Monday Update – February 25, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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