Monday Update – March 18, 2019

Welcome to your weekly Title III update for March 18, 2019. Different from previous weeks, this time a lot happened in PROMESA.

On March 12, 2019, just before the Omnibus hearing, AAFAF objected to the fee examiner’s report for a 5-7% increase in the fees by attorneys in the case. It wanted it capped at 2%. Judge Swain, however, approved the fee examiner’s report. If the Commonwealth wants to control the cost of litigation, all it has to do is reduce its litigation and request that the Board do the same. Just saying.

Also on March 12, 2019, the UCC filed an Omnibus Objection to the ERS bonds saying they were issued ultravires and also filed a separate objection to Oaktree Funds’ ERS bonds. The UCC states:

In 2008, ERS issued approximately $3 billion of ERS Bonds in underwritten public offerings.3 The ERS Bonds were issued as part of the failed implementation of an ill conceived “arbitrage” strategy ostensibly designed to rescue ERS from eventual insolvency. In 2011, the Puerto Rico Legislative Assembly stated that the issuance of the ERS Bonds “was illegally made by [ERS] even though such transaction was submitted to the Legislative Assembly for approval and rejected by the House of Representatives for deeming it detrimental to the System.” Act 116-2011 at Statement of Motives (emphasis added).

As previously raised by the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) and other government parties in ERS-related adversary proceedings, the issuance of the ERS Bonds was “illegally made” in that the ERS Bonds were issued ultra vires. ERS’s statutory “authorization to incur debt” is limited to “seek[ing] a loan from any financial institution of the Government of the Commonwealth of Puerto Rico or the Federal Government of the United States of America or through the direct placement of debts.” (emphasis added). A government entity such as ERS has no inherent power to issue bonds to the public, and any such power must be expressly granted by statute. Furthermore, as commonly understood in the finance world, a “direct placement of debts” means a private placement, not a public offering. Indeed, whenever the Puerto Rico Legislative Assembly has granted bonding authority to a Commonwealth instrumentality (both before and after it authorized ERS in 2008 to “seek loans”), it has done so expressly and specified that the bonds may be sold publicly or privately.

Because the ERS Bonds were issued ultra vires, they are null and void, and the bondholders have no remedy against ERS. Accordingly, all claims asserted against ERS based on the ERS Bonds must be disallowed in their entirety.

I wonder if this move is related to the possibility that the Board at some time soon may be unable to act in the Title III cases. In any event, this is going to very interesting. In a related matter, Judge Swain issued an order to deal with the ERS bondholders’ request for lifting the automatic stay:

This matter is before the Court on opposing motions proposing litigation schedules related to the Motion of Certain Secured Creditors of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico for Relief from the Automatic Stay (Docket Entry No. 289,2 the “ERS Lift Stay Motion”). Movants3 and the Employees Retirement System of the Government of the Commonwealth of Puerto Rico (“ERS”) have provided the Court with dueling schedules, where they have agreed on the events which need to occur before a final hearing on the ERS Lift Stay Motion but disagree as to the applicable timeline. (See Docket Entry Nos. 388 and 389).

The Court has considered carefully the provisions of 11 U.S.C. § 362(e)(1) regarding the prompt disposition of motions for relief from the automatic stay. In light of the complexity of the issues, and the need for adequate time for discovery and related litigation, the Court finds that compelling circumstances require that the Court extend the final hearing date to May 21, 2019. (See 11 U.S.C. § 362(e)(1) (providing that the timing of a final hearing may be extended “with the consent of the parties in interest or for a specific time which the court finds is required by compelling circumstances.”).)

Accordingly, the Court sets the following schedule for the ERS Lift Stay Motion:

  1. March 15, 2019: Deadline for completion of exchange of documents and

exchange of privilege logs with respect to non-ESI production.

  1. March 18, 2019: Meet and confer on outstanding discovery issues.
  2. March 21, 2019 at 3:00 p.m. (Atlantic Standard Time): Deadline for first

round of motions to compel.

  1. March 25, 2019 at 3:00 p.m. (Atlantic Standard Time): Deadline for


  1. March 27, 2019 at 3:00 p.m. (Atlantic Standard Time): Deadline for replies.

As you may see, Judge Swain has given the Board a date after the May 16, 2019 First Circuit deadline, which I am sure will be part of the request to the Supreme Court for a stay on said order. It helps to have an understanding and pro-Board judge.

On March 13, 2019, the Judge held an Omnibus hearing. The first matter in the agenda was a report by the Board on the status of the cases. Martin Bienestock, the Board’s principal attorney, announced that his client would seek a modification of the First Circuit’s stay and would also request certiorari from the ERS ruling. So much for saving on litigation. Mr. Bienestock also reported the Board was working on the Fiscal Plans, the Budget and the suggestions appeal by the Commonwealth. He also said they were monitoring fiscal reforms (Law 80, maybe), negotiating with creditors and suggested there would be further Title III’s. Judge Swain then asked for the timing of the new plans. Mr. Bienestock then said that the Commonwealth Plan would be filed possibly at the end of April, 2019, depending on creditor support. Suspect timing to say the least.

After this came out, Mark Stancil, for the GO creditors group took the podium. He started by saying the obvious, there is a lot of litigation and the Board had not engaged with creditors (I suppose he meant the GO groups since there are reports Judge Housser had to suspend mediation since the parties would not budge). He stated that the GO’s would file additional litigation having to do with the failure of the Board to impose change on the Puerto Rican Government. Stancil questioned how a Plan of Adjustment could be contemplated without these changes and that these reforms were crucial. He encouraged the Board to nudge and had to put the politicians through their paces.

Mr. Bienestock then said that the GO’s were a gating issue for the Plan of Adjustment. He also mentioned the Board tried to repeal Law 80 but they failed and if Mr. Stancil wanted to tell them how to do it, he was willing to listen. He added that the Board was willing to negotiate with creditors.

There are considerable views out there that believe the Board has simply failed to force change aside from its letter writing campaign to the Governor and the photo-ops at Fortaleza. It is clear to most that this Board has simply resorted to becoming a tool for debt relief and establishing legal precedents for future state bankruptcies rather than a force for fiscal and governmental reform. Once again, the people of Puerto Rico lose.

Later, the Board tried to explain that the problems reported in the COFINA bond exchange was due to market fluctuations and that everything would be fine from now on. Maybe.

Next was Luc Despin of the UCC. He started saying that he agreed with the Board in 98-99% of the cases but since January of 2018 it has been saying Alternate Dispute Resolution (ADR) was needed but nothing had come out it. He complained that the UCC had been excluded from the PREPA RSA and the Committee had a right to be involved. When asked if he had confronted the Board, Despin said yes.

Bienestock answered that there had been more negotiations with the UCC than with anyone else but that he did not see what the Committee had to do with secured creditors. Although Despin believes the Committee had a place at the table, Bienestock does not agree as to secured creditors. Judge Swain asked the parties to meet and confer and if anything has to be resolved, she would deal with it. Mr. Rosen, another attorney for the Board, informed the Court that the Board was working on ADR and would have something ready for the next Omnibus hearing of April 24, which was news for the UCC.

The issue of ADR is important. There are thousands upon thousands of lawsuits stayed because of the Commonwealth’s Title III filing and have to be deal with in the Plan of Adjustment. Almost all are without a judgment. In order for ADR to work, not only must there be a structure but also mediators and time to evaluate each case. This cannot be done by April 2019. But the Board said it would file a Plan of Adjustment by that date. Moreover, the Board just made an RFP for a claims management and reconciliation agent… If it is going to start this procedure at the end of March, how can it have a Plan of Adjustment by April? If the Federal Government is taking over statistics for Puerto Rico because the island’s are unreliable, how can a Plan of Adjustment be seriously considered at the end of April. If the Board insists that the objection to some GO’s issued is a gating issue for the Plan of Adjustment be filed at the end of April? Questions, questions.

Cooperativa de Ahorro y Creditor Vegabajeña filed an adversary proceeding against the Board and ERS claiming it has a lien over individual retirement contributions held by the ERS but belonging to Commonwealth employees and ERS participants. Soon the UCC will seek to intervene, as is its right and this case will go to judgment and whoever loses will appeal to the First Circuit and possibly seek certiorari from the SCOTUS. Thus is the Board’s way.

Finally, and very importantly and very telling, during the night of Friday March 15, 2019, the Board put in its website the Duff & Phelps IFAT Report on the Title III Bank Accounts as of June 30, 2018. Yep, it is not a typo, this report is as of June of 2018. This report is the Board’s response to AAFAF’s revelation in December of 2017 of over 800 accounts with almost $6 billions.

The Report is over 150 pages with its different tables and exhibits. At page 4, it states:

A principal goal of the Project was the publication of a report that would include a description of the processes employed, the results obtained and an opinion from D&P on whether or not procedures performed validate, with a high degree of certainty, that Commonwealth bank and investment accounts were identified and account balances as of the Measurement Date were accurately disclosed (the “Report”).

The report states that it depended on the voluntary cooperation of the Puerto Rican Government and its dependencies, but not all cooperated. At page 4, footnote 6, the Report makes clear this is not an audit. Curious. Also interesting, at page 4:

Based on a classification (a “Classification”) asserted by Commonwealth entity account holders regarding whether bank account funds were subject to certain types of restrictions, certain legal due diligence and financial analytical procedures were performed to identify the support for, nature of, and terms of such Classifications. As part of the Commonwealth bank account holders’ (“AH”) response, the entity was asked to provide supporting documentation for the Classification. The results of the legal due diligence and financial analytical procedures performed are set forth in Section III.

Guess who did the legal due diligence? O’Neill & Borges, the Board’s local counsel. Talk about a conflict free and impartial evaluator!

Continuing at page 7, the Report states that “[a]nalytical procedures peformed on the Restricted-Selected accounts is ongoing. The work regarding analytical procedures is not sufficiently developed to indicate whether or not AH cash flows do or do not support the Restrictions.” WHAT!!!??? This Report does not even state that the funds that the Commonwealth claims are restricted for another use are in fact restricted? Amazing!

Moreover, the Report at page 10 states that “D&P regards the CE not identified by Counsel or not covered by the Report, as described in paragraph 10 of Section I,  as described in paragraph 10 of Section I, such as the Puerto Rico Aqueduct and Sewer Authority (PRASA) and municipalities are outside the scope of this Report.” Paragraph 10, which is at page 5, makes clear that D&P must:

[F]ocus on those Commonwealth instrumentalities identified by counsel as Title III entities or covered by the Commonwealth Fiscal Plan certified by the FOMB as of October 23, 2018, and set March 12, 2019 as the Report issuance date. The University of Puerto Rico (“UPR”) is also included in the Report because the UPR relies heavily on funds provided from the Commonwealth to sustain its operations.

In other words, PRASA, the Municipalities could have billions in accounts but we will never know from this report. Unbelievable. Total waste of taxpayer dollars.

At page 14, the Report states that in unreconciled accounts, there are $11,575,189,236 in different accounts, of which $4,806,456,332 are unrestricted, $1,245,598, 957 as to which no representation has been made, $5,356,298,000 as restricted and $166,935,947 in a Commonwealth pooled account. In other words, the Commonwealth is sitting on at least $6 billion in cash with could be used for debt payment. That is without the benefit of a review of why over $5 billion is considered restricted. That is almost two years of full debt service of Puerto Rico’s debt.  If we look at the reconciled accounts at page 15, we have over $10.2 billion, of which over $5.7 billion are unrestricted or no representation has been made. Mindbogling.

Moreover, at page 23, the Report states that it could not “validate the claims of AH who reported that GDB was holding funds for them as of the Measurement Date. The sum of bank account balances (Table 10) which were reported as held at GDB cannot be validated, and therefore have been excluded from the values reflected in the Table 1 and Table 2.

At page 24, the Report states that neither the Judiciary nor PREPA had responded to D&B requests for information. Pages 25-26 makes recommendation as to work needed to be performed.

At the time of the revelation of these secret bank accounts, the Board sought to blame the Governor for withholding this data from the Board, and commenced the Duff & Phelps inquiry. Nothing could be farther from the truth. At the time, I released a secret [communications log] between AAFAF and the Board, which demonstrates there was no deception on the part of the Puerto Rican Government. Rather, why then did the Board go to great lengths to hide these accounts, and then when caught red-handed, attempt to paper over them with outside counsel report?  Why after spending hundreds of thousands of dollars to hire Duff & Phelps we still don’t have all of the answers? The involvement of O’Neill and Borgess raises even more questions, especially considering that one of the architects of PROMESA, former Resident Commissioner Pedro Pierluisi, remains a lawyer and lobbyist for the Board. Moreover, this report raises more questions than provides answers. Why are certain accounts restricted? What will be done for the unrestricted accounts? How could these accounts not be known by the García Padilla Administration and hence the Obama administration when they went to Congress claiming a humanitarian crisis? How can you justify not paying bondholders and unsecured creditors when the Commonwealth is sitting on this pile of cash? Why was this report not an audit, where an opinion would be issued? These questions only reinforce what I have been thinking for a while; the objections to any Commonwealth Plan of Adjustment will be monumental, both by bondholders and unsecured creditors. Litigation will go on for years and there will be no end to it, unless the Board sits down and settles with creditors, both secure and unsecured. The likelihood of this happening, however, is slim to none.

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 – March 11, 2019

Welcome to your weekly Title III update for March 11, 2019. Very little happened last week.

I reported last week that Judge Dein denied the Board’s urgent motion for production of certain documents it requested in the lifting stay to appoint a receiver in PREPA. Undeterred, the Board requested reconsideration via Rule 59 and 60 of the Federal Rules of Civil Procedure from Judge Dein on Friday March 8. In my experience, Courts seldom reconsider but this is part of the Board’s confrontational attitude to all Title III cases. On Friday, Judge Dein ordered that “[a] ny response shall be filed by March 19, 2019 at 3:00 p.m. Atlantic Standard Time. Any reply shall be filed by March 25, 2019 at 3:00 p.m. Atlantic Standard Time.” Let’s see what she decides. Remember the hearing on the merits will be held on May 8, 2019. Will the First Circuit’s opinion on Aurelius influence Judge Swain’s decision on this matter? If there is no appointed Board by that date, will she decide to grant the monolines wish and allow another Court to appoint a receiver for PREPA? Having only the benefit of the monolines’ expert reports, it seems the utility is being badly managed. Questions, questions.

The new kid on the block, the Lawful Constitutional Debt Coalition, filed a motion to intervene in the PBA adversary proceeding. The Board stated that it would not object but what is interesting is that the intervention requested is as a defendant and in their proposed answer to the complaint, the Lawful Constitutional Debt Coalition requests that it be dismissed. Now we don’t know on which side this group will be. Interesting.

The number of notices of participation in the GO litigation continues to grow. This is something we must keep a close eye since all the ones I have examined are pro se. They need legal representation.

The First Circuit denied Utier’s request for rehearing and rehearing en banc. The union quickly vowed to go to the Supreme Court. This belies Mr. Skeel’s claims that it was Aurelius who was behind the challenge. Utier has made it clear that it wants all of the Board’s actions to be declared null and void. Let’s see who arrives at the SCOTUS first. And talking of Mr. Skeel, he posted in Twitter the following comment as to the First Circuit’s denial of rehearing. “Very clear here and in the First Circuit’s Feb 21 decision rejecting a challenge from Puerto Rico lawmakers that the Board’s authority is fully intact until the Apptments [sic] Clause ruling goes into effect (if it ever does.” Very cocky tweet considering how difficult it is to obtain certiorari review from the SCOTUS and even if it is obtained, winning is not a sure thing. Just ask the García Padilla administration that obtained two certioraris for the same year, only to lose both decisions on the merits. Also, let’s not forget that Mr. Skeel filed an amicus brief in support of the Puerto Rico Recovery Act. He did not persuade the SCOTUS. Moreover, this does not show much respect for the First Circuit decision, which bottom line only affects the present members’ appointments, with purportedly two not wanting to seek review.

Caribbean Business reports that Mr. Skeel said there is no timetable for the publication of the Duff and Phelps report on the government’s bank accounts. This is important for according to emails in my possession, the Board knows of the existence of these accounts no since December 2017 when it was announced but July of 2017. This knowledge and the subsequent feet dragging on any report makes you wonder at the Board’s insistence on the Commonwealth’s lack of transparency. According to the weekly, “the island’s bank accounts have more than $12 billion, of which $3.6 billion is in a restricted account subject to the bankruptcy proceedings and $4.1 billion is in the Treasury Single Account.” Very hard to justify not paying bondholders and other creditors with that much loot.

The Omnibus hearing was transferred to NYC and will be held on March 13. Very little to happen, I think.

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 – March 4, 2019

Welcome to your weekly Title III update for March 4, 2019. The Aurelius case continues to dominate Aurelius the PROMESA news.

As I predicted, the Board announced on February 28, 2019, that it will seek certiorari from the Supreme Court on the Aurelius decision and a stay on the First Circuit judgment. In addition, Mr. David Skeel told the Puerto Rico Chamber of Commerce that the decision from the Supreme Court could come in the fall. Caribbean Business reported, however, that this decision was not unanimous. Would love to see the transcript of that meeting. Was it a 4-3 decision? Was it only the Claims Committee members? My sources tell me it was but I doubt if we will ever find out.

Add to this, the Board objection to the GO challenge and you can see the Board’s strategy. If the Board files late April the petition for certiorari, there will be no time for the case to be seen this term and the petition would be set, if granted, for the start of the Supreme Court term, first Monday in October 2019. If the oral arguments are in October, the decision would not come down until late November or early December. Moreover, the Supreme Court frequently grants stays in cases that later it does not grant a certiorari. Also, the Board may seek an extension of time to file the petition for certiorari and seek the stay on the First Circuit decision. This would take the time for the decision to come denying the certiorari into late 2019 and if granted, any decision into 2020. All the while, the Board could continue to operate even if later ruled unconstitutional by the Supreme Court.

Finally, today Utier filed a motion for rehearing en banc for the entire First Circuit to review the Aurelius decision. The Utier motion states at pages 15-17:

The court must reconsider its decision. First, the Court must determine that the actions taken by the Oversight Board members after the filing of the complaint on August 6, 2017, are null since its good faith ended when the legality and constitutionality of their appointments were questioned. Therefore, the actions taken by the Board, after the filing of the complaint, were taken in bad faith and with full knowledge of the vice in their appointments. Also, the Court must reconsider its decision to allow the Board to continue operating for 90 days since at this time its appointments are unconstitutional. We, respectfully submit, that the Court must not allow an Oversight Board with unprecedented and unlimited powers, that was unconstitutionally appointed, to make vital decisions about a country that is going through one of its worst economic, political and social crises as if it they had a constitutional appointment.

If the Court allows the Oversight Board to continue operating, its members would be acting without legal authority or credibility, in bad faith, subject to attacks questioning its motivations and they would be making important decisions and determinations for Puerto Rico without the power to do so.

Utier asked for the following remedy:

For the above stated reasons, UTIER prays for a Panel Rehearing or a Hearing En Banc to modify the Judgment in this case to declare void and null all the Oversight Board’s actions and decisions since the filing of the Complaint on August 6, 2017. Furthermore, this Court should stay all the Oversight Board future determinations or proceedings after the Judgment of this case was issued on February 15, 2019, until its members are reappointed, or the Oversight Board is reconstituted with the advice and consent of the Senate.

Rule 13.3 of the Supreme Court of the United States, reads as follows:

The time to file a petition for a writ of certiorari runs from the date of entry of the judgment or order sought to be reviewed, and not from the issuance date of the mandate (or its equivalent under local practice). But if a petition for rehearing is timely filed in the lower court by any party, or if the lower court appropriately entertains an untimely petition for rehearing or sua sponte considers rehearing, the time to file the petition for a writ of certiorari for all parties (whether or not they requested rehearing or joined in the petition for rehearing) runs from the date of the denial of rehearing or, if rehearing is granted, the subsequent entry of judgment.

This means that now the Board has more time to file its petition for certiorari and extend their appointment. This would allow the Board to finish the GO challenge or settle it and then move for the Plan of Adjustment. Once the Plan of Adjustment is filed, it will have a momentum of its own and maybe influence the Supreme Court to overturn the First Circuit for practical reasons. Not likely, but possible. Since last Friday, Mr. Skeel has been in the press pushing an agenda that has only one thing in mind: the filing of the Commonwealth Plan of Adjustment, which obviously is the only thing the Board cares about.

To top it all off, Bond Buyer quotes Congressman Bishop saying that the First Circuit opinion should be appealed because the Court got the powers of the Board all wrong. Even if he is right, which he is not, that has nothing to do with the appointments clause. Let’s see what happens.

Moreover, although the Board members’ term ends in August, PROMESA section 101(e)(5)(C) establishes that “[u]pon expiration of a term of office, a member of the Oversight Board may continue to serve until a successor has been appointed.” Hence, if President Trump decides not to bother with new appointments, the present Board members can continue in place. But section 101(5)(D) states that “[a]n individual may serve consecutive terms as appointed member, provided such reappointment occurs in compliance with paragraph 6.” Section 101(e)(6) states “[a] vacancy on the Oversight Board shall be filed in the same manner in which the original member was appointed.” The present members were appointed in a manner not available anymore unless the First Circuit opinion is overturned. Would this be the real reason they will seek certiorari?

The wild card in all of this is President Trump. He could decide to join the Board in its request for certiorari and stay of proceedings. He could, however, decide to appoint a new Board and possibly moot the Board’s petition for certiorari. Moreover, Aurelius and Utier could push for the Supreme Court to determine that all of the Board’s actions are invalid, overturning part of the First Circuit’s holding. This could push the Supreme Court to quickly deny certiorari or deny any stay petition, under the idea that it is better to have a new Board than risk having the whole Title III and other decisions be rendered invalid.

Seems to me that the best thing for Puerto Rico and its Title III cases to have the present Board cease litigating these issues and remove any possibility of its decisions be rendered invalid. That, however, would mean relinquishing power. Reminds me of what James F. Byrnes once said: “Power intoxicates men. When a man is intoxicated by alcohol, he can recover, but when intoxicated by power, he seldom recovers.”

The Board, in reaction to the ERS bondholders’ motion for appointment of a trustee, filed a stipulation between this agency and the Commonwealth the following effect:

The period in which Avoidance Actions of the Commonwealth, on the one hand, and ERS, on the other hand, must be commenced against one another pursuant to sections 546(a) and 549(d) of the Bankruptcy Code (the “Statutory Deadlines”) shall be tolled such that the Statutory Deadlines shall expire (a) two hundred seventy (270) days from and after the date on which the Statutory Deadlines would have expired in the absence of this Stipulation unless (b) the Commonwealth or ERS provide written notice of early termination (the “Termination Notice”) in accordance with clauses (A) and (B) below, in which case, the Statutory Deadlines shall expire on the date that is one hundred fifty (150) days from the delivery of such Termination Notice plus the number of days between the Stipulation Effective Date, as defined below, and the date on which the Statutory Deadlines would have expired in the absence of this Stipulation to: (A) the Court, through the filing of an informative motion, and counsel to the Bondholders, by serving a copy of such Termination Notice upon (B) (i) Jones Day, 250 Vesey Street, New York, NY 10281, Attn: Bruce S. Bennett, Esq., by hardcopy and email transmission ([email protected]), and (ii) White & Case LP, 200 South Biscayne Boulevard, Suite 4900, Miami, FL 33131, Attn: John K. Cunningham, Esq., by hardcopy and email transmission ([email protected]); provided, however, that, the foregoing is without prejudice to (y) the rights, interests and defenses that may be raised by either the Commonwealth or ERS in connection with any such Avoidance Actions, other than the applicable statute of limitations, laches, or any other time-related defense and, (z) the treatment of the Statutory Deadlines as may be provided in a plan of adjustment for the Commonwealth or ERS, subject to the effectiveness and consummation of any such plan of adjustment.

  1. The Commonwealth and ERS shall have the right to extend the period set forth in Paragraph 1(a) above for a period specified in writing upon thirty (30) days’ prior written notice and service of such notice upon the Court and counsel for the Bondholders in the matter set forth above.

Judge Swain promptly approved the stipulation. The whole process in the ERS will be interesting to watch.

A new Group of GO called the Lawful Constitutional Debt Coalition that holds or manages PBA and GO bonds filed appearance in the Commonwealth Title III. The group hired Susheel Kirpalani from Quinn Emanuel who successfully represented the COFINA Senior Bondholders during Title III. It is not clear what position they will take on the bonds. Will they oppose the Board and the UCC defending those challenged bonds? Will they instead be the class that is needed to accept the Plan of Adjustment for the cramdown pursuant to PROMESA sec. 314(c)? We need to watch this group, and its members. We will soon find out more.

Finally, we cannot let today’s update go by without acknowledging the intense lobbying being undertaken by the Board and her advocates to project confidence, control and to influence the legal process.  Simon Johnson, the famed British-American economist and proponent of PROMESA claims a “tragedy looms” in Puerto Rico following the First Circuit’s decision.  His doom and gloom view was prominent in 2016.  He writes that adhering to the Constitution’s Appointments Clause is a “purely procedural issue” and suggesting the U.S. Constitution is not as important when the lights could get shut off.  These claims are as tired as the Board and Governor Rosselló’s bickering.  As a refresher from our British friend turned U.S. citizen, the U.S. Constitution was written after the defeat of British Tyranny. It appears though Mr. Johnson would like the Oversight Board to be more like the British Monarchy. In fairness, Johnson does get one thing right when he writes, “Trump could immediately nominate, and the Senate could confirm, the current oversight board members, or, as Skeel points out, a new set of board members could be chosen.”  I guess we all wait on Mr. Trump.

Judge Dein denied the Board’s urgent motion for production of certain documents it requested. The Board, however, was not deterred. On March 2, 2019, the Board filed a motion for reconsideration stating that new documents were being reviewed and would renew its motion by March 4. The litigation so loved by the Board continues.

Each day more and more notices of participation in the GO litigation are being filed but for the most part as pro se. I urge these persons to hire an attorney. The issues are of Puerto Rican law and are not simple.

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 – February 25, 2019

Welcome to your weekly Title III update for February 25, 2019. This week’s news in PROMESA is still dominated by the First Circuit’s reversal of Judge Swain’s opinion in the Aurelius-Utier litigation and I discuss further implications and developments in a separate posting. Outside Aurelius, however, several things happened.

On February 18, 2019, the Board posted the Final Investigative Report-McKinsey & Company, Inc., issued by Luskin, Stern & Eisler LLP. The report, as expected, totally exonerated McKinsey of any wrongdoing although one of its subsidiaries owned Puerto Rican bonds. It seems the Board and its cronies can do no wrong. We shall see.

The notices of appeal continued to be filed in the COFINA plan of adjustment issue but it will likely run into the doctrine of equitable mootness. The Third Circuit explained what it is in In re Tribune Media Co., 799 F.3d 272, 278 (3d Cir. 2015), cert. denied sub nom. Aurelius Capital Mgmt., L.P. v. Tribune Media Co., 136 S. Ct. 1459, 194 L.Ed.2d 575 (2016)

“Equitable mootness” is a narrow doctrine by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when to grant the relief requested will undermine the finality and reliability of consummated plans of reorganization. The party seeking to invoke the doctrine bears the burden of overcoming the strong presumption that appeals from confirmation orders of reorganization plans—even those not only approved by confirmation but implemented thereafter (called “substantial consummation” or simply “consummation”)—need to be decided.

The doctrine may be narrow but no one has requested a stay of the execution of the plan of adjustment and by the time the case is briefed, it may be too late for an appeal. We will have to follow this one.

Certain ERS bondholders filed an important motion on February 19. It states, inter alia:

The ERS Bondholders respectfully ask this Court to appoint them trustees under 11 U.S.C. § 926 to pursue avoidance claims against the Commonwealth under 11 U.S.C. §§ 549 and 544. Such relief is necessary because the Financial Oversight and Management Board (“Oversight Board” or “Board”) has refused to litigate those claims. That is unsurprising, because the claims arise from Commonwealth legislation, enacted after the commencement of ERS’s Title III case and at the Oversight Board’s behest, purporting to dismantle ERS and transfer all of ERS’s assets, including its revenues and its right to receive revenues, to the Commonwealth. And despite the fact that ERS was a debtor in its own Title III case and was an independent entity to which the Commonwealth owed statutory financial obligations, neither the Board’s fiduciary duty to ERS nor ERS’s fiduciary duty to its creditors appears to have been recognized or to have played any role in the Board’s decision making. Section 926 was designed for just such circumstances, in which a conflict of interest has disabled a debtor or its representatives from pursuing claims in the debtor’s own best interest or that of its creditors.

Here you see the recurring theme of a Board “conflict of interest.” Board Member Carlos García with COFINA, Chairman Carrión with Banco Popular Puerto Rico, to name a couple of others. Curious is it not? In any event, this motion, valid as it is, will probably be denied by Judge Swain since the Board is sure to oppose it. What will happen in the First Circuit is quite another issue.

The ERS bondholders also filed a motion to have their request for lifting of the stay for adequate protection considered in an expedited fashion. Although the Board opposed the motion, it also requested that if granted, certain dates be changed. Let’s see what happens.

On February 22, 2019, the First Circuit gave Judge Swain her first win, affirming her dismissal of the Legislature’s complaint against the Board. The Court said:

The plaintiffs, the Speaker of Puerto Rico’s House of Representatives, Carlos Méndez-Núñez, and the President of its Senate, Thomas Rivera-Schatz, in their official capacities and on behalf of the Legislative Assembly, sued the Board, its members, and its executive director after the Board developed and certified a Fiscal Plan and a Territory Budget for Fiscal Year 2019. The complaint alleged that the Board had made several erroneous certification decisions and had exceeded its power under PROMESA during the Fiscal Plan and Territory Budget development and certification processes. It sought declaratory and injunctive relief. The district court dismissed the complaint, in part for lack of subject matter jurisdiction and in part for failure to state a claim. See Rivera-Schatz v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 327 F. Supp. 3d 364 (D.P.R. 2018). We affirm the dismissal on the same grounds.

Judge Lynch, as did Judge Swain, called out the Legislature for presenting incorrect facts, again, and again. The oral argument, as I explained when it came out, was embarrassing for plaintiffs. All paid by the People of Puerto Rico. No wonder we have a Board.

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.

Special Update: The Board Desperately Clings to Power

One week after the expected but seemingly surprising (for the Board) Aurelius decision, it is already jockeying to main power in Puerto Rico. Last Friday, Board Member David Skeel made it abundantly clear when he gave a speech to the Puerto Rico Chamber of Commerce essentially saying that the Board would seek certiorari review from the Supreme Court of the United States (SCOTUS) and hinted the U.S. Government would do the same. Mr. Skeel also hinted that the Board would seek a stay of the 90-day stay granted by the First Circuit. He insisted that the case is constitutionally very important and that he was confident the Supreme Court would reverse the decision by next fall. These are surprisingly precise predictions, perhaps suggesting he knows the outcome from the Robert’s Court from an important Board member, but they must be examined closely.

If in less than 90-days, the Board seeks certiorari review and requests that the SCOTUS issue a stay of the mandate until the case is decided or the cert is denied. This way it could circumvent the May 16, 2019 deadline to wield power. If the Supreme Court grants the certiorari, this could happen, but as I have explained many times, the likelihood of the grating of a cert is less than 1%. Also, while the SCOTUS reviews the petition, it occasionally grants stays even if it later denies the petition. Also, the issue of the Appointments Clause is constitutionally important, but that is not the litmus test for the granting of a petition for certiorari. SCOTUS watchers and Mr. Skeel has written amicus briefs to the Supreme Court, know that conflicts between the Circuits is the best way to have a certiorari granted. Another useful way is for the United States to seek the certiorari and then the odds increase to around 25%, which are still very bad. Even if granted, the Board risks having the Supreme Court reverse the First Circuit and decide all its work is for naught and invalidate the Title III’s. As to Mr. Skeel’s opinion on likelihood of success, let’s just say he filed a brief of amicus curiae supporting the Commonwealth’s Recovery Act. It didn’t work.

Moreover, Mr. Skeel said that the Court could decide this by fall. That is very strange since the Supreme Court term ends on June 30 and the next term starts on the first Monday in October. Even if the case is argued in October, usually decisions do not start coming in until late November or December. Additionally, just last term, June 21, 2018, the Supreme Court decided Lucia v. SEC, 138 S. Ct. 2044 (2018), a case having to do with the Appointments Clause, which albeit important, is an arcane part of Constitutional lore. Hence, there is no real need to discuss this again.

Why then risk this in a long shot cert? Why not accept the First Circuit judgment and wait to see if President Trump will nominate him? My sources tell me the Board has been lobbying in DC for their reappointment. Is it as Lord Acton said, “Power tends to corrupt, and absolute power corrupts absolutely”?  Seems the Board wants to continue wielding power far beyond its time by stretching the request for cert as much as it possibly can in order to impose on creditors (including my clients, who are unsecured creditors) a plan of adjustment in the Commonwealth case. It is almost thumbing its nose at the Constitution. Not exactly what one would expect from a group of principal United States Officers, or from a leading member of the Federalist Society.

Mr. Skeel also repeated what he has said in the University of Puerto Rico Law Review and what Martin Bienestock told judge Swain this past November; the Board plans on filing a plan of adjustment for the Commonwealth this year.  As to the plan of adjustment, there are a couple of things that must be pointed out. The Board has said that it will certify a new Fiscal Plan by April 22. Since the plan of adjustment must be consistent with the Fiscal Plan, it must be in place before the plan of adjustment may be filed. In addition, the Board and the UCC have stated that it is a threshold issue for the Court to decide the GO objection it filed before the plan of adjustment. Given the complexities of the issues involved and the notices to the different parties, I can’t see Judge Swain solving the issues before the end of the year. We will see.

And finally, Mr. Skeel writes in today’s Wall Street Journal a rather alarming claim:

Puerto Rico would collapse into chaos if the [Aurelius] ruling took immediate effect. The hedge fund that is the principal plaintiff in the case asked the court to dismiss the bankruptcy-like proceedings the oversight board began in May 2017. That would cause a mad scramble as creditors used every legal and political lever available to force Puerto Rico to pay. 

Nothing is further from the truth. Although Aurelius in its complaint requested the dismissal of the Title III proceedings as ultra vires actions, which they are, during oral arguments at the district court and appellate level, it stipulated it would accept a stay of proceedings until the new Board was installed and decided what it would do with the previous board’s decisions. What Mr. Skeel does not tell you is that Utier, the union who filed the first complaint claiming the unconstitutionality of the appointments, has not offered such stipulation and continues to argue that not only is the Title III illegal and should be dismissed, but all Board actions are illegal in toto.

In addition, dismissal of the Title III would not create a mad scramble. There are several cases right now dealing with bondholder and non-secured creditor claims. Others are on appeal. The mad scramble already exists precisely because of the Board’s Title III and other actions. Most creditors would have no federal jurisdiction since GO claims have to be litigated in state court (even the 2014 claims may be litigated there) and Commonwealth law prohibits any embargo of governmental accounts. The First Circuit already has ruled that ERS bondholders hold a lien and even though the Board seems to deny payment, they are secured creditors under bankruptcy law and entitled to payment to the full extension of the lien. PREPA bondholders had a deal in place without the benefit of PROMESA and as of now, the Board has an RSA, which is not very different from the previous one. The monolines are still holdovers but that may change, even after a dismissal of the Title III. The COFINA deal is already done and very unlikely to become undone even with no Board. PRASA and the UPR have been paying its debts, as well as the Municipalities.

In sum, Mr. Skeel’s various public comments are intended to portray the situation as one as business as usual and that the Board will continue its “important” work. Let’s face it, the situation is NOT normal, an Appellate Court has just determined that its members were unconstitutionally appointed and hence have no power.  To attempt to file a plan of adjustment right in the middle of a certiorari petition is desperate, to say the least.

What would change substantially with the Aurelius ruling is that this particular Board would probably be replaced, which seems to strike fear in Mr. Skeel. But the Board is not this superhero group, no League of Justice, without which would perish. After 2 years of continuous bickerings with local politicians, it seems to me that it would be best if PROMESA, including Title III, is dismissed and the local politicians left to do all the changes and schemes necessary to straighten our existence. There was no humanitarian crisis in 2016 and there is none now, only the lack of will and profiles in courage to act.

On the local front, the governor says the White House has refused to meet with him to discuss the reconstruction funds. The White House said it had not received the request for a meeting but Mr. Mercader, who is very serious public servant, countered saying that as executive director of the Puerto Rico Federal Affairs Administration he wrote White House Director of Intergovernmental Affairs, Douglas Hoelscher, on January 17 to request a meeting with Trump for Rosselló

This public conflict does not help the governor . . . or does it? If the Board is not reappointed by May 16, barring any SCOTUS extension, its power ceases to exist since it never was properly appointed. This means that any delay in the appointment of the Board members means that the Governor cannot not restrained by anyone. He can make whatever budget it wants, reassign any funds it wants, even if the Board imposes a budget before May 16 because no one can take him to Court. Governor Rosselló is already claiming his fiscal team achieved the COFINA deal. If we add to this that the PDP is clamoring for Puerto Rico to have control of the Title III, we have the perfect storm for local politicians; a recovering economy and no Board to tell them what to do.

The only problem with this scenario is that eventually a Board will be appointed which will not look at these actions with pleasure. In addition, 11 U.S.C. § 930(a)(1) and 930(a)(2) complicate the issues. It states:

(a) After notice and a hearing, the court may dismiss a case under this chapter for cause, including-

(1) want of prosecution;

(2) unreasonable delay by the debtor that is prejudicial to creditors;

Hence, if after a couple of months without action in the case, the creditors, including unsecured creditors, may seek dismissal of the Title III. Will the governor risk the Title III for power? Difficult to say for he will not get a chance for control over the Title III until 2021, if the Democrats win the White House and Senate. In the meantime, no one looks out for the well-being of the People of Puerto Rico.

Monday Update – February 18, 2019

Welcome to your weekly Title III update for February 18, 2019. This week’s news in PROMESA is dominated by the First Circuit’s reversal of Judge Swain’s opinion in the Aurelius-Utier litigation, which I discuss in a separate posting. Outside Aurelius, however, several things happened.   

On February 11, 2019, AAFAF filed a motion in the COFINA cases informing the Court of the following:

Bonistas del Patio, Inc. (“Bonistas”), is party to the Plan Support Agreement and has represented to AAFAF that it has incurred expenses in the aggregate amount of $7,000,000.00 for professional services rendered in connection with the development, negotiation, confirmation, and consummation of the Plan and the compromise and settlement of the Commonwealth-COFINA Dispute (such expenses, the “Bonistas Expenses”);

WHEREAS, Bonistas is not a Consummation Cost Party and is not a recipient of Consummation Costs under the Plan;

WHEREAS, Section 15.2 of the Plan provides that “all expenses . . . incurred . . . in connection with the development, negotiation, confirmation and consummation of the Plan and the compromise and settlement of the Commonwealth-COFINA Dispute shall be paid to the extent available from the funds distributable to the Commonwealth in accordance with the provisions of Sections 2.1 and 15.1 hereof and otherwise by the Commonwealth”;

WHEREAS, AAFAF wishes to stipulate and agree that the Bonistas Expenses are “expenses” within the meaning of Section 15.2 of the Plan and are payable by the Commonwealth on the Effective Date

Bonistas del Patio is local non-profit allegedly representing local jr. COFINA bondholders. This was the first time anyone heard of this agreement and the UCC quickly moved to oppose this “settlement,” requesting that the Court stop the stipulation pending the answer of the following questions:

 Is Bonistas contractually obligated to pay $7 million to its professionals?

 Has Bonistas made any payments to its professionals? If so, how much?

 What is the basis for the Commonwealth’s proposed $7 million payment to Bonistas?

 What consideration is the Commonwealth receiving (or has received) in exchange for making the proposed $7 million payment to Bonistas?

 Who are the ultimate recipients of the proposed $7 million payment?

 When did the Commonwealth agree to take on the obligation to pay $7 million to Bonistas?

 If such an agreement was made before February 11, 2019, why was this agreement not disclosed sooner?

Judge Swain ordered AAFAF NOT to pay the $7 million and to answer the UCC’s motion. AAFAF filed a response with a declaration by Bonistas’ attorney but did not answer the UCC’s questions, which prompted the Court to order the Committee to file a reply, which states, inter alia:

By and large, the AAFAF Response and the Declaration speak only in generalities,7 often fail to specify whether the work at issue was even connected to COFINA (or the Commonwealth-COFINA Dispute), or make other uninformative statements. Even the bullet point list in paragraph 9 of the Declaration falls short of justifying $7 million in fees and expenses—instead, again, resorting to vague and generalized descriptions of services purported provided by Bonistas and its professionals. In that regard, the claim that Bonistas needed to engage in solicitation efforts is particularly dubious given that the Commonwealth already incurred more than $25 million as a “Solicitation Fee” to certain dealer managers for their efforts in soliciting votes of COFINA bondholders. Moreover, the Committee strenuously disputes statements contained in the Declaration to the effect that Bonistas or its professionals were involved for hundreds of hours in the settlement of the Commonwealth-COFINA Dispute (which dispute dealt with the issue of which entity, as between the Commonwealth and COFINA, owned the Sales Tax). These settlement negotiations were handled by the Commonwealth Agent and the COFINA Agent, and not even the Oversight Board was involved. (Footnotes omitted)

The UCC motion also makes alarming allegations against Bonistas’ principals:

The Committee also takes issue with the entire narrative that Bonistas is a “notfor-profit” entity devoting itself pro bono for the good of the small island bondholders. While Bonistas may be, as a technical matter, a non-for-profit corporation, the two main principals of Bonistas, Mr. Rafael Rojo (President of Bonistas) and Mr. Jorge Irizzary (Executive Director of Bonistas), are not mere by-standers in these cases. Mr. Irizzary is a former president of the Government Development Bank for Puerto Rico (“GDB”) and a holder of Puerto Rico bonds. Furthermore, Mr. Rafael Rojo, also a holder of Puerto Rico bonds, has had dealings with the Government of Puerto Rico during these Title III cases. According to a published report (which quotes Mr. Rojo),  in November 2018, Mr. Rojo purchased, through one of his investment vehicles, a 90-acre property (known as the Río Bayamón Community) for $12 million from GDB—a property that, as recently as 2017, had been appraised at $19.6 million. This transaction closed on November 16, 2018, i.e., only a few days after this Court approved GDB’s Qualifying Modification. It is therefore clear that, while he was purportedly negotiating a resolution of the COFINA issues on behalf of on-island bondholders, he was also negotiating with GDB to close a transaction for his own pecuniary gain. What is not clear is what other involvements these two gentlemen may have in these Title III cases.

Unless this is properly explained, these allegations are serious and the UCC should be commended for bringing forth this information. And as the UCC pointed out in its February 12 motion, Bonistas has not complied with Bankruptcy Rule 2019 which requires the disclosure of the following:

(c) Information Required. The verified statement shall include:

(1) the pertinent facts and circumstances concerning:

(A) with respect to a group or committee, other than a committee appointed under § 1102 or § 1114 of the Code, the formation of the group or committee, including the name of each entity at whose instance the group or committee was formed or for whom the group or committee has agreed to act; or

(B) with respect to an entity, the employment of the entity, including the name of each creditor or equity security holder at whose instance the employment was arranged;

(2) if not disclosed under subdivision (c)(1), with respect to an entity, and with respect to each member of a group or committee:

(A) name and address;

(B) the nature and amount of each disclosable economic interest held in relation to the debtor as of the date the entity was employed or the group or committee was formed; and

(C) with respect to each member of a group or committee that claims to represent any entity in addition to the members of the group or committee, other than a committee appointed under § 1102 or § 1114 of the Code, the date of acquisition by quarter and year of each disclosable economic interest, unless acquired more than one year before the petition was filed;

(3) if not disclosed under subdivision (c)(1) or (c)(2), with respect to each creditor or equity security holder represented by an entity, group, or committee, other than a committee appointed under § 1102 or § 1114 of the Code:

(A) name and address; and

(B) the nature and amount of each disclosable economic interest held in relation to the debtor as of the date of the statement; and

(4) a copy of the instrument, if any, authorizing the entity, group, or committee to act on behalf of creditors or equity security holders.

Now that the Board has only 90 days to exist as presently formed, can Bonistas provide this information in such a time?

After the UCC filing, Judge Swain issued an order stating:

The Official Committee of Unsecured Creditors (the “UCC”) and AAFAF are hereby directed to meet and confer and to file a joint status report by February 21, 2019 at 5:00 p.m. (Atlantic Standard Time). Unless the UCC’s objections have been resolved, the joint status report must address whether both parties consent to the proposed March 13, 2019 hearing date, as well as the parties’ positions as to the requests for discovery and an appropriate timetable for any discovery. AAFAF shall also file a further separate brief by the same deadline regarding its positions on the contracting issues raised by the UCC if those issues have not been resolved consensually.

It is obvious from the order that Judge Swain understands there is prima facie validity to the UCC’s objections and is warning of this becoming a contested matter to be discussed during the March 13 hearing. We must stay tuned to this one.

The Board filed an adversary proceeding against the Senate to obtain information on its bank accounts. It attempted to do it via letter, but  President Rivera Schatz flatly refused the request by saying the Board was exceeding its bounds. The status of this proceeding is somewhat in the air due to the Aurelius decision.

Last week I reported that the Board was seeking discovery on certain information held by the monolines having to do, inter alia, with its reserves of funds due to the PREPA Title III. Assured and others filed an opposition saying the information is protected by privilege, including Bank Examiner Privilege and Confidentiality Statues. I believe this is protected and there will be a hearing before Magistrate Judge Dein on February 26. Will try to attend.

Finally, Judge Swain approved the Urgent Motion of (i) Financial Oversight and Management Board, Acting Through its Special Claims Committee, and (ii) Official Committee of Unsecured Creditors for Entry of Order, Under Sections 105(a) and 502 of the Bankruptcy Code, Bankruptcy Rule 3007, and Sections 301(a) and 310 of PROMESA, Establishing Procedures with Respect to Omnibus Objection to Claims Filed or Asserted by Holders of Certain Commonwealth General Obligation Bonds and Requesting Related Relief, having to do with the notice to GO bondholders. It is very detailed and not a bad order. Now with the Aurelius decision, the Special Claims Committee of the Board, comprised of Mr. Skeel, Ms. Matosantos and former Judge González is compromised and can only operate for 90 days. Moreover, the statute of limitations for filing claims such as the GO’s challenge expires in May 2019. Will there be enough time to do everything that needs to be done? Questions, questions.

As to the GO and PBA controversy, I strongly urge bondholders to retain counsel for this may end your right to payment. Remember what happened in COFINA. Band together and fight for your rights.

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.

Aurelius Decision Finally Comes Down

On Friday February 15, 2019, the First Circuit finally came down with its decision on the Aurelius-Utier challenge to the Board appointments. As predicted, the Circuit reversed Judge Swain for the fifth straight time. The 55 page decision examined PROMESA carefully, going through the Board’s powers and the Governor and Legislature’s inability to exercise power over the “territorial entity.”The Circuit summarized some of the Board’s arguments which have great importance to the relationship between Congress and Puerto Rico and said at page 18:

The Board further argued that, in any event, the Appointments Clause did not apply even if the individual members were federal officers, because they exercised authority in Puerto Rico, an unincorporated territory where the Territorial Clause endows Congress with plenary powers. This, according to the Board, exempted Congress from complying with the Appointments Clause when legislating in relation to Puerto Rico.

The Circuit further explained what the District Court’s reasoning was, at pages 20-22:

The district court based its ruling on the premise that “the Supreme Court has long held that Congress’s power under [the Territorial Clause] is both ‘general and plenary.'” Such a plenary authority is what, according to the district court, allows Congress to “establish governmental institutions for territories that are not only distinct from federal government entities but include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States.” The district court further pronounced that Congress “has exercised [its plenary] power with respect to Puerto Rico over the course of nearly 120 years, including the delegation to the people of Puerto Rico elements of its . . . Article IV authority by authorizing a significant degree of local self-governance.” . . .

Turning to the relationship between Congress and Puerto Rico, the district court noted that “Congress has long exercised its Article IV plenary power to structure and define governmental entities for the island,” in reference to the litany of congressional acts that have shaped Puerto Rico’s local government since 1898, including the Treaty of Paris of 1898, the Foraker Act of 1900, the Jones-Shafroth Act of 1917, and Public Law 600 of 1950. Furthermore, with regards to PROMESA and its Board, the district court afforded “substantial deference” to “Congress’s determination that it was acting pursuant to its Article IV territorial powers in creating the . . . Board as an entity of the government of Puerto Rico.” The district court then proceeded to consider whether Congress can create an entity that is not inherently federal. It concluded in the affirmative, because finding otherwise would “ignore[] both the plenary nature of congressional power under Article IV and the well-rooted jurisprudence . . . establish[ing] that any powers of self-governance exercised by territorial governments are exercised by virtue of congressional delegation rather than inherent locals sovereignty.” Accordingly, the district court found that the”creation of an entity such as the . . . Board through popular election would not change the . . . Board’s ultimate source of authority from a constitutional perspective.”

Judge Torruella, author of the opinion and a scholar on Puerto Rico’s relationship with the Supreme Court, quickly dispelled these findings at pages 24-25:

However much Article IV may broaden the reach of Congress’s powers over a territory as compared to its power within a state, this case presents no claim that the substance of PROMESA’s numerous rules and regulations exceed that reach. Instead, appellants challenge the way the federal government has chosen the individuals who will implement those rules and regulations. This challenge trains our focus on the power of Congress vis-à-vis the other branches of the federal government. Specifically, the Board claims that Article IV effectively allows Congress to assume what is otherwise a power of the President, and to share within the two bodies of Congress a power only assigned to the Senate.

We reject this notion that Article IV enhances Congress’s capabilities in the intramural competitions established by our divided system of government. First, the Board seems to forget — and the district court failed to recognize and honor — the ancient canon of interpretation that we believe is a helpful guide to disentangle the interface between the Appointments Clause and the Territorial Clause: generalia specialibus non derogant (the “specific governs the general”). . .

The Territorial Clause is one of general application authorizing Congress to engage in rulemaking for the temporary governance of territories. See Reid v. Covert, 354 U.S. 1, 14 (1957) (plurality opinion). But such a general empowerment does not extend to areas where the Constitution explicitly contemplates a particular subject, such as the appointment of federal officers. Nowhere does the Territorial Clause reference the subject matter of federal appointments or the process to effectuate them. On the other hand, federal officer appointment is, of course, the raison d’etre of the Appointments Clause. It cannot be clearer or more unequivocal that the Appointments Clause mandates that it be applied to “all . . . Officers of the United States.” U.S. Const. art II, § 2, cl. 2 (emphasis added).

Judge Torruella, who is an acerbic critic of the Insular cases, made it clear that they did not support the Board at pages 33-34:

Finally, nothing about the “Insular Cases” casts doubt over our foregoing analysis. This discredited lineage of cases, which ushered the unincorporated territories doctrine, hovers like a dark cloud over this case. To our knowledge there is no case even intimating that if Congress acts pursuant to its authority under the Territorial Clause it is excused from conforming with the Appointments Clause, whether this be by virtue of the “Insular Cases” or otherwise. Nor could there be, for it would amount to the emasculation from the Constitution of one of its most important structural pillars. We thus have no trouble in concluding that the Constitution’s structural provisions are not limited by geography and follow the United States into its unincorporated territories.

Judge Torruella also announced the Circuit’s position as to the insular cases and said “[t]he only course, therefore, which we are allowed in light of Reid is to no further expand the reach of the “Insular Cases.”(Page 36, bold added) Is this a harbinger of the Circuit’s treatment to the series of cases by Judge Gelpí on SSI and Medicaid? We can only hope.

There is an interesting finding by the Court at page 38 where it said:

The Board Members’ federal authority includes the power to veto, rescind, or revise Commonwealth laws and regulations that it deems inconsistent with the provisions of PROMESA or the fiscal plans developed pursuant to it. See 48 U.S.C. § 2144 (“Review of activities to ensure compliance with fiscal plan.”).

Although I have insisted that the Board has this power, its members have been very reluctant to put it into effect. Based on this, the Board will be hard pressed to justify allowing the Commonwealth to have thousands of publicity contracts while not paying debt. So the next 90 days will be interesting to see what the Board does and will they cram down anything against the PR Government, the Legislature or the creditors? A new Board could take a different view.  Also relevant to the new adversary proceeding against the Senate seeking information on its bank accounts and which Mr. Rivera Schatz insists it exceeds the Board’s authority. At page 39, it states “Board Members’ investigatory and enforcement powers, as carried out collectively by way of the Board, exceed or are at least equal to those of the judicial officers the Supreme Court found to be ‘Officers of the United States.’” Seems Judge Swain will have little leeway to agree with Mr. Rivera Schatz. As to the role of the Board, Judge Torruella, ever the historian, said at page 40 “[t]he Board Members are, in short, more like Roman proconsuls picked in Rome to enforce Roman law and oversee territorial leaders than they are like the locally selected leaders that Rome allowed to continue exercising some authority.” A quote for the ages.

Judge Torruella also discussed the difference of Board members with PR elected officials and said at page 45:

The Board’s basic point (and the United States’ basic point as well) is this: If we find that the Board Members must be selected by presidential nomination and Senate confirmation, then that would mean that, for example, all elected territorial governors and legislators have been selected in an unconstitutional manner.

We disagree. The elected officials to which the Board and the United States point — even at the highest levels – are not federal officers. They do not “exercise significant authority pursuant to the laws of the United States.” See Lucia, 138 S. Ct. at 2051; Freytag, 501 U.S. at 881; Buckley, 424 U.S. at 126; see also United States v. Germaine, 99 U.S. 508, 511-12 (1878). Rather, they exercise authority pursuant to the laws of the territory. Thus, in Puerto Rico for example, the Governor is elected by the citizens of Puerto Rico, his position and power are products of the Commonwealth’s Constitution, see Puerto Rico Const. art. IV, and he takes an oath similar to that taken by the governor of a state, id.

It is true that the Commonwealth laws are themselves the product of authority Congress has delegated by statute. See Puerto Rico v. Sánchez Valle, 136 S. Ct.1863, 1875 (2016). So the elected Governor’s power ultimately depends on the continuation of a federal grant.But that fact alone does not make the laws of Puerto Rico the laws of the United States, else every claim brought under Puerto Rico’s laws would pose a federal question.(Bold added)

The statement on Governor’s power is telling. In other words, the Governor’s power and the whole apparatus of the PR Government depends on Congress not changing Law 600. Or as the Court in Downes v. Bidwell, 182 U.S. 244, 289-290 (1901) said:

The Constitution has undoubtedly conferred on Congress the right to create such municipal organizations as it may deem best for all the territories of the United States, whether they have been incorporated or not, to give to the inhabitants as respects the local governments such degree of representation as may be conducive to the public wellbeing, to deprive such territory of representative government if it is considered just to do so, and to change such local governments at discretion.

The current governor should read this passage a few times.

Although Utier pushed the issue of invalidity of the Board’s actions, Judge Torruella would have none of it. At pages 52-53 stated:

Here, the Board Members were acting with the color of authority — namely, PROMESA — when, as an entity, they decided to file the Title III petitions on the Commonwealth’s behalf, a power squarely within their lawful toolkit. And there is no indication but that the Board Members acted in good faith in moving to initiate such proceedings. See Leary v. United States, 268 F.2d 623, 627 (9th Cir. 1959). Moreover, the Board Members’ titles to office were never in question until our resolution of this appeal.

Other considerations further counsel for our application of the de facto officer doctrine. We fear that awarding to appellants the full extent of their requested relief will have negative consequences for the many, if not thousands, of innocent third parties who have relied on the Board’s actions until now. In addition, a summary invalidation of everything the Board has done since 2016 will likely introduce further delay into a historic debt restructuring process that was already turned upside down once before by the ravage of the hurricanes that affected Puerto

Rico in September 2017.

This may mean that Utier or maybe Aurelius will seek certiorari from the Supreme Court of the United States. Given that less than 1% of the certioraris requested are granted, it will probably not happen.

Later at page 54, the Court decided:

Finally, our mandate in these appeals shall not issue for 90 days, so as to allow the President and the Senate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause. Cf. Weinberger v. Romero-Barceló, 456 U.S. 305, 312-313 (1982). During the 90-day stay period, the Board may continue to operate as until now.

Judge Torruella summarized the Court’s decision at pages 54-55:

In sum, we hold that the Board Members (other than the ex officio Member) must be, and were not, appointed in compliance with the Appointments Clause. Accordingly, the district court’s conclusion to the contrary is reversed. We direct the district court to enter a declaratory judgment to the effect that PROMESA’s protocol for the appointment of Board Members is unconstitutional and must be severed. We affirm, however, the district court’s denial of appellants’ motions to dismiss the Title III proceedings.

This decision is nothing short of monumental. The whole Board may be changed, although of course President Trump has the choice of re-nominating the same members but will have a tough time getting them through the Senate. This may mean more debt payment, dismissal of the Title III, more intervention with the PR Government. We will have to wait and see what transpires but first I would like to comment on the wild speculation I have seen in both the main stream media and social media.

Judge Torruella’s decision does not mean that PROMESA has to be amended. The opinion states at page 51:

Accordingly, we hold that the present provisions allowing the appointment of Board Members in a manner other than by presidential nomination followed by the Senate’s confirmation are invalid and severable. We do not hold invalid the remainder of the Board membership provisions, including those providing the qualifications for office and for appointment by the President with the advice and consent of the Senate.

Since PROMESA does not NEED to be amended, it is unlikely the Board can secure more powers.  Democrats are leery of the Board’s handling of the PR Government and are reluctant to give it more power. Also, given the contentious nature of Governor Rosselló with President Trump and his campaigning for democratic candidates in Florida, he is unlikely to have much influence on who is appointed.  The Claims Committee of the Board will continue to exist until May 16, 2019, when the 90-day period expires. What will happen to the Board’s objection to 2012 and 2014 GO’s? Not clear but even if the new Board does not want to continue the case, the UCC is likely to want to do so and it probably could pursuant to section 926(a) of the Bankruptcy Code, also adopted in PROMESA.

What can Judge Swain do? Not much. She can continue to act until May 16 but in the back of her head she must realize it all could be for naught. Moreover, she must not be feeling very good since this is the 5th straight time she has been reversed. I am sure she will be sustained in other cases that have been argued before the Circuit but those will have to wait. Finally, the Republican President and Republican Senate will be involved in naming the next Board. Only 51 votes are needed (Republicans have 53) for the new members. In any event, I don’t see a filibuster unless a candidate is someone extreme. We will have to wait and see.

Monday Update – February 11, 2019

Welcome to your weekly Title III update for February 11, 2019.  

On February 4, 2019, Judge Swain approved the COFINA plan of adjustment and later filed an amended order. After the Board made it clear that the rejection of the plan of adjustment would lead to no deal, Judge Swain ran roughshod over all the objections filed by different bondholders and politicians. As a result, COFINA is the owner of part of the SUT and these funds are not “available resources” for payment of other public debt. One has to congratulate the legal representation of the COFINA Seniors Coalition who are the big winners here. Not only do they get less than 7% haircut, but they get some of the attorney’s fees back for their work.

Judge Swain’s rational for the deal can be seen at paragraph 171, page 74 of the order:

Confirmation of the Plan demonstrates that Puerto Rico is taking the steps necessary to enable its return to the capital markets. The restructuring of the COFINA debt under Title III of PROMESA is expected to act as a catalyst for other restructurings, setting the stage for Puerto Rico’s emergence from bankruptcy and reducing costly litigation.

In other words, one deal done and the rest will line up. Let’s see if it happens. In addition, Judge Swain dismissed the Municipality of San Juan’s belated effort to file a brief of amicus curiae by saying at footnote 10:

Because the arguments untimely raised in the proffered amicus brief will not provide “supplementing assistance” to existing counsel, and because the Autonomous Municipality of San Juan has not established that it has a “special interest in this case” that justifies the filing of an amicus brief at this juncture, the San Juan Motion is hereby denied.

In a similar fashion, Judge Swain dismissed the PDP senate minority objections by saying at footnote 14:

Additionally, in its amicus brief, the PDP argues that the New Bond Legislation impermissibly restricts the ability of a successor Legislative Assembly to exercise its exclusive taxing, spending, and police powers. PDP’s position is unfounded. Although the New Bond Legislation sets forth procedures that must be met before any amendments to the New Bond Legislation can become effective, the procedures do not preclude the possibility of future alterations. The New Bond Legislation merely clarifies

the means by which the Legislative Assembly’s taxing power may be exercised in the future without impairing COFINA’s interests.

This is especially important for some of the senators saying that Judge Swain has given them leave to amend the COFINA deal in the future. Actually, former Governor García Padilla again showed his ignorance of these matters by saying that the COFINA deal was to be revisited and payments reduced. It is very clear from this footnote and the order itself, that Puerto Rico may alter the New Bond Legislation but cannot impair “COFINA’s interest.”

Also, Judge Swain dismissed VAMOS and Puerto Rican Rep. Natal’s objections by saying at footnote 14:

The VAMOS objectors argue that a pending adversary proceeding challenging the constitutionality of the New Bond Legislation must be resolved prior to confirmation of the proposed COFINA Plan. (See VAMOS Obj. at 2-6.) These objectors contend that the New Bond Legislation is unconstitutional under both the United States and Puerto Rico Constitutions because Representative Natal-Albelo was prohibited, in violation of the rules of the House of Representatives, from participating in the legislative process leading up to the House of Representatives vote on the New Bond Legislation. Plaintiffs also assert that both the original COFINA legislation and the New Bond Legislation violate the Constitution of Puerto Rico because borrowing authorized there under allegedly exceeds the limits on“public debt” set forth in Sections 2 and 7 of Article VI of the Constitution of Puerto Rico (which sections respectively limit the amount and duration of direct obligations of the Commonwealth backed by a pledge of the full faith and credit and taxing power of the Commonwealth, and provide that appropriations for a fiscal year shall not exceed total estimated revenues for the year absent the imposition of taxes to cover the shortfall). Plaintiffs’ arguments regarding an alleged violation of the rules of the Commonwealth House of Representatives are non justiciable and are therefore overruled insofar as they are raised as objections to the Plan. See Noriega Rodríguez v. Jarabo, 136D.P.R. 497 (P.R. 1994); Silva v. Hernández Agosto, 118 D.P.R. 45, 18 P.R. Offic.Trans. 55 (P.R. 1986). Furthermore, arguments regarding the Commonwealth’s “public debt” limit have been resolved as part of the 9019 Settlement Agreement between the Commonwealth and COFINA insofar as they relate to the statutory authorization of the existing COFINA bonds. The New Bond Legislation, which is presumptively valid and not facially inconsistent with the cited Puerto Rico constitutional provisions,clearly provides that Reorganized COFINA is a “corporate and political entity independent and separate from the Government of Puerto Rico,” that Plan of Adjustment Bonds shall be payable solely from COFINA Revenues, and that the “COFINA Revenues do not constitute ‘available resources’ or ‘available revenues’ of the Government of Puerto Rico as used in Section 8 of Article VI of the Puerto Rico Constitution.”

As mentioned before, Judge Swain also decided the PROSOL-Utier objection and repeated the rational at footnote 16:

The Court precluded the tender of an economist’s declaration concerning future Commonwealth finances because its proponent, PROSOL-UTIER, lacks standing as a non creditorof COFINA. (Docket Entry No. 4848 in Case No. 17-3283, January 16, 2019 Hearing Transcript, 130:8-132:11.) PROSOL-UTIER also argued that the Plan’s proponents had a burden to tender expert economic evidence. The Court finds the declaration of Brownstein, an experienced municipal finance professional who participated in the formulation of the COFINA Fiscal Plan, sufficient to carry the Plan proponents’ burden as to feasibility.

On the other hand, I do not believe the Court properly addressed the claim of violation of the Takings Clause of the Constitution. She stated:

Considering the first factor, the Court notes that the actions challenged by the objecting parties will not result in the total destruction of the value of the liens securing the existing bonds. Pursuant to the terms of the Plan, bondholders will receive substantial value in new secured bonds and, in some cases, cash. Furthermore,based upon the record before it, the Court finds that the resolution of substantial legal challenges to the structure underlying the existing COFINA bonds provides significant value to the bondholders. Second, although the proposed treatment of bondholders’ claims may interfere with certain bondholders’ subjective investment expectations, bondholders’ reasonable expectations must take account of the claims and potential claims that have been the subject of the substantial litigation that the Settlement Agreement and the Plan, which were negotiated with the assistance of the Mediation Team,propose to resolve. Third, the character of the governmental action strongly supports the Court’s conclusion that the Plan and Settlement Agreement do not result in an unconstitutional taking. The challenged proposals are not physical invasions of property by the government. Rather, the restructuring of the relationships between the Commonwealth and COFINA, and between COFINA and its bondholders, using the powers established by Congress in PROMESA is a quintessential example of a “public program adjusting the benefits and burdens of economic life to promote the common good.”

Judge Swain seems to be saying that there is no violation of the taking clause because bondholders will recover some of their bond’s value. In any event, she argues, they could have ended up recovering zero principal. With all due respect to Judge Swain, I don’t think that is the measure of whether a taking violates the Constitution. In any event, some bondholders claim they will appeal. I won’t go into details but appealing the approval of a plan of adjustment creates special problems as the General Motors case showed. Let’s see what happens.

In the PREPA receiver litigation, the Board filed a motion to compel discovery it believes is connected directly to the issue of the value of bondholders’ lien. It claims that the value of the lien is zero and hence, there is no need to provide adequate protection. The problem with this argument is that movants want a rate increase so that their lien will have value. This motion shatters the possibility I posited of the Board agreeing to the receiver but does not eliminate the possibility of negotiations to resolve the monolines’ haircut. We shall know more by the end of February when Judge Dein will deal with this.

A few months ago there was mention of a Federal overseer of aid to Puerto Rico. This idea has been revived after the Resident Commissioner visited acting Chief of Staff Mick Mulvaney at the White House. It is being called a Federal Coordinator of federal funds. The Resident Commissioner is ok with the idea but Governor Rosselló, as usual, opposes any challenge to what he perceives as his authority. It is interesting to note that there is no mention of using the Board for this purpose. Also, there are rumors of disagreement between the Board and the Commonwealth on the definition of essential services. Given that the Board wants to file a plan of adjustment for the Commonwealth sometime this year, this is an important undertaking. I bet the Board wants to cut around 30% of employees or furlough them and the Commonwealth insists that each and every one of them is indispensable. Dying to find out.  

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 – February 4, 2019

Welcome to your weekly Title III update for February 4, 2019.  

On January 30, 2019, Judge Swain held an Omnibus hearing in the case. During the hearing, the lawyer in charge of investigating McKinsey’s alleged conflicts of interest, Michael Lusking, reported that it would have a report ready for publication by February 18. As to PREPA, the Board reported negotiations are continuing (more on that latter) and that they will announce the winner of the distribution contract in the 3rd quarter of this year. As to the Plan of Adjustment for the Commonwealth, negotiations will be in February/March, 2019, and it may be that some legal questions will be put to the Court.

When the main event, the procedures motion on the GO challenge came about, Judge Swain had several questions to all parties and it became obvious she was not going to sign the order as proposed. On the other hand, she did say she would issue some kind of order. Later in the week, she issued an Order Regarding Submission Of Revised Proposed Order Establishing Procedures With Respect To Omnibus Objection To Claims Filed Or Asserted By Holders Of Certain Commonwealth General Obligation Bonds, where she explained how she wanted the order to read. The parties are to meet and confer within 7 days for a proposed order reflecting the guidance issued by the Court. The notices to the bondholders must be written in English and Spanish with a view to clarity as to the potential consequences of movants’ success. The parties must have 60 days from entry of the order to file the Notice of Participation, and the notice must include that if not filed on time, a party may be precluded from participating in the litigation. The suggestions by the Court include what information participants may have to provide. The order continues with other suggestions. In essence, once the order is issued, all holders of GO’s of 2012 and 2014 should hire an attorney to represent their interests. COFINA jrs. are still kicking themselves for not having intervened in the case sooner. BEWARE.

Connected to this, Assured requested leave to intervene in the UCC adversary proceeding against the PBA’s. As Mark Stancil said during the Omnibus hearing, the PBA adversary proceeding and the UCC challenge are overlapping. We will see more on this later in the month.

In regards to COFINA, Judge Swain approved the COFINA-Commonwealth settlement today but she decided that she will address the Plan of Adjustment in a separate order. Swain argued that the court was “not required to decide the numerous questions of law and fact raised by [the objectors].” Rather, its task was to determine the “reasonableness” of the settlement agreement, which Judge Swain deemed was sufficient. Since the announcement came out today, I will provide a more thorough analysis next week.

Continuing with the developments, the First Circuit in the ERS bonds case reversed Judge Swain for the fourth time. In its opinion, the First Circuit stated:

We affirm the district court’s holding that the 2008 Financing Statements did not perfect the Bondholders’ security interest in the “Pledged Property.” We determine that the Bondholders met the requirements for perfection beginning on December 17, 2015, and so reverse the district court. PROMESA’s incorporation of the Bankruptcy code does not allow for the avoidance of perfected liens, and so we vacate the district court’s holding that the Bondholders’ security interest can be avoided under PROMESA. Concerning the district court’s dismissal of the Bondholders’ second and third counterclaims with prejudice, we vacate and remand to the district court for further consideration in light of this opinion. We affirm the district court’s dismissal of the Bondholders’claim regarding the January 2017 Stipulation.

The Third Cause of action mentioned above has to do with section 928 of the Bankruptcy Code, which is the subject of another appeal not yet decided by the First Circuit and argued on November 7, 2018. In addition, this case shows that in any litigation, there are winners and losers and you can never predict on which side you will end. I have won cases I thought I was going to lose and lost cases I swore I was going to win.

As to the PREPA receiver controversy, the parties were supposed to file an amended schedule for the resolution of the case on or before January 31, but that date passed without any filing. The Board could be negotiating a haircut deal with the monolines or agreeing to some type of receiver—or both. Hopefully we will know soon.

The Puerto Rico House of Representatives amended the public policy energy bill and the Senate did not agree. Further negotiations will ensue. Also, PREPA has reported that the Integrated Resources Plan will be filed in February. Seems to me that politicians really don’t want to sell PREPA. Hopefully, it will happen irrespective of political shenanigans.

In other news, the Board ordered the Commonwealth to file a new Fiscal Plan by February 22. The letter indicates that the plan is to certify a new Fiscal Plan by April 26, 2019. Moreover, the new budget must come by June of 2019. Given that the Plan of Adjustment must conform to the Fiscal Plan, this means that the former will not be filed until either summer or fall of 2019. This will also be dependent on the outcome of the GO challenge and other legal issues now being mediated.

In a separate letter, the Board sent a detailed letter as to the budget which must include:

Additional reductions based on U.S. mainland state benchmarks for the Legislative Assembly, applying standard executive branch right-sizing targets to the State Elections Commission, as well as a reduction to WIPR’s budget reflecting its privatization by the end of the third quarter of the fiscal year.

In other words, there will be more cuts to the Legislature, the CEE and the privatization of WIPR, which is a government TV station. Some have hailed this as a way for Government employees to receive wage increases but the letter explains it will; “[t]o the extent that applying these parameters results in reductions to appropriations beyond those contemplated by the Fiscal Plan, the Oversight Board will agree to reinvest those savings in the high priority areas of Public Safety and Public Education.” Hence, the Board wants further austerity. Not sure the Government will agree and not sure what the Board will do if it does not.

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 28, 2019

Welcome to your weekly Title III update for January 28, 2019.  This has been another week dominated by Court filings.

As I reported last week, the COFINA Ad Hoc Group and the Board filed revised findings of fact and law in an attempt to comply with the Court’s order and assuage any misgivings Judge Swain may have had about “rewriting the PR Constitution.” It was not to be. The next day,on January 22, 2019, Judge Swain issued an order for a supplemental brief to be filed no later than January 24:

The Supplemental Brief must address (a) the legal basis for the proposed findings regarding the valid establishment of Reorganized COFINA2 and Reorganized COFINA’s status as a separate independent public corporation and instrumentality (see Docket Entry No. 523 in Case No. 17-3284, the “Hearing Transcript” at 183:7-11; 139:17-140:2); (b) factual support for the proposed finding that the documents contained in the Plan Supplement constitute valid legal documents and contain valid provisions that are enforceable in accordance with their terms (Hr’g Tr. at 133-36); and (c) the legal and factual bases for the proponents’ assertions that the Court has authority to determine and declare the substantive validity of the New Bond Legislation and to resolve,based on the proposed settlement of the Commonwealth-COFINA dispute, the constitutional and other legal challenges to the COFINA structure raised under the Constitution of the Commonwealth of Puerto Rico in the manner set forth in the proposed findings and conclusions (Hr’g Tr. at 140:4-7).

Then, on January 23, 2019, the PDP senate minority members filed a brief of amicus curiae, essentially telling the Court that the COFINA settlement could not rewrite the PR Constitution or preclude the legislature from amending the COFINA statute in the future. Judge Swain had rejected all previous amicus briefs, but in a surprise move, she granted the request, while denying another brief by a part time resident of PR. Obviously, her interest was piqued.

The Board and COFINA Ad Hoc Group filed the requested supplemental briefs. The Board also objected to the PDP’s brief. In addition, National filed a brief in support of the agreement, as did Ambac. The Board’s brief, which included translated cases of the PR Supreme Court, tells Judge Swain that she can approve the COFINA deal. Page 22, paragraph 29 of the motion summarizes the arguments:

The foundation of the Commonwealth-COFINA Dispute Settlement—from its inception with the Agreement in Principle to its embodiment in the Plan—is the antecedent question of which Debtor is the owner of the sales taxes purported to be transferred to COFINA by Act 91-2006, as amended, for purposes of these Title III Cases. As the forum with exclusive jurisdiction over the property of each Debtor, see PROMESA § 306(b), this Court has been asked to approve the Settlement to resolve that issue. Upon entry of the Settlement Order, the Court will have determined that COFINA is the sole owner of 53.65% of the PSTBA (among other assets). See Notice of Filing of Revised Proposed Order Approving Settlement between Commonwealth of Puerto Rico and Puerto Rico Sales Tax Financing Corporation (Case No. 17- bk-3283, ECF No.4816-1, Ex. A at ¶ 3); see also Plan § 2.1(a). Indeed, the Settlement Order itself provides that the compromise and settlement embodied in the Settlement Agreement is approved in all respects and all objections not otherwise withdrawn are overruled in their entirety. (Bold added)

In essence, the Board is telling the Court that it must resolve the issue of who is the owner of COFINA. If the decision is not favorable to the plan then the deal is off. But if Judge Swain has to decide this issue, why settle instead of letting the litigation come to its conclusion with a Court Opinion and Order? The ownership of COFINA is an issue that has been thoroughly briefed and is ripe for adjudication. Rather than have the Court rule on the issue, the Board wants it to specifically rule that COFINA is owner of the part of the SUT that is apportioned in this settlement. I have repeatedly stated that in my opinion, COFINA is unconstitutional—but, that is not the issue. The issue is Judge Swain’s take on this.

Judge Swain could validate COFINA as the Board wants or she could determine that she cannot approve the Plan of Adjustment for it is in violation of both applicable bankruptcy law and PROMESA. Section 1129(a)(3) of the Bankruptcy Code requires that the Plan of Adjustment be proposed in good faith “and not by any means forbidden by law.” PROMESA section 314(b)(3) requires that the Plan can be approved if “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” If the COFINA structure is not consistent with the PR Constitution, and I think that is what Judge Swain is worried about, does the Plan of Adjustment comply with these two sections? Questions, questions.

On the other hand, some observers believe that if Judge Swain were to somehow invalidate COFINA, PR would not be able to go back to the markets. Undoubtedly, this is true for a few years, but as Detroit, Ecuador and the Latin American debt crisis of the 1980’s have shown, markets and investors have very short memories. On the other hand, such a ruling would make the Rosselló administration very happy. Let’s see what happens.

Paul Hastings law firm, attorneys for the UCC, filed an Urgent Motion, Pursuant To Promesa Sections 316 And 317, Bankruptcy Code Section 105(A), Paul Hastings’ August 10, 2017 Retention Order, And June 6, 2018 Interim Compensation Order, To Compel Debtors To Comply With June 6, 2018 Interim Compensation Order. Seems to be that the Government of PR indicated that it would not pay the full amount owed to Paul Hastings for fees and expenses incurred in October and November 2018 until after Hacienda has determined whether such fees should be subject to a 29% withholding tax as a result of Public Law No. 257-2018 enacted on December 10, 2018. This withholding includes work done outside of PR. The motion requests:

For all these reasons, Paul Hastings respectfully requests entry of an order directing the Debtors (including Hacienda) to comply with their obligations under the Interim Compensation Order and to pay to Paul Hastings, on or before January 31, 2019,7 the amounts due under its October and November fee statements, without any tax withholding, in accordance with the Interim Compensation Order.

This is not the first time the UCC lawyers have had to ask the Court for payment. Seems that PR is not fond of its work. Moreover, from personal experience I can tell you that Hacienda can take its own sweet time to decide issues such as these, especially to retain payment. In any event, the 29% retention is outrageous and Martin Bienestock, attorney for the Board, cautioned the Court that stateside attorneys would have to review their fees if this is done to them. Food for thought.

Judge Swain had given GO bondholders until Friday, January 25, to file any objections to the proceedings motion by the Board to deal with its objection to the 2012 and 2014 GO offerings. The Ad Hoc Group of Constitutional Debtholders, the Commonwealth Bondholder Group, Assured Guaranty Corp. and Assured Guaranty Municipal Corp. filed a joint objection to the proceedings motion. In addition, Oppenheimer Funds also filed an objection. In essence, they believe that the parties should meet and confer to determine how to deal with this procedure. It is also very telling that the motions mention that very soon there will be mediation for the GO’s, begging the question of whether the objection filed by the Board and UCC is real or simply a negotiation ploy. In any event, the GO group’s objection also mentions that the Board effectively wants to bar individual bondholders from joining the fray. It states at page 7:

Apart from the legal deficiencies of such notice (discussed below), it is obvious from the face of such a proposal that the Movants have a very specific agenda in mind: to narrowly tailor their opposition and to avoid litigating against smaller (and more sympathetic) bondholders.Contrary to the Proposed Procedures, no individual bondholder may be singled out and forced to litigate on behalf of other holders, and all holders, large and small, must be given a fair and equal opportunity to be heard in the defense of their claims.(Bold added)

If the COFINA Plan of Adjustment litigation has shown us anything, it is that individual bondholders resented not being present during mediation. Imagine not being able to participate in this litigation. From my experience with PR bondholders, they are slow to react to developments and the very short timetable the Board has set will make it very difficult for them to organize. To me, it makes sense to have a longer period for bondholders to decide whether they will participate in this litigation. All this will be discussed in the January 30, 2019 Omnibus which has now been moved to NY. In any event, I will be in San Juan to see what develops in the hearing.

In a surprising move, the parties to the bondholders request for a receiver for PREPA filed another stipulation to extend the deadlines in the case. The motion states that the parties “will file proposed revised schedule(s) for the Court’s consideration, either through stipulation or separate proposals, on or before January 31, 2019.” This again postpones the time the Board would have to tell the Court whether it would oppose the motion for the lifting of the stay to appoint the receiver. Again, it is my impression that the parties are negotiating the haircut the PREPA monolines are willing to take. It could be however, that part of the negotiations is the Board’s willingness to agree to the lifting of the stay. As a resident of Puerto Rico, I hope the Board agrees to the lifting of the stay and follows through with the appointment of competent management for PREPA. Hopefully we will soon find out.

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.