Welcome to your weekly Title III update for September 4, 2018. Important things came about inside and outside the cases.

I will start with the cases before the First Circuit Court of Appeals. In case 18-1214, where Congressman Bishop filed a brief of amicus curiae, Congressman Grijalva and Congresswoman Velázquez filed their own brief of amicus curiae, essentially denying all of Chairman Bishop’s statements and saying that Congress wanted Puerto Rico to file for Title III. Sounds as if the brief had been written by Antonio Weiss of the Obama Treasury. Oh, well.

Previously, I had mentioned an oral argument in the Aurelius case for September 10, but I was mistaken. There is no date for the oral argument, but Aurelius filed its brief that the Board has until September 21 to file its own and October 5 for a reply. The Court is not inclined to give extensions. I assume oral argument will be sometime in October/November and a decision by December/January, which gives time for a writ of certiorari to the Supreme Court and a decision by June 30, 2019. Or not. We shall see what happens.

Speaking of the Aurelius case, the Popular Democratic Party filed a brief of amicus curiae in that case arguing that Judge Swain’s opinion is incorrect inasmuch as “Congress renounced the power to annul the laws of Puerto Rico (brief at page 12).” This is nothing more than the old Luis Muñoz Marín theory of the ELA as a consensual pact that cannot be changed unilaterally, discredited by PROMESA. The PDP did not ask to intervene in the Aurelius case nor filed this brief there. It is hoping against hope for some favorable statement by the First Circuit (or the SCOTUS) in favor of its theory. The problem with the theory is that if Congress cannot annul the laws of Puerto Rico, then Title I and Title II of PROMESA are invalid and then pursuant to section 3(a) of PROMESA, Title III would be deemed invalid. Small problem. In any event, this is simply another intrusion of the Byzantine party politics of Puerto Rico in a case.

In response to the UCC’s motion as to the GDB brought reaction from both AAFAF and the Board. Both motions are very similar and claim that the UCC cannot challenge the Governmental and Political Judgments about the use of their property, specifying that (1) The Title III debtors do not have a net positive claim against the GDB, (2) That the UCC does have not authority to Object to the GDB restructuring,  (3) That the UCC lacks standing; (4) That the automatic stay does not apply to the Title VI case; and (5) That sections 303 and 305 of PROMESA protects the Title VI restructuring. The Board, at page 10-11 of its brief states:

The UCC does not represent GDB creditors because GDB is not a Title III debtor. To attempt to get a seat in the GDB Title VI case, the UCC contends the GDB restructuring eliminates the Debtors’ claims against GDB and its current and former insiders. Motion ¶ 19. As shown above, the Debtors do not have net positive claims against GDB in the first place. But even if they did, it is beyond credulity that the Commonwealth, HTA, and PREPA can have meritorious claims against the governmental entity that loaned them money and kept them afloat at the request of the Puerto Rico government. But, even if they do, in the absence of the applicability of Bankruptcy Code § 363, and in light of PROMESA § 303’s protection of governmental and political powers over GDB’s assets and revenues, the Commonwealth and other Title III debtors are entitled to use their property to facilitate repayment of bondholders in their discretion. (Bold added)

Therein lies the conundrum. Two members of the Board are former Presidents of the GDB and one of them issued large amounts of COFINA debt, which is still outstanding. And they both worked at Santander Securities who helped to issue said bonds. If they violated any fiduciary duty, it would be unseemly for the Board to pursue this theory or allow for it to be pursued. Hence, it wants to shut down any possibility of a cause of action by the Government against the GDB, even if the Kobre and Kim report intimates that the GDB acted negligently.

Separate from the UCC objections and AAFAF and the Board’s opposition to said objections, last week the Municipality of San Juan filed a notice of intent to object to the GDB restructuring. In the objection, the Municipality states:

First, San Juan enjoys a lien over the monies held in trust by GDB pursuant to P.R. Act 64-1996 and the Trust Agreement between San Juan and GDB, yet San Juan is not being provided a separate voting pool, as required by PROMESA. See San Juan v. GDB, et al., Case No. 3:17-cv-2009-LTS-JGD (D. PR.), ECF No. 109, at 38-39.

Second, while PROMESA provides the sole and exclusive means for the GDB to effectuate a restructuring of its assets and liabilities, the GDB is nonetheless relying upon P.R. Act 109-2017, as amended, to effectuate a restructuring of San Juan’s Excess CAE trust funds.

This brings us to another mystery. The Board in its opposition included a GDB RSA of over 130 pages but the Municipality of San Juan’s motion makes reference to a 42 page RSA. Which is the correct one? Only the Board knows.

Talking about RSA’s, the one for COFINA is out and it is well over 100 pages. The agreement includes the Board, COFINA, AAFAF, Senior COFINA holders of bond claims, Ambac, National, Junior COFINA holders of bond claims, Assured and Bonistas del Patio.  With AAFAF involved, it means that the Commonwealth is in agreement. The document also mentions that it is the result of participating in the mediation process. “In the event that any disputes arise in connection with the preparation of the Plan and Disclosure Statement, each of the Parties consent to such matters being referred to mediation for the resolution thereof; provided, however, that no Party is limited to having any such dispute finally determined by mediation.” In other words, mediate first and if you don’t like the result, then go to Judge Swain.

The RSA states that the Disclosure statement (required by the Plan of Adjustment) in COFINA and the settlement documents in the Commonwealth Title III case will be filed on or before October 15, 2018, which means that by early 2019 the Plan of Adjustment may be approved.

As to the Covenants (duties) of Bonistas del Patio, a local group purportedly representing only locals, must:

Bonistas shall (i) actively encourage support by “on island” bondholders for the agreement set forth in the Term Sheet, (ii) post a statement of support for the Term Sheet and the Plan on the Bonistas’ website, (iii) make Bonistas available to “on island,’ bondholders to answer questions regarding the Term Sheet, the Plan, Disclosure Statement, Confirmation Order and other Definitive Documents, and (iv) support legislation that may be necessary or appropriate to implement the transactions contemplated by the Term Sheet.

Those parties who are part of the Aurelius challenge may continue in the case but:

hereby covenants and agrees that, no matter the determination and the entry of a Final Order in connection with the Appointments Related Litigation, with such determination and Final Order being entered either prior to consideration of approval of the Settlement Motion or confirmation of the Plan by the Title ITI Court or subsequent to entry of an order approving the Settlement Motion and confirmation of the Plan, such Party (i) shall not urge or argue that such determination and Final Order reverses, affects, or otherwise modifies the transactions contemplated herein, in the Term Sheet, in the Settlement Motion and in the Plan and (ii) in the event that such determination and Pinal Order (y) occurs prior to approval of the Settlement Motion and confirmation of the Plan and (z) causes or requires the reconstitution or reappointment of the Oversight Board, such Patty shall urge and request that such reconstituted or reappointed board ratify the terms and conditions of this Agreement and the Term Sheet and promptly seek approval of the Settlement Motion and confirmation of the Plan by the Title III Court.

Pursuant to section 7.5, the agreement is governed by New York law, and jurisdiction is set for the Title III Court. This agreement is throughout the GDB, COFINA and PREPA agreements. In other words, these agreements are far removed from Puerto Rico’s legal institutions. Guess that is what happens when you hire New York law firms. As part of the agreement:

The Commonwealth-COFINA Dispute shall be compromised and settled pursuant to the Settlement Motion in the Commonwealth PROMESA Proceeding, on the one hand, and pursuant to the COFINA Plan of Adjustment, as defined below, on the other hand, with (i) COFINA being granted an ownership interest of the COFINA Portion, as defined below, and (ii) the Commonwealth being granted an ownership interest of the Commonwealth Portion (Underlining added)

In addition, in a section entitled COFINA Plan of Adjustment, it is further clarified:

Contemporaneously with the filing of the Settlement Motion, the Oversight Board, on behalf of COFlNA, will file the COFINA Plan of Adjustment and disclosure statement related thereto. The COFINA Plan of Adjustment shall provide, among other things, (i) that, as of the COFINA Effective Date, COFINA will be the sole and exclusive owner of the present and future revenues and collections generated by the five and one-half percent (5.5%) of the sales and use taxes imposed by the Commonwealth (the “COFlNA Pledged Taxes”) up to the COFINA Portion (Underlining added)

What is important is that the Commonwealth surrenders its claim that its power to tax cannot be surrendered as per Article VI, section 2 of the Puerto Rico Constitution. One can argue that the Puerto Rico Constitution is not applicable as per the agreement but this does not apply to non-parties. In addition, what would prevent future governments from claiming that the agreement is contrary to the PR Constitution and therefore null ab initio? We must remember that section 314(b)(3) requires that “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” If the plan requires the surrender of the taxing power, is that legal? We must remember that the UCC in the COFINA litigation claimed that the taxing power could not be surrendered as per the Constitution. Who is right? Questions, questions.

Although originally all of the money deposited with New York Mellon bank up until July 1, 2018 was to be distributed to COFINA, now $78,355,837.63 will be distributed otherwise, with $33,355,837.63 going to the Commonwealth. Complicated.

The breakdown of the settlement is that Senior COFINA bondholders will receive 93% of their bond (although some analyst state this could be as high as 96%) and Junior COFINA bondholders will receive 53.399%. A very good deal for COFINA seniors and not so good deal for COFINA Juniors, originally purchased by local elites.

The Plan of Adjustment for COFINA will have the following classes (although the Board reserved the right to alter this):

Class 1: Senior COFINA Bond Claims

Class 2: Senior COPINA Bond Claims (Ambac Insured)

Class 3: Senior COFINA Bond Claims (National Insured)

Class 4: Senior COFINA Bond Claims (Taxable Election)

Class 5: Junior COFINA Bond Claims

Class 6: Junior COFINA Bond Claims (Assured Insured)

Class 7: Junior COFINA Bond Claims (Taxable Election)

Class 8: GS Derivative Claim

Class 9: General Unsecured Claims

Interestingly, Class 9 will not “receive a distribution pursuant to the COFINA Plan of Adjustment; provided, however, that, notwithstanding the foregoing, in the event that Class 9 votes to accept the COFINA Plan of Adjustment, each holder of a COFINA General Unsecured Claim shall be entitled to receive its pro rata share of One Hundred Thousand Dollars.” Since the Plan of Adjustment must be approved by all classes, does the Board actually want this class to say no, so it can force a cramdown via section 314(c)?

Bonds to be paid by the insurers have different rules so it is important to review this carefully. In addition, the agreement calls for actions by the Legislature:

Legislation and Documentation: On or prior to the COFINA Effective Date, legislation shall be enacted to amend (or repeal and replace) the existing COFINA legislation to, among other things, (i) establish the independent COFINA board of directors referred to in Section II (L) above, (ii) permit the sales and use tax, tax exemption, substitution of collateral and non-impairment provisions referred to herein and ( iii) grant such other authorizations, if any, which may be required to implement the transactions contemplated herein, including, without limitation, (a) a determination that COFINA is the owner of the COFINA Portion under applicable law, (b) a grant of a statutory lien on the COFlNA Portion to secure the payment obligations with respect to the COFINA Bonds and COFINA Parity Bonds, in whole or in part, or otherwise in accordance with the ABT, (c) enhanced financial reporting, (d) events of default and imposition of certain measures upon an event of default (e) submission to the jurisdiction of the Title Ill Court, and (f) other customary terms, conditions, and covenants for similarly structured and supported municipal bonds that are acceptable to the PSA Parties. To the extent applicable, the foregoing terms and such other terms as may be agreed upon shall be included in the new bond resolution authorized by COFINA. (Underlining added)

With the clear war that Senate President has waged with Governor Rosselló, will he dare to say no to surrendering the Constitutional power over COFINA taxes? Will the Legislature continue to defy the Board? No idea at this time.

Nor do we have an idea at this time if the General Obligation bondholders will object to this agreement. They filed motions for summary judgment in the COFINA litigation and the stay on the determination of all motions in the case is fast approaching. Will the creation of a new GO group, allegedly more willing to compromise according to the Wall Street Journal, change the dynamics of this deal? The GO’s blocking of the COFINA deal will depend on whether they are offered a similar or better deal. If they don’t block the COFINA deal, they will lose much of their bargaining power to get a similar or better settlement. We shall soon find out.

In other news, the Board informed the Commonwealth that its new fiscal plan is also non-compliant. It requires the Commonwealth to provide more information how Act 154 revenues increment in $5.9 billion; a reduction in payroll expenditures (possible firings as per Ms. Jaresko’s statements to the press?); either eliminate the Christmas bonus or increase savings somewhere else (and Mr. Carrión has made it clear that the Commonwealth cannot take money from one part of the budget to pay this without Board consent), reflect payments to PREPA, and payroll freeze language should eliminate “if continued.”

Moreover, the Boards position on pensions remains (10% reduction to be implemented in 2019) and the Commonwealth is informed that its plan “cannot budget to pay Social Security contribution costs of its employees; rather, the budget only provides for the employer contributions.” Finally, the numerous references to the need for statehood must be eliminated. Although I am a staunch statehood-er, I concur with this assessment.

The Board also noticed the Commonwealth that the UPR fiscal plan was deficient. It wants increases to the graduate students tuition and exemptions to tuition. In addition, the Board warns on the need of elimination of positions being vacated, saying “[f]ailure to achieve savings required in the June Certified Fiscal Plan through voluntary attrition may require intentional headcount reduction.” OUCH! Finally, the UPR is given the same warnings on Christmas bonuses and pensions.

Last week the Southern States Energy Board made an announcement “Strategizing an Electric Energy Policy & Regulatory Framework in Puerto Rico” as to its role in Puerto Rico and also announced the membership of its “Blue Ribbon Task Force—a force with the assignment to make recommendations regarding the functions of a Puerto Rico regulatory agency with responsibilities for ensuring a safe, reliable, and resilient electric grid that provides a strategic energy plan for the future.” Although Bruce Walker had said that the SSEB was in charge of the development of a policy and legal framework to provide a regulatory regime for a potential privatization of the PREPA electric system, now it seems that is not the case. In the Frequently Asked Questions of the website, it states:

Does SSEB have a role in the reformation and privatization of PREPA and its regulation?

No. SSEB is not an advisor in efforts to reform and privatize PREPA. SSEB will not be making or influencing decisions related to PREPA’s privatization or how it is ultimately regulated. That decision resides with the Government of Puerto Rico. However, SSEB will examine the current state of the privatization effort to inform the drafting of appropriate regulatory models for consideration by the Government of Puerto Rico.

This is extremely confusing. The website confirms that the Department of Energy is funding this effort and my recollection is that Mr. Walker of the DOE stated that it was giving the SSEB $1.3 million to deal with the sale. If now it is not dealing with it but will only examine the effort, what is the money for? Is the DOE aware and in agreement with this? In any event, this seems to make any idea of DOE involvement with PREPA nothing more than wishful thinking on our part.

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.