Welcome to your weekly Title III update for March 12, 2018. Judge Swain held an Omnibus Hearing on March 7, which was the highlight of the week.

While giving the report from the Board, its attorney, Martin Bienenstock stated that there was not an impending need for a new loan for PREPA. His statement was that instead of a probability, it was only a possibility that PREPA would need to seek a new loan due to increased collection of its bills. Given that the Board first asked for $1.3 billion, then $1 billion and when it was only given a $300 million loan, it asserted that in 2-4 weeks it would seek more, two things are clear.

First, Judge Swain knows her numbers and the Board and PR are not transparent in their financial information. This brings us to another point. It was reported in the news that fuel expenses for PREPA increased but the Governor refused to increase rates (via de fuel adjustment clause).  Rather, he believes he can force President Trump and the Federal Government to provide the Community Disaster Loan to make up the difference.  That is an interesting political calculation.  This is another example of why PREPA has problems; political decisions (increasing rates will be electorally unpopular) that undermine the continuity of services. PREPA was totally unprepared for the hurricanes in part due to its lack of funds. Less than 90 days from the next hurricane season, it seems it will be as unprepared.

Also this week, the Governor revealed the legislation for the sale of PREPA. If one examines it, as I carefully did, although it allows for the sale of assets, one can see that it favors Public Private Partnerships (3P) over the sale and that has bee echoed by some legislators and the Governor. The Board on the other hand, has been clear that it wants it sold. Who will prevail? I think the Fiscal Plan will resolve the issue. If the PREPA Fiscal Plan, the new version which has not been released by the Governor, includes the outright sale of the utility, the FOMB’s view will prevail. Section 305 of PROMESA, which precludes the Court from interfering with the Commonwealth’s use of its property, has an exception, “[s]ubject to the limitations set forth in titles I and II of this Act.” The Fiscal Plan is in Title II of PROMESA. Hence, if the sale is in the fiscal plan, it is likely PREPA will be sold.

Last Monday, Judge Swain issued an order scheduling Omnibus hearings for different dates up to April of 2019. This coupled with hear statement during the March 7 hearing that the “PROMESA cases were in their infancy,” makes us believe the earliest the Commonwealth Title III gets resolved is May of 2019. Moreover, if the GDB and PRASA are added to the Title III, we could have these cases drag until late 2020.

Judge Swain approved the fee examiner’s report and most of the requested fees, totaling around $50 million. For the most part, these amounts had already been paid and date from before the start of the case until September of 2017. A number of the requested fees were left for the April Omni. Clearly, this bankruptcy is costing PR tax payers a pretty penny.

In addition, the parties to the PBA motion for payment of certain leases was “settled” by providing claimants with an administrative expense status for the rents, but with a caveat:

“Unless and to the extent the PBA Leases are subsequently adjudged not to be leases for purposes of Bankruptcy Code section 365(d)(3) and subject to paragraph 3 below, the PBA shall have allowed administrative priority claims against the Debtors with respect to unpaid rent accruing under any leases of nonresidential real property from and after each Debtors’ respective petition date, pursuant to Bankruptcy Code 365(d)(3), 503(b), and 507(a)(2) (including, for the avoidance of doubt, any amounts due from the Commonwealth’s agencies and departments) arising under PBA Leases currently due and owing to the PBA, which shall continue to accrue, but not require payment absent further court order, until each such PBA Lease is either assumed or rejected by the applicable Debtor (collectively, the “Administrative Rent Claims”).”

Section 3 of the settlement states:

“Any and all Administrative Rent Claims and their allowance or disallowance shall remain subject to all rights, claims, defenses, and setoffs available to each Debtor, as applicable, and the Debtors and the Official Committee of Unsecured Creditors retain all rights to assert objections or defenses to the Administrative Rent Claims, provided, however, the Debtors shall not be entitled to assert that any of the Administrative Rent Claims have been waived as not timely asserted. For the avoidance of doubt, the issues of whether the PBA Leases are “true leases” entitled to treatment under section 365(d)(3) of the Bankruptcy Code, the validity or enforceability of the PBA bonds or PBA guarantees, and whether a debtor-guarantor who is not the tenant under the subject lease is subject to the performance obligations of section 365(d)(3), are expressly preserved.”

Since the UCC had filed a motion that intimated that the leases were not real leases and that it was investigating whether the bonds were issued illegally, we can expect some time in the future and adversary proceeding by the UCC against the PBA bondholders.

In addition, the unions and the Commonwealth came to an agreement for arbitration and grievances to continue. If the Board feels that any procedure would affect the Fiscal Plan, it will notify the unions and the issue will be brought before Judge Swain. Good settlement for all involved.

Judge Swain has set the hearing on the injunction requested by the PR Energy Board against the FOMB for March 27. The UCC filed a request for intervention stating the following:

“Plaintiff in this Adversary Proceeding claims that “whenever a proposed PREPA Fiscal Plan would impact substantive electric industry matters, [Plaintiff’s] timely assessment and approval is a prerequisite for [Oversight Board]’s certification of such Fiscal Plan.” See Compl. at 50 [Docket No. 1]. In other words, Plaintiff contends that it has the right to review any Fiscal Plan PREPA intends to propose, and either to approve or reject its contents, before the Oversight Board can consider the Fiscal Plan. Thus, PREPA cannot propose, and the Oversight Board would be unable to entertain, any strategies for reorganization except for those that Plaintiff has already blessed. This would do violence to the scheme Congress adopted and sharply curtail the approaches to reorganization the Oversight Board might adopt.

The Committee has a significant interest in this case because the relief that Plaintiff seeks would destabilize Congress’s statutory scheme for title III cases and would undermine the Committee’s efforts to adequately represent the many unsecured creditors in this case. By inserting itself into PROMESA’s statutory scheme, Plaintiff’s involvement in this case would needlessly protract the process of getting PREPA on the path to fiscal responsibility. In addition, the Committee has a vital interest in the issues raised in Plaintiff’s Complaint as they pertain to PREPA’s revenues and expenses, and therefore the funds PREPA will have available to satisfy its general unsecured creditors—the constituency the Committee was appointed to protect. If Plaintiff prevails, the resources available to satisfy the claims of general unsecured creditors would be directly affected. Perhaps most importantly, the Committee has a substantial interest in a just and speedy resolution of this case. Plaintiff’s claim that it must preapprove any Fiscal Plan submitted to the Oversight Board necessarily affects these issues; therefore, the Committee should be allowed limited intervention in this Adversary Proceeding.”

I believe this question sums the issue in this litigation; who certifies the fiscal plan, the FOMB or the PR Energy Commission? Seems to me that for good or for bad, PROMESA is clear that it is the FOMB. Judge Swain has already ruled on this and is likely to rule in a similar fashion.

Lastly, last week I mentioned the GO motion for summary judgment of only 1,399 on COFINA. One of its exhibits has a very interesting discussion, which deserves closer examination. The email is from Lawrence Bauer of Sidley Austin to Jorge Irizarry of the GDB in 2007:

“The sales tax is a tax imposed by and collected by the Commonwealth Dept. of the Treasury not by the Corporation and not “on behalf of” the Corporation, which has no taxing power. As such, the tax revenues are “property” of the Commonwealth until such time as they are transferred to the Corporation (even if it’s only a under a minute until the moneys are transferred to the Corporation). Therefore, during that (admittedly short) period from the time the taxis collected by the Commonwealth until it is transferred to the Corporation, Ithink a court would have a hard time concluding just on the basis of the legislature saying so that the sales tax revenues are not “available” to the Commonwealth should it need the money to pay G.O. debt. Ultimately, the legislation may be upheld (courts uphold conclusions that are reached by incredible legislative gymnastics over a more simple and straightforward analysis – just look at the “separate but equal” nonsense that the U S. Supreme Court upheld and the decades it took to reverse it in Brown v. Board of Education), but the mere fact that I’m having this discussion with you about its validity is the reason you have to disclose that this conclusion isn’t a slam dunk. After all, why – for Constitutional availability purposes – is a sales tax on gasoline any different from a sales tax on men’s flip flops? If the answer is “because the legislature said so.”, then from a disclosure standpoint of giving investors the complete “information mix” they need in order to make an informed investment decision as the U.S. Supreme Court has mandated, you have to disclose this distinction. That is, you have to make reference to the other sales taxes in Puerto Rico that are treated as available and explain why this sales tax is different. Then you have to say: but we’re not sure the P.R. Supreme Court would agree with that view, because under our system of laws, whenever the question is “what does the Constitution mean?” the final answer can only be given by the highest court in the jurisdiction – in this case the P.R. Supreme Court, and just because the legislature or the working group on the sales tax bonds wants it to be another body (i.e., itself) doesn’t change that. Remember, the question of whether an item needs to be disclosed is whether a reasonable investor would have liked to have known of the information while pondering whether to buy the bonds. Do you think this is not important information to a potential bondholder? If you think not, then don’t disclose it and see what happens. If you think it is important, then you have your answer: you have to tell him/her. Think about what information you would like to have before you made a decision to buy (or not to buy) these sales tax bonds.”

The discovery of these emails, and the contents of the exchanges between parties, cannot be overstated.  They directly speak to whether the SUT is an available resource to PR, and will certainly be used to argue against COFINAs constitutionality. I have also said many a time and I repeat it now, if the Court were to side with the UCC and others that the SUT cannot be assigned to COFINA and it is available resources, all those bondholders will be left with claims against a corporation that has no income. They will file dozens of fraud claims against the Government of PR which must be adjudicated in order to have a vote on the Plan of Adjustment. Hence, the Title III case may take well beyond May of 2019.

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.