928 of the Bankruptcy Code and has no authority under PROMESA to do so.

  2. At a minimum, Plaintiffs’ request that the Court decline to hold a confirmation hearing with respect to a proposed plan of adjustment based on the Revised Fiscal Plan cannot possibly be viewed as a challenge to FOMB’s purported certification of the Revised Fiscal Plan, because the Revised Fiscal Plan would remain certified and in effect even if the Court were to grant such relief. Therefore, Plaintiffs’ request that the Court not hold a confirmation hearing based on the Revised Fiscal Plan does not implicate Section 106(e) of PROMESA.”

Finally, Assured claims that without judicial review, PROMESA would be unconstitutional. All in all, a strong complaint with a very good summary of bondholders’ positions as to the nature f the PROMESA controversy.

As readers may remember, my view is that it all boils down to the Plan of Adjustment. The Board now is saying the Plan of Adjustment will not be filed this year but rather in 2019. If Judge Swain were to side with Assured, it would push back this timetable. Also, consistent with the previous attempt of GO’s and COFINA to come to a solution, the complaint states that bondholders are willing to make a deal but the Board and the Commonwealth do not. I think this is another theme that will continue to resonate this year. Let’s see what happens.

On May 24, 2018, Judge Swain decided not to send the COFINA issues to the Puerto Rico Supreme Court. She held:

“Thus, to resolve the central question of ownership the Court will have to, at a minimum, engage the federal bankruptcy law arguments raised in the Commonwealth Parties’ Submissions, even if the Court ultimately rejects those arguments. Further subdividing the ownership question into federal and Puerto Rico law elements would create the possibility of rendering the Supreme Court of Puerto Rico’s decision advisory. . . Because federal law issues are thus necessarily bound up in the antecedent question of ownership, the Commonwealth-COFINA Dispute presents a mixed question of federal and Puerto Rico law that is inappropriate for certification under Rule 25(b).

Certification is also unwarranted here because it will delay resolution of this particular dispute, impede progress towards a plan of adjustment, postpone the conclusion of these Title III proceedings, and consequently delay the debtors’ ability to regain access to financial markets.”

I think this was the correct decision, not only because of the federal law issues but the delay. Judges in the Federal District Court in Puerto Rico are very reluctant to send cases to the local Supreme Court precisely because it can delay for years and then send it back saying it won’t decide.

Also, the Retirees Committee had requested that it be appointed to represent the PREPA retirees and everyone seemed to be in agreement until the Sistema de Retiro de los Empleados de la Autoridad de Energía Eléctrica filed its opposition saying they should represent these retirees. Given the fact that it is the administrator of the plan, makes sense to me that they represent the PREPA retirees. Let’s see what the Commonwealth Retirees replies.

Finally, the issue of the Commonwealth budget continues to simmer with the President of the Puerto Rico Senate, Thomas Rivera Schatz sticking to his guns in refusing to eliminate Law 80. Although I doubt Senator Rivera Schatz’s opposition will last long, it is still an obstacle for the budget. If the law is not eliminated, what will the Board do? Again, let’s see what happens.

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.