Welcome to your weekly Title III update for September 24, 2018. Important things have happened this week, in and out of litigation.

On September 18, 2018, representatives of Kobre and Kim, together with Oversight Board members Arthur González, Ana Matosantos and David Skeel, presented their findings to the public, which was essentially the press. In a rehash of the report, which does not make any findings of who is responsible, Arthur González made it clear that attributing responsibility was not important to the Board. Although this was an overview of the report, a few important things came out. During the discussion, David Skeel made it clear that the purpose of the report was not to find causes of action, which is totally contrary to the representations made by the Board attorneys to Judge Swain. Also, after the presentation, a panel of “experts” (myself included) commented on the report. Most of us insisted that the Board had to assert causes of action against some, if not all, the entities mentioned in the report who may be liable to the government. One of the panelists, Alvin Velázquez, who represents a union that sits in the UCC, was adamant on this point. I, on the other hand, insisted on amendments to the Puerto Rico Constitution to prevent what has occurred in the past 50 years. Finally, Ana Matosantos, during the presentation and during the press conference, stated that the Board was going to take a look at the $3.5 billion 2014 GO issue. I would not be surprised to see the Board suing to declare it illegally issued, which would make it an unsecured, non-priority claim. In any event, I doubt the Board will exercise all the options it may have and will leave little time for the UCC to deal with them before May 2019. This is especially important for the unsecured creditors who are seeing the pot shrink with all the deals being made with bondholders.

Judge Swain denied the UCC’s claim that the GDB restructuring violated the automatic stay. The Court seemed to find that the UCC had standing but—in clear violation of First Circuit precedent (standing goes to the Court’s jurisdiction, hence must be dealt with first)—abandoned the complete discussion on the issue and went to the merits of the claim, essentially dismissing all arguments. The Court determined:

Respectively, these provisions preserve the authority of territories to exercise “political or governmental powers,” 48 U.S.C. § 2163, provide that the provisions of Title III do not prevent holders of claims from consenting to modifications under Title VI, 48 U.S.C. § 2164(i), and prohibit the Court from interfering with Title III debtors’ property and political or governmental powers, 48 U.S.C. § 2165. Here, the Oversight Board, acting pursuant to its powers under PROMESA (which include review of Commonwealth legislation, certification of Title VI restructurings, and representation of the Title III debtors), has consented, by virtue of its certification of the Restructuring Support Agreement, to the GDB Restructuring. The Commonwealth’s legislature considered and enacted the GDB Restructuring Act, which creates new entities, authorizes asset transfers, and curtails certain causes of action of the Commonwealth and the instrumentality debtors. The GDB Restructuring, although subject to Court approval, is a vehicle to effectuate a transaction by, not against, the Debtors and is not subject to the strictures of the automatic stay. Thus, the Committee’s argument that Section 362(a) precludes the GDB Restructuring absent relief from the automatic stay fails on its merits.

The Judge also dispatched what I thought was the UCC’s strongest argument:

The Committee’s argument that the debtor-representation responsibilities that Congress placed on the Oversight Board create conflicts of interest, and that historical ties of the Oversight Board members, and other personnel involved with the restructuring, with certain institutions exacerbate such conflicts, is immaterial to the issue of the statutory reach of the automatic stay and thus will not be further addressed here.

Clearly the Court is not saying it will not consider these arguments in the GDB restructuring case, which is not part of the Title III proceedings, but it does not abode well for the argument. The issue of standing is crucial to the UCC since both the Board and the GDB have filed motions to dismiss its adversary proceedings essentially based on the issue of standing. I would not be surprised if Judge Swain denies the UCC standing, which would also doom its objection to the GDB restructuring, since it relies heavily on the Board’s real conflicts of interest.

Other creditors have filed objections to the GDB restructuring. The Rafael Hernández Colón and Sila Calderón foundations filed objections claiming that the GDB has money assigned to them. Also, two sureties, Fidelity and Deposit Company of Maryland and Zurich American Insurance Company filed objections stating that their claims are ignored in the Qualifying Modification and they will not be resolved in this manner. No idea what the Court will do with that.

In addition, National Public Finance Guarantee Corporation, Ambac Assurance Corporation, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., requested leave to file their objections by September 25, 2018. It is even possible they are negotiating with the Board to get some change to the Qualifying Modification. We will know more on during the October 3 Hearing.

These objections are important for the Board so it notified the Court about the GDB bondholders’ votes:

Eligible Voters of over 74.8% of the aggregate principal amount of the Participating Bond Claims in the GDB Bond Claims Pool voted, and that, of those that voted in such pool, over 97.4% of the Participating Bond Claims voted to approve the Qualifying Modification, reflecting over 72.9% of the aggregate principal amount. In addition, 100% of the aggregate principal amount of the Participating Bond Claims in the Guaranteed Bond Claims Pool voted to approve the Qualifying Modification.

In the Commonwealth case, both AAFAF and the Board opposed the UCC’s request to be given derivative standing to represent all Title III debtors in the GDB restructuring based on the clear conflicts of interest they have. This will also be discussed on October 3, but I doubt Judge Swain will disqualify the Board on this issue.

Also of great importance is the announcement by the Board of an Amended COFINA Plan Support Agreement. The Amended agreement includes the Puerto Rico Government, COFINA, the monoline insurers, Senior and Junior ad hoc groups, Bonistas del Patio, Aurelius Capital Master Ltd and Six PRC Investments, LLC.—both  holders of GO bonds. Hence, the COFINA deal has the blessing of the GO bondholders, which means they are either willing to take cuts on their bonds or the Board has made them an offer they can’t refuse. This idea is bolstered by the fact that Aurelius and Six will dismiss their claims in the Lex Claims litigation. Finally, Seniors retain their 93% payment and Juniors 56.399%. Also, all the parties to the settlement agree that even if the Aurelius Constitutional challenge to the Board appointment is successful, this agreement will be valid.

Since COFINA makes up about 24% of the debt, this settlement is of great importance to the Board and AAFAF. Unless the Junior bondholders object to the distribution, the only thing that could prevent its approval is the warning of the UCC that the numbers in the June Commonwealth Fiscal Plan are not enough to pay COFINA. Since the Board will certify a new Fiscal Plan by September 30, it is possible that even that objection may be withdrawn.

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.