Welcome to your weekly Title III update for October 9, 2017. This week not much happened in the Court but what did transpire can have profound effects on the Title III litigation.
On October 2, 2017, the Solicitor General of the United States filed a motion for an extension of time notice whether it will defend the way in which PROMESA set out the appointments of members of the Board that has been challenged by Aurelius and UTIER, PREPA’s union. The motion stated, inter alia, “The United States now respectfully seeks an extension of time to file its Notice and, if necessary, its brief in support of the constitutionality of PROMESA. The Government’s deliberation on the issue has taken longer than initially anticipated. Indeed, the approval of the Solicitor General is required for the United States to defend the constitutionality of a federal statute.” It seems to me the Solicitor General and the White House are taking a very close look at PROMESA to determine whether it passes constitutional muster, but beware not to look too much into this. Let’s see what happens.
In response to the above petition, the Court issued an order moving the dates to resolve the Constitutional question. By November 3, 2017, the parties in interest, including the Oversight Board, must file opposition papers to the Aurelius Motions and “answer or otherwise respond to the complaint filed in the UTIER Adversary Proceeding.” By November 6, 2017, the Attorney General of the United States is “to notify the Court of its intent with respect to intervention in connection with the Aurelius Motions and the UTIER Adversary Proceeding.” The oral argument on the constitutional challenge will be held on January 10, 2017, which makes a decision before February/March unlikely.
The UCC continued its mission of intervening in most of the adversary proceedings filed in the Puerto Rico bankruptcies. Just today, the Board responded to the UCC’s motion to intervene stating that the UCC “should be allowed to ‘raise, appear and be heard’ on issues and review discovery and attend depositions subject to any relevant protective order, and nothing more.” The response showed just how unhappy they are with the UCC by outright denying that they have constitutional or prudential standing to control any of the issues at hand. The UCC continues to claim, however, that it does.
It seems likely that the limited interventions sought by the UCC will be granted by Judge Swain. It is also likely that at some point during the pendency of these cases, the UCC will seek greater involvement in the cases, much to the displeasure of the Board. It will be interesting to see what Judge Swain’s reaction will be.
In addition, the Board dismissed its adversary proceeding against the Governor for the furloughs and will not renew it until at least July of 2018 with the new fiscal year. Remains to be seen what will happen.
The Board has also requested an extension on the review of petitions to lift the stay and answers to motions to lift the stay, claiming the Department of Justice has difficulty accessing its files. Since I had to oppose said motion, I will not comment here on its legal implications and correctness.
Late Friday October 6, Assured Guaranty Corp., Assured Guaranty Municipal Corp. (f/k/a Financial Security Assurance Inc.) and National Public Finance Guarantee Corporation filed a notice of voluntary dismissal of their complaint, 17-ap-125, which was up for oral argument on October 11. Although the notice gives no reasons, plaintiffs made the following statement to the press:
“While we continue to believe the current fiscal plan is illegal, we have determined to voluntarily dismiss our complaint without prejudice at this time due to the crisis in Puerto Rico following Hurricane Maria, and the high likelihood that the fiscal plan will have to be revised,’ Dominic Frederico, chief executive of Assured Guaranty said in a statement.”
Since the Board announced it would revise the fiscal plan, it makes sense to dismiss the case, especially since the new one will be even more outrageously anti-bondholder than the original.
Finally, while Washington does not have a direct role in the Title III proceedings, the decisions they make in the coming weeks will have a profound impact on their outcome. There are two major issues confronting Washington: first, Puerto Rico’s request for federal financial assistance, and second, whether or not PROMESA will be amended.
On October 3, 2017, the Board sent a letter to Congress seeking help for Puerto Rico claiming damages of up to $95 billion across the island. Anyone who has followed Congress knows that with luck Puerto Rico will get $10-15 billion in aid. Where will the rest of the funds come from, especially when the Government claims it will run out of funds this month? One logical place is COFINA.
Last week, we discussed the possibility of “borrowing” from COFINA but this could take some time. Rather than write letters, a more efficient way for the Board to help would be for the Board to instruct Marty Bienenstock to file an injunction and declaratory judgment requesting that COFINA be declared unconstitutional, borrowing from the UCC’s causes of action 12-13. This would obviate the need for lengthy discovery, could get Puerto Rico some quick cash and reduce San Juan’s SOS calls to Washington for tax dollars.
The Board isn’t the only one writing letters to Congress for relief. Governor Rosselló has been all over cable news demanding that Washington provide loans or a line of credit to service Puerto Rico’s “immediate liquidity needs.”
It’s worth recalling that Janet Yellen, chair of the Federal Reserve, testified before Congress last year that the Fed’s authority, “is extremely limited and it wouldn’t be appropriate for us to give loans to Puerto Rico. We have very limited authority to buy municipal debt and the authority we have if we were to buy eligible debt, I don’t think would be helpful to Puerto Rico, and beyond that we have no ability to make emergency loans, we could not use 13(3) or powers of that type to extend a loan to Puerto Rico, and this is inherently a matter for Congress and is not appropriate for the Federal Reserve.”
Now, that might not stop the U.S. Treasury from extending a loan to Puerto Rico. If they do, it would raise significant questions, including whether any new loans would take priority over existing senior creditors as well as if the loan will simply be backed by the federal government, requiring the Puerto Rican Government to go to the private market to secure new monies.
What could be just as important, sources tell me the Trump Administration and some in Congress are demanding accurate and transparent financial information from the Board and the Commonwealth as a precursor and basis for any loans, especially given that there is no precedent for such financial assistance.
Puerto Rico and the Board should use the passage of Hurricane María to get a settlement of all bond claims, but in order to achieve it, they will have to substantially up the 26% payment they have been pushing.
Lastly, there’s been growing discussion regarding possibly amending, and possibly strengthening, PROMESA, which has been raised by Members of Congress. In a recent House Natural Resources Committee press briefing, Representative Rob Bishop went so far as to state that, “[amending and re-opening PROMESA] will be in consideration. Obviously, as we start moving beyond simply the initial way of saving lives as best you can and move to the restructuring and rebuilding process there has to be a way to do that faster than it has been done.” We will see if their suggestions garner any other supporters, but we should keep a close eye on how the conversation develops.
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.