Monday Update – June 4, 2018

Welcome to your weekly Title III update for June 4, 2018. This week, many things happened in the case and outside the case.

I mentioned last week that the Retirees Committee had requested that it be appointed to represent the PREPA retirees and everyone seemed to be in agreement until the Sistema de Retiro de los Empleados de la Autoridad de Energía Eléctrica (SREAEE) filed its opposition saying they should represent these retirees. I thought that filing would be the end of the issue. I was wrong. The Retirees Committee, while professing to be neutral as to the issue of who would represent the PREPA retirees as long as someone represented them, replied to the SREAEE motion by noting it had potential conflicts of interest since 4 of its members were designated by PREPA management, three were active employees and only one was a retiree. The Retirees Committee also pointed out to the litigation in which AAFAF claims that its retirement system is part of PREPA with no independent existence. In addition, the Retirees requested from SREAEE documents to support its contention that “retirees had expressed, through the organizations which group them, that they want to be represented by SREAEE in these Title III proceedings.” The Retirees Committee questions whether this is true and whether they have been informed of the alleged potential conflict of interests. In a sur reply, SREAEE filed a resolution that includes several organizations that purport to represent retirees showing their support to the organization representing them. The resolution purportedly includes three organizations that include around 7,500 retirees. Given that PREPA retirees number 18,500, this still does not answer the Retiree Committees question. Judge Swain has asked that a representative of the US Trustee’s office be present at the June 6, 2018 hearing. Definitely will be interesting to see what the US Trustee has to say about this.

The UCC had filed on May 15 a renewed motion to conduct discovery as to Puerto Rico’s financial institutions, such as but not limited to Banco Popular of Puerto Rico, Popular Securities and Santander Securities, even though the Board hired an investigator to conduct such discovery.  The Board and the objects of the investigation objected to the  UCC motion saying the investigator is doing its job. It is never a good sign when the investigated say the investigator is doing a good job, especially when there are substantial financial ties between three board members (Carrion, Garcia, Ramon Gonzalez) and two of the institutions being investigated (Banco Popular, Santander). It is never a good sign when the investigated say the investigator is doing a good job. The UCC filed an omnibus reply, restating that the job the investigator is going to do and their view of the investigation are different. Also, the UCC points out that the time to file avoidance actions would expire May 2019 before they run the risk of expiring under section 546 of the Bankruptcy Code. The UCC also, quite correctly, states:

“Likewise, the “ownership” arguments rest on the false premise that discovery can only be relevant for the purposes of bringing affirmative claims. That is not the case, and Bankruptcy Rule 2004 allows examination of the “acts, conduct, or property

 [] of the debtor, or to any matter which may affect the administration of the debtor’s estate.” Fed. R. Bankr. P. 2004(b); see also 11 U.S.C. § 1103(c)(2) (Committee may investigate “any other matter relevant to the case or to the formulation of a plan”). Indeed, as the Committee has stated before, discovery from the Puerto Rico Financial Institutions may be used for a number of other purposes, including:

 Evaluating or objecting to the potential claims asserted by the Puerto Rico Financial Institutions (or other entities which are affiliated or have acquired claims through the Puerto Rico Financial Institutions) against the Commonwealth;

 Placing a value on the likelihood of success of potential claims against individuals or entities for the purposes of plan formulation or other negotiations—i.e., as is currently ongoing in the negotiations over the GDB’s Restructuring Support Agreement under title VI of PROMESA. See Renewed Motion, ¶ 20 (noting that GDB has attempted to release directors and officers from liability);

 Evaluating whether certain bonds issued with the assistance of the Puerto Rico Financial Institutions were valid or, instead, violated the Puerto Rico constitution.

 Ensuring that creditors who “re-invest” in the Commonwealth as part of a plan of adjustment understand whether any culpable individuals or entities would remain involved in Commonwealth financial affairs going forward.”

The UCC again points out the conflicts of interest of AAFAF and the Board:

“AAFAF seems to believe that the Committee should not play a role in any of the title III cases, noting for example that “any defenses to creditor claims can be asserted by the Oversight Board or AAFAF.” AAFAF Objection, ¶ 7. While the Oversight Board and AAFAF could certainly take any number of actions—and the parties may indeed share common interests in many areas—the fact of the matter is that debtors often do not always take actions that are in their creditors’ best interests. That is especially true where certain parties are rife with conflicts, such that they cannot plausibly be taken seriously when they claim that they should take the lead as to those entities. The Committee raised these issues at length in its briefing on the Original Motion, but it bears repeating that these agencies are personally led by individuals associated with potential “targets” of the Committee’s discovery:

 AAFAF is led by an investment banker who spent eight years at Santander (including in the municipal finance field) before joining the government and could have participated in many of the transactions that have given rise to the Committee’s concerns.

 At least three members of the Oversight Board are deeply enmeshed with the Puerto Rico Financial Institutions. Two of the Oversight Board’s members, Carlos Garcia and José R. González, were directly employed by Santander and worked on the transactions at issue here. In addition, Oversight Board Chairman José Carrión III is a scion of the family that founded Banco Popular, the son of a former Popular Inc. board member, a relative of the current Executive Chairman of the Board of Popular Inc., and the founder of an insurance firm which has received millions per year in commissions from Popular Inc.

21. As the Committee then observed, and perhaps as a result of these conflicts, the Oversight Board commenced its investigation only after the Committee filed its original Motion—even though it had the authority to do so for more than a year. Conflicts like these, and the need for an outside view by a party most incentivized to “grow the pie,” are part of the reason that Congress has not given debtors a monopoly over any investigation. In fact, the importance of the Committee’s “watchdog” role has already played out in these title III cases, even outside the public eye or its efforts in prompting this investigation. For weeks, AAFAF questioned the Committee’s requests for lists of any bank accounts containing over $2 million in deposits, questioning “the purpose of the bank account request.” See Ex. 5, September 14, 2017 email chain between counsel for Committee and counsel for AAFAF. Interestingly enough, a short time after the Committee’s request, AAFAF announced that it “discovered” nearly $6.9 billion in hundreds of previously “missing” cash accounts. There are likely many other unforeseen examples in which the Committee—equipped with the discovery it now seeks—can advance the overall goals of PROMESA, including the aim of promoting financial transparency.”

Given the obvious conflict of interest and the rollover of the time table of the investigator’s report, it makes sense to me that the Judge, who knows a thing or two about bankruptcy, will think long and hard to the UCC’s request.

On the subject of discovery, several bondholders, the Board and AAFAF, as strongly suggested by Magistrate Judge Dein, came up with a protocol to challenge the latter’s claims of deliberative process privilege, which was promptly approved via order. Hopefully, this will advance the Title III case, which has now been active for over a year.

The American Federation of State County and Municipal Employees had filed a motion requesting and order from the Court against the mediation team and other parties in reference to the COFINA and GO’s stipulation a couple of weeks back. Judge Swain denied the motion saying:

“AFSCME’s Motion seeks to compel the Mediation Team, the FOMB, AAFAF, and the COFINA Agent to “comply immediately with the Stipulation,” and refrain from “participating in any discussions to settle the Commonwealth-COFINA [D]ispute with the Commonwealth Creditor Representative selected by the Ad Hoc Group of General Obligation Bondholders and Assured Guaranty Corp. . . . unless and until such a settlement is reached between the Commonwealth Agent and the COFINA Agent first.” (Docket entry no. 3092-1 at 2.) The Motion focuses primarily on paragraph 4(i) of the Stipulation, which relates to the roles and responsibilities of certain Agents and Representatives in the context of Commonwealth-COFINA Dispute negotiations, and under the dispute resolution structure established pursuant to the Stipulation. Among other things, the Stipulation defines the parameters of the Agents’ authority and requires that settlements negotiated by the Agents be subjected to particular disclosure and approval protocols. Contrary to AFSCME’s structural assumption that paragraph 4(i) prohibits other parties from participating in settlement discussions, the Stipulation does not constrain the ability of any other party in interest to participate in mediation or negotiation of any issues, nor does it constrain the general authorization of the Mediation Team to facilitate such efforts. Thus, the Motion rests on a faulty legal premise. AFSCME’s Motion is also lacking in factual foundation to the extent that it is premised on speculation regarding activity in the confidential mediation setting. The Court makes no assumption about, and will not inquire into, such confidential communications.”

It was a bizarre request that unfortunately took up too much of the Court’s time.

PBJL Energy Corporation filed a RICO complaint against PREPA but ethical considerations bar me from saying anything more. I used to represent plaintiff but not at this time and was not involved in the filing of this complaint.

Western Surety Company and Continental Casualty Company file an adversary proceeding in order from the Court:

“[D]eclaring that the funds retained by the PRHTA to prime contractor in the public work projects, Betteroads Asphalt, LLC and/or Betterecycling Corporation, are not property of the estate of the PRHTA in the pending Title III case, but rather property of the Sureties as result of its equitable lien and rights of subrogation, and pursuant to the terms the General Agreement of Indemnity executed by the prime contractor, among other indemnitors.”

In addition, the Hermandad de Empleados del Fondo del Seguro del Estado, Inc., also known as Unión de Empleados de la Corporación del Fondo del Seguro del Estado, , Asociación de Empleados Gerenciales del Fondo del Seguro del Estado Corp., and Unión de Médicos de la Corporación del Fondo del Seguro del Estado Corp., all labor unions associated with the Puerto Rico Workmans’ Compensation Fund, filed a complaint claiming PROMESA is unconstitutional since it violates the 13th (slavery) and 15th (voting rights) Amendments. Their thesis is that since the members of the unions do not vote for president or Congress, PROMESA is unconstitutional. Although definitely imaginative, this tells us to the extremes the unions in Puerto Rico will go to get rid of PROMESA. Aside from the more obvious problems with the complaint, it is a good idea to remember that no territory has ever voted for the President or Congress. It took the approval of the 23rd Amendment in 1961 for DC residents to be able to vote for President. The Constitution itself reserves presidential and Congressional vote for states, not territories. Let’s see what Judge Swain does with this.

The saga of the Commonwealth budget continues to simmer with the Senate surprisingly approving the prospective elimination of law 80. The Board quickly announced that this was not the agreement with the Government. Then, the House, that originally had said would approve the elimination of Law 80 now seems to have second thoughts. God only knows where this will end. Although the Board recertified the fiscal plan, it is up in the air whether there will be further changes if it believes that the Legislature has not complied with the agreement. This will also delay any future Plan of Adjustment. Looks like one big parody. Again, 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.