Monday Update – January 29, 2018

Welcome to your weekly Title III update for January 29, 2018. Things in the Puerto Rico’s bankruptcy are picking up and important activity in the political sphere is strongly impacting the litigation.

On January 22, 2018, Governor Rosselló gave a televised speech announcing that PR would sell PREPA. The short 15 minute speech only stated that legislation would be presented to allow the sale, that a period of negotiations would ensue and then the sale, all in the period of 18 months. It was also stated that the generation would be sold but transmission would be leased.

Immediately, political analysts in PR showed their ignorance of bankruptcy law and PROMESA by stating that Governor Rosselló could not sell PREPA without Court permission or the Board’s agreement. As to the first, PROMESA, the same as Chapter 9, did not adopt section 363 of the Bankruptcy Code which requires Court approval of any sale outside the ordinary course of business. As to the Board, let’s just remember what Judge Swain said in her opinion on the appointment of Mr. Zamot as CEO of PREPA, at page 16:

“The FOMB’s assertion that Title III creates or reinforces direct managerial power granted by Titles I and II rings hollow as well. PROMESA section 303 reserves the territory’s political and governmental powers to the territory or “any territorial instrumentality thereof,” subject only to Titles I and II. See id. § 303.6 As the Court has explained, nothing in Titles I and II permits the FOMB to displace local government structures and authority by declaration. Similarly, sections 305 and 306 do not empower the FOMB to interfere unilaterally with the debtor’s political and governmental powers, or with the debtor’s property or revenues.”

Since PREPA is owned by the Government of Puerto Rico, the Board’s agreement to the sale is not needed. The way the Governor wants to sell PREPA, however, free of liens and debts, however, requires the Board’s agreement since it is the only entity allowed by PROMESA to file a Plan of Adjustment, see PROMESA section 312 and page 18 of the Zamot opinion. But any Plan of Adjustment that impairs creditor classes must be approved by said creditors and if no such approval ensues, the Court may, but does not have to, cramdown the Plan, see, section 314(c) of PROMESA. If the Court does not allow the cramdown, however, the Title III petition must be dismissed, see, 11 U.S.C. § 930.

In addition, this sale creates many questions. Will the monopoly be extended to the purchaser or purchasers, creating then an oligopoly or cartel? What will happen to the employees? What will be the sale price? The new PREPA fiscal plan states that it has assets of $9.4 billion and debts of $11.4 billion. This was contradicted by the Board and AFFAF’s motion on Saturday for interim financing for PREPA where it states that the utility has debts of over $14 billion. It would be nice if the Government and the Board would make up their minds as to the actual numbers.

Also during the week, separate from the litigation, PREPA, PRASA and the Commonwealth filed their Fiscal Plans. Although Governor Rosselló insisted on January 10, that he was ready to hand in the plans, the three documents are clearly marked as drafts, something that is not what the Board wanted. The PREPA and PRASA fiscal plans are also filled with disclaimers which puts doubts as to the reliability of their numbers. The Commonwealth fiscal plan is long on what it is going to do, but short on how it will be done.

In addition, it postpones a balanced budget until 2022, making the Board a permanent fixture until at least 2026. In addition, the Commonwealth fiscal plan has no employee furloughs or reductions of pensions as was required by the Board in the past. Moreover, the fiscal plan does not define essential services and hence does not explain how they will be funded nor does it explain how it respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of this Act.” (Section 201(b)(1)(N) of PROMESA).

My view is that the Board will reject the plan for various reasons and will order the furloughs and the reduction of pensions. Since the Government will reject these changes, the Board will certify its own fiscal plan in order to dictate policy. The same will happen with the PREPA and PRASA fiscal plans for only that way will the Board ensure that it will call the shots. The Government will go to Judge Swain and the vicious cycle of infighting will continue to the detriment of the people of PR.

Meanwhile, creditors have become increasingly vocal about their own concerns with the revised fiscal plan. Given the plan’s lack of debt service, and mounting evidence of ample liquidity, this is not surprising. Assured Guaranty released the following statement, which points to their view of the broader implications of the plan, beyond just further litigation and delay in returning the Commonwealth to capital markets:

“This disregard for creditors’ rights would shake, on a nationwide basis, investors’ confidence in the enforceability of their contracts, the rule of law and public officials’ willingness to abide by the commitments they have made. In doing so, they will make it more expensive for municipalities throughout the United States to fund essential services and infrastructure for their taxpayers.”

Turning now to the litigation. As was to be expected, the Board opposed the GO’s motion to conduct discovery pursuant to Bankruptcy Rule 2004. What is new is the Board, the Commonwealth and AFFAF’s position as to the payment of prepetition debts. At page 6 of their motion they stated:

While, as a practical matter, the Oversight Board and Commonwealth want to repay as much debt as is consistent with carrying out PROMESA’s directive to create fiscal responsibility and access to the capital markets, PROMESA § 314(b)(6) does not require the debtor to pay prepetition claimholders as much as it can. Rather, it provides the Court should “consider” what creditors could recover under applicable non-bankruptcy law, i.e., what a race to the courthouse would produce for “the creditors” under non-bankruptcy law.”

My take on this is that the Board and the Government of PR are taking the position they do not have to pay what they can but what they want to creditors. Doubt this was missed by all the bondholders who claim a lien on bond payments.

Finally, on Saturday, the Board and the Commonwealth filed a motion for interim financing of PREPA. As we have discussed before, FEMA and the US Treasury informed PR at the beginning of January that according to its own documents, it had too much money in its accounts to qualify for a CDL loan and that they would not lend to PREPA directly. The letter mentions that after the hurricanes, the Government account did not go below $1.5 billion and that recently it had informed the “discovery” of over 800 accounts with $6.875 billion. The Board and the Commonwealth, however, claimed in its motion that given the allegedly precarious economic condition of PREPA, they decided to proceed pursuant to 11 U.S.C. § 364 for an emergency approval of a loan. The motion states that the lender will be the Commonwealth of Puerto Rico and the debtor will be PREPA. The loan will have senior secured priming super-priority not to exceed $1.3 billion but initially the Commonwealth will only provide $550 million.

The security interests, liens and superpriority administrative claim will be subject only to a carve-out for professional fees and costs of administration incurred during the Title III Case (defined below) of the Debtor (as approved by the Court), any state matching requirements of Federal grants and loans and certain fees due and owing to the Office of the United States Trustee as set forth in the Title III Order.

In addition:

The proceeds of the Loans shall be used to make expenditures and disbursements: (i) for the Debtor’s operations including, without limitation, employee payroll and benefits, facilities maintenance costs that are not capital expenditures or infrastructure improvements, and normal operational materials, supplies, fuel and power supplies, vendor, and services payments (collectively, “Eligible Uses”) and (ii) for reimbursement of amounts expended for Eligible Uses from September 6, 2017 until the funding of the Loans. . .

“Unless otherwise specifically consented to in writing by the Lender and the Oversight Board, the proceeds of the Loans shall not be used for debt service; capital improvements; repair or restoration of damaged public facilities; paying the non-federal share of any Federal program; tax refunds; lobbying; Title III costs including but not limited to judgments arising from Title III cases and related cases, and legal or advisory fees; deposits, transfers, or payments to accrual accounts, reserve funds, or contingency accounts that do not represent an actual, immediate cash disbursement to continue current government operations for essential services; administrative costs of Federal disaster assistance grants and loans; or disaster related expenditures eligible for reimbursement from the Federal Government; or any expense that is not a “Current Expense” under the Trust Agreement (collectively, the “Ineligible Uses”). . . “

The motion also foresees the parties positions as to this loan. It states:

“Prior to filing this Urgent Motion, certain holders of general obligation (“GO”) debt of Puerto Rico advised the Oversight Board in writing that they oppose any lending from the Government of Puerto Rico to the Debtor without court approval, and that they oppose the concept of the Government of Puerto Rico borrowing from the federal government to lend to the Debtor. While the Government of Puerto Rico and the Debtor never intended to enter into this loan transaction without court approval in the PREPA Title III case, the Government of Puerto Rico cannot necessarily assuage the GO debtholders’ general opposition or their statements that they might seek stay relief and oppose any plan of adjustment.”

The motion dispenses with PREPA bondholders claims of lien in the following fashion:

“As explained below, the existing lien securing bonds under the Trust Agreement already provides for “Current Expenses” (including a sixty-day operating reserve) to be paid from revenues. Because the Lender’s loan to the Debtor can only be used to pay Current Expenses, the existing lien is not diminished or impaired by the first lien to be granted to the Lender because Current Expenses already have a prior right to be paid from the Debtor’s revenues before any positive net revenues exist that could go to creditors. This situation is unique because the priming lien the Lender is requesting, does not subordinate the existing creditors’ lien to anything to which it is not already subordinated. For example, in the ordinary course, if the Debtor had $1 billion of revenue and $1 billion of current expenses, the revenues would pay the Current Expenses, not creditors. If instead, the Debtor has $200 million of revenues and $1 billion of Current Expenses, the $200 million of revenues and the next $800 million of revenues would be paid to cover Current Expenses before there would be collateral available to creditors.”

In other words, the Board claims that PREPA bondholders have only a net lien; that is, they get paid only after all expenses are paid. PREPA bondholders on the other hand, claim a gross lien, meaning that they get paid from the stream of income irrespective of expenses. What this means is that before the loan is approved, Judge Swain will have to weigh on these objections.

The motion also alleges there are no other alternatives but it only mentions one offer from a group of bondholders. On the other hand, the motion mentions that “[b]eginning on January 21, 2018, the Debtor, through Rothschild, initiated a marketing effort to obtain alternative financing.” If, as the motion states, AFFAF has been negotiating with Treasury for the CDL loan, whose funds were appropriated by Congress in October, why the delay in searching for other sources? Could it be that the Board and the Government of PR have been playing hide the potato (funds) and now have been caught in their own web of deceit? After all, as mentioned in the last update, the Board and the Government knew about the “discovered” accounts since July of 2017 and did not then proceed with an audit to determine what part of those funds were available. In fact, neither of the two have proceeded with the hiring of said auditors. Interesting indeed.

In any event, there are 7 entities that have signed non-disclosure agreements to have access to a data room to commence the process  The interest rates of 0% for the first semiannual period, .50% for the second semiannual period, 1% for the third semiannual period, 1.5% for the fourth semiannual period, 2% for the fifth semiannual period, 2.5% for the sixth semiannual period and 3% thereon.  This does not appear to be a serious effort on behalf of the Commonwealth or the Oversight Board in seeking private financing for PREPA.  Perhaps they still believe the Trump Administration will provide a CDL directly to the Commonwealth or PREPA itself.

All of this leaves me with many other questions. How does the Commonwealth lend to PREPA if its agencies and the Municipalities still owe PREPA more than the $550 million? What happens if Judge Swain determines that PREPA bondholders have a gross lien? Will the sale still go through? Does the lien follow the stream of income if PREPA is sold? If the Commonwealth is broke, how can it lend to PREPA? Given the Board’s statements as to the net lien, do the pension funds in PREPA have to be paid as part of the “current expenses” definition of the 1974 Bondholders Agreement? These and many other questions will have to be answered and soon.

In addition, the parties have been filing slight modifications to the Board’s motion for Bar date. It is likely that the Board will accommodate any reasonable suggestion since it is in everyone’s interest that this issue be dealt with without litigation.

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.

Monday Update – January 22, 2018

Welcome to your weekly Title III update for January 22, 2018. Things in the Puerto Rico bankruptcy are picking up, but developments outside the case, which were for the most part political in nature, dominated the week.

On January 17, 2018, El Nuevo Día reported that FEMA and the US Treasury were denying PR’s requests for a loan pursuant to the Community Disaster Loan Program, commonly known as CDL. The letter, however, has a print of received on January 9, 2018, more than a week before it was reported. In the letter, the agencies told AFFAF Director Gerardo Portela that the Commonwealth, PREPA and PRASA projected in late September that they would exhaust their operating funds by October 31, 2017, but as of December 29, the Commonwealth had $1.7 billion cash balance and “discovered” $6.875 billion in over 800 accounts. The letter continued saying:

“Because the Commonwealth’s central cash balance, as publicly reported, has consistently exceeded $1.5 billion in the months following hurricanes, and considering the implications of the reported $6.875 billion of total cash across the Commonwealth, the Federal Government will institute, as a matter of policy, a Cash Balance Policy, that will determine the timing of CDLs to the Commonwealth and its instrumentalities, including PREPA and PRASA. Under this Cash Balance Policy, funds will be provided through the CDL Program when the Commonwealth’s central cash balance decreases to a certain level.”

In response to FEMA and US Treasury, Mr. Portela attempted to downplay these newly discovered monies writing in a response to the Federal Government, “The disclosure in the Initial Report reflects a preliminary analysis of hundreds of bank accounts of the Commonwealth and Commonwealth instrumentalities, but it does not provide an accurate picture, or should not be construed as indicative, of governmental liquidity for unrestricted general use.”

Similarly, Mr. Portela told Politico late Friday that PREPA and PRASA faced severe liquidity problems and that the Commonwealth had provided the Federal Government all that it requested. Politico reported, however, that a “Treasury spokesperson pointed the finger back at Puerto Rico’s government for failing to provide information that the administration wans to fulfill the loan request. ‘We are closely monitoring Puerto Rico’s liquidity and stand ready to support the island’s needs,’ the spokesperson wrote. ‘The Government of Puerto Rico has the responsibility to demonstrate liquidity needs in a transparent fashion to ensure appropriate program use and stewardship of taxpayer dollars.” Yet, another sign that the Trump administration is not buying the claims of the Commonwealth or the Board.

Predictably, the Oversight Board, on that same date of January 17, announced a hearing to discuss the “discovered” cash. The meeting was nothing more than a blatant attempt to whitewash the Commonwealth’s cash situation. The AFFAF presentation, has several caveats that make it of questionable use for either the Federal Government, the mediation team or Judge Swain. In its disclaimer section, AFFAF states that the information contained in the presentation is preliminary and subject to further analysis, the account balances have not been confirmed through an audit in accordance to the generally accepted auditing standards and it makes no representation with respect to the information it presents.

“Discovered” Monies: What the Board Knew and When

The Board’s attempt to whitewash the “discovered” funds, however, fails for several reasons. Andrew Scurria, a reporter for The Wall Street Journal, wrote an article in the Bankruptcy section of the daily, revealing that the Board knew of these accounts not in December of 2017 but in July 2017. See here for the proof. There are several email exchanges between the Board and AFFAF pertaining to these accounts. This begs the question of why the Board continued to tell Judge Swain in the summer of 2017 that the Commonwealth’s finances were so bad that it would have to borrow from COFINA in November. Later the Board changed its tune to December, but after the hurricanes, upped the ante. On November 7, 2017, Natalie Jaresko told Congress PR needed $3.6 billion before the end of the year and between $13-$21 billion for the next 7 quarters. Clearly, the Board has some explaining to do to Congress and Judge Swain.

Without a CDL, Puerto Rico Seeks to Finance PREPA Directly

This leaves the Rosselló administration in a bind. It desperately needs to reestablish electrical power in Puerto Rico in order to run again in 2020. Hence, it needs to fund PREPA and PRASA. Since the Federal Government told the Governor, for now, to use his own funds, it has decided to lend these corporations money. This was previously reported by The Wall Street Journal, and I have examined this draft Commonwealth-PREPA term sheet.

In short, the Commonwealth would provide for and initial $250 million loan and up to $1.5 billion, but the latter only if there is a CDL. The loan would be secured by a lien on the net revenues of PREPA and would not be for payment of debt. Although the loan would be secured, its payment would be as an administrative expense, after lawyers and experts are paid. The loan will be without interest unless Puerto Rico has to pay interest from the CDL and then the same rate will apply.

Profound Implications for Title III Case

All this mess has profound implications for the Title III litigation and PROMESA in general. For example, if the Treasury demands a lien over Commonwealth funds, and it probably will, this would affect the GO Bondholders claim they have a lien over the same funds. Hence, pursuant to 11 U.S.C. § 363(c)-(f), Judge Swain would have to intervene, determine the validity of the GO claim and if she finds they have a lien, make sure this is paid in full in the Plan of Adjustment before she can grant the US any lien. Even with this guarantee, it is questionable if Puerto Rico could pay the Federal Government and GO’s. In addition, the Federal Government could claim a lien on the SUT, angering the COFINA bondholders who claim they have a lien and to which there is ongoing litigation.

None of the Board’s dire predictions, made both to Congress and Judge Swain, has been proven true. In December, AFFAF and the Board stated that each would hire an auditor to determine, what, if anything of those $6.875 billion could be used. But neither had done so. Moreover, AFFAF and the Board knew about these funds since July 2017. Why didn’t they hire an auditor then? Probably because they would have to change the Fiscal Plan and would change the nature of the mediation talks. This lack of transparency has consequences. If a federal judge thinks you lied to them once, it will never again believe a word you say. This applies to Judge Swain and the six federal judges in the mediation team.

Moreover, if the Commonwealth is to lend to PREPA, it also needs to enact new legislation authorizing it to do so and would have to again go through Judge Swain in order to secure a lien. This is not something that can be done in a couple of days and the legal storm will be severe.

In addition, any audit will take time, at least 60-90 more days. This means the middle of March or April before Puerto Rico could come out and seek a CDL loan. It would then have to wait for the FEMA bureaucracy, slow at its best, to disburse the money. Puerto Rico, far from being a pauper, has enough money to operate and lend to its public utilities, if it has not already done so. Not a good scenario for the Governor and the Board.

During the weekend, the Governor Rosselló announced he would address the people of Puerto Rico via TV, later today. The topic will be the CDL, fiscal plan, etc. It is clear the Board will move quickly to approve either the Governor’s plan or its own, probably by February. It will then file the Plan of Adjustment to forestall the economic growth that insurance and FEMA money always brings after a hurricane. In addition, this plan will not reflect any CDL loans or any Medicaid/Medicare future funds. That way, the Board will be able to argue to Judge Swain that PR cannot pay a penny in debt service.

The problem with this scenario is that the audit of the “discovered” accounts will not be finished by the end of February since neither the Board nor the Commonwealth have hired the firms to perform it. Nevertheless, Mr. José Carrión admitted that the Fiscal Plan was a changeable document. Hence, if in June new money comes into PR, the Fiscal Plan should reflect it and more importantly, the plan of adjustment must be consistent with the Fiscal Plan. See PROMESA section 314. The Fiscal Plan may vary but the Plan of Adjustment and the Disclosure statement that accompanies it, should not be changed every couple of months. A quick approval by the Board of an incomplete fiscal plan will underscore their approach is not serious, and further erode what’s left of their credibility before the Court.

In any event, a Plan of Adjustment that has no debt service for 5 years, and even then only growth bonds, is highly unlikely to be approved by creditors. The Board will then request from Judge Swain that she cramdown the plan as in the best interest of creditors. Given the situation, I find that unlikely, although clearly it has been the Board’s plan from the beginning. If Judge Swain does not cramdown the plan, the Bankruptcy would have to be dismissed pursuant to 11 U.S.C. § 930. Then what? PR would not have the automatic stay to hide behind and would be faced by very angry bondholders who have not been paid in two years. That’s why Congress envisioned Title VI as the best option but the Board and Governor Rosselló preferred bankruptcy over negotiations.

Turning now to the actual litigation, the American Federation of State, County and Municipal Employees International Union, AFL-CIO (“AFSCME”) and the American Federation of Teachers, AFL-CIO (“AFT”), International Union sought an order to lift the automatic stay to continue all the labor arbitration that were initiated before the filing of the petition. The Service Employees International Union (“SEIU”) and International Union, United Automobile, Aerospace and Agricultural Implement Workers of America joined the petition. Seems to me a fair request but the Commonwealth is sure to oppose it.

National filed a Rule 2004 request for discovery for the following purposes:

“National seeks authorization to take discovery of the Government Development Bank for Puerto Rico (“GDB”) regarding the existence, historical treatment, and status of a State Infrastructure Bank (“SIB”) trust account (the “PR SIB Trust Fund”) created at GDB for the benefit of Puerto Rico Highway and Transit Authority (“PRHTA”) bondholders pursuant to an agreement (the “Puerto Rico Infrastructure Bank Agreement” or the “Bank Agreement”) between the Puerto Rico Department of Transportation and Public Works (“the Department”), PRHTA, and GDB on June 12, 1998 and to conduct examinations of designated representatives of GDB.”

The Court has been changing its view on Rule 2004 discovery and may very well grant this but likely with limitations. Let’s see what happens.

The Ad Hoc Group of PREPA Bondholders, National Public Finance Guarantee Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Syncora Guarantee Inc., and U.S. Bank National Association and PREPA came to a stipulation pertaining to Rule 2004 discovery and presented it to Judge Swain. Good to see some good faith cooperation.

As I suspected, Judge Swain granted the UCC’s leave to file amended constitutional claims against COFINA and said:

“The twelfth and thirteenth causes of action, as amended, plead plausibly claims that can properly be litigated in connection with the determination of the binary asset ownership issue framed by the Stipulation. Although they also implicate issues that may be relevant to other, out of scope, questions that were raised in the pleadings filed in this adversary proceeding, such potential overlap is not preclusive of in-scope consideration of the claims.”

The UCC promptly filed its amended complaint and this could be a game changer in the Commonwealth v. COFINA challenge. As we discussed before, not only does the UCC claim the COFINA transfer is unconstitutional but so do the GO bondholders. And if indeed COFINA is unconstitutional, the full SUT would belong to Puerto Rico and the GO’s would be in a perfect position to argue via an adversary proceeding or contested matter, that these funds must be used to pay their bonds. Let’s see what transpires.

The Board filed its motion requesting the entrance of an order as to proof of claim bar dates. The proposed date is May 29, 2018. This is a long motion which must be examined by anyone that has a claim in the case. Those who do not already have one, please hire an attorney. The Board also filed a motion to extend the time to accept or reject leases.

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.

Weekly Update – January 16, 2018

Welcome to your weekly Title III update for January 16, 2018.  I am presenting this on Tuesday since Monday was Martin Luther King. Proceedings this week were dominated by the January 10 hearing on the Aurelius and Utier’s constitutional challenge, but a few more important things happened.

As you may know from my report on the oral argument of January 10, Judge Swain took under advisement both the Aurelius challenge and the UCC’s request for reconsideration. She also denied the reconsideration but granted the UCC a chance to amend the complaint in order to make the constitutional challenge to the transfer of the SUT to COFINA. The UCC filed its amended complaint and memorandum quickly, but predictably, Ambac and other objected. Essentially, the constitutional challenge to the SUT transfer, if successful, would leave COFINA, a Puerto Rican corporation which has no income except the SUT contribution, holding the bag of the $17.6 billion debt. That way, COFINA bondholders would get zero but the Commonwealth would not owe a penny. On the other hand, if COFINA is unconstitutional, the obligation, to wit, the bonds, would be inexistent and since the Commonwealth took the money, it would owe the majority of the COFINA debt. Under this scenario, even as unsecured creditors, COFINA bondholders could claim against the Commonwealth, instead of a penniless entity.

In the previous update, I mentioned that attorney Gregorio Igartua filed a request to present an amicus curiae brief, in which he argued that Puerto Rico is an incorporated territory, which is what AFFAF should have done. Unfortunately, Judge Swain denied Mr. Igartua’s request. Oh, well.

Last week, AFFAF, on behalf of HTA, filed a motion to extend deadlines to oppose Adrián Mercado Jiménez’ request for the payment of $16,448 allegedly owed to him pursuant to a settlement agreement dated December 9, 2016. Allegedly, “HTA is continuing to analyze the Motion and it remains HTA’s hope that the parties can reach a consensual resolution of the Motion. Considering that HTA and AFFAF’s lawyers charge over $1,000 an hour, sixteen hours of work on this issue equals what is owed. Apparently, AFFAF does not want to pay and/or wants a reduction on the debt and therefore procrastinates payment. Not the best way to spend the limited resources of the Commonwealth if you ask me.

Utier, aside from its adversary proceeding challenging the Board’s appointment, also filed another case, 17-229, where it challenges the PREPA Fiscal Plan, etc., claiming, inter alia, that the Board’s actions violate the contracts clause of the US Constitution. For all its claims during the Aurelius argument that the Board was a part of the Puerto Rico government, the Board claimed as follows:

 “The FOMB is authorized by PROMESA to certify fiscal plans and budgets and to commence Title III cases, see PROMESA §§ 201(e), 202(e), 304(a), but the FOMB has not legislated here. Moreover, the FOMB has acted pursuant to a federal, not a Commonwealth, statute.” (underlining added)

As my Native American ancestors would say, the Board speaks with a forked tongue.

Finally, this past week the Board made some moves on the Commonwealth. Governor Rosselló was supposed to present the Fiscal Plans on January 10, but the Board sent him a letter telling him his request for extension had been granted and they were now due on January 24. But the Governor insisted he was ready to present the plans and the Board extended the deadline. If this was true, why didn’t the Government file the plan?

In addition, the Board informed the Governor that the law approved by the legislature over his veto, Act 119, was not in compliance with the Fiscal Plan or the budget. The Board, contrary to most of what the press said, ordered to correct the inconsistencies or to explain to the Board’s satisfaction.

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.

The Hearing on the Constitutional Challenge to the Board’s Appointment

On Wednesday January 10, 2018, Judge Swain heard arguments on the constitutional challenge by Aurelius and Utier to the appointment of the Board. The first to argue was Ted Olson, former Solicitor General of the United States, presenting Aurelius’ position. Mr. Olson started by stressing the necessity of having this issue decided quickly. Olson argued that the Appointments Clause of the US Constitution, like the other structural protections of the Constitution, exists to safeguard individual liberty.

Judge Swain weighed in with the first questions: The Board is a territorial entity according to PROMESA, what is your take on this?

Mr. Olson answered that under Metro. Wash. Airports Auth. v. Citizens for Abatement of Aircraft Noise, Inc. and Buckley v. Valeo, the Board was subject to the Appointments Clause since it exercised significant federal authority under federal law. He enumerated the powers of the Board and compared them to the Board in the Metro case and argued that the name of the thing does not make it whatever Congress says.

This brought up another question: Metro Airport was about separation of powers? Why do you cite it?

Mr. Olson explaining that the exercise of legislative power by that Board was a different constitutional violation but the case shows that Congress is subject to the structural requirements of the Constitution even when it acts regarding federal property or territories.  He noted the fact that clerks of the Territorial Courts were federal officials according to Supreme Court precedent. He also mentioned that in Marbury v. Madison, the issue was the appointment of a justice of the peace for DC, and because he was a federal officer, he needed a federal commission and thus brought suit.  Mr. Olson mentioned footnote 15 at page 34 of the US brief where he believes the Government was conceding that future members of the Board would have to be appointed as per the Appointments Clause.

The US denied that was the case but when we examine it, I believe Mr. Olson is right. The footnote states:

PROMESA also provides that if any of the seven members had not been appointed by September 1, 2016, then the President would have to appoint an individual from the list associated with the vacant position by September 15, 2016. See 48 U.S.C. § 2121(e)(2)(G). That provision, however, never came into play, and will not have any constraining effect on the President’s authority going forward. PROMESA provides that future vacancies will be filled “in the same manner in which the original member was appointed.” Id. § 2121(e)(2). That provision is most naturally read to mean that the President can choose future candidates off a congressional list (supplemented, as needed, by additional names) or select his own candidates subject to Senate confirmation. This reading is consistent with the text and the well-settled doctrine of constitutional avoidance. See Edward J. DeBartolo Corp. v. Florida Gulf Coast Building & Constr. Trades Council, 485 U.S. 568, 575 (2009) (“The so-called canon of constitutional avoidance is an interpretive tool, counseling that ambiguous statutory language be construed to avoid serious constitutional doubts.”).

Why mention the constitutional avoidance principle if you don’t mean that doing so will comply with the Constitution? The footnote thus presumes that the Appointments Clause applies to Puerto Rico.

In any event, Judge Swain asked another question: Is the fundamental power of Congress discussed in Sánchez Valle limited to criminal law? Does that power come from Congress or do you argue it comes from the people?

This is a good question, the implication being, does Sánchez Valle require the appointment of the Governor of Puerto Rico? Olson answered cleverly by saying the Governor of Puerto Rico does not wield significant federal authority and that the Governor is accountable to the people of Puerto Rico but the Board is not. He cited as precedent the case of Free Enter. Fund v. Pub. Co. Accounting Oversight Bd. and Freytag v. C.I.R.

Mr. Olson also argued that the Appointments Clause was a fundamental right but the other side argued that not all states have adopted its requirements so it can’t be an essential right. The USA gave several examples where that was not the case. It is unlikely this argument will be adopted since this would force the states to adopt the Appointments Clause. As he finished, Mr. Olson again urged a quick decision and stated that if the Court agreed with Aurelius’s position, they would consent to a stay during appeal, citing Marathon Pipeline as precedent.

Mr. Rolando Emmanuelli argued on the same side of Aurelius and at one point expressly adopted its submissions and arguments. He is representing UTIER, the principal union of PREPA. He argued that the Insular cases should be reversed, although but these cases can only be reversed by the Supreme Court, and also said the Court should not extend their holdings.

Judge Swain asked: If I recommend the repudiation of the Insular cases, would Puerto Rico have all the rights in the Constitution?

Mr. Emmanuelli sidestepped the answer saying that Congress would have to act. The right answer, however, would be that it would have the same rights of all territories, meaning no discrimination by Congress on assignment of funds for federal programs but that there would not be a right to send representatives to Congress or send electors to the Electoral College. Mr. Emmanuelli is not a statehooder.

Judge Swain asked another good question: As to exclusive federal powers, the debtor in a Chapter 9 or a Chapter 11 is allowed by Federal law to file a plan. Is that exercise of substantial federal power?

Emmanuelli said it is not. The answer, however, is much more complex since an isolated exercise of federal power does not make one into a federal official.

After Mr. Emmanuelli, the issue turned to Aurelius arguing as to its motion of lifting of the stay, which took about five minutes.

Donald Verrilli, Solicitor General under President Obama, argued for the Board insisting on the power of Congress to legislate as to territories, pushing Downes as good law.  Predictably, he disagreed with Mr. Olson and suggested a different test from Buckley, to wit, the structural relationship between the Board and Puerto Rico and the Board and the Federal Government. He stressed the Board was funded by Puerto Rico, it would not receive a penny from the USA, that several federal laws did not apply to the Board and that the statute says it is part of the Puerto Rican government. He continued mentioning that there was no territorial case cited in Aurelius brief and that Congress had broad authority when it legislate as to territories.

Then came the only question to him from the Judge: Congress can create agencies that carry Constitutional limitations outside the Territorial Clause? Where do you draw the line?

Verrilli answered that Congress has to follow the Constitution when legislating for Puerto Rico. Judge Swain then said your opponent will say that Territorial Courts are not Article III Courts. Verrilli countered that Congress allowed popular election in 1947. If in 1946, the governor was an official of the US, what changed? Congress retained the fundamental role which it delegated to the people but the ultimate source of the authority of Puerto Rico was Congressional Authority.

Mr. Verrilli continued defending the appointment by saying that President Obama had options in the appointment of the Board, contrary to Mr. Olson’s reading from the Congressional Record that the purpose was for a Republican Congress to select the members of the Board. President Obama, he argued, could have asked for more names also. He ended by claiming an independent Board was imbedded in the Government of Puerto Rico and the President was given removal powers to put some control on it. That begs the question, why place the power in the President if it is a Puerto Rico agency?

In a telling manner, the USA argued briefly, telling the Judge that if she adopted Aurelius’s argument, the Government of Puerto Rico would be unconstitutional, that Sánchez Valle and the Insular cases (and of course, Downes) all agree that territorial governments all owe their existence to Congressional Authority. Moreover, Mr. Ward surprised Judge Swain by saying that the USA would not necessarily agree to a stay if she granted Aurelius’s motion. The Government would want a time to brief the Court on the consequences of this action. Judge Swain was clearly dumbfounded by what the USA told her.

Walter Dellinger, acting Solicitor General under President Clinton, argued for AFFAF, surprisingly saying very little. He denounced the Insular cases, contrary to what he did in his brief where he cited Downes as good law, but said that the Appointments Clause exception was not dependent on them. He repeated the argument of what the Board could do in the name of the US. Unbelievably, he stated that the power of the Board, if it disappeared, would revert to PR. How it is that the power to file for Title III or to file the Plan of adjustment would revert to Puerto Rico is beyond my ken.

Other parties argued their points, but mostly in less than five minutes and not adding any significant points to the discussion, some rejecting the Insular cases, some arguing the UTIER did not have standing.  Martin Bienenstock briefly argued against the lifting of the stay saying Aurelius wanted to dismiss the Title III proceeding and rush to Court.  That’s not what the Aurelius brief says, but such comments from Bienenstock are par for the course in these proceedings.

In rebuttal, Mr. Emmanuelli discussed the standing issue, but the question still remains in my mind if, at this time, vis-à-vis, when the Plan of Adjustment is filed, the union has a cause of action.

Mr. Olson started his rebuttal by restating the question of the argument: Whether the Board members were officers of the US.

Judge Swain asked: Why do you think Congress said the Board is part of the Government of PR?

Olson answered probably because it was worried about the Appointments Clause.

Judge Swain asked: What if the President had a list of Board members and submitted them to the people of Puerto Rico for an election, would that make them a local or federal Board?

Olson said that it would be federal since it wields substantial federal authority.

She then asked: In 1947, there was a change on how the governor was selected, how does this change the authority?

He answered that this was done in all other territories and discussed the Northwest Ordnance.

Judge Swain changed the question to: Do you have any specific case law that says that elections obviate the Appointments Clause?

Olson answered that it all hinged on whether the party wielded federal authority.

Next Judge Swain asked: If Congress requires the President to make a list for governor and for the people to elect them?

Olson stated this creates constitutional problems and that that her hypothetical did not include what type of authority was wielded.

She finally asked: The president had time to appoint other persons to the Board but decided not to object?

Olsen answered that Congress had not given him time if n the Senate would not act.

After this, Judge Swain said she was taking the controversy under advisement. Although I think movants’ Constitutional argument is quite correct, given the many questions to Mr. Olsen and only one to those opposing him, I doubt Judge Swain will find in favor of Aurelius. That said, Judge Swain asked the parties about the stay of proceedings in case she decided in favor of Aurelius and was genuinely disturbed and dumbfounded by the USA’s refusal to go with the stay agreement, which could tip the scales. I don’t see the opinion coming out before February or March since Judge Swain knows the loser will take the issue to the US Supreme Court.

Later in the afternoon, Judge Swain heard argument on a motion for reconsideration of her dismissal of the UCC’s constitutional challenge to COFINA. I agree with the UCC that the stipulation does provide for constitutional challenges and only Ambac took exception to it. Judge Swain again took it under advisement and on January 11, 2018, issued an order denying the motion. However, she allowed the UCC the following:

“[The UCC] may file an urgent motion seeking leave to file a revised proposed Second Amended Complaint, with a redlined copy of the new proposal and a memorandum of law explaining the consistency of the proposal with the Court’s Scope ruling, by 6:00 p.m. (Atlantic Standard Time) on Thursday January 11, 2018. Any opposition to that urgent motion must be filed by 1:00 p.m (Atlantic Standard Time) on Friday January 12, 2018. Any reply must be filed by 10:00 p.m. (Atlantic Standard Time) on Friday January 12, 2018.”

Hence, the issue is still alive but the UCC has to very fine tune its averments.

Monday Update – January 8, 2018

Welcome to your weekly Title III update for January 8, 2018. After a short vacation, we are back to discuss the happenings in PROMESA. While not much happened, much will happen soon.

Foremost for this week, and even for this year, is the oral argument of the Aurelius and Utier constitutional challenge to the appointment of the members of the Board. Aurelius’s Objection and Motion to Dismiss presents a single yet fundamental question: Whether the members of the Board should be secretly hand-picked by four members of Congress or selected by the President and publicly confirmed by the Senate.

After a lengthy delay, the US Office of the Solicitor General informed the Court that it would defend the PROMESA appointments’ clause. Nothing surprising there since the office of the Solicitor General defends the overwhelming majority of constitutional challenges to acts of Congress. The last time I remember the Solicitor General deciding not to defend a law was when President Obama changed his mind about the Defense of Marriage Act.

The US Solicitor General wisely steered as far away as it could from the “Insular Cases,” especially the racist piece of resistance, Downes v. Bidwell, deciding instead in concentrating on cases before the 1898 dawn of the Imperial American Age.

The Board and AFFAF, however, in their motions reinforced the Territorial Clause of the US Constitution and Downes, which is the basis for Congressional discrimination against Puerto Rico in most federal programs. The Board claimed in its opposition to Aurelius motion that “[i]n a series of cases, the Court recognized that the U.S. Constitution applies ‘only in part in unincorporated Territories.’” The reference ends with a footnote citing Downes for the proposition that the Appointments Clause of the US Constitution does not apply to PR as an unincorporated territory. This probably explains why AFFAF did not argue in its brief that PR is an incorporated territory as Judge Gelpí decided in Consejo de Salud de Playa de Ponce v. Rullan. It seems that “[i]n the eyes of the Board and Governor Rosselló, it is better to have 100 more years of colonialism and discrimination than to have to pay the island’s debt.” See my Caribbean Business column, Interestingly, Aurelius’ argument did not make any mention of the Territorial Clause.

Contrary to what some commentators believe, this challenge is important enough for the Board to have hired Donald Verrilli, President Obama´s former Solicitor General to argue its case and even used a reply to the US Solicitor General’s brief to further snipe at Aurelius, forcing the Court to allow the latter for file an unusual sur-reply. Anticipating the importance of the case, Aurelius hired Ted Olsen, George W. Bush’s Solicitor General and Matthew McGill, who successfully argued the Franklin California challenge to the Puerto Rico Recovery Act.

In addition, some of the same commentators that argued that the Aurelius challenge was not to be taken serious now claim that to grant the bondholder’s request would mean the dismissal of the Title III cases. In its reply to the Board’s motion to dismiss, Aurelius made clear how it envisioned the result of its successful challenge:

“In fact, the Opposing Parties agree with Aurelius that the proper remedy here is narrow andeminently practical: The Court should simply sever the offending portions of Section 2121(e). Board Opp. 34–35. That would cure the constitutional problem by allowing the President to decide for himself, with the Senate’s consent, who is best suited to serve on the Board. The parties also agree that the Court has procedural tools to ensure an orderly transition from the current Board to one that complies with the Appointments Clause. See, e.g., Dkt. 1627 (“GO Bondholders’ Stmt.”) at 2–3; see also Board Opp. 34; Dkt. 1629 (“Retiree Comm. Opp.”) at 35; Dkt. 1640 (“AAFAF Opp.”) at 31; Dkt. 1631 (“Unsecured Creditors Opp.”) at 28. In particular, this Court could simply stay its order of dismissal pending appeal, and the First Circuit, following appellate review, could stay its mandate pending the nomination and confirmation of a new Board. The Opposing Parties’ prophecies of disaster are belied by their own view of the remedies. They are also revealing. The Opposing Parties presuppose that the President would not select, or the Senate would not confirm, the same people who currently occupy the Board’s seats—even if that were necessary to prevent the sky from falling in Puerto Rico. If the President did determine that the current members are unworthy of their offices or not capable of discharging the Board’s important responsibilities in the wake of the hurricanes, and the Senate did not disagree, that would be to the good. There is no legitimate reason to shield the Board from this public scrutiny.”

The oral argument is going to be epic and lengthy. Judge Swain has allotted 90 minutes for each side. Argument starts at 11 am AST and 10 am EST in New York. Given the importance of the issue, I have no doubt Judge Swain will decide quickly and any appeal to the First Circuit will be expedited

The Aurelius constitutional challenge, however, is not the only thing in the agenda. At 3 pm AST and 2 pm EST, there will be the consideration of the UCC’s request for reconsideration on Judge Swain’s dismissal of some of its causes of action for allegedly going beyond the scope of its appointment in the Commonwealth v. COFINA case. Specifically, the UCC, quite correctly, points out that although its causes of action challenging the constitutionality of the COFINA structure were struck down, similar causes of action presented by the Ad Hoc Group of GO bondholders and Bettina Whyte as COFINA agent were not. Let’s see what Judge Swain decides.

In addition, several bondholders had filed requests for Rule 2004 discovery and the Court signaled its agreement to it subject to specific objections. The parties filed a report informing the Court where they agree and where (surprise surprise) they did not and subsequently, the Ad Hoc GO Group filed a motion objecting to following:

“Some of these Fiscal Plan Development Materials—such as the live model that underlies the Commonwealth Fiscal Plan, certified in March 2017—were provided to Movants in the “data room.” Those data room materials are subject to the strict constraints of an NDA (or in some cases, the mediation agreement), which prohibits their use in any way in the litigation. Among other things, they cannot be used as evidence-in-chief or for impeachment purposes, nor can they ever be shown to the Court. As for the rest of the Fiscal Plan Development Materials—such as versions of the new fiscal plan submitted to (but not certified by) the Oversight Board—Respondents refuse to produce them at all. Joint Rpt. at 3. Either way, Respondents, who continue to tout their “commitment to transparency” (Dkt. 1928 at 1), insist that these Fiscal Plan Development Materials must never see the light of day.”

As I have mentioned many times before, the Board is anything but transparent and will fight to the end to continue obfuscating the truth. Some Supervisory Board!

Also this past week, Gregorio Igartua, who has filed many cases to get Puerto Rico to vote for President, filed a petition for permission to file a brief of amicus curiae and included it with his pleading. In essence, it requests:

“As it can be seen, for Federal Courts to follow the Insular Cases, the case of Balzac, and/or the case of Harris v Rosario to legally support Puerto Rico’s special relation with the U.S. as a non-incorporated territory is today legally unfounded and incorrect. The practice of treating Puerto Rico as a non-incorporated territory where constitutional dispositions do not apply, and as an incorporated for others, must end.”

Finally someone arguing what the Government of Puerto Rico should have argued, for example, that Puerto Rico is an incorporated territory and the full power of the Constitution applies to it. Too bad that this is too little, too late.

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.