The Road to Hell is Paved with Good Intentions


Lin Manuel Miranda's 100 Miles Across

Lin Manuel Miranda’s 100 Miles Across

On Last Week With John Oliver last night, Lin Manuel Miranda and John Oliver made an impassioned plead in favor of Congressional help to Puerto Rico. Since I am not a fan of musical theater, my wife, who would give a kidney for tickets to Hamilton, had to explain who Lin Manuel was, I saw the video and recognize his incredible talent.  It is clear that they both are sincere in their plead for the island. It is also clear that they do not have all the information on the PR Debt Crisis.


The bad guys in their narrative are the hedge funds or as they call them, vulture funds. These are funds that go into distressed businesses or municipalities and buy their bonds at a discount. In the case, for example, of the Puerto Rico Government Development Bank bonds, they are selling at around 18 cents on the dollar. This is equivalent of a 34% interest rate. Of course, PR will likely default on them on May 1.


Hedge funds come in all colors and sizes. Some want to be paid 100 cents on the dollar, others are willing to take a haircut (a cut in the price and hence the interest rate paid) because they would still make money. For example, in the PR Power Electric Company’s deal, where bondholders are taking haircuts, there are hedge funds. Hence, to say they are the enemy is disingenuous.


Another misconception is Chapter 9. If you hear Mr. Miranda or Mr. Oliver, it seems the panacea to all of the island’s problems. However, Chapter 9 DOES NOT APPLY to the Government of Puerto Rico or to ANY state government. It applies to MUNICIPALITIES, which is defined as the more common cities of a state or its political subdivisions. In Puerto Rico’s case, much of the debt was issued by political subdivisions. Still, Chapter 9 does not provide much relief as I further explain.


According to the Government Development Bank Quarterly Report dated May 7, 2015, PR’s GO debts total $23.804 billion. PR’s GO’s have the protection of the island’s constitution which requires that in case of a lack of funds in the budget, they be paid before anything else. See, Article VI, section 8 of the Constitution. That leaves us with $48.400 billion as potentially subject to Chapter 9. However, 11 U.S.C. § 109(c) requires that state law specifically allow a municipality or public corporation to file for Chapter 9 protection. If Law 71-2014, the Recovery Act, is any indication of the legislature’s intent, municipalities, the GBD and its subsidiaries, the Fideicomiso de Niños, the Commonwealth’s Retirement System and its instrumentalities, the Judicial Retirement Fund, the Agency for Municipal Financing, AFI, COFINA, the Teacher’s Retirement Fund, and others were excluded from filing for its protection. Therefore, one can conclude that the legislature would not allow them to file for Chapter 9 protection. If one excludes these parties bonds, one is left with only $24.914 billion that could file for Chapter 9 protection, leaving $47.290 unprotected. See pages 56 and 64 of Government Development Bank Quarterly Report dated May 7, 2015.


Moreover, 11 USC § 109(c) requires that a municipality be insolvent in order to file for Chapter 9 protection. But COFINA is not insolvent. Hence, even if PR law allowed it to file, it could not. In addition, § 109(c) requires that the parties negotiate in good faith. Ms. Melba Acosta, head of the Government Development Bank testified in a case in February 2016 in Federal Court where WalMart was challenging a PR tax and admitted, under oath, that the FIRST time PR had met with its creditors was January 29, 2016. Hence, this good faith negotiation has not yet been met.


These and other reasons are why PR is pushing for a Super Chapter 9 where it would restructure all of its debt. That, however, has a snowball’s chance in hell of being approved since no STATE can do this and would be a terrible precedent for General Obligation bondholders. If Congress gives this to a territory, why would it not provide it to the states? And the 10th Amendment would not be a bar since it would mirror Chapter 9 by making it a state decision to take advantage of the law.


Another inaccuracy is the mention of firing teachers as a hedge funds idea. Happens to be that it is part of the Government of Puerto Rico’s Krueger report, which in typical IMF fashion, favors wholesale firing of employees and lowering of minimum wage. AGAIN, THIS IS NOT HEDGE FUNDS’ IDEAS BUT RATHER AN OFFICIAL GOVERNMENT REPORT. As to the hospital that had its electricity disconnected, there is no mention that the lack of government payments was what forced the default. PR’s Government claims it cannot pay its bond debt, but it is not paying its suppliers to the tune of $2 billion. In addition, there is no mention of the fact that the last 4 administrations have more than doubled the debt in order to finance its budgetary deficits or that the island has 120 public agencies. Nevertheless, Puerto Rico has been able to pay TENS OF  MILLIONS  to their restructuring advisors and spin-doctors without complain.  See:  Professional Services Contracts for the Government Development Bank 1/1/2013-4/26/2016 (And this is just for the Government Development Bank, does not include the TENS OF MILLIONS already spent over at PREPA, PRASA, and other agencies)

Finally, and more importantly, the fact is that the PR economy has not grown in quite a while. Without economic development, PR cannot pay its debt. At the center of this morass is the status, which Mr. Miranda seems to want to ignore. Interestingly, since the 1930’s Luis Muñoz Marín proclaimed that the status was not the issue but rather improving the economy. More than 70 years later the economy is worse than ever. The status IS the issue.


Puerto Rico is in dire problems, yes, and help is needed, yes, but as Sergeant Joe Friday used to say, “just the facts, just the facts.”




Previous Last Week With John Oliver where he mentioned Puerto Rico

Puerto Rico Bonds and the Courts

During the presentation to bondholders by Puerto Rico, Mr. James Millstein stated that without restructuring any litigation involving bonds would take at least 5 years. I beg to differ. Bond litigation will commence with the exception of $3.9 billion, which I will discuss later, in the Federal District Court for the District of Puerto Rico or in the Court of First Instance in San Juan. Since I litigate in both, I think I am in a better position to describe what could happen.


At the get go, the immense majority of issues in any PR Bond litigation will of interpreting bond documents, including the Constitution of Puerto Rico. I cannot think of many factual issues that would require discovery, except maybe to determine the actual available resources of the Commonwealth. In any event, these can be disposed of as I discuss infra.


If different cases are filed in the PR Federal District Court, pursuant to the Rule 42 of the Federal Rules of Civil Procedure, if cases “involve a common question of law or fact, the court may:

(1) Join for hearing or trial any or all matters at issue in the actions;

(2) consolidate the actions; or

(3) issue any other orders to avoid unnecessary cost or delay.” The actual procedure to do it in PR is described in Local Rule 42.


Now lets go to certain examples. In Franklin California v. Commonwealth, the PR Recovery Act case, the complaint was filed on June 28, 2014. The District Court issued the injunction declaring the law unconstitutional on February 6, 2015. No discovery was done. Defendants appealed to the First Circuit and the Court, recognizing the importance of the issues, expedited matters and issue its opinion on July 6, 2015. Defendants’ requested certiorari to the Supreme Court, which obliged and the case will be decided on or before June 30, 2016, two years after the case was filed.


More recently, Wal-Mart sued the Commonwealth of PR for constitutional violations in December of 2015, discovery ensued, there was a 4-day hearing in February and we are waiting for a decision from Judge Fusté. Fast indeed.


But what about state court? First, the same Rule of Consolidation of Cases exists in state court, to wit, Rule 38 of the Puerto Rico Rules of Civil Procedure. Moreover, PR has a set of Rules for the Litigation of Complex Cases, and they provide for the consolidation of all cases of the same nature with one judge. Hence, there will not be multiple judges deciding issues.


Two examples show how fast it cases can proceed in PR. In January of 2014, the Teachers Union sued the Commonwealth for Constitutional violations. After discovery and an evidentiary hearing, the PR Supreme Court decided the case in a intrajurisdictional certification in April of 2014. In the Doral v. ELA case, the complaint was filed in July of 2014, the case went three times to the Supreme Court for intrajurisdictional appeal, which was not granted, the Supreme Court ordered the case to move quickly, went twice in interlocutory appeals to the Appellate Court, there was discovery and a four-day hearing, which Doral won. Defendants’ appealed to the Appellate Court, which overruled the Court of First Instance on February 25, 2015 and the Supreme Court of PR denied certiorari on February 27, 2015. As we can see, the Courts in PR can move very quickly indeed.


There is, however, a $400 million issue by the Highway Authority in 2013 and a $3.5 billion issue of GO’s that are governed by NY law and to which NY courts will have jurisdiction as per bond documents. The bond documents, however, do not require that the cases be filed in NY and gives the parties the flexibility to file in San Juan. Also, the same situation of simply interpreting legal documents applies to these two bond issues. Moreover, if bondholders have cases in Federal District Court in PR and NY, any party may seek for the Judicial Panel for Multidistrict Litigation to consolidate for discovery, etc., the cases in one Court. If the cases are pending in Federal and State or Commonwealth Court, this cannot occur, however. Nevertheless, I have no doubt that NY Federal or Supreme Court’s would decide the issues in these cases in a very swift manner as their counterparts in PR have done.






La Decisión de Gelpí en el Caso de Mercado-Flores

Ayer el Juez Gelpí emitió una opinión en el caso de US v. Mercado-Flores que tiene profundas implicaciones para el estatus de PR. El Sr. Mercado fue acusado de 18 U.S.C. § 2423(a) , el Mann Act, o sea, transportar a una menor de 18 años para tener sexo con ella. Luego de negociaciones con fiscalía federal, el Sr. Mercado aceptó declararse culpable de otra parte del Mann Act, 18 U.C.S. § 2421. En el sistema federal el Juez es el que aprueba un “plea agreement” y el Juez Gelpí al evaluarlo tuvo serias dudas y estudió el asunto a profundidad. El Juez Gelpí determinó que no tenía jurisdicción para poder aprobarlo y plasmó sus razones en su opinión.

El Mann Act se creó en 1917 para evitar la transportación de mujeres para propósitos sexuales. El 2421 habla de la comisión del delito en territorios o posesiones de los USA. Por el otro lado, el 2423 habla de hacerlo en un Commonwealth, territorio o posesión de los USA. En 1998, el Congreso enmendó el 2423 y añadió Commonwealth y enmendó también el 2421 pero no hizo esa adición.

La opinión hace un recuento de la relación de PR y los USA y el cambió hacia el ELA. El Juez Gelpí hace un recuento de los varios casos del Primer Circuito donde éste indica que PR no es un territorio si no un lugar único, un Commonwealth, ni estado ni territorio. Por ejemplo, en First Federal Sav. And Loan Ass’n of Puerto Rico v, Ruiz de Jesús, 644 F.2d 910, 911 (1st Cir. 1981) el Juez Campbell nos dice “Puerto Rico’s territorial status ended, of course, in 1952. Thereafter it has been a Commonwealth with a particular status as framed in the Puerto Rican Federal Relations Act.”

Más adelante, en Cordova Simonpietri Insurance Agency, Inc. v. Chase Manhattan Bank, NA, 649 F.2d 36, 41 (1st Cir. 1981) el Juez Breyer (ahora en el Supremo Federal) dijo que “[i]n sum, Puerto Rico’s status changed from that of a mere territory to the unique status of Commonwealth. And the federal government’s relations with Puerto Rico changed from being bounded merely by the territorial clause, and the rights of the people of Puerto Rico as United States citizens, to being bounded by the United States and Puerto Rico Constitutions, Public Law 600, the Puerto Rican Federal Relations Act and the rights of the people of Puerto Rico as United States citizens.”

Luego, en U.S. v. Quiñones, 758 F.2d 40, 42 (1st Cir. 1985) el Juez Bownes dijo “Thus, in 1952, Puerto Rico ceased being a territory of the United States subject to the plenary powers of Congress as provided in the Federal Constitution. The authority exercised by the federal government emanated thereafter from the compact itself. Under the compact between the people of Puerto Rico and the United States, Congress cannot amend the Puerto Rico Constitution unilaterally, and the government of Puerto Rico is no longer a federal government agency exercising delegated power.”

Luego vino el caso de U.S. v. López Andino, 831 F.2d 1164, 1168 (1st Cir 1987) donde el Juez Bownes dice “Although the legal relationship between Puerto Rico and the United States is far from clear and fraught with controversy, it is established that Puerto Rico is to be treated as a state for purposes of the double jeopardy clause. In 1950 Congress enacted legislation “so that the people of Puerto Rico may organize a government pursuant to a constitution of their own adoption.” Puerto Rican Federal Relations Act, Pub.L. No. 600, 64 Stat. 319 (1950).” Este caso es neurálgico ya que esta en conflicto directo con la reciente opinión del Tribunal Supremo de P.R. sobre el origen del poder de la isla para legislar, Pueblo v. Sánchez, 2015 TSPR 25. Aquí mi análisis del mismo.

Basados en estos casos del Primer Circuito que indican que PR no es un territorio si no un Commonwealth (pero no como los estados que lo dejaron de ser cuando se convirtieron en estados, ver, Couvertier v. Gll Bonar, 173 F.3d 450, 453 (1st Cir. 1999). Al ser un Commonwealth y el Congreso haber enmendado el 2423 para incluir Commonwealth y no el 2421, se desprende que el primero aplica a PR más no así el segundo. Su razonamiento es impecable y no da margen a error. El Juez Gelpí reconoce la posición del Juez Torruella sobre que PR es un territorio no incorporado pero dice que no le queda más remedio que seguir estos precedentes del Primer Circuito. Sin embargo, reconoce en su nota al calce 8, que otros tribunales si están de acuerdo con el Juez Torruella, citando el caso del 11avo circuito U.S. v. Sánchez, 992 F.2d 1143 y el caso de Pueblo v. Sánchez, ante.

¿Que efecto tiene esta decisión? Una muy grande. Los que me siguen saben que en Harris v. Rosario, 446 U.S. 651, 652 (1980) el Supremo Federal dijo “We disagree. Congress, which is empowered under the Territory Clause of the Constitution, U.S. Const., Art. IV, 3, cl. 2, to “make all needful Rules and Regulations respecting the Territory . . . belonging to the United States,” may treat Puerto Rico differently from States so long as there is a rational basis for its actions.” Si el Supremo Federal dice que PR esta bajo la clausula territorial, todo el lenguaje del Primer Circuito es irrelevante. Más aún, el Juez Gelpí decidió en Consejo de Salud Playa de Ponce v. Rullan, 586 F. Supp. 2d 22 (D.P.R. 2008), decidió que PR es un territorio incorporado y por ende, no un Commonwealth. ¿Por que, entonces, no decidió este caso así y mantuvo la convicción?

Aunque uno nunca puede saber lo que esta en la cabeza de un Juez, me parece que sabe que todos esos pronunciamientos del Primer Circuito van contra el derecho y la Constitución Federal (por ejemplo, en la Constitución nunca se menciona un Commonwealth solo territorios, estados y naciones soberanas). Sabe que para que el Gobierno pueda continuar usando el 2421 como un arma, tiene que apelar la decisión y el Primer Circuito tendría que decidir a su favor de la opinión del Juez Gelpí o revocar todo su lenguaje anterior. Máxime cuando el Primer Circuito ha hecho malabares jurídicos para mantener ese lenguaje pero llegar al resultado deseado diciendo que el Commonwealth se trata como un estado, ver, Dávila-Pérez v. Lockheed Martin Corporation, 202 F.3d 464 (1st Cir. 2000) y U.S. v. Laboy Torres, 553 F.2d 715 (1st Cir. 2009).

Estamos viendo un claro desafío a la naturaleza misma del ELA. Desde el caso de Consejo de Salud, Pueblo v. Sánchez y U.S. v. Mercado, Jueces estatales y federales ponen en entredicho el ELA como lo vislumbra el PPD. Falta ver si el Gobierno de PR intentará revisar Sánchez en el Supremo Federal o si el Gobierno Federal decida probar suerte en Mercado.