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.