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 https://thehill.com/latino/431245-puerto-rico-governor-white-house-clash-over-meeting

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.

Special Update – January 22, 2019

Welcome to your weekly Title III update for January 22, 2019.  Due to the Martin Luther King holiday and developments below, I decided to do the update on Tuesday. This week Judge Swain presided over the COFINA confirmation hearing during January 16-17. There were surprises galore during the hearing.  

Before the drama of the COFINA hearing, on Monday January 14, the Board and the UCC filed an objection to three GO issuances of the PR Government. The issuances include two 2012 bonds and one 2014 bond. The objectors argue that the PBA bonds should be counted as part of the Article VI,section 2 of the PR Constitution, which would mean that these emissions exceeded the constitutional debt limit.  In the objection, they call for the nullification of the debt and for no debt payments to be made. They also claim the 2014 issuance is illegal even if the PBA bonds are not to be added to the calculation, since PR reserved $425 million to pay interests. The complaint avers this should have been added but it was not.  In addition, the UCC (the Board does not aver it but reserved the right to do so) claims that the 2014 issue was illegal since it violated the balanced budget requirement of Article VI, section 7 of the Puerto Rico Constitution.

This is a well-written complaint that depends on the facts of the PBA bonds and the debt service calculation. If one examines the complaint, however, one notices that this objection depends exclusively on the Court’s interpretation of the Commonwealth’s Constitution.

But I fail to see the federal issues in this challenge. Moreover, I disagree with the claim that PR would not have to pay a penny if the 2012 and 2014 were illegally issued. Article 1247 of the Puerto Rico Civil Code, sec. 3496, which I believe is applicable here, states the parties have to give back what they received in the transaction, but the debt would not be bond debt pursuant to Article VI, section 8 of the PR Constitution. Procedures for this objection will be discussed during the January 30, 2019 Omnibus hearing.  One final point, the motion says that this is a gating issue for the Commonwealth Plan of Adjustment. Ominous words indeed.

On the 16th, Judge Swain started the hearing by saying that she could reach “no decision that can reconcile the peoples’ concern.” First, the 9019 objections were discussed and the UAI argued against the approval, as did PROSOL-Utier. UAI exhorted the Judge to reject the plan, give the parties clear instructions on what type of deal to arrange and presto, it would be done. As if COFINA bondholders were willing to lose more money on what they consider a secure credit. After that, Judge Swain asked the persons selected at random from the public to speak. In general, they did a good job arguing overwhelmingly against the deal. Judge Swain then asked if there was an agreement as to PROSOL-Utier and others alleged lack of standing.

After lunch, when it was obvious that no agreement could be reached, Judge Swain decided PROSOL-Utier and the other unions were not COFINA creditors so they had no prudential standing to object the Plan of Adjustment. Nothing new on this, but Judge Swain also decided not to consider the declaration of Dr. Alameda, PROSOL-Utier’s expert, because it did not conclude that COFINA wouldn’t receive 5.5% of SUT, irrespective of the Commonwealth’s situation. For Swain, this did not match with the feasibility of the Plan. Hence, the unions were not allowed to cross-examine witnesses or present evidence. The Board, in a clever move, said it would not object to the unions arguing against the plan.

That left the GMS Group, Mr. Hein, Mr. Dvoras and Mr. Emmet to cross-examine the witnesses since the declarations would be considered as direct examination. After some negotiations, it was decided that no cross-examination would be done except for Mr. Rodrigue.

I will not bore you with the back and forth. Suffice it to say that the objectors, all subordinate COFINA holders, gave good reasons for not approving the deal but I doubt it will do them any good. Judge Swain did not ask them any questions, a bad sign in this case. Moreover, after the presentations were done and she started asking questions to the Board and the COFINA Ad Hoc group, none were about the numbers of the COFINA deal. Surprisingly, her questions were directed on the Supremacy Clause and her power to rewrite the PR Constitution.

In the Plan of Adjustment and the ensuing order, what the COFINA bondholders want from Judge Swain is for her to federalize several documents that in essence would mean that forever and ever, the SUT would not be “available resources” as per Article VI, section 8 of the Puerto Rico Constitution. Because Judge Swain reads everything, she realized that the COFINA deal requires her to make that determination, effectively rewriting the PR Constitution. I have no doubt that Congress has the power to rewrite the PR Constitution, but I see nowhere in PROMESA where it gives this authority to the Board or the Court. Not even section 108(a)(2) of PROMESA, that states that PR cannot “enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board.” But here there is no such claim. On the contrary, both section 201(b)(1)(N) and 314(b)(6) and (7) seem to require compliance with PR law as to lawful priorities and lawful liens as may be applicable in the constitution or laws of the territory.

Due to this, I believe, the GO bondholders informed Judge Swain that they did not believe that she had to reach 314(b)(6)(review if creditors could get better recovery outside PROMESA) in order to approve the COFINA deal. This issue will be very important in the Commonwealth Plan of Adjustment.

The issue of the Judge’s power over the PR Constitution is important for two reasons. Five years from now, the new PR government administration could go to court and claim that the settlement is illegal since constitutionally (Article VI, section 2) it could not surrender its power to tax by surrendering part of the SUT to COFINA. This argument was made by the UCC in the COFINA litigation, but there was no judgment on the issue. Also, if in the future GO’s bonds are issued by PR, they could claim that COFINA is available resources for payment of said bonds.

Judge Swain gave the COFINA Ad Hoc Group and the Board until Monday January 21 to revise the Findings of Fact and Law they had submitted. Before 4 pm on Monday, the Board filed said documents, with red-line of the changes. In the [Proposed] Findings Of Fact And Conclusions Of Law Regarding Confirmation Of The Third Amended Title Iii Plan Of Adjustment Of Puerto Rico Sales Tax Financing Corporation the changes are interesting. At page 63 of the red-line, it states:

As a separate debtor with its own Title III case, its own certified fiscal plan, and its own plan of adjustment, COFINA is a separate covered territorial instrumentality that is legally distinct from the Commonwealth. See 13 L.P.R.A.§ 11a(a) (“A public corporation and instrumentality of the Commonwealth of Puerto Rico, is hereby created, which constitutes a corporate and political entity independent and separate from the Commonwealth of Puerto Rico to be known as the Corporacion del Fondo de Interes Apremiante de Puerto Rico(‘COFINA’), Spanish acronym), whose name in English shall be Puerto Rico Sales Tax Financing Corporation.”); New Bond Legislation art. 2.1 (providing that Reorganized COFINA “shall be recognized for all purposes as an independent and separate legal entity from the Government of Puerto Rico and any other Government Entity.”). The Court has previously held, in connection with the Commonwealth-COFINA Dispute, that the nature of each debtor’s interest in the Pledged Sales Taxes, for purposes of PROMESA, is a mixed question of federal and Commonwealth law.The Plan, however, provides for an agreed upon allocation of the Pledged Sales Taxes premised upon this Court’s approval of the Settlement and confirmation of the Plan, and, upon such approval, the COFINA Revenues shall be the sole and exclusive property of COFINA, and shall not be property of the Commonwealth or available to the Commonwealth. The Settlement and the allocation of the Pledged Sales Taxes are necessary for the implementation of the Plan, and, pursuant to Bankruptcy Code section 1123(a)(5), made applicable to COFINA’s Title III Case pursuant to PROMESA section 301(a), are self-executing and preemptive notwithstanding otherwise applicable non bankruptcy law, including otherwise applicable Commonwealth law. See 11U.S.C. § 1123(a)(5) (“Notwithstanding any otherwise applicable non bankruptcy law, a plan shall . . . provide adequate means for the plan’s implementation,such as (A) retention by the debtor of all or any part of the property of the estate . . . .”); PROMESA § 301(c)(5) (“The term ‘property of the estate’, when used in a section of title 11, United States Code, made applicable in a case under this title by subsection (a), means property of the debtor.”); see also In re Irving Tanning Co., 496 B.R. 644, 664 (B.A.P. 1st Cir. 2013) (“[O]nly those means may preempt state law that are sufficient for the implementation of the plan: they must be sufficient to implement the plan, equal to what is required, but also not more than is required.”). Furthermore, pursuant to the Settlement Order and the Plan, and subject to the terms of the plan, claims of COFINA’s creditors are released as against the Commonwealth and the Commonwealth itself shall not be liable for the repayment of the COFINA Bonds,nor will the COFINA Bonds have any recourse to any property of the Commonwealth.See New Bond Legislation art. 3.1(c).

Pursuant to PROMESA, including 171. section 4 there of, as well as sections 944 and 1123 of the Bankruptcy Code, and in accordance with the Confirmation Order, the Settlement, the Plan,and Act 241, the Court determines that the COFINA Bonds are legal, valid, binding and enforceable obligations of Reorganized COFINA benefitting from the following protections, each of which are is legal, valid, binding, legal, and enforceable against Reorganized COFINA, the Commonwealth, and other persons and entities, as applicable, under Puerto Rico and federal law.

Later at pages 75-76:

Pursuant to Bankruptcy Code sections 1123(a), 1123(b), and 944(a) as well as genera principles of federal supremacy, the provisions of this Confirmation Order, and the Plan, and related documents or any amendments and modifications thereto shall apply and be enforceable notwithstanding any otherwise applicable non-bankruptcy law. The documents contained in the Amended Plan Supplement (as such documents may be further modified and filed with the Court prior to the Effective Date), including, without limitation, Reorganized COFINA By-Laws, the COFINA Bonds, the New Bond Indenture, the Instructions Agreement, the Ambac Trust Agreement, the National Trust Agreement, the Standard Terms to National Trust Agreement, the Remarketing Agreement, and the Continuing Disclosure Agreement provide adequate means for implementation of the Plan pursuant to Section 1123(a)(5) of the Bankruptcy Code, and, as of the occurrence of the Effective Date, shall constitute valid legal obligations of COFINA and the Commonwealth, as applicable, and valid provisions to pay or secure payment of the COFINA Bonds pursuant to section 944(b)(3) of the Bankruptcy Code, and be enforceable in accordance with their terms.

In addition, footnotes 4 and 5 were added. Footnote 4 states:

Adversary Proceeding. ECF No. 483, Decision and Order, dated May 24, 2018, at 5-6,Exhibit DX-TT (“the Court must decide what the relevant property rights are within the context of these Title III proceedings, under PROMESA and federal bankruptcy law provisions that Congress has incorporated into PROMESA . . . .[T]he Commonwealth-COFINA Dispute presents a mixed question of federal and Puerto Rico law”). See also Abboud v. Ground Round, Inc. (In re Ground Round,Inc.), 482 F.3d 15, 17 (1st Cir. 2007) (“The label … that state law affixes to a particular interest in certain contexts is not always dispositive.” (citingIn re Nejberger, 934 F.2d 1300, 1302 (3d Cir. 1991)).

Footnote 5 states:

Section944(b)(3) requires the Court, as a condition to providing a discharge, to determine the validity of obligations imposed under a plan of the debtor and of any provision made to pay or secure payment of such obligations. 11 U.S.C. §944(b)(3). See generally In re City of Stockton, 526 B.R. 35, (Bankr. E.D. Cal.2015) (“The structure of the federal-state relationship . . . regarding restructuring of municipal debt is dictated by the U.S. Constitution. . . .[T]he Supremacy Clause operates to cause federal bankruptcy law to trump state laws, including state constitutional provisions, that are inconsistent with the exercise by Congress of its exclusive power to enact uniform bankruptcy laws”(citing Ass’n of Retired Employees of the City of Stockton v. City of Stockton(In re City of Stockton, CA), 478 B.R. 8, 14–16 (Bankr. E.D. Cal. 2012); U.S.CONST. art. VI, cl. 2; Int’l Bhd. of Elec. Workers, Local 2376 v. City of Vallejo (In re City of Vallejo), 432 B.R. 262, 268–70 (E.D. Cal. 2010), aff’g403 B.R. 72, 76–77 (Bankr. E.D. Cal. 2009) (additional citations omitted)). As set forth in the leading bankruptcy treatise: “The requirement of a court determination of validity is extra assurance for those who might be skittish about the nature of the bonds being issued . . . . It has the added feature of removing any doubt concerning the matter, because the determination of the court on that issue should be binding in the future.” 6 COLLIER ON BANKRUPTCY §944.03[1][b] ((16th ed. 2013). See, e.g., Order Confirming Third Amended Plan for the Adjustment of Debts of the City of San Bernadino, California, as Modified by the Court, dated February 7, 2017, ¶ 22 (“In accordance with Section 944(a) and notwithstanding any otherwise applicable law, upon the occurrence of the Effective Date, the terms of the Plan and this Confirmation Order shall be binding upon . . .”); Order Confirming Eighth Amended Plan for the Adjustment of Debts of the City of Detroit, dated November 12, 2014, ¶ 86(“ in accordance with section 944(a) of the Bankruptcy Code and notwithstanding any otherwise applicable law, upon the occurrence of the Effective Date, the terms of the Plan and this Order shall be binding upon, and inure to the benefit of . . .”); Findings of Fact, Conclusions of Law, Order Confirming the Chapter 9 Plan of Adjustment for Jefferson County, Alabama, dated November 6,2013, ¶ 37, (“Pursuant to Bankruptcy Code sections 1123(a), 1123(b), and 944(a), as well as general principles of federal supremacy, the provisions of this Confirmation Order, the Plan, and related documents or any amendments or modifications thereto shall apply and be enforceable notwithstanding any otherwise applicable nonbankruptcy law”).

In essence, the COFINA bondholders and the Board are legalizing the COFINA bond issues, the COFINA ownership of part of the SUT and changing the Constitution by making this portion not available resources pursuant to Article VI, section 8 of the PR Constitution. Judge Swain saw this and as a former bankruptcy judge, is well aware of the case law cited by them.Moreover, the problem I see with this attempt is that there has been no actual adjudication of a case or controversy as to COFINA. Rather, it is all done via settlement. Furthermore, the U.S. Supreme Court in Raleigh v. Illinois Dept of Revenue, 530 U.S. 15, 20 (2000), held that “[t]he basic ‘federal rule’ in bankruptcy is that state law governs the substance of claims, Congress having ‘generally left the determination of the property rights in the assets of bankrupts estate to state law.’” Will Judge Swain refuse to sign the agreement because she cannot change PR’s Constitution or will just shrug and do it? If she does not sign it,what will the Board and COFINA Ad Hoc bondholder do? Judge Swain cannot change the Plan of Adjustment but she does not have to approve it either. The alternative is dismissal via 11 U.S.C. § 930. I have no idea what Judge Swain will do but this is something to ponder.

Also of interest is proposed Order And Judgment Confirming The Third Amended Title Iii Plan Of Adjustment Of Puerto Rico Sales Tax Financing Corporation, which states at pages 27-28:

Releases by COFINA  and Reorganized COFINA. Except as otherwise expressly provided in the Plan, this Order, or the Settlement Agreement, on the Effective Date, and for good and valuable consideration, each of COFINA and Reorganized COFINA, the Disbursing Agent and each of COFINA’s and Reorganized COFINA’s Related Persons (other than any former elected or appointed officials, directors, or officers of any of the Government Parties and the Commonwealth, in each case acting in his or her capacity as such prior to January 1, 2017)3 shall be deemed to have and hereby does irrevocably and unconditionally, fully, finally and forever waive, release, acquit, and discharge the Released Parties from any and all Claims or Causes of Action that COFINA, Reorganized COFINA, and the Disbursing Agent, or any of them, or anyone claiming through them, on their behalf or for their benefit, have or may have or claim to have, now or in the future, against any Released Party (other than any former elected or appointed officials, directors, or officers of any of the Government Parties and the Commonwealth, in each case acting in his or her capacity as such prior to January 1, 2017) that are Released Claims or otherwise are based upon, relate to, or arise out of or in connection with, in whole or in part, any act, omission, transaction, event or other circumstance relating to COFINA taking place or existing on or prior to the Effective Date, and/or any Claim, act, fact, transaction, occurrence,statement, or omission in connection with or alleged or that could have been alleged in the Actions, the Related Actions, including, without limitation, any such Claim, demand, right, liability, or cause of action for indemnification,contribution, or any other basis in law or equity for damages, costs or fees; provided, however, that, notwithstanding anything contained in the Plan to the contrary, “Related Persons” shall not include any financial advisors, investment bankers, underwriters, attorneys, accountants, agents and professionals of the Commonwealth and COFINA, solely to the extent of services provided in connection with the issuance of the Existing Securities; and,provided, further, that the plaintiffs in that certain adversary proceeding before the Title III Court, captioned Cooperativa de Ahorro y Credito AbrahamRosa, et al. v. Commonwealth of Puerto Rico, et al., Adv. Proc. No. 18-00028,shall be entitled to continue pursuit of such litigation against all parties other than COFINA and Reorganized COFINA, subject to all available rights and defenses with respect to claims and causes of action asserted therein.

This is interesting because Judge Swain questioned during the hearing why she had to give officials a waiver. The Board and AAFAF changed it and they are now NOT immune. Interesting. Also, the Cooperativas mentioned above had objected to the COFINA deal because it affected their case. Now, it will not affect it, especially since the Board has already filed a motion to dismiss. Let’s see what happens. 

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

Monday Update – January 14, 2019

Welcome to your weekly Title III update for January 14, 2019.  This week all eyes are on the COFINA confirmation hearing on January 16 and 17. The future of the COFINA settlement and the COFINA Title III, hang on the balance.

The Board has the burden of proof as to the Plan of Adjustment. Confirmation of the plan is not regulated by the Bankruptcy Code but rather by section 314(b) of PROMESA, which states:

CONFIRMATION.—The court shall confirm the plan if—

(1) the plan complies with the provisions of title 11 of the United States Code, made applicable to a case under this title by section 301 of this Act;

(2) the plan complies with the provisions of this title;

(3) the debtor is not prohibited by law from taking any action necessary to carry out the plan;

(4) except to the extent that the holder of a particular claim has agreed to a different treatment of such claim,the plan provides that on the effective date of the plan each holder of a claim of a kind specified in 507(a)(2) of title 11, United States Code, will receive on account of such claim cash equal to the allowed amount of such claim;

(5) any legislative, regulatory, or electoral approval necessary under applicable law in order to carry out any provision of the plan has been obtained, or such provision is expressly conditioned on such approval;

(6) the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan; and

(7) the plan is consistent with the applicable Fiscal Plan certified by the Oversight Board under title II.

These requirements mirror those of 11 U.S.C. sec. 943(b) except for 6 and 7.

PROMESA, however, adds a twist to this. The feasibility of the plan, which usually is limited to whether the municipality may fund the changes it has made, added a twist not found in the bankruptcy law, to wit, “whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” The Board’s position has been that the Court has only to look at said law—not give it any weight—but it has not put forward any precedent or legislative history to back this up. If one were to interpret it as written, the Court would have to consider whether creditors would be better off going to the state and federal courts instead of a bankruptcy like procedure.

In addition, the plan must comply with 11 U.S.C. sections 1129(b)(1), 1129(b)(2(A) and 1129(b)(2)(B), which state:

(1) Notwithstanding section 510(a)of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

(2)For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

(A)With respect to a class of secured claims, the plan provides—

(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and

(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;

(ii) for the sale, subject to section 363(k)of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or

(iii) for the realization by such holders of the indubitable equivalent of such claims.

(B) With respect to a class of unsecured claims

(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan,equal to the allowed amount of such claim; or

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.

Not only are these requirements difficult to achieve, but section 1129(a)(3) requires that the Plan of Adjustment be filed in “good faith and not by any means forbidden by law.” The case law on this is extensive and contradictory and cannot be discussed in this brief analysis. The same can be said of the requirement that the Plan of Adjustment be fair and equitable.

To date,there are 9 objectors to the Plan of Adjustment and they will be given a chance to argue their objections. In addition, the Board filed a motion stating that it will cross examine Dr. Alameda, Utier’s expert witness. On Saturday, the Board filed declarations by Ms. Jaresko and Mr. Brownstein from Citi. Objectors have until Monday to notice whether they are going to cross examine them. I don’t know what they will do but I would definitely do it. I must note that Mr.Brownstein’s declaration states as to the objection that subordinate bondholders were not present during mediation:

I understand that Assured, an insurer of approximately $274 million in “First Subordinate”Existing Securities, is aligned with the economic interest of the holders of“First Subordinate” Existing Securities and has no exposure, either through insurance coverage or beneficial ownership, to “Senior” Existing Securities. I am aware that Assured participated fully in litigation from the perspective of“First Subordinate” Existing Securities. Assured participated in Plan mediation and was a party to the A&R Plan Support Agreement.12 Additionally, retail COFINA bondholders were represented throughout the process by retail or mutual funds, representing the interests of mainland and “on-island” bondholders, and Bonistas, advocating for the interests of Puerto Rico resident bondholders, all signatories to the A&R Plan Support Agreement that included terms for the treatment of the holders of “Senior” and “First Subordinate” Existing Securities to settle the issues of the relative rights between such holders. This settlement was also subsequently incorporated into the Plan.

Although by no means is the Plan of Adjustment approved, it is clearly a done deal. Judge Swain already ordered the following:

In connection with the hearing to consider approval of the Third Amended Title III Plan of Adjustment of Puerto Rico Sales Tax Financing Corporation (Docket Entry No.4652 in Case No. 17-3283, and as may be further amended), counsel to the Financial Oversight and Management Board for Puerto Rico is hereby directed to file the form of proposed order, findings of fact and conclusions of law by Monday, January 14 at 3:00 p.m. (Atlantic Standard Time).

Enough said.

With the COFINA Plan of adjustment approved, it will make all other deals much easier to accomplish. Moreover, the Board filed an Omnibus answer to all objections, just 84 pages, where it provides Judge Swain with sufficient legal cover to approve the deal. I don’t agree with some of the Board’s arguments but without a doubt they are “plausible.” Also, the alternative to confirming the plan is the dismissal of the Title III via 11 U.S.C. § 930. Food for thought.

WARNING: Anyone thinking of appealing said approval of the COFINA Plan of Adjustment should be very familiar with the doctrine of Equitable Mootness.

As I mentioned last week, on January 7, 2019, at 9:30 am, the First Circuit held oral arguments on Altair Global Credit Opportunities Fund (A), LLC, et al. v. The Employees Retirement System as to liens. I listened to the oral argument and it seems Altair has the advantage, but not by much. If there is a reversal, it will be with specific instructions for findings. As to the Aurelius decision, it has not been announced yet, but the First Circuit states in its website that the Federal Court system has enough money to operate regularly until January 18, 2019. Hopefully, the decision will come out before that date but we don’t know. It would be stunning if it came out before the January 16th hearing, especially if it reverses Judge Swain and there is a stay of proceedings. The waiting continues.

In the PREPA Title III, the Puerto Rico Central Recovery and Reconstruction Office and the Puerto Rico Public Private Partnership Authority retained Cleary Gottlieb Steen & Hamilton, LLP (the previous Governor’s law firm) “to provide legal representation in connection with the above-captioned case now pending before the United States District Court for the District of Puerto Rico.” Does this mean that the PREPA sale will accelerate?

After Mr. Bienestock dropped the bomb that the Commonwealth Plan of Adjustment would probably be handled as a “cram down,” I decided to do some research on Board members publications and found that David Skeel has published Reflections on Two years of P.R.O.M.E.S.A.,87 Revista Jurídica de la Universidad de Puerto Rico 862-883, num 3 (2018). At page 880, he states: “[w]e are hopeful we can propose Plans of Adjustment for the Commonwealth and P.R.E.P.A. by early 2019, though we cannot yet tell if that is realistic.” Given the possibility of the First Circuit reversing Judge Swain in Aurelius and the expiration of the appointment of the current Board members, it seems they want to leave these two major plans in place before they leave. We will see.

In addition, the Board sent a letter to the Commonwealth and stated:

The Oversight Board is deeply concerned about the continued delays in the Commonwealth of Puerto Rico’s completion of its audited Basic Financial Statements and Required Supplementary Information.

On April 30, 2018, the Oversight Board asked that you provide a timetable for the issuance of the audited financial statements for FY2015, FY2016, and FY2017,respectively. On May 7, 2018, you provided the following estimated dates for completion of the audited financial statements: FY2015 by June 8, 2018; FY2016 by August 17, 2018; and FY2017 by December 31, 2018. While the FY2015 audit was completed in June 2018, both the FY2016 and FY2017 audit remain outstanding,despite your May 7, 2018 letter projecting that both would be completed by now.

Accordingly,pursuant to Section 104(c)(2) of PROMESA, please provide the following information by January 18, 2019:

an explanation for thedelays in issuing the 2016 and 2017 audits;

a detailed description of the pending items for completion of the 2016 audit;

updated estimated dates for completion of the 2016 and 2017 audits; and

an estimated date for completion of the 2018 audit

The Commonwealth has flaunted the Board’s deadlines on this issue before. What will happen if it does again? The Board has shown great reluctance in forcing the Commonwealth to do anything. In fact, the Commonwealth has been much more willing to take the Board to Court than the other way around. This year the pensions have to be reduced and that promises to be another big fight between the Board and the Commonwealth. Let’s see who takes who to Court first.

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 7, 2019

Welcome to your weekly Title III update for January 7, 2019.  After a two-week hiatus to give my readers a respite during the holidays, unfortunately we must now face the realities of PROMESA, Title III and the Board.

On December 19, 2018, Judge Swain granted the Board’s motion to reject the Debt Service Deposit Agreement with Lehman Brothers Special Financing Inc., which was to be expected. In addition to the Omnibus objections to duplicative proofs of claim, the Board started to file individual objections to specific proofs of claim. Important to remember that those specific objections must be answered quickly.

On December 21, 2018, the parties in the PREPA bondholders’ request for lifting of the stay to allow for the appointment of a receiver again amended the schedule of the case in the following manner:

The Revised Scheduling Order is amended to revise existing deadlines as follows:

a. January 7, 2019: Parties to exchange preliminary will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

b. January 29, 2019:Respondents to file opposition brief and supporting declarations;

c. February 20, 2019:Parties to exchange final will/may call witness lists (identifying whether witnesses will appear live or via designated deposition testimony);

d. February 25, 2019:Movants to file reply brief and supporting declarations;

e. March 1, 2019:Parties to complete expert discovery and depositions;

f. March 5, 2019:Parties to file exhibit lists;

g. March 5, 2019:Parties to designate deposition testimony; and

h. March 8, 2019: Parties to cross-designate deposition testimony.

In addition, the Court will hold a hearing on the motion on March13, 2019, at 2 pm to be continued on March 14, in San Juan. Seems to me that the requested extensions pertain more to negotiations to end this issue as well as to bringing the monolines to the prospective settlement of the PREPA claims,which may include the Boards agreement to the lifting of the stay for said appointment. In addition to this, on December 21, 2018, the Board issued a new directive that states, inter alia:

This FOMB Policy (the “Policy”) is established pursuant to Section 204(b)(4) of PROMESA to require prior FOMB approval of certain rules, regulations, administrative orders, and executive orders proposed to be issued by the Governor (or the head of any department or agency) to assure that they “are not inconsistent with the approved fiscal plan.” This Policy shall also apply as provided in Section 204(b)(5). . .

Any rule,regulation, administrative order, or executive order that is issued in connection with the PREPA Transaction, whether by the Public-Private Partnership Authority or the Partnership Committee, as contemplated by Act No.120-2018.

Seems that the Board is very concerned about governance in PREPA and a receiver upon which they would have input, could be of use. It must be remembered, however, that any receiver appointed by the Court would substitute both PREPA’s governing Board and its Executive Director, but would still be subject to the Board’s directives. Balancing this, the receiver would still respond to the Judge that appoints him. Interesting turn of events if it were to happen.

On December 21, 2018, the Service International Union filed an objection to the COFINA Plan of Adjustment that simply says they adopt the objection they made to the settlement in COFINA. Since this objection does not deal with PROMESA sec. 314 of Bankruptcy section 1129, it is unlikely it will have any impact.

On December 21, 2018, the Board and the UCC filed an adversary proceeding challenging the PBA bonds as invalid. It argues:

PBA is an instrumentality of the Commonwealth created to issue bonds (the “PBA Bonds”) to finance the acquisition, construction and/or improvement of office space and other facilities (collectively, the “PBA Facilities”) used by departments,agencies, instrumentalities, authorities, public corporations, and municipalities of the Commonwealth (the “Public Occupants”) for government operations and providing essential services to the public. Currently, more than $4 billion in aggregate principal amount of PBA Bonds remain outstanding. PBA also enters into purported leases (the “Leases”), pursuant to which it ostensibly leases the PBA Facilities to the Public Occupants (the “Lessees”). In reality, however, the Leases are not arm’s length rental transactions designed to grant the Public Occupants temporary use of the PBA Facilities; rather, the sole purpose of the Leases is to provide a vehicle for the Commonwealth to repay the PBA Bonds through the Lessees’ purported “rent” payments. . .

Consistent with the economic reality of the Leases, this adversary proceeding seeks a declaratory judgment that the Leases are not “true leases,” but, rather, disguised financing transactions. As a result, PBA has no right under PROMESA or the Bankruptcy Code to receive post-petition rent payments from the Debtors or administrative claims against the Debtors. In addition, this adversary proceeding seeks a declaratory judgment that certain of the Leases do not give rise to administrative claims against the Debtors because the Lessees are non debtor entities.

As I have said many times, the audit of Puerto Rico’s debt is being done in federal court, not a kangaroo commission as the island’s left favors.

On December 26, 2018, the GMS Group, LLC, who had objected to the COFINA Plan of Adjustment and had latter withdrawn it, filed an amended objection. It claims the Plan of Adjustment violates the takings clause, that the plan has not been proposed in good faith, the plan improperly releases non-debtors, and that the plan is unfair and inequitable and thus fails to comply with section 1129. With one exception, this objection has little chance of succeeding. More on this latter.

 The Department of Justice requested an extension to file objections to the COFINA deal but the Court only gave it until January 4, 2019. No objection was filed.

On December 27, 2018, Luskin, Stern & Eisler LLP, the law firm selected by the Board to investigate McKinsey & Company, Inc., filed a motion informing the Court of the following:

At the November 7, 2018 omnibus hearing, LS&E informed the Court that the FOMB had retained LS&E to (i) investigate certain allegations concerning potential conflicts of interest of McKinsey & Company, Inc., Washington D.C. (“McKinsey”) and(ii) issue a written report detailing its findings. At the hearing, LS&E stated it would attempt to complete its investigation and to issue its written report by December 31, 2018. LS&E has determined that it will not be able to complete the investigation by that date and submits this informative motion to provide the Court an update on the status of its investigation.

Since the November 7,2018 hearing, LS&E has completed its initial round of interviews and its initial review of documents and has begun to draft its report. However, based on information obtained to date, LS&E has determined that follow-up(additional document requests and additional witness interviews) will be necessary, and its investigation will, therefore, continue into January 2019.

LS&E will provide an update to the Court in advance of the January 30, 2019 omnibus hearing.

In other words, we will know nothing on McKinsey’s conflicts of interest but it continues advising the Board. Makes no sense to me but I just report the facts, I don’t make policy.

On December 28, 2018, Peter C. Hein, who claims to own COFINA bonds, wrote a very cogent pro se objection to the plan of adjustment. He claims the Plan of Adjustment discriminates against non-Puerto Rican residents, that the plan cannot be confirmed unless the issue of the validity of COFINA is decided (not very likely), that there is no justification to give subordinate COFINA bondholders less than seniors, that it violates the contracts (it does not), that it violates the takings clause (maybe), violates due process, equal protection and immunities clauses of the US Constitution, and that the objection process violates due process and fairness, etc. Good job for someone who says is not a lawyer.

On December 31, 2018, the Board filed supplemental documents for COFINA, but the date for objections remained the same. Interesting.

On January 2, 2019, PRO SOL-Utier, filed an objection to the COFINA Plan of Adjustment, and included an expert report by a doctor in economics who is a professor in UPR at Mayagüez. Well done by Utier. The only problem is that I don’t think the union has standing. However, as their attorney Mr. Rolando Emmanuelli told me, the Board did not raise standing when it replied to the objection filed to the COFINA deal. Irrespective of the objection, this means that the Board will have to sit its own experts to say the deal is a good idea.

On January 2, 2019, Mark Elliot, individually and D/B/A/ Elliot Asset Management, claiming to be a COFINA bondholder also filed an objection pro se. He claims that the plan ignores the threshold question of what is available resources, that there are better remedies for creditors pursuant to 314(b)(6)(important in my opinion), the plan deprives Jr. bondholders of important rights without compensation, Jrs. and Seniors are treated differently although there is money to pay both, the Senior COFINA mediating team that allegedly mediated for Jrs. was conflicted (maybe), and that the plan will have bad consequences for the muni market, etc.

Lawrence B. Dvores also filed a pro se objection (so many people do not want to hire a lawyer). His objection basically says that the settlement is grossly unfair to Jr. bondholders and repeats the issue of preferential treatment to locals and that Jrs were not involved in negotiations. Except for the discrimination claim, it will not go far.

Cooperativa de Ahorro y Crédito de Rincón, Cooperativa de Ahorro y Crédito Dr. Manuel Zeno Gandía, Cooperativa de Ahorro y Crédito del Valenciano and Cooperativa de Ahorro y Crédito de Juana Díaz also filed an objection. This group has an adversary proceeding which includes COFINA as a defendant and they complain that the Plan of Adjustment does not mention their complaint. Of course it does not, they are getting nothing. Again, very unlikely this will succeed.

Puerto Rico Representative Natal, who has left the PDP, joined forces with several groups and unions requesting that the COFINA plan hearing be postponed or that the approval be rejected. Their claim is that Mr. Natal was not given a chance to debate one of the measures in the House and therefore it is unconstitutional as per the case filed in the island’s courts. Also, they claim COFINA is unconstitutional. Not very likely this claim will have any impact.

Given the fact that by the time of the January 16, 2019 hearing on the Plan of Adjustment we will have the vote tally and it very likely be in favor, there are a couple of objections that I think have merit. As long as COFINA is valid, all bondholders have a lien on the SUT. Undoubtedly, you can alter a lien if the lienholders agree, but doubt it can be done if the decision is not unanimous. A couple of the objections claim this. Also, there are claims that the Plan of Adjustment discriminates between Puerto Rico and US bondholders, hence violating the Equal Protection clause of the US Constitution. These two are difficult to circumvent, although I am sure the Board has thought of an answer. In addition, PROMESA 314(b)(6) states that the Court must find, in order to approve it, that “the plan is feasible and in the best interests of creditors, which shall require the court to consider whether available remedies under the non-bankruptcy laws and constitution of the territory would result in a greater recovery for the creditors than is provided by such plan.” Although the Board claims that the Court only needs to look at the available resources, not consider them, I think otherwise. In any event, I am sure Judge Swain will bend over backwards to approve the plan of adjustment since otherwise the Title III would have to be dismissed as per 11 U.S.C. § 930. Which by the way, those in the left in Puerto Rico have not explained what will be done if the Title III is dismissed. Food for thought.

Also, the Court issued an order where individuals may request time to be heard and up to 24 persons, selected by the Judge, will be given supposedly 5 minutes, to voice their frustration. It is great for venting these frustrations but that will lengthen the hearing. Oh well. This could mean that the hearing may extend over to January 17 and it is unlikely Judge Swain will immediately rule on the plan and may take a few days to write the opinion. We will see.

In other news, on December 27, 2018, the Board essentially put on hold the new PR Tax law by requesting more information that had to be provided by January 4, 2019. Hopefully this week we will know if this tax law will be put into effect or not.

Governor Rosselló now claims he wants new Board members, which he will get either sooner (Aurelius appeal reverses Judge Swain) or later when the three year period expires. In any of the two events, it is unlikely he will get what he wants. As to the Aurelius appeal, we are still waiting for a decision, which may come next week since the website for the First Circuit states they will continue working until January 11, 2019. Finally, on January 7, 2019, at 9:30 am, the First Circuit will hold oral arguments on Altair Global Credit Opportunities Fund (A), LLC, et al. v. The Employees Retirement System as to liens. Let’s see what comes out.

The new Democratic majority in the House is making noises that it will make changes to PROMESA, just like Congressman Bishop did for two years. Doubt much will be done but there will be hearings upon hearings filled with hot air. Oh well.

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 – December 19, 2018

Today, Judge Swain held the December Omnibus hearing. The first order of business was Martin Bienestock giving a status report on the cases. As we know, the GDB Title VI was finished and the COFINA Plan of Adjustment confirmation hearing will be heard on January 16-17, 2019. He also announced that the PREPA RSA is under way but no mention was made of the bondholders’ request for a receiver for the utility.

Mr. Bienestock also announced that the Commonwealth Plan of Adjustment was the subject of mediation. This is the first time this is mentioned. He stated that there are issues with the PBA bonds (whether they are leases) and that there will be claim challenges based on the Kobre & Kim report. Also, for the first time, we were told that the Commonwealth Plan of Adjustment could proceed with a cramdown, depending on the objections that are raised, presumably during mediation. If the objections are legal, we were told they would be keyed up to the Court. If they are monetary, then there could be a cramdown. There was no mention of GO’s or any other bondholder group.

What does this mean? In the last Omnibus hearing,there was no mention of the Plan of Adjustment of the Commonwealth and there was a mention that the Highways Plan of Adjustment was intimately related to the Commonwealth’s. I think the Board feels that its time is running out. The Board members term of service expires in August 2019 and it is imperative they get this Plan of Adjustment under way before Trump appoints seven new members.Also, the Governor needs to get this underway before election year 2020,especially if the cramdown is very favorable (as it probably would be) to the Commonwealth. Finally, if the Aurelius decision is reversed by the First Circuit, it is likely that a certiorari will be granted by the U.S. Supreme Court and a decision would come down near the end of their term, on June 30,2019. Timing is everything. Mr. Bienestock said we would know more by March-April but Judge Swain said she would probably want further update on January 30. Let’s see what happens.

Mr. Bienestock also mentioned that the Board was working on the PRASA and UPR cases, but did not provide any details. Very difficult to have the union contracts or pensions modified without a Title III though. More waiting. The Teachers Union had requested lifting of the stay. The hearing was today but the parties postponed it to January 30 since they are still discussing the issues.  

The Board told Judge Swain that it would address many of the concerns of the persons that had sent letters and emails to the Court about the COFINA deal and the Plan of Adjustment. Judge Swain mentioned that she would like to give persons selected at random 5 minutes to vent their concerns either to the settlement or the Plan of Adjustment. She said it would take between 1-2 hours.

Also, the Board announced that it would file three more Omnibus objections to the COFINA proofs of claim and would also file some individual objections. Finally, a supplemental plan will be filed by COFINA at the end of the month.

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.