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.