Welcome to your weekly Title III update for September 24, 2018. Important things have happened this week, in and out of litigation.

On September 18, 2018, representatives of Kobre and Kim, together with Oversight Board members Arthur González, Ana Matosantos and David Skeel, presented their findings to the public, which was essentially the press. In a rehash of the report, which does not make any findings of who is responsible, Arthur González made it clear that attributing responsibility was not important to the Board. Although this was an overview of the report, a few important things came out. During the discussion, David Skeel made it clear that the purpose of the report was not to find causes of action, which is totally contrary to the representations made by the Board attorneys to Judge Swain. Also, after the presentation, a panel of “experts” (myself included) commented on the report. Most of us insisted that the Board had to assert causes of action against some, if not all, the entities mentioned in the report who may be liable to the government. One of the panelists, Alvin Velázquez, who represents a union that sits in the UCC, was adamant on this point. I, on the other hand, insisted on amendments to the Puerto Rico Constitution to prevent what has occurred in the past 50 years. Finally, Ana Matosantos, during the presentation and during the press conference, stated that the Board was going to take a look at the $3.5 billion 2014 GO issue. I would not be surprised to see the Board suing to declare it illegally issued, which would make it an unsecured, non-priority claim. In any event, I doubt the Board will exercise all the options it may have and will leave little time for the UCC to deal with them before May 2019. This is especially important for the unsecured creditors who are seeing the pot shrink with all the deals being made with bondholders.

Judge Swain denied the UCC’s claim that the GDB restructuring violated the automatic stay. The Court seemed to find that the UCC had standing but—in clear violation of First Circuit precedent (standing goes to the Court’s jurisdiction, hence must be dealt with first)—abandoned the complete discussion on the issue and went to the merits of the claim, essentially dismissing all arguments. The Court determined:

Respectively, these provisions preserve the authority of territories to exercise “political or governmental powers,” 48 U.S.C. § 2163, provide that the provisions of Title III do not prevent holders of claims from consenting to modifications under Title VI, 48 U.S.C. § 2164(i), and prohibit the Court from interfering with Title III debtors’ property and political or governmental powers, 48 U.S.C. § 2165. Here, the Oversight Board, acting pursuant to its powers under PROMESA (which include review of Commonwealth legislation, certification of Title VI restructurings, and representation of the Title III debtors), has consented, by virtue of its certification of the Restructuring Support Agreement, to the GDB Restructuring. The Commonwealth’s legislature considered and enacted the GDB Restructuring Act, which creates new entities, authorizes asset transfers, and curtails certain causes of action of the Commonwealth and the instrumentality debtors. The GDB Restructuring, although subject to Court approval, is a vehicle to effectuate a transaction by, not against, the Debtors and is not subject to the strictures of the automatic stay. Thus, the Committee’s argument that Section 362(a) precludes the GDB Restructuring absent relief from the automatic stay fails on its merits.

The Judge also dispatched what I thought was the UCC’s strongest argument:

The Committee’s argument that the debtor-representation responsibilities that Congress placed on the Oversight Board create conflicts of interest, and that historical ties of the Oversight Board members, and other personnel involved with the restructuring, with certain institutions exacerbate such conflicts, is immaterial to the issue of the statutory reach of the automatic stay and thus will not be further addressed here.

Clearly the Court is not saying it will not consider these arguments in the GDB restructuring case, which is not part of the Title III proceedings, but it does not abode well for the argument. The issue of standing is crucial to the UCC since both the Board and the GDB have filed motions to dismiss its adversary proceedings essentially based on the issue of standing. I would not be surprised if Judge Swain denies the UCC standing, which would also doom its objection to the GDB restructuring, since it relies heavily on the Board’s real conflicts of interest.

Other creditors have filed objections to the GDB restructuring. The Rafael Hernández Colón and Sila Calderón foundations filed objections claiming that the GDB has money assigned to them. Also, two sureties, Fidelity and Deposit Company of Maryland and Zurich American Insurance Company filed objections stating that their claims are ignored in the Qualifying Modification and they will not be resolved in this manner. No idea what the Court will do with that.

In addition, National Public Finance Guarantee Corporation, Ambac Assurance Corporation, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., requested leave to file their objections by September 25, 2018. It is even possible they are negotiating with the Board to get some change to the Qualifying Modification. We will know more on during the October 3 Hearing.

These objections are important for the Board so it notified the Court about the GDB bondholders’ votes:

Eligible Voters of over 74.8% of the aggregate principal amount of the Participating Bond Claims in the GDB Bond Claims Pool voted, and that, of those that voted in such pool, over 97.4% of the Participating Bond Claims voted to approve the Qualifying Modification, reflecting over 72.9% of the aggregate principal amount. In addition, 100% of the aggregate principal amount of the Participating Bond Claims in the Guaranteed Bond Claims Pool voted to approve the Qualifying Modification.

In the Commonwealth case, both AAFAF and the Board opposed the UCC’s request to be given derivative standing to represent all Title III debtors in the GDB restructuring based on the clear conflicts of interest they have. This will also be discussed on October 3, but I doubt Judge Swain will disqualify the Board on this issue.

Also of great importance is the announcement by the Board of an Amended COFINA Plan Support Agreement. The Amended agreement includes the Puerto Rico Government, COFINA, the monoline insurers, Senior and Junior ad hoc groups, Bonistas del Patio, Aurelius Capital Master Ltd and Six PRC Investments, LLC.—both  holders of GO bonds. Hence, the COFINA deal has the blessing of the GO bondholders, which means they are either willing to take cuts on their bonds or the Board has made them an offer they can’t refuse. This idea is bolstered by the fact that Aurelius and Six will dismiss their claims in the Lex Claims litigation. Finally, Seniors retain their 93% payment and Juniors 56.399%. Also, all the parties to the settlement agree that even if the Aurelius Constitutional challenge to the Board appointment is successful, this agreement will be valid.

Since COFINA makes up about 24% of the debt, this settlement is of great importance to the Board and AAFAF. Unless the Junior bondholders object to the distribution, the only thing that could prevent its approval is the warning of the UCC that the numbers in the June Commonwealth Fiscal Plan are not enough to pay COFINA. Since the Board will certify a new Fiscal Plan by September 30, it is possible that even that objection may be withdrawn.

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.

Welcome to your weekly Title III update for September 17, 2018. Very little happened this week.

On Wednesday, September 13, Judge Swain held the Omnibus hearing. Apart from reports by the Board and AAFAF, the hearing focused on the UCC”s motion asking for a declaration that the GDB agreement and settlement law violated the automatic stay.

The Board began by announcing that the settlement in the Title III of the Commonwealth and the Disclosure statement for COFINA would be filed on or before October 15, and that it expected to wind up the Plan of Adjustment by December 2018. Ambitious timetable indeed.

The Board also mentioned that on Tuesday, September 18, there would be a discussion on the Investigator’s report. The Board mentioned that it will be concentrating on the causes of action that will bring value to the bankruptcy, rather than prioritizing one debtor over another. Judge Swain brought up the issue of recommendations for criminal prosecution, which the Board picked up, although obviously the federal and local Department of Justices can deal with this. The Judge also wanted to know if the Board knew more than the Kobre report states. The answer was not clear.

As to Investigator’s report, I must advise that the Board has invited me to be part of a panel to discuss the policy recommendations of the Report. I accepted and will then report what happened.

As to PREPA, the Board reported that it does not need any new financing and it continues to discuss a settlement with its insured bondholders. The Board also informed there was significant interest in the purchase of generation and that the P3 agency had retained counsel (that’s all we need, more ultra-expensive U.S. counsel).

The Board boasted that with the agreements to date, it was close to restructuring 40% of the bond debt (COFINA $17.6, PREPA $8.3 and GDB $4 billion). Mr. Bienestock then intimated that the Board was discussing a settlement with the GO’s and that their value was $18 billion plus $5 billion extra for pledges (presumably PBA bonds). Not only is this a significantly larger amount than originally thought, but if the Board gets to an agreement similar to the previous one, that would mean $53 billion of the $72 billion in bond debt. If done this year and all else goes according to plan, the Title III cases could be wound up by 2020. Not bad,

The UCC renewed their fear that the COFINA deal cannot go through with the present Commonwealth Fiscal Plan. AAFAF, Bettina Whyte, and the Senior COFINA bondholders, however, countered saying the agreement was not based on any of the fiscal plans. More on this latter. The Retiree’s Committee joined in and said COFINA was now unaffordable and if it goes through, there will not be enough money to fund services and pensions.

The Board reported that the Commonwealth, COFINA, and UPR Fiscal Plans would be done by the end of the month and the remaining plans would be done by October. I assume we will know more on the Committee’s objections at that time.

AAFAF reported that the GDB deal was voted by 70% of those eligible and that 95% were in agreement. Also, it reported that 26 of the 30 municipalities with excess CAE were on board with the deal.

Judge Swain informed AAFAF that it wanted to know exactly what she has been asked to approve and what she was not been asked to approve.

Mr. Bienestock stated that the Board believed that the GDB agreement was a good thing for the Title III debtor, the Municipalities, and the GDB and that the restructuring was consistent with PROMESA.

When it came to the UCC to argue its objections, one thing was clear: Judge Swain is not buying. From her questions she is not sure the UCC has standing to object to the agreement and she believes that the Government of Puerto Rico can decide to give all the releases and accept the settlements—especially when the Board agrees. It is likely Judge Swain will deny the UCC any standing, which will also mean the dismissal of its Adversary Proceeding to stop the GDB deal. If this happens, it is more likely than not that the UCC will appeal. More uncertainty.

Finally, Minority Leader Pelosi said last week that the decision of selling PREPA should be left to Puerto Rico, which I am afraid will mean no sale at all. Wonder what Mr. Walker at the DOE thinks about this.

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.

Welcome to your weekly Title III update for September 10, 2018. Important things came about in the case, almost all related to the UCC.

The UCC came out swinging in its reply to the Board and AAFAF’s opposition to their stay motion. It argued:

As discussed below, the GDB Restructuring does not involve the exercise of the “governmental and political powers” reserved to the Commonwealth under section 303 or protected from Court interference under section 305. Moreover, it is impossible for an order enforcing the automatic stay to “interfere” within the meaning of section 305 of PROMESA because such an order merely recognizes the application of a stay that is already in force, having arisen either “automatically” by act of Congress or consensually by prior order of this Court (in the case of the Stay Order).

The Oversight Board’s remaining arguments also fail. Contrary to the Oversight Board’s assertion that the Title III Debtors consented to the GDB Restructuring, the Title III Debtors cannot consent to annul the automatic stay. Further, the Oversight Board’s assertion that the Title III Debtors lack net claims against GDB is irrelevant, unsupported, and shows only that the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the Title III Debtors. . .

Debtors cannot consent to annul the automatic stay. Further, the Oversight Board’s assertion that the Title III Debtors lack net claims against GDB is irrelevant, unsupported, and shows only that the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the Title III Debtors. (Bold added)

The motion does not stop there. It claims:

More fundamentally, the actions taken by GDB pursuant to the GDB Restructuring consist of more than just the use, sale, or lease of property as described in section 363; they are actions specifically designed to enforce the GDB’s claims against the Title III Debtors and to disallow the claims of the Title III Debtors against the GDB, including by handing out releases to the GDB Releasees.

At the end of the motion, the UCC further abounds on the issue of the Oversight Board’s fiduciary duty:

Indeed, the Oversight Board’s premature conclusion that the Title III Debtors have no net claims against the GDB is profoundly troubling given the Oversight Board’s role in the Title III cases. The Oversight Board is the Title III Debtors’ trustee and representative, a fiduciary charged with maximizing the Title III Debtors’ assets. Yet, without any analysis, it is eager to abandon potential claims against GDB in order to facilitate the GDB Restructuring.

This is particularly troubling given that the Oversight Board’s own investigator has produced a report that discusses, among other things, how GDB officials directed the Commonwealth to borrow additional debt even as they were plotting for a restructuring by hiring restructuring counsel and restructuring financial advisors before the issuance of the $3.5 billion GO bond offering in March 2014 (which they failed to disclose to the general market). These same GDB officials controlled the 2014 GO offering, as they did for all of the Puerto Rico bond offerings, utilizing proceeds of such offering to repay the GDB, so that GDB and its directors and officers would be off the hook from any liability—all of this at a time when both the Commonwealth and the GDB appeared to be at least undercapitalized, if not insolvent.

Want more? At footnote 68, the UCC says:

The Oversight Board has argued elsewhere that section 315(b) of PROMESA simply makes the Oversight Board the representative of the Debtor in a title III but does not make the Oversight Board a fiduciary. See Motion of the Financial Oversight and Management Board for Puerto Rico to Dismiss Plaintiffs’ First Amended Adversary Complaint Pursuant to Fed R. Civ. P. 12(B)(1) and 12(B)(6), at 30 n. 15, Pinto Lugo v. United States [Docket No. 36 in Adv Proc. No. 18-041-LTS]. The Supreme Court has recognized that a “trustee for a debtor out of possession” owes fiduciary obligations to creditors and shareholders.

This motion is not all the news. The UCC also filed an Informative Motion Regarding the Investigator’s Final Report, essentially saying the investigator’s work is not up to par. At the conclusion, the UCC states:

The Committee wishes to reiterate that it is not dismissive of the work performed by the Investigator. Moreover, the Committee continues to study the Final Report, and, while attempting to minimize costs, will likely file another motion (or amend the Committee’s prior Rule 2004 Motion) to the extent necessary to do so to cover areas of inquiry that were either completely ignored or partially covered by the Final Report. However, the Committee makes this filing only to highlight for the Court and the various parties that the Final Report is not the end of the matter, that its findings remain subject to question, and that—as the Final Report acknowledges—much more work remains necessary to obtain full transparency in these Title III cases.

On Thursday, September 6, 2018, the UCC filed an adversary proceeding against the Commonwealth, AAFAF, the GDB and the Board seeking to stop the bank’s Title VI proceeding. The complaint states:

As a result of the fiscal crisis, GDB was operationally wound down and ceased operations more than a year ago, but former GDB insiders remain involved in all aspects of Puerto Rico’s restructuring efforts. Indeed, current and former GDB insiders are now (i) members of the Oversight and Management Board for Puerto Rico (the “Oversight Board”), (ii) officers of the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”), (iii) managing directors of AAFAF’s financial advisor, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called “Bonistas Del Patio”).

These individuals would prefer that this Court “bury” GDB before the Committee and other interested parties have the opportunity to perform the autopsy. To that end, they are attempting to do what PROMESA does not allow—restructure all of GDB’s debts and liquidate all of its assets outside of Title III pursuant to a “home-baked” chapter 7 equivalent known as the Government Development Bank of Puerto Rico Debt Restructuring Act (the “GDB Restructuring Act”), which was enacted specifically to effectuate the restructuring of GDB and all related transactions (collectively, the “GDB Restructuring”).

The complaint’s requests for relief are:

• On the First Cause of Action, declaring that the GDB Restructuring Act is invalid and unenforceable because it amounts to a de facto bankruptcy law that is inconsistent with Title III of PROMESA;
• On the Second Cause of Action, declaring that the GDB Restructuring Act is inconsistent with Section 601(m)(2) of PROMESA and therefore preempted pursuant to Section 4 of PROMESA insofar as it purports to release rights and claims of the Title III Debtors unrelated to any Bond affected by the purported Qualifying Modification, including any claims against the GDB Releasees;
• On the Third Cause of Action, declaring that the GDB Restructuring Act is inconsistent with the automatic stay and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it purports to release the Title III Debtors’ rights and claims against the GDB Releasees;
• On the Fourth Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it would deprive creditors of the Title III Debtors of their right under Section 926(a) of Bankruptcy Code to seek appointment of a trustee to pursue Avoidance Claims;
• On the Fifth Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA Section 601(n)(2) and therefore invalid and unenforceable in accordance with Section 4 of PROMESA insofar as it purports to deprive the Title III Debtors of standing they would otherwise have under PROMESA to challenge the unlawful application of Title VI;
• On the Sixth Cause of Action, declaring that the GDB Restructuring Act is invalid and unenforceable insofar it purports to deprive the Title III Debtors of standing they would otherwise have in federal court;
• On the Seventh Cause of Action, declaring that the GDB Restructuring Act is inconsistent with PROMESA and therefore invalid and unenforceable in accordance with Section 4 of PROMESA because a core purpose of the GDB Restructuring is to ensure compliance with a Fiscal Plan that is not in compliance with PROMESA Section 201(b)(1)(M).
• On the Eighth Cause of Action, that the GDB Restructuring Act is invalid and unenforceable insofar as it violates Section 303 of PROMESA;

As if this were not enough, the UCC filed a motion to be appointed the representative of the Title III debtors, claiming, with good reason, conflicts of interest in AAFAF, the Board, the GDB and GDB Bondholders (i.e. Bonistas del Patio). The UCC requests from the Court the following:

This Court should exercise its broad equitable powers and grant the Committee derivative standing to act on behalf of the Title III Debtors with respect to the GDB Restructuring for the limited purpose of maintaining the status quo and preserving their rights and claims. This Court should also confirm that, in addition to having derivative standing to act on behalf of the Title III Debtors, the Committee separately has the ability to appear in the Title VI case for the limited purpose of arguing that it has direct standing to be heard in that case on behalf of the Title III Debtors’ unsecured creditors.

The motion minces no words in describing the different conflicts of interest involved in the GDB restructuring:

GDB and AAFAF share the same officers, several of whom were GDB officers prior to the creation of AAFAF in 2016. GDB and AAFAF also share the same counsel, and the same financial and restructuring advisor.

Among the financial advisor personnel advising GDB and AAFAF are (i) a senior managing director who was president of GDB from 2011 to 2012 and Senior Vice President and Director of Investment Banking at Santander Securities Corporation, which advised GDB on numerous government debt offerings, and (ii) a senior managing director who was Executive Vice President-Financing and Treasury of GDB from 2009 to 2011 and then CEO and vice chairman of Santander Securities LLC. The financial advisor engagement team also includes a managing director who served as a senior vice president and special advisor to the president of GDB from 2013 to 2016. All would get a release for their prior GDB role pursuant to the GDB Restructuring.

Furthermore, at the time the GDB Restructuring was being orchestrated, the executive director of AAFAF was a former vice president of investment banking at Santander Securities LLC, which acted as an underwriter in numerous Puerto Rico debt offerings, all of which were controlled by GDB.

The Oversight Board, which certified the relevant terms of the RSA as a “Qualifying Modification,” is also conflicted, as is its counsel. The Oversight Board is conflicted because two of its members are former GDB presidents (who both would get a release pursuant to the GDB Restructuring) and because it is the statutory representative of the Title III Debtors. And counsel to the Oversight Board was engaged by GDB starting in January 2014 “to provide specialized legal services with respect to the evaluation of potential liability management transactions as may be requested by the [GDB].” These “liability management transactions” (i.e., restructuring and/or bankruptcy services) included drafting the Puerto Rico Corporation Debt Enforcement and Recovery Act30—the Commonwealth bankruptcy statute that was ultimately struck down by the U.S. Supreme Court. Such engagement, which was signed prior to the Commonwealth’s $3.5 billion general obligation bond offering in 2014, was never disclosed to the general market.

Even the GDB Bondholders that are signatories of the RSA are tainted by conflict. The executive director of Bonistas del Patio (the bondholder advocacy group that represented bondholders in the restructuring negotiations) was president of GDB from 2007 to 2008, and therefore would be getting a release pursuant to the GDB Restructuring. He was also an executive director at Morgan Stanley, which played an instrumental role several Puerto Rico bond offerings with which he was directly involved. Moreover, the board of directors of the Corporacion Publica para Supervision y Seguro de Cooperativas (“COSSEC”), which regulates and supervises the Cooperatives, authorized and encouraged them to buy GDB bonds in 2009 and then authorized them to buy more in 2012. COSSEC’s board of directors includes representatives of GDB and previously included two of the former GDB officers who have been advising GDB and AAFAF as financial advisors.

If the purported Qualifying Modification is approved, the very people who orchestrated the GDB Restructuring will have succeeded in releasing themselves, GDB, and others of any liability to the Title III Debtors relating to GDB’s role in Puerto Rico’s financial crisis, including any liability based on “unknown” facts. (Bold in the original)

Finally, the UCC and Bettina Whyte filed a motion requesting an extension until October 3 for holding in abeyance any motions on their case on COFINA. The UCC mentions its motion where it states that the numbers in the Commonwealth Fiscal Plan cannot cover COFINA payments. However,given that a new Fiscal Plan will be certified in September, it is willing to wait. The question is what happens if the new Fiscal Plan does not pass the UCC’s muster?

Paraphrasing Walter Donovan in Indiana Jones and the Last Crusade, “the UCC has declared war on AAFAF and the Board.” I don’t know what Judge Swain will think or do about these motions but they are important and the factual allegations are well supported.

We will probably know more on September 13 during the Omnibus hearing—although I am sure Judge Swain will want a full briefing before the oral arguments, which may delay the Title VI procedure. During the hearing, Judge Swain will hear arguments on the UCC’s motion on the stay request on the Title VI, which is opposed both by AAFAF and the Board. Her decision may give us some idea of which way she leans, or not. Stay tuned.

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.

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.