Monday Update – July 23, 2018

Welcome to your weekly Title III update for July 23, 2018. A lot happening both in and out of the Title III cases.

Although the Legislature filed a complaint against the Board for allegedly taking away its constitutional prerogative to legislate the budget, the PDP minority members of the House filed a motion to intervene in the case. The intervention is accompanied by a complaint, which does not adopt the allegations of the Legislature’s complaint but rather seeks the following:

Plaintiffs respectfully request the issuance of a declaratory judgment holding that the Oversight Board appointment provisions contained in PROMESA are in violation of the Appointments Clause or, in the alternative declaratory judgment be entered decreeing the delegation of executive and legislative authority to the Oversight Board is in violation of the Separation of Powers doctrine or, in the alternative, issue a declaratory judgment decreeing that the Board’s exercise of authority over budgeting to compel the adoption of its public policy constitutes an impermissible interference with federally-protected legislative autonomy.

In other words, the minority leaders are invoking the Aurelius claims, which were dismissed by Judge Swain and the separation of powers in the Federal Constitution, as causes of action. Meanwhile, the Separation of Powers argument seems elegant at first glance but in Luther v. Borden, 48 U.S. 1 (1849), the Supreme Court made it clear that the extent of the separation of powers was entrusted to Congress and the President, not the Courts. Hence, there is no cause of action as averred by the PDP minority. Moreover, the minority did not file a separate complaint but rather sought intervention. Why? There is a debate amongst scholars whether Rule 24 requires standing. To me, it is clear the minority does not have said standing. Interestingly, the Legislature opposed the request for intervention by claiming (surprise, surprise) no standing. The Board did not raise the issue of standing but said that the requirements of Rule 24 were not met since the causes of action of both parties were different. They also added that the Legislature could of course file its own complaint.

If the minority legislators probably do not have standing or actually a cause of action, why did they file it? Politics. Although the PDP legislators are represented by counsel Martínez Luciano and Rodríguez Conde, both experienced and capable attorneys, well versed in federal litigation, the complaint was also signed by Aníbal Acevedo Vilá, former PDP governor. Furthermore, they sided with Aurelius. Cheeky. Or just simply politics, nothing more. In any event, Judge Dein denied the intervention on Saturday, stating that what was being claimed was new allegations and that could not be done in an intervention under Rule 24(a). Thus, she denied intervention via Rule 24(b), as is her discretion. Obviously, she did not want to deal with this distraction.

AAFAF opposed the Board’s motion to dismiss the complaint but stated something that could mean its dismissal: The governor and AAFAF, however, seek declaratory and injunctive relief to halt the enforcement of only a handful of specific recommendations that the elected Government duly rejected under PROMESA section 205 . . .

If the Court were to grant the relief that the elected Government requests, the Court would not have to decertify any fiscal plan or budget. The fiscal  plan’s revenues and expenses, for example, would not need to change. The Board and the elected Government could proceed with the existing fiscal plan and budget without any alteration other than being relieved of the obligation to comply with the particular, defined recommendations that exceed the Board’s statutory power. The Board would merely be barred from enforcing recommendations that it never had the power to impose in the first place.30

Plaintiffs do not contest that the Board can certify a fiscal plan that includes recommendations under PROMESA section 205, as the Board has done here. The sole issue presented by this action is the effect of certifying a fiscal plan that includes recommendations the elected Government had the power to reject. If PROMESA made the Board the sole arbiter not only of whether to certify a fiscal plan or budget but also on the effects such certification would have, the Board’s power over the Commonwealth and its elected Government would be limitless. For example, if the Board recommended that Saturday be a mandatory work day for all public employees in Puerto Rico and then included such a recommendation in the fiscal plan or budget, against the elected Government’s objection, there would be no means for the elected Government to contest, or for the Court to review, the Board’s conduct. The Board’s interpretation makes such absurd results permissible.

AAFAF’s argument is bipolar and inconsistent. It makes no sense to say you can alter a little of the Fiscal Plan and say you are not violating sec. 106(e). In it’s reply, the Board points this out. Also, if AAFAF gets away with this, all creditors will do the same. I expect Judge Swain to politely listen to arguments on July 25 and then say she has no jurisdiction to grant a remedy. If she grants any remedy, it is unlikely a confirmable Plan of Adjustment can be presented and Title III would have to be dismissed.

Bettina Whyte, the UCC and the Retirees Committee all filed motions requesting payment as per the Court’s orders. AAFAF filed an opposition stating that it expected to pay them by July 25 and that it is working on a procedure for the reimbursement of the retained taxes. Why is there a delay in payment from a government flush with cash? Why has a procedure not to retain any taxes taken so long to develop? Either it was done purposely or it is another example of government incompetence.

Lord Electric requested the $1,000,000 plus it is owed for helping PREPA reconstruct the grid. AAFAF answered that it was willing to pay Lord Electric when FEMA reimbursed it or when funds were available. What doesn’t make sense is that PREPA has paid all other companies involved in the reconstruction and still has $346 million left over in cash. I wonder if Lord Electric is owned by PDP sympathizers?

As to the Motion of Certain Secured Creditors of the Employees Retirement System of the Government of the Commonwealth of Puerto Rico for Relief from the Automatic Stay, which was opposed by the Board, the Court issued an order stating:

For the reasons that will be explained on the record at the Omnibus Hearing scheduled for July 25, 2018 at 9:30 a.m. (Atlantic Standard Time) (the “July Omnibus Hearing”) the oral argument on the Motion scheduled for the July Omnibus Hearing will be a preliminary hearing pursuant to section 362(e)(1) of title 11 of the United States Code. A final hearing on the Motion will be held at the Omnibus Hearing scheduled for September 12, 2018 at 9:30 a.m. (Atlantic Standard Time).

It will be interesting to hear their argument. Also in the July 25 hearing, the UCC’s Rule 2004 request will be discussed. With the weighty issues to be discussed there, the hearing may take more than a day.

At PREPA, things could not be worse. José Ortiz was appointed as the fifth Executive Director in 8 months. He quickly began promising the impossible, such as lowering the electric bill in 120-days and ridding PREPA of Title III and then selling it. Mr. Ortiz also made claims regarding the selling of certain PREPA installations and the creation of new generation plants. All this resulted in Congressman Bishop, head of the House Committee on Natural Resources, calling for a hearing on July 25th called the “Management Crisis at the Puerto Rico Electric Power Authority and Implications for Recovery.” Chairman Bishop sent Governor Rosselló a letter inviting him to the hearing and mentioned that due to “continued disfunction at PREPA” the Committee is interested in hearing on how the Governor intends “to provide for the depoliticization of PREPA and a credible plan for the utility’s transformation that can garner the confidence of the island’s residents, federal taxpayers, and future private investors.” Someone using the Committee’s handle, tweeted the letter saying, “Governor, call your office.” The tweet was soon after deleted, but set the Governor and his team off. CBS reporter David Begnaud asked the Committee why the tweet was deleted and the Committee responded that the governor’s office requested it. Then, PRFAA’s account said the governor did not do that even though a person in charge of the House Natural Resources Committee’s account said Rosselló’s office requested it. On Friday, the governor reacted enraged, saying the hearing was a trap and intimating he would not attend or send anyone. Seems to me the governor senses that its all falling apart around him, that Congress could file legislation for a federal takeover of PREPA or give the energy commission broader federal powers, which he will vehemently oppose and is posturing for the voters.

This brings us to a letter from Assured Guarantee and National, among others, dated July 16, 2018, directed to the Board. The letter states:

Following preliminary discussions with your advisors, we write on behalf of National Public Finance Guarantee Corp. to urgently seek to work together with the Oversight Board in addressing PREPA’s governance crisis and lack of political independence, which directly contravene Commonwealth law. . .  

For these reasons and as we have discussed with your advisors, it is National’s objective to work together with the Oversight Board to ensure that PREPA is governed by qualified, politically independent leadership, which will facilitate debt restructuring and other positive developments. We request to discuss with the Oversight Board how best to achieve this objective for the good of the island—through the receivership statute or other agreed-upon means. Without emergency measures now, PREPA’s problems will grow worse and long-term solutions will become more difficult to achieve. PREPA’s leadership must be able to operate the utility for the benefit of all stakeholders, insulated from politically motivated threats and ultimatums such as those seen in recent days.”

Are these insurers asking the Board to name a CEO in PREPA? Judge Swain has already said  no, but in her decision on the Ad Hoc Group of PREPA bondholders attempt to lift the stay to have a receiver appointed, she states on pages 10-11:

Section 305 of PROMESA provides that, “notwithstanding any power of the court, unless the Oversight Board consents or [the debtor’s Title III] plan [of adjustment] so provides, the court may not by any stay, order or decree, in the case or otherwise, interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.” PROMESA § 305. The Debtor here, PREPA, is a government instrumentality of the Commonwealth, exercising governmental powers in providing electrical service to the inhabitants of the Commonwealth, using its property to generate that power and deriving income from the sale of the power so generated. The rates it charges for its services define the magnitude and impact of its principal revenues. The relief that Movants seek – permission to require the appointment of a receiver to manage PREPA’s operations and seek the approval of rates higher than those PREPA has thus far chosen to charge – is facially inconsistent with Section 305 of PROMESA. Section 305 bars the Court, “notwithstanding any power of the court,” from using “any . . . order or decree, in the case or otherwise,” to interfere with such basic functions and assets of PREPA absent the Oversight Board’s consent, which has not been given here. (emphasis supplied)

What if the bondholders consented to have Zamot be the receiver appointed by the Court and the Board allowed the lifting of the stay for this purpose? Given what has been going on in PREPA, it is not that farfetched. Let’s see what happens.

In other news, Politank, a local lobbying firm, sued several of the COFINA creditors for moneys allegedly owed. What is interesting is the following:

The Agreement also provided for a success fee under the following terms:

5.2 If the CLIENT or the COFINA GROUP enters into a consensual plan for COFINA that limited the impairment of the face value of the bonds, or the COFINA GROUP achieves a similar economic outcome through a means other than a consensual plan, the COFINA GROUP will pay to the CONSULTANT a success fee based on [the Recovery Value1 of the Senior COFINA bonds] as follows:

Recovery Value Success Fee

≥ 95% $3,000,000.00

92.5% $2,500,000.00

90% $1,275,000.00

87.5% $750,000.00

85% $500,000.00

82.5% $250,000.00


The success fee will be due and payable to the CONSULTANT within thirty (30) days of the execution of any consensual plan or such any other means which achieve a similar economic outcome.

If on/or before May 31, 2018, the CONSULTANT becomes entitled to the payment of a success fee, as set forth above, the CONSULTANT’S success fee shall be increased by an additional TWENTY PERCENT (20%) of the otherwise payable success fee.

Interesting indeed how lobbying works. The timing is even more interesting: just days before the Agent’s Agreement was reached.

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.