Financial Control Board


                                                                        May you live in interesting times. Chinese proverb

At 12:02 am of September 17, 2022, with Tropical Storm Fiona about to strike Puerto Rico, the Financial Oversight and Management Board (the Board) filed a motion informing the Title III Court that it believed that the path forward for PREPA was to litigate the bondholders alleged security interests, the allowability of their claims pursuant to section 927 of the Bankruptcy Code and the alleged seniority of the fuel line claims.

I confess I was surprised by the Board’s motion. I was inclined to believe a settlement was in the works. Obviously I was wrong.  This means, irrespective of the manner in which it evolves, there will be years of litigation in the PREPA Title III and beyond. I will attempt to provide a background to this mess.

Around July 1, 2014, PREPA drew $41 million from its debt service reserve and immediately creditors and analysts pondered whether this was a technical default. Subsequently, negotiations between PREPA and its creditors began, and in September of 2014, Liza Donahue was appointed restructuring Officer at PREPA This move was dictated by bondholders. Ms. Donahue continued negotiations with bondholders in September 2015 with a 15% haircut. By this time, however, Congress had already introduced PROMESA and on June 30, 2016, it was signed into law by President Obama. PREPA missed its July 1, 2016 payment pursuant to section 405 of PROMESA. Subsequently, then Disgraced Governor Rosselló renegotiated the deal by April of 2016 The Board, in a 4-3 vote, however, decided to ignore section 104(i)(3) of PROMESA and filed for Title III protection on July 2, 2016

During the Title III proceedings, the bondholders asked Judge Swain to lift the stay for the appointment of a receiver for PREPA. Judge Swain denied the relief, partly claiming section 305 of PROMESA precluded her from doing so. Bondholders appealed and in FOMB v. Ad Hoc Group of PREPA Bondholders, 899 F.3d 13 (1st Cir. 2018) reversed Judge Swain, explaining that she could lift the stay in order to have a different judge determine whether a receiver was to be appointed. The First Circuit also emphasized that the lifting of the stay required a showing that movant had a lien that needed adequate protection and that the Title III Court could also determine the powers of the receiver. This decision will have great importance as we will soon see.

With this reversal, the Board quickly engaged bondholders in negotiations and by May of 2019 had reached a Restructuring Support Agreement with them As different groups joined this agreement, parts of it were modified, etc. By October of 2019, the Board filed a Bankruptcy Rule 9019 motion for the approval of the RSA. The Board subsequently alleged that it was trying to obtain the Legislature’s approval of laws for the RSA and that this, coupled with earthquakes, the Covid-19 Pandemic, caused the postponements of the 9019 motion. I find it doubtful given the Board’s claims in the Commonwealth plan of adjustment controversies where it claimed it did not need it but that is what it claimed.  

Tellingly, the Unsecured Creditors Committee (UCC) filed several motions claiming that the RSA was dead, and the Board opposed them saying that its attention was in the restructuring of the Commonwealth and negotiating with the Legislature. Every time Judge Swain swept away the UCC’s objections.

Things were coasting along when PREPA bondholders filed a motion pursuant to PROMESA section 312 requesting that the Court appoint a mediation team on February 18, 2022. The Board opposed the motion on February 28, 2022, stating, inter alia, at page 3 of its motion “[h]igher oil prices are now causing higher electricity rates independent of the increased rates imposed by the RSA, and likely by any restructuring. That underscores the need for prudence and evaluation rather than a rush to reach and consummate a deal that serves only one constituency and could prove too costly for PREPA post-emergence.” AAFAF and other stakeholders opposed the motion.

On March 8, 2022, the Governor announced it would withdraw from the RSA and Judge Swain denied the PREPA bondholders’ motion. The Court, however, stated that it would entertain mediation that was economically feasible. It also stated that “[u]ntil recently, the Oversight Board and the government entities’ words and actions gave the Court reason to expect that a plan of adjustment would be forthcoming promptly and that no interruption of the oversight engagement efforts would hinder the process.”

Subsequently, PREPA, the Board, the UCC, Bondholders, Utier (the PREPA union) and the PREPA retirement fund, went to mediation. This mediation was extended several times, over the objection of the UCC, the Utier and PREPA’s retirement fund, who preferred to litigate different issues of bondholders’ rights.

When the decision by the Board was announced, Justin Peterson, a member of the Board, took to tweeter to express his disappointment on the Board’s decision. He also said that “rolling the dice on litigation instead of making a deal means that this will cost Puerto Rico even more.” In another tweet he said “To kick things off, consider this: now the pensions are on the table. Bondholders will come for everything.” Most interesting to me was this tweet: “The centerpiece of the FOMB proposed litigation schedule is alien challenge of bondholder claims. Everyone should understand this is a radical move by the Board and an attack on the entire system  of municipal finance in the United States.”

What can we expect from all this? Judge Swain, on Saturday July 17, 2022, a few hours after the Board’s motion, ordered the parties to file any oppositions by Monday September 19, replies by September 20 and be ready for argument during the Omnibus of Wednesday, September 21, 2022.

It is clear that the Bondholders will file a motion to dismiss the Title III bankruptcy. Section 930(a) of the Bankruptcy Code states that if a plan of adjustment cannot be filed, the case must be dismissed. In addition, Bondholders will request the lifting of the stay for the appointment of a receiver for PREPA. I do not think the Judge will dismiss the Title III but we must remember the case is over 5 years old. The longest Chapter 9 case I can remember is San Bernardino, which lasted 6 years. Even if the Court were to adopt the Board’s schedule, a hearing of the summary judgment motions would be held around April of 2023. Giving the Court time to evaluate the motions, she would decide the issues by fall of 2023 and the losing party would immediately appeal. This could take between six months to a year, meaning summer or fall of 2024 for the dust to settle and determine whether a plan of adjustment could be filed. Yes, could. Even with the issues decided, there is no guarantee a confirmable plan of adjustment could be achieved.

In addition, the problem with litigation is that you may win, or you may lose. Even if the Board wins, this does not mean PREPA will not have to pay bondholders but could mean that their claims could be substantially impaired as unsecured creditors. It could also mean that more money could go to Utier and the PREPA Retirement Fund. On the other hand, if bondholders win, it will mean that they would have to be paid in full. Have no doubt that after not being paid for several years, bondholders will want their pound of flesh. In addition, it is likely that after such a victory, Bondholders will gain a receiver to increase the PREPA rates in order to pay them. This would mean substantial increase of the rates. Moreover, even if the Board wins, it would mean an increase in the rates to a lessor degree.

If the Court were to dismiss the Title III, many things will happen. Not having the protection of the automatic stay, PREPA would have a receiver appointed. Moreover, this would not mean the end of the challenge to the bonds but would shift it from Judge Swain to some other Court, most likely Federal Court in Puerto Rico. Several years of litigation would ensue before the issue of the liens would be decided.

In any of the two scenarios, with or without Title III, LUMA, the administrator of PREPA’s distribution system, could decide to let the contract expire by November 30, 2022. This would put in jeopardy the reconstruction of the electric grid, require AAFAF to get another company to handle the system and substantially increase the future cost to PREPA. Governor Pierluisi recently stated that instead of the $115 million LUMA charges, it would be charging between $180-200 million for its services during the transition.

From what the Board wrote in February 2022, it seems the RSA ceased being a good idea due to the increase of the fuel costs due to the war in Ukraine. Although this may be true, an increase in fuel costs was foreseeable at some point in time. Hence, contrary to what the Board said for a long time, the RSA was not a good idea. Its actions, however, are risking a substantial increase in rates as I explain supra, something we won’t know until later. It is my belief, however, that this stance is nothing more than a ploy to extract more concessions form bondholders. That is why the Board hedged its bet by also requesting  that the mediation team be standby. The question is whether it will be available. Now we must wait and see what Judge Swain decides.



La semana pasada Eva Prados y Juan Dalmau publicaron columnas sobre la Junta y el Plan de Ajuste que se ha presentado. En ambas los colegas rechazan el mismo y llaman a la Resistencia. Yo tengo mis problemas con el plan de ajuste de la Junta pero creo que la “información” que los colegas ponen en sus columnas debe ser escudriñada con cuidado.

Eva Prados nos dice que la Junta y el plan de ajuste “ponen en riesgo la calidad de vida de todas nuestras familias que residen en Puerto Rico y apoyarlo nos niega un futuro digno.” Obviamente no nos dice como ni que es un futuro digno pero eso es de esperarse. Prados continua diciendo que el Gobierno “demostró no tener dinero para pagar sus deudas.” FALSO.

La colega no nos dice que en la sección 301 de PROMESA incluye todas las secciones de la ley de quiebras federal que se incorporan en el Título III. Esta sección es muy similar a la sección 901 de Quiebras que hace lo mismo para el Capítulo 9 (la base del Título III de PROMESA). Uno de los puntos donde difiere es que en el Capítulo 9 se incluyó la sección 109. La sección 109(c) especifica que una municipalidad para ser elegible a quiebra tiene que estar insolvente. La sección 101(32)(c) nos define insolvencia y dice:

with reference to a municipality, financial condition such that the municipality is—

(i)generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or

(ii) unable to pay its debts as they become due.

En el caso de Puerto Rico, esto nunca ocurrió. De hecho, a pesar de que el Gobernador García Padilla indicó en el Verano de 2015 que PR no podía pagar sus deudas, solo dejó de pagar unos bonos que dependían específicamente de que la legislatura les asignara fondos. Todas las demás deudas de bonos se estaban pagando y las otras, se pagaban con atrasos pero se pagaban. Más aún, desde julio 31 de 2017, la Junta supo de que PR tenía sobre $6 mil millones en 800 cuentas. Aquí mi columna sobre ello que contiene un enlace a los correo electrónicos que lo demuestran Así que el Gobierno NUNCA ha demostrado que no podía pagar sus deudas.

La colega sigue en su diatriba diciendo que el pago a los abogados y expertos “deja a la isla sin dinero en caja para cualquier emergencia.” Nuevamente, FALSO. En el plan fiscal de Puerto Rico, incluyendo su última versión de abril de 2021, a las páginas 57-58,

se discute el plan de reserve de $130 millones anuales. No solo se ha usado este fondo de reserve en las emergencias del María y el Covid-19, es la única ocasión donde PR ha tenido un plan de reserva.

La Lcda. Prados critica el que los fondos buitres se beneficien del plan al haber comprador a descuento. Sin embargo, no nos dice que nada en la ley federal o de Puerto Rico prohíbe el hacerlo, amén, que es más fácil negociar descuentos con bonistas que compraron a descuento. Si compraron a 30 centavos y les descuentas el valor del bono a 60 centavos, el gana, es cierto, pero también el estado al conseguir ese descuento.

Prados continua con el asunto de la auditoría de la deuda. Yo llamo el reclamo una ñoñería y explico aquí porque. Parece que la colega cree que si comparece ante la Juez Swain e invoca la frase auditoría de la deuda, el caso de Título III se detiene mágicamente, si PEPE. Además, la colega olvida convenientemente que la Junta encargó a Kobre & Kim a hacer un informe sobre como se llegó a la deuda Imagino que como tiene 608 páginas, no se lo leyó. Yo si y aunque no es lo que esperaba, si explica muchas cosas. El problema es que no señala el dedo diciendo que fulano y mengano irán presos, que creo que es lo que la colega quiere al igual que Juan Dalmau. Más adelante hablo sobre esto. Más aún, si una auditoria de la deuda señalara que alguna de ellas se emitió ilegalmente, hay que ir al Tribunal a demostrarlo. La colega nuevamente ignora los múltiples pleitos que la Junta ha radicado para invalidar varias emisiones. El problema es que cuando uno va a pleitear, uno puede ganar o puede perder y por ende usualmente (93% de los casos) se transigen. Eso es lo que la Junta ha hecho. El tratamiento de los bonos en el plan de ajuste. Si vemos las páginas 21-25 del Disclosure Statement, los bonistas recuperan entre 10% hasta un 77.6%. Esto refleja el juicio de la Junta y los bonistas en cuanto a cuan probable era el ganar sus demandas. En contraste bajo el Artículo VI, sección 8 de la Constitución del ELA, habría que pagar el 100% de la deuda publica antes de pagar otro renglón.

La colega menciona “estudios importantes” sin mencionar cuales son diciendo que había que bajar la deuda de un 85% a 95%. Aparte del hecho que ninguno de estos estudios ha sido presentado a la Juez Swain en el record, la verdadera pregunta es como se logra esto bajo es sistema legal boricua o estadounidense. Eva Prados no lo menciona porque no existe forma legal de hacerlo. Parafraseando a Otto Von Bismark “[law] is the art of the possible, the attainable — the art of the next best” El machetear un descuento de tal naturaleza como el que ella menciona es contrario al derecho y “the rule of law”, vital para el desarrollo de cualquier sociedad

La colega continua denunciando el recorte a las pensiones e insiste en que se vote en contra del plan de ajuste. Como el colega Juan Dalmau insiste en los mismo, lo discutiré luego de alizar su columna.

Juan Dalmau, a quien distingo y aprecio, escribe una columna titulada Pueblo v. Junta. Concuerdo con el que la Junta es un organismo antidemocrático pero fue creado porque nuestros políticos y los que los elegimos (incluyéndome a mi), endeudaron al gobierno. El colega se queja de lo que se le paga a la Junta y sugiere que la Legislatura no les pague. El problema es que como la sección 107 de PROMESA establece que PR pagará su presupuesto, si la Legislatura hiciera eso, la Junta correría a donde la Juez Swain y se declarará la ley contraria a PROMESA y sin efecto. Además, si no se pone en el presupuesto, la Junta lo pondrá y lo impondrá como hizo de 2017-2020. Más aún, si el Gobierno se niega a llevarlo a cabo, la Junta le pide a Swain el control de las cuentas del Gobierno y ya. Such is life in the tropics and then you die.


Además, no estoy de acuerdo con Juan cuando dice que la “Junta ha sido incapaz de favorecer al país.” La Junta permitió al Gobierno de PR pagar las pensiones en 100%, no pagar los bonos garantizados por la Constitución, no ha requerido recortes de personal y ha aumentado los gastos gubernamentales. Esa es la realidad. Concuerdo con el que la raíz del problema es el estatus pero nada puede hacer la Junta sobre ello.

Difiero de que la “deuda pública se incurrió para sostener la imagen del gobierno federal cuando ya la situación del país hacía insostenible la relación colonial.” La deuda pública que se dispara del 2001-2014 fue producto del deseo malsano de los gobiernos de turno de que su gobernadora fuera reelecto, dándole a ciertos grupos prebendas inmerecidas. Esto incluye a los amigos del alma y los sagrados pobres.

Su propuesta de “[d]eclarar que la deuda pública es impagable, y cesar de inmediato todo pago proyectado, hasta tanto el gobierno de los Estados Unidos, los acreedores y las entidades que les representan, accedan a una justa reestructuración de la misma, como parte de un acuerdo mayor de indemnización y Desarrollo económico libre de toda tutela colonial.” Quimeras nada más. El Gobierno federal no nos va a dar un Plan Marshall en compensación por el coloniaje y pretender que luego de 4 años de litigo y negociaciones los acreedores accedan a esta burda propuesta es soñar con pajaritos preñados. Más aún, ya el plan de ajuste de COFINA fue aprobado y es una orden de un Juez Federal que tiene que acatarse.

Finalmente, Juan nos dice que se debe “crear un ente independiente para investigar y encausar civil y criminalmente a los que en el gobierno de Puerto Rico comprometieron fiscalmente al país.” Yo concuerdo que se debió haber hecho PERO el término prescriptivo de 5 años ya pasó y civilmente entiendo que bajo el antiguo Artículo 1802 también. Claro, a menos que echemos a un lado todas las garantías constitucionales que tanto les gustan a mis colegas cuando les conviene.

Finalmente, el votar en contra del plan de ajuste sirve de muy poco. Aunque normalmente un caso de quiebra necesita que todas las clases voten a favor del plan, la Junta ha hecho claro que este va a ser un caso de “cramdown”, queriendo decir que la le pedirán a la Juez que acepte el plan a pesar de las objeciones. Esto se hace bajo el 11 U.S.C. § 1129 y la sección 314 de PROMESA. Con una aceptación de bonistas y muchos otros acreedores, hay altas probabilidades de que se apruebe.

Pero, ¿que pasa si no se aprueba el plan de ajuste? La sección 930 de quiebras nos dice que si no se puede aprobar el plan de ajuste, la quiebra se desestima. Sin el stay de PROMESA, los acreedores cobrarían el 100% o cerca de ello. ¿Es eso lo que los colegas quieren?


            On June 30, 2021, the Financial Oversight and Management Board filed its 4th (or 5th) Plan of Adjustment and Disclosure Statement. Although it has received no press in PR, this is significant for several reasons. Not only is it longer by 141 pages but it also has points of interest.

            In the section entitled Conditions Precedent to the Effective Date, the new disclosure statement and plan state as to conditions precedent to the effective date:

(xvii) Provide that neither the Governor nor the Legislature shall enact, adopt, or implement any law, rule, regulation, or policy that impedes, financially or otherwise, consummation and implementation of the transactions contemplated by the Plan; and

(xviii) Provide that the Governor and the Legislature, individually and jointly, as appropriate, shall take any and all actions necessary to consummate the transactions contemplated by the Plan.

This language was pointed out by AAFAF in its reservation of rights as to the latest plan. Their point, and a valid one, is that this condition precedent seems to imply that Judge Swain, by approving the plan, is ordering the Commonwealth to legislate the necessary legislation to effectuate the plan, which would include legislation for the issuance of new bonds. Problem is, that nowhere in PROMESA is it specifically spelled out that Judge Swain has that power.

Obviously this new language is precipitated by AAFAF’s own objection to the previous plan, where it said that the Board did not explain how it would get around the Legislature’s refusal to legislate if the plan included pension cuts. The Board, upped the ante by specifying what it implied with requesting an order pursuant to Section 305 of  PROMESA. To this controversy we have to add the Board’s complaint to invalidate law 7-2021, which it says is contrary to PROMESA for it includes a plan of adjustment where bondholders receive less and the Legislature prohibits the Government from supporting a plan that includes pension cuts. Since the case was filed last Friday, it will not be decided by the time the disclosure statement approval hearing is held on July 13, 2021.

This is nothing short of a mess. The Legislature has challenged the Board, saying it will not approve legislation if the plan of adjustment includes pension cuts, which it does, modest as they may be. AAFAF warned the Board of this, requiring an explanation of how it would deal with it and the Board did just that. It is an open question, in my opinion, whether Judge Swain would agree to order the Government and Legislature to enact the legislation or to otherwise waive the requirement of said legislation. If she does not, however, the plan cannot be confirmed and pursuant to 11 U.S.C. § 930, the Title III would be dismissed. The question is whether the Government or Legislature is willing to risk said dismissal.

I am sure the Governor would not risk it but the Legislature is not controlled by his party. The House is in the hands of the Popular Democratic Party and has a plurality in the Senate. Both Legislative presidents have, in my opinion, an eye on their party’s candidacy for Governor. Hence, it is entirely possible that they could, with the battle cry of “No Cuts to Pensions” let the Title III be dismissed and blame the Governor.

On the other hand, will Judge Swain let 5 years of PROMESA go down the tubes because of party politics? Your guess is as good as mine.