Monday Update – March 5, 2018

Welcome to your weekly Title III update for March 5, 2018. Judge Swain has decided important issues this time in favor of the Board.

In the Ambac adversary proceeding, Judge Swain dismissed the insurer’s claims for different reasons. She dismissed claims on liens and takings claims as premature, I assume hoping they will be solved in mediation or in the case of taking without just compensation, that it be considered moot once the Plan of Adjustment is presented. As predicted, Judge Swain rejected the challenge to the certified fiscal plans (except for possible Constitutional deficiencies) and said:

“Section 201(b) of PROMESA identifies fourteen specific objectives and requirements that a fiscal plan, whose development is overseen by the Oversight Board, must satisfy. The Oversight Board, pursuant to Section 201(c)(3) of PROMESA, is specifically tasked with reviewing and approving proposed fiscal plans and is granted “sole discretion” to determine in connection with such certification whether such fiscal plans satisfy the Section 201(b) requirements. PROMESA not only grants the Oversight Board exclusive authority to certify fiscal plans, but it also insulates the Oversight Board’s certification determinations, which necessarily rest on determinations that the Section 201(b) requirements have been met, from challenge by denying all federal district courts jurisdiction to review such challenges. See PROMESA § 106(e). To be meaningful, denial of jurisdiction to review the certification of the Fiscal Plan thus must be understood preclude the review of claims that particular aspects of the Fiscal Plan are noncompliant with Section 201(b) requirements.

The First, Second, and Fourth Claims for Relief of the Amended Complaint expressly seek invalidation of the Oversight Board’s certification of the Fiscal Plan and injunctive relief prohibiting Defendants from taking or causing to be taken any action pursuant to the Fiscal Plan. (Am. Compl. ¶¶ 215, 218, 223, 226, 236, 239.) To the extent these claims rest on contentions that the Fiscal Plan violates Section 201(b) specifications, such as the requirement that a fiscal plan respect lawful priorities or lawful liens under territorial law, this requested relief necessarily implicates review of the Fiscal Plan’s certification and therefore the Court lacks subject matter jurisdiction to consider the merits of the claims. Congress has entrusted the ultimate decision to certify a fiscal plan to the sole discretion of the Oversight Board. See PROMESA § 201(c)(3). PROMESA creates a statutory structure that is protective of the Oversight Board’s authority under Section 312(a) of PROMESA, which grants the Oversight Board the exclusive right to propose a Title III plan of adjustment that must be consistent with the applicable certified Fiscal Plan to be eligible for confirmation. Together, these provisions underscore the central, discretionary role that Congress has assigned to the Oversight Board in the Title III debt adjustment process. See PROMESA § 314(b)(7). Under PROMESA’s statutory framework, it is only at the plan confirmation stage that the Court determines whether a proposed plan of adjustment complies with, among other things, the provisions of Title 11 of the United States Code which have been made applicable to these cases by Section 301 of PROMESA and the relevant provisions of PROMESA.(Bold added)

I have long held the view that it is only at the time of the Plan of Adjustment that Judge Swain may, if so inclined, rule on anything pertaining to the Fiscal Plan. By that I mean it must be determined whether the Plan of Adjustment is confirmable even if the Fiscal Plan does not respect the lawful priorities or lawful liens. It seems that this is the Judge Swain’s view also. In addition to the above, Judge Swain dismissed the claims for violation of the contracts clause, section 407 of PROMESA and the claim of violation of Section 303 of PROMESA by the Moratorium Act. Judge Besosa had also dismissed a similar claim of violation of Section 303 in another case. Judge Swain decided in a similar fashion as she did in the Assured litigation as to sections 922 and 928 of the Bankruptcy Code.

In the Commonwealth v. COFINA litigation, the COFINA representative filed a surprising motion requesting that the question on COFINA be certified to the Supreme Court of Puerto Rico, which was quickly and vigorously opposed by the Board. The COFINA bondholders had attempted the same thing and were rebuked by Judge Swain by stating the question was a mixed one of federal and state law and that the District Court would decide. Judge Swain denied the motion to expedite the discussion of the matter but will hear arguments on the April 25 Omnibus hearing. Seems all COFINA defenders believe the Puerto Rican Supreme Court will be more willing to declare it valid than the District Court. We shall see.

Last week the Board filed a quixotic acceptance to lifting the stay in labor grievance cases and the unions filed a motion pointing out that contrary to what it said, the Board was not acting as if the stay was lifted. We’ll see what the Judge decides.

As I reported last week, the UCC filed summary judgment stating that COFINA was in violation of the Puerto Rico Constitution as to limits on debt issuance pursuant to Article VI, section 2 of the Puerto Rico Constitution. I had not noticed, however that they were investigating whether some of the PBA bonds were also issued in excess of the constitutional limit. Interesting indeed. We shall see what the UCC concludes and how it will handle the issue if it believes the constitutional limit was indeed exceeded. Again, an important constitutional issue for Puerto Rico is to be decided in federal court. In any event, as the GO Bondholder’s reservation of rights points out, the issues presented require a full evidentiary hearing. Hence, it may or may not be resolved on Wednesday’s Omnibus hearing.

Echoing other creditors’ cries for more information from Puerto Rico and the Board, “the American Federation of State, County and Municipal Employees International Union, AFL-CIO (“AFSCME”), American Federation of Teachers, AFL-CIO (“AFT”), International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, AFL-CIO (UAW) (“UAW”), and Service Employees International Union (“SEIU”)” filed a motion requesting leave to conduct discovery via Bankruptcy Rule 2004. Judge Swain quickly sent it to Magistrate Judge Dein. The Unions are seeking the following from the Board, from the Commonwealth and from AFFAF:

“[D]ocuments responsive to the requests listed on Schedule A; (2) compelling the depositions of (i) Oversight Board Executive Director Natalie Jaresko and Chairman José B. Carrión III, and (ii) AAFAF Executive Director Gerardo Portela and Chairman Christian Sobrino; and (3) compelling the Commonwealth to designate for deposition a witness or witnesses knowledgeable about the topics described on Schedule A.”

The Unions justify their request in the following manner:

“The Unions require information from the Oversight Board, AAFAF, and the Commonwealth (collectively, the “Government Parties”) necessary for the Unions to understand whether and how the Commonwealth and AAFAF, with the implicit blessing of the Oversight Board, have violated the rights of tens of thousands of Commonwealth employees by taking money through employee contributions deducted directly and involuntarily from their wages without, it appears, depositing those funds immediately into individual employee accounts controlled and investable by the employees as required by law. Notably, the draft fiscal plan submitted by the Commonwealth and AAFAF to the Oversight Board on February 12, 2018 (the “February 2018 Draft Fiscal Plan”) fails to make any disclosure concerning the status, location, segregation, investment, and management of ongoing mandatory public employee contributions to their individual retirement accounts. This Motion therefore seeks information necessary to determine whether there has been post-petition wrongdoing with respect to public employees’ property and to protect their rights.

It is simply offensive to the Commonwealth’s public servants—many of whom have since 2000 suffered mandatory deductions from their pay which were supposed to be contributed to individual retirement accounts (without any matching employer contribution)—that in July 2017 the Government Parties admitted that those funds were not, in fact, deposited into the employees’ segregated accounts, as they should have been, but instead were spent to satisfy other obligations.

It adds insult to injury that, even after the subsequent passage of a Commonwealth pension reform statute, Law 106, on August 23, 2017, and numerous commitments that ongoing employee contributions would be properly segregated into individual 401(k)-style accounts, the Commonwealth (through AAFAF) publically released a report of its 2017 end-of-year bank account balances on January 19, 2018 (the “2017 EOY Bank Account Balances”) which states (at pp. 8-9) that approximately $133 million in “employees/participants withholdings . . . for defined contribution retirement accounts” are being commingled with other “Pension Related” assets in a single government account, rather than individual employee retirement accounts as is required by Law 106.”

Given this scenario, I think Judge Dein will be hard pressed not to grant this relief and if it is granted, another adversary proceeding challenging this conduct is almost assured.

On Sunday, at 9:44 pm, the Puerto Rico Energy Commission filed an adversary proceeding for injunctive relief seeking the following:

A Declaration that FOMB may not mandate or authorize substantive electricity actions that are within the Commission’s jurisdiction but that the Commission has not approved, including but not limited to the following: actions affecting resource mix; asset ownership, operations, maintenance and retirement; market structure; integrated resource planning; and rates (including but not limited to revenue requirement, revenue allocation, cost allocation and rate design).

A Declaration that when FOMB exercises its fiscal powers over PREPA, it shall do so consistently with Commission actions, orders and regulations on substantive electricity matters, and on fiscal matters unless inconsistency is unavoidable.

A Declaration that whenever a proposed PREPA Fiscal Plan would impact substantive electric industry matters, the Commission’s timely assessment and approval is a prerequisite for FOMB’s certification of such Fiscal Plan.

Preliminary and permanent injunctions against FOMB, prohibiting FOMB from mandating or authorizing PREPA to take substantive electricity actions if those actions are jurisdictional to the Commission but not authorized by the Commission.

Preliminary and permanent injunctions against PREPA, prohibiting PREPA from taking substantive electricity actions mandated or authorized by the FOMB, if those actions are jurisdictional to the Commission but not authorized by the Commission.

This sounds suspiciously like the Energy Board is challenging the PREPA Fiscal Plan and given Judge Swain’s previous ruling, that will not fly. Let’s see what happens.

In other news, Andrew Scurria from The Wall Street Journal tweeted out that Governor Rosselló was to meet the Board last Friday to discuss the fiscal plan. Given the Board’s insistence on furloughs and pension reduction that culminated in a law suit last year, it is possible the Board will give the Commonwealth one last chance to amend the fiscal plan before it imposes its own at the end of the month. That will mean another major clash of the Board with the Commonwealth, but given Judge Swain’s ruling on the fiscal plan certification, it is unlikely the latter will prevail. Food for thought.

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.