Monday Update – April 2, 2018

Welcome to your weekly Title III update for April 2, 2018. Once again, not much happened in the cases. Outside matters have now taken center stage; but first, let’s talk about Court matters.

On March 27, 2018, Judge Swain heard arguments as to the injunction presented by PREC. The regulator had “requested an order providing that ‘the [Oversight Board] is directed to refrain from mandating or authorizing PREPA to take substantive electricity actions that are within [PREC’s] jurisdiction but not authorized by [PREC], and [that] PREPA is directed to refrain from taking substantive electricity actions mandated by [the Oversight Board] if such actions are within [PREC’s] jurisdiction but not authorized by [PREC].””

But the day of the hearing, PREC changed its tune and instead said it was requesting “abandoned its focus on the fiscal plan process. At oral argument, PREC reformulated its request as one for a declaration that a sphere of ‘substantive’ energy-related decisions remains under PREC’s exclusive control, and that the Oversight Board’s area of authority is limited to ‘fiscal’ matters.

Not surprisingly, Judge Swain denied the request for an injunction and said:

PREC has not identified a specific mandate or authorization from the Oversight Board that PREC believes invades PREC’s alleged sphere of control over substantive energy policy. In fact, PREC candidly acknowledged that its reformulated request is instead one that seeks to obtain advice on the spheres of control of the relevant parties in advance of action by the Oversight Board related to such substantive matters. PREC thus seeks premature advice from the Court so as to avoid concrete disputes in the future. The Court lacks jurisdiction to render a declaratory judgment embodying such advice, as it would constitute an advisory opinion. In that PREC’s request for injunctive relief is premised on the rendition of such an opinion, it necessarily fails.

There was little probability that the original petition would be granted and probably for that reason the remedy requested was changed, although it obviously was a request for an advisory opinion. The fact that the attorneys for PREC, the Board, AFFAF and the UCC are all paid by the PR taxpayers was not wasted on the Judge. At the end of the hearing, Judge Swain took the issue under advisement but her distress was clear. She said PR needs to find a way forward using the resources it had. She encouraged increased lines of communication and to work collaboratively to the advantage of the investors and other stakeholders in order to lower transaction costs. Maybe the Judge will be much stricter in approving fees at the next hearings or start sanctioning complaints similar to PREC’s.

In an important parallel decision not mentioned by the press, Judge Swain denied the remand of cases that PREPA had removed from the Commonwealth Courts’ involving orders from PREC that the utility claimed put it at odds with its fiscal plan. The Judge stated:

“PREPA contends that the specific procedural requirements of the Rate Order that PREC issued place obligations on PREPA that conflict with PREPA’s obligations and the authority of the PROMESA-created Oversight Board in connection with the development and certification of a PROMESA-mandated fiscal plan for PREPA. ICSE contends that the same Rate Order has been invalidated or mooted by PROMESA. Determinations of these issues will affect the manner in which PREPA engages with the PROMESA fiscal plan process, as well as the force and scope of the Rate Order.”

Obviously Judge Swain is concerned about PREC’s orders conflicting with the Fiscal Plan and if so, given her previous decisions, it is likely she will invalidate them.

Last week, I discussed the Commonwealth and PREPA’s fiscal plans that were submitted by Governor Rosselló. On March 28, 2018, the Board sent letters to the Governor notifying of objections to the fiscal plans of PREPA, PRASA and the Commonwealth. The Board objected to the increase of the minimum wage and placed impossible restrictions on them. It also insisted in elimination of the county structure and the $100 million county support fund. In addition, it required that PREC not be made part of Public Service Commission and the continued existence of the Institute of Statistics. Finally, it again required the reduction of pensions above a combined SS/pensions of $1,000. This requirement was included in the PREPA and PRASA notices. The Board gave the Commonwealth until April 5 to provide the revisions and plans to have them certified by April 25.

The Governor wasted no time in saying he was not going to comply with the requirements of the Board and that if that Fiscal Plan is certified, he will not execute it. On Sunday, April 1, 2018, a letter dated April 2 was released where the Governor detailed his position as to the Board’s “requests.”

At page 2 of the letter, the Governor stated that “[t]he Board may not use the fiscal planning process to usurp or impair the Government’s own exercise-through legislation, expenditures, or otherwise-of its political, governmental and operational powers.” The quote ends with footnote 5 which cites section 303 of PROMESA which makes clear that with the exception of Titles I and II, the Court may not “impair the power of the Commonwealth to control, through legislation or otherwise, the territory . . .”

Finally, the Governor will send the Board a fiscal plan without any of the “requests” by the Board. The letter ends with this warning:

“Simply put, as Governor, I will not allow the Board to again seek the exercise of powers it does not have. Should the Board decide to certify a fiscal plan that exhibits an overreach of its powers, know that the elected Government will exercise its discretion when implementing those measures it considers proper and in the public well-being. We suggest the Board refrain from taking actions that will cause more detriment to the task the Board was mandated to execute.”

Governor Rosselló contends that the Board’s instructions are public policy and it cannot do that since that belongs to the Government.  Given the above, the Board will certify its own Fiscal Plan and then a new confrontation between the Board and the Commonwealth will reach Judge Swain’s desk . . . again.

Is the Governor’s complaint valid? Sure the Board is stablishing its own version of public policy for the Commonwealth, but I believe it can. Section 201(b)(1) states:

“A Fiscal Plan developed under this section shall, with respect to the territorial government or covered territorial instrumentality, provide a method to achieve fiscal responsibility and access to the capital markets.”

Most specifically, 201(b)(1)(F-G) state that the Fiscal Plan will include ways to “improve fiscal governance, accountability, and internal control” and “enable the achievement of fiscal targets.” Also, Section 405(m)(1) of PROMESA states

“Congress finds the following:

A combination of severe economic decline, and, at times, accumulated operating deficits, lack of financial transparency, management inefficiencies, and excessive borrowing has created a fiscal emergency in Puerto Rico,”

Subsection 4 also states:

“A comprehensive approach to fiscal, management, and structural problems and adjustments that exempts no part of the Government of Puerto Rico is necessary, involving independent oversight and a Federal statutory authority for the Government of Puerto Rico to restructure debts in a fair and orderly process.”

To me, it is clear that Congress intended the Board to establish public policy for the Commonwealth given its “management inefficiencies.” Section 303 does not protect the Government since section 201 is in Title II which is an exception to Governmental action. Moreover, Judge Swain could determine that PROMESA has preempted state law and given the Board part of Congress’ power. Hence, it is likely Judge Swain will side with the Board on the Commonwealth’s refusal to comply with the fiscal plan. How will this play out? There are several scenarios, and I detail just a few to start the conversation.

If Judge Swain sides with the Board and orders the Commonwealth to comply with the Fiscal Plan, Governor Rosselló will refuse and claim he would rather go to jail. The Board is unlikely to follow that avenue but could ask the Court for control of all of the Commonwealth’s bank accounts and order banks not to honor checks that do not have the FOMB’s imprimatur. The Board’s takeover of the PR government would thus be complete. Although in Downes v. Bidwell, 182 U.S. 244. 289-290 (1901) the Supreme Court said that Congress could 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,” this would be a decidedly undemocratic result, reminiscent of the most egregious colonialism.

Obviously, Governor Rosselló knows the Court will probably side with the Board and that everything in the case will be put in hold until Judge Swain decides the issue and the controversy is appealed and the First Circuit decides. It is likely that the controversy will not be decided by the First Circuit until after November. By that time the House or the whole Congress could flip and Democrats would rule. Governor Rosselló has sworn to campaign against those who voted against PR in the recent federal tax reform and he has been hobnobbing with Democrats for a while. It seems he is hoping that a Congress dominated by Democrats will give him control of the Title III proceedings and dissolve or severely limit the Board. It is possible, but President Trump has not shown any inclination to substitute its members and is likely to veto any changes.

If Judge Swain sides with the Commonwealth, things would get even more interesting. It would mean that the Board could not determine any changes to the PR Government or pensions or the public corporations that were not approved by Governor Rosselló. This would simply not work since both Governor Rosselló and the Board want to be in total control of PR. Irrespective of this, no cuts to the government’s payroll or pensions would likely result in a plan of adjustment that would not be approved by creditors or crammed down by Judge Swain which would force the dismissal of the Title III petition as per 11 U.S.C. § 930.

Moreover, the Board could determine that it could not accomplish its job under PROMESA and dismiss the Title III. This would leave the Governor without a § 362 stay and would be sued for not paying debt for over two years. Of course, the Governor could sit down with bondholders and negotiate payment, but would he have enough money left over to pay all employees and pensioners? What if bondholders are not in the mood to negotiate and want their pound of flesh after PR’s shenanigans?

Another possible scenario is another type of Congressional action. Rob Bishop sent a letter to the Board and Governor Rosselló where he complains against the former’s lack of Title VI agreements with bondholders and the latter’s defiance. Congressman Bishop has complained in the past of the Board’s actions as to PREPA and he could spearhead an amendment to PROMESA removing its jurisdiction over the utility and establishing a federal trustee to handle its operation and sale.

Finally, I must mention Ana Matosantos. El Vocero reported on her possible conflicts of interest with regard to PREPA, and I wrote a [column on the issue]. If they existed at the time of the Board’s rejection of the PREPA RSA and they were not reported, not only could she be criminally prosecuted but the Board’s decisions on PREPA could be challenged. I would not be surprised if sometime soon PREPA bondholders request leave to conduct discovery pursuant to Rule 2004 of the Bankruptcy Rules as to Ms. Matosantos finances, especially if more information comes forward.

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.