Federal Cases

Monday Update –September 18, 2017



Welcome to your weekly Title III update for September 18, 2017. As Hurricane María bears down on Puerto Rico, we should recap several important things from the past week. Judge Swain denied the PREPA bondholders’ request to lift the stay to request the appointment of a receiver. Interestingly, the Court based its decision on only one of the Board’s arguments, making it clear that Judge Swain knows who the boss in these Title III cases is. At page 10 she stated:


“Section 305 of PROMESA provides that, “notwithstanding any power of the court, unless the Oversight Board consents or [the debtor’s Title III] plan [of adjustment] so provides, the court may not by any stay, order or decree, in the case or otherwise, interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor of any income-producing property.” PROMESA § 305. The Debtor here, PREPA, is a government instrumentality of the Commonwealth, exercising governmental powers in providing electrical service to the inhabitants of the Commonwealth, using its property to generate that power and deriving income from the sale of the power so generated. The rates it charges for its services define the magnitude and impact of its principal revenues. The relief that Movants seek – permission to require the appointment of a receiver to manage PREPA’s operations and seek the approval of rates higher than those PREPA has thus far chosen to charge – is facially inconsistent with Section 305 of PROMESA. Section 305 bars the Court, “notwithstanding any power of the court,” from using “any . . . order or decree, in the case or otherwise,” to interfere with such basic functions and assets of PREPA absent the Oversight Board’s consent, which has not been given here.” (underlining added)


At page 13, she made the most important point of the opinion:


“Congress, similarly, denied the Title III court power to displace PREPA’s management, even for misconduct, by omitting Section 1104 of the Bankruptcy Code, which provides for the appointment of a trustee or an examiner in a Chapter 11 bankruptcy case, from the Bankruptcy Code provisions incorporated into PROMESA’s statutory scheme. Instead, Section 301(c)(7) of PROMESA specifically designates the Oversight Board as the sole “trustee” under PROMESA. See PROMESA § 301(c)(7).” (underlining added)


Anyone familiar with a Trustee in bankruptcy knows that when one is appointed for a debtor, she is the one who calls the shots. Hence, Judge Swain has made it clear that the Board, and not Puerto Rico’s elected officials, are in charge of the management of PREPA and the rest of the entities in Title III. Very telling. Board 2, Bondholders 0, but PREPA bondholders have vowed to appeal the decision. Peaje has already filed its notice of appeal.


Also this week, the COFINA agent answered the UCC’s complaint. As you remember from last week’s update, the UCC, as Commonwealth Agent filed a complaint against COFINA with 13 causes of action, including the unconstitutionality of the law. The COFINA agent came out swinging with a 71 page counterclaims, answer and defenses.


In addition to the oft repeated platitudes of legal opinions and legislative statements, COFINA’ First Cause of Action at page 29:


“[S]eeks a declaration that: (i) the statutes creating COFINA and directing transfer of the Pledged Sales Tax and the Dedicated Sales Tax Fund to COFINA are constitutional under the Constitution of Puerto Rico; (ii) the Pledged Sales Tax, including all Pledged Sales Tax revenue collected in the future, and the Dedicated Sales Tax Fund are the property of COFINA; and (iii) the Pledged Sales Tax and the Dedicated Sales Tax Fund are not “available resources” under the Constitution of Puerto Rico. In the alternative, Counterclaim Plaintiff seeks a declaration that: (i) COFINA has a perfected and unavoidable lien.”


Its Second Cause of Action states that Commonwealth actions violate the Takings Clause and Impairment of Contractual Obligations of both Constitutions. The Third Cause of Action that the Compliance law violates PROMESA, the Fourth Cause of Action that Act 84 violates PROMESA. The Fifth Cause of Action claims tortious interference with a contractual relation and the Sixth Cause of Action claims that if COFINA is unconstitutional, PR committed Fraud, which it likely did, since it should have known that the PR Constitution did not permit the surrendering of the power to tax and that GO’s had priority. The Seventh Cause of Action seeks an injunction but the Eighth Cause of Action claims that “GO Bonds, PBA Bonds and Other Debt Issued in Violation of the Debt Limit Set Forth in the Constitution of Puerto Rico Are Not Entitled to Priority Under the Constitution.”


The COFINA dispute promises to be an interesting slug-fest. The complaint was filed on September 8, but the UCC has already issued 22 subpoenas duces tecum including law firms, Banco Popular, Santander, Barclays and Moody’s, to name a few.


Also last week, Siemens Transportation Partnership, S.E., an HTA creditor, sought permission from the Court to conduct Rule 2004 discovery from the GDB, Carlos Vizcarrondo (GDB) and Hector Betancourt (AFAF). Ambac also sought leave to conduct discovery pursuant to Rule 2004 from the Board as representative of the Commonwealth of Puerto Rico, the Commonwealth; and AAFAF and other parties. More specifically, Siemens, at page 5 of its motions, states:


“Siemens files this Motion to obtain information about the account and the funds therein, including GDB’s funding of the account and any withdrawals or transfers, to determine whether and to what extent: (i) Siemens’ claim against HTA Authority may be paid from funds that are not property of HTA or GDB; and (ii) any third parties have received funds from the account, and if so, whether such transfers may give rise to a claim for fraudulent transfer, conversion or other action, such that Siemens may recover on account of its claim against HTA from parties or assets other than the HTA, which is a Debtor in the above-captioned proceeding, under Title III of PROMESA.”


On this same subject, the UCC reported to Judge Dein that the Board was not cooperating on the coordination of Rule 2004 discovery, which the Board confirmed saying:


“Based on the meet and confer and the Initial Work Plan, the Oversight Board proposes that the UCC’s motion be deferred, and that no decision be made on the UCC’s request to conduct an investigation at this time. The Oversight Board makes this proposal based on its belief that there is no need for the UCC to conduct a separate, potentially duplicative investigation at this time. It would be premature for the UCC to conduct its own investigation given the Independent Investigator’s commitment to maintain open lines of communication with the UCC, to solicit input from the UCC, and to seek documents, including but not limited to those already sought by the UCC. The Investigation should proceed as outlined above and, if there comes a time when the UCC is not satisfied with the speed or substance of the Investigation, it should make an application to the Court to pursue its own investigation on the specific matters on which it is not satisfied.”


Translation: The Board wants to be the only one conducting any investigation on Puerto Rico’s debt and wants no interference. The UCC, in my humble opinion, showed that the Board was conflicted and that it was dragging its feet, which lead Judge Dein to say coordinate because the discovery will be done. Let’s see what happens.


Also this week, PREPA filed a motion requesting an order establishing a procedure to reject power purchasing agreements, of which it states more than 60 exists. Pretty normal procedure in a bankruptcy, except that these contracts are for renewable energy. Why does the Board want to reject them? Is it, as I have been saying, to level the playing field to sell PREPA as free of encumbrances as possible? Is it preparing to sell only the generation part of PREPA? Questions, questions.


On September 11, 2017, Judge Swain listened to oral arguments in the Municipality of San Juan’s request for an injunction against the GDB RSA. Absent from the argument was any real proof of irreparable harm, which is essential to any injunction. In addition, Judge Swain seemed to believe that the monies deposited by the Municipality were a loan and hence could be altered via Title VI. Judge Swain took the arguments under advisement and will render her opinion soon. In the meantime, defendants filed a motion to dismiss the complaint and the one filed by the Municipality of Caguas. Given the Judge’s comments and the Federal Courts view of a municipality, they may be granted.


Finally, on Friday, Judge Dein heard arguments on the UCC’s renewed motion to intervene in the NY Mellon-COFINA bondholders dispute. The UCC has filed motion to intervene in most of the adversary proceedings filed in the Commonwealth and COFINA cases. Judge Dein seems baffled by the arguments and will have to further study them.


Before I leave I want to make one thing clear about these weekly updates. 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.




Monday Update – August 28, 2017



Welcome to the Monday Title III-PROMESA Update! So much happens every day in Puerto Rico’s bankruptcy, including the Friday night news dump that I came up with the idea of updating every Monday morning what transpired during the previous week. Each day I receive dozens of notifications regarding the five Title III cases that comprise the bankruptcy and through this update I will highlight the previous week’s developments and shed a little light on their implications both to the case, to bondholders and the general public.

During the week of August 20-27, many motions were filed but perhaps most importantly, on August 22, Magistrate-Judge Dein held a “discovery hearing” in two key issues of the Title III litigation. The first was the COFINA Senior Parties objection to the Board and AFAF’s responses to certain areas of discovery. The objections read:

“(i) the Oversight Board’s blanket refusal to designate any witness to testify in response to any of the topics in the subpoena; (ii) the Government Parties’ refusal to offer any testimony whatsoever concerning the Fiscal Plan’s treatment of the dedicated sales tax pledged to COFINA (the “DST”); and (iii) the Government Parties’ overly broad assertion of the deliberative process privilege.” (Page 2-3 of THE COFINA SENIOR PARTIES’ URGENT MOTION REGARDING DISCOVERY DISPUTES AND FOR A PRETRIAL HEARING PURSUANT TO FED. R. BANKR. P. 7016 of August 11, 2017)

The COFINA Senior Parties wanted to depose a member of the Board as to COFINA and its position pertaining to that bond issuance. The Board flatly refused to designate any Board members pursuant to Federal Rule of Civil Procedure 32(b), made applicable to Title III as per the Federal Bankruptcy Rules of Procedure. The Board opposed said designation adamantly but Judge Dein made it clear that she believed the COFINA Senior Parties were entitled to either a Board statement on COFINA or a designation for deposition. Based on this, Judge Dein issued the following order:

“The COFINA Senior Parties (“Senior Parties”) and the Financial Oversight and Management Board (“Oversight Board”) will attempt to reach a stipulation of facts in order to eliminate the need for the Senior Parties to take the deposition of the Oversight Board. These parties shall notify the court by August 29, 2017 as to whether a stipulation has been reached. If no stipulation has been reached, the court will rule on the pending request that the Oversight Board designate a witness to be deposed, as detailed in the Motion.” (Page 2 of Judge Dein’s order of August 23, 2017)

From the statements of Judge Dein during the hearing, it is clear the Board must come up with something that will satisfy the COFINA Senior Parties or one of its members will be deposed. The stipulation must be reached by August 29, 2017 or Judge Dein will decide.

Interestingly, once Judge Dein made her point, counsel for the COFINA Senior Parties seemed to lose interest in the rest of their claims and accepted that most of the discovery was subject to the deliberative process privilege and the procedures would be taken on a case-by-case basis.

The second key issue that came up was the Unsecured Creditors Committee request to do discovery on the GDB, Banco Popular, Inc., Banco Popular, Popular Securities, Banco Santander, Santander Asset Management and Santander Securities pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure. But first, a little background is needed.

Last year, the Puerto Rican left and Democrats, broadly, were screaming for an audit of the debt so part of it could be declared illegal and hence not paid. Aside from the fact that illegal debt would still have to be paid (see here), Governor Rosselló said he would not do it and Mr. Carrión has said it’s a waste of time. Then, after the Board filed for Puerto Rico’s Title III and Unsecured Creditors Committee (UCC) was formed, it requested leave to do the aforementioned discovery, mentioning the possible conflict of interest of a member of the Board. All of a sudden, the Board discovered PROMESA allowed the Board to do so and said, no UCC cannot do it, only the Board can do it. Obviously, GDB, Banco Popular, Inc., Banco Popular, Popular Securities, Banco Santander, Santander Asset Management and Santander Securities all said they agreed for the Board to do it but objected that the UCC conduct said discovery. During the hearing, the Board’s attorney, Martin Bienestock, said that the UCC did not have to stand down since it simply had not gotten up, ridiculing the discovery request. Even the Retirees Committee waded in support of the Board, no wonder since it has been allowed full payment of pensions.

The UCC, however, came out swinging, pointing out that Mr. Carrión had a conflict as part of the family that founded Banco Popular and an ongoing referral arrangement whereby he provides insurance for many clients of Banco Popular (isn’t this where the $1.8 billion is at?), and Mr. Carlos García was mentioned as the issuer of much of COFINA. The UCC also called the Banco Popular, Santander Securities and the GDB relationship a “revolving door” since many of its executives worked at different times in these places.

Judge Dein was not convinced by the Board’s approach. She asked when the entity that was to conduct the investigation on the debt and when it would commence. When Mr. Bienestock could not provide an answer, Judge Dein made clear that she was concerned about the cost of discovery, the extent but that the UCC and the Board had to coordinate its discovery and stated this in an order

  1. “The Rule 2004 Motion shall remain pending and the Court is not ruling on it herein;
  2. . . ; 
  3. Once the FOMB retains its investigator for the investigation it intends to undertake (the “FOMB Investigator”), the FOMB and the FOMB Investigator shall meet and confer with the Creditors’ Committee’s attorneys to determine whether they can agree that certain areas of investigation can either be allocated between them or coordinated among them on terms they agree on; 
  4. The FOMB, the FOMB Investigator, and the Creditors’ Committee shall take into account and undertake to avoid unreasonable interference with discovery in the pending adversary proceedings; 
  5. On or before September 12, 2017, the FOMB and the Creditors’ Committee shall file with the Court a joint status report advising the Court (a) whether an agreement has been or will likely be reached resolving all or parts of the Rule 2004 Motion, and a proposed deadline for any agreement likely to be reached, (b) of the terms of any agreement already reached, (c) a joint schedule or separate schedules proposing, to the extent currently known, individual topics and targets of investigation and timelines for commencing and completing each investigation, and (d) the remaining unresolved issues in the Rule 2004 Motion for which rulings are requested and proposed hearing dates for such unresolved issues”

With this order, Judge Dein essentially authorized the Rule 2004 discovery but in a coordinated form. Hence, if the Board drags its feet, the UCC can come to the Judge and complain.  Moreover, in a very elegant way, Judge Dein put a deadline on the Board appointing its investigator in such a way that it can coordinate the discovery by the time the report must be made by September 12 or she will rule on the UCC’s motion.

Clearly, the Board lost on two important issues that it adamantly opposed, deposition of its members and debt discovery. It remains to be seen what will be the implications of these “defeats.”

From what we can see of the Board’s actions in the Title III proceedings, it wants to claim that all bond debt is illegal for one reason or another so they are unsecured claims with no constitutional priority (see Article VI, section 8 of the PR Constitution). This way it will substantially reduce debt payment and justify the ridiculously low debt service in the Fiscal Plan.

But with the UCC’s intrusion it has the problem that some of it members and their protected allies may be sued for millions of dollars. The UCC made it clear that it believes COFINA was illegal, and the 2014 GO issuance, as surpassing the debt limit of Article VI, section 2 of the Puerto Rico Constitution. It is very telling that one of the documents requests of the UCC to the banks is “Documents or Communications concerning any director and officer liability policies.” The Board members are immune from liability for their work as members of the Board but not for actions performed BEFORE they were members.

The decisions by Judge Dein seem to have convinced National and other bondholders to request discovery pursuant to Rule 2004, this time on the Fiscal Plan, the Budget and other documents issued by Puerto Rico and the Board. Movants claim they have asked Puerto Rico and the Board for certain documents since before the filing of the Title III petitions and that they are important for the understanding of the future Plan of Adjustment which must be based on the Fiscal Plan. Expect the Board and AAFAF to claim they have been produced or that now is not the time. Judge Dein will have another opportunity to rule on discovery sometime in the next month.

On Friday, August 25, 2017, the Municipality of San Juan filed a Preliminary Injunction in a case it has previously filed against the Board, Puerto Rico and the GDB. The Injunction seeks to stop the GDB from soliciting votes and tabulating them on its RSA, which it said it would start once the Governor signed the statute that permits it. Since it was signed Friday, the Municipality sought the injunction. The Municipality claims the RSA violates section 601 of PROMESA, and it very likely does. The problem as I see it is the proof of irreparable harm required in these procedures, especially since section 601 requires Court approval of any RSA in a hearing in which any party may challenge whether the requirements of the section have been met. Judge Swain would likely postpone any ruling until the aforementioned hearing. In any event, I believe the Municipality’s claim, as well as those of the Municipality of Caguas in a separate lawsuit are very valid and require careful scrutiny.

I hope you found this new update helpful… till next Monday…!



The Negotiation Farce

We are now in April and, come May 1, the PROMESA stay on litigation expires. Where are we on bondholder negotiations? What happens if there is no Title VI restructuring?

It looks like the answers to those questions might be “nowhere” and “we’re about to find out,” respectively.

Last year, the Oversight Board announced with great fanfare the start of bondholder’s negotiations set for December 19, 2016, but aside from a meet and greet session, nothing happened. And that has remained the case even after the board certified Governor Rossello’s second fiscal plan last month.

After certifying the plan, the board requested that the two senior-most bondholder groups, General Obligations and COFINAs, enter into private mediation to settle their ongoing dispute.

This request kicked off a flurry of letters from creditors, including joint letters authored by holders of some $13 billion of both GO and COFINA debt, which outlined numerous criticisms of the fiscal plan. The letters also asked the government to commence negotiations with bondholders immediately, arguing that the stay expires too soon to waste time negotiating a creditor dispute rather than negotiating with all bondholders.

Despite these overtures, however, the Puerto Rican Government and the Board have not moved onto negotiation, and have instead pushed forward with the mediation process, assigning Judge Allan Gropper to serve as mediator in talks reportedly starting tomorrow and lasting through the end of the week.

Why? To Sow Confusion

It appears that the Oversight Board and the Government are intentionally conflating mediation between two creditors in active litigation and actual negotiation with creditors.

It is impossible that a real solution to the GO/COFINA dispute will be brokered over a mere 48-72 hours, especially given the numerous, unaddressed problems that parties on each side have with the fiscal plan. Moreover, even if a settlement was reached, there will be only two weeks for real negotiation to occur after the mediation ends.

But the Board does not appear genuinely interested in a resolution to the dispute or conducting serious negotiation talks. Rather, I think the board is intentionally confusing the issue with the hope of stalling for Title III.

Once the stay runs out, the Board will most likely say that the mediation proceedings themselves actually qualify as a good faith effort toward reaching a consensual agreement under Title VI of PROMESA, and will use that to justify throwing the entire process into a Title III restructuring.

Will Mediation Count as a Good Faith Effort at Negotiation?

Mediation is a type of alternate dispute resolution where a supposedly neutral person helps the parties involved to resolve their disputes. It is not the same thing as a negotiation, especially when some of the parties say they don’t want to participate in the process.

Section 206 of PROMESA requires the entity (PR) to make “good-faith efforts to reach a consensual restructuring with creditors” before the Board issues a certification for Title III. Good faith negotiations is part of Chapter 9 of the Bankruptcy Code, but the section that deals with it, 109(c), was not adopted by PROMESA. Nevertheless, it is a requirement and likely bankruptcy law precedents will be used by the Courts to determine if there have been any.

To be sure, bondholders will raise this point in court. While we often hear from Oversight Board members and Commonwealth leaders that this process is not subject to judicial review – and while that also seems to be the intellectual opinion of Judge Gonzalez and Marty Beinenstock – I don’t think any judge appointed to oversee the Title III process will just let such a crucial issue like this go unquestioned.

Thus it seems very unlikely that a judge will agree with the Board that its attempts to force bondholders into mediation will satisfy PROMESA’s requirement of a good faith effort at a consensual negotiations.


Has the Board or the Puerto Rican Government Provided Sufficient Information for Good Faith Negotiations to Commence?

In the Detroit litigation, the Court determined that the city had not negotiated in good faith for failing to provide sufficient information to make counterproposals and that there was not sufficient time to do so. In this case, negotiations started on June 14 and bankruptcy was filed on July 18. See In Re Detroit, 504 B.R. 97, 175 (E.D. Mich. 2013). As I said earlier, after the conclusion of mediation proceedings on April 14, there will be only 16 days until the end of the stay. Even in the unlikely event that mediation is allowed to constitute part of a negotiation process, there will still only be 18 days between April 13 and the end of the stay.

The issue of sufficient information is important with respect to Puerto Rico’s financial statements, since sec. 206(a)(2) requires PR to adopt   procedures necessary to deliver timely audited financial statements; and . . . made public draft financial statements and other information sufficient for any interested person to make an informed decision with respect to a possible restructuring.

Since the Board’s report by Ernst & Young, at pages 5, 9-10 and 16 states that the financial information it used (provided by the PR Government) is poor, it can hardly mean that it is sufficient for any interested person to make an informed decision with respect to a possible restructuring.

Hence, the way in which these negotiations are conducted and the information provided is of paramount importance for the Title III petition not to be dismissed by section 304 of PROMESA. As of yet, it does not appear that the government has submitted sufficient information for real negotiations to occur.

Does the Fiscal Plan Satisfy Requirements in PROMESA?

It is my belief the Court may review the fiscal plan to determine whether it complies with PROMESA in the intersection of sections 201(b)(1)(N) and section 314(b)(7). Section 201(b)(1)(N) requires that the Fiscal Plan “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality in effect prior to the date of enactment of” PROMESA.

The Fiscal Plan as approved, however, does not do this in any of it sections. In fact it states, at page 6 that it does not determine, inter alia, “the scope, timing or specific use of revenues to be frozen or redirected as ‘claw back’ revenue, the value, validity and/or perfection of pledges or whether any particular bond or debt issuance may have been improvidently issued” Since the Bankruptcy plan, pursuant to section 314(b)(7), must be “consistent with the applicable Fiscal Plan certified by the Oversight Board under title II” one can argue that any Bankruptcy Plan based on a deficient Fiscal Plan is invalid and hence the Court would have to make said review of the Fiscal Plan. Moreover, the Fiscal Plan cannot violate the US Constitution and bondholders seem poised to make that challenge.

What if the Court were to find that the Bankruptcy Plan is not consistent with what should be the Fiscal Plan? Pursuant to 11 U.S.C. § 930 (adopted in PROMESA by section 301), if the Court could determines that the Bankruptcy Plan could not be certified, it can dismiss the proceeding and PR would not have the protection of the automatic stay.

Or is the Strategy to File for Title III, then Negotiate?

Given all of these obvious shortcomings of an impending Title III petition, it’s worth asking why the Board would file for Title III and risk having it dismissed. The answer likely lies in Section 304(b) of POMESA, which does not allow the dismissal of a Title III petition during its first 120 days.

Therefore, the Board could use this window to negotiate AFTER filing Title III (including Court mandated mediation as in Detroit) and then claim that it negotiated in good faith. It could then aver that it would be a shame to dismiss the claim after all this time. Essentially, the board could file for Title III with full knowledge that its petition will most likely be rejected, if only to buy itself four more months.

Let’s see.