gdb

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.

 

 

 

 

 

El Posible Impago de Diciembre

El día 6 de noviembre de 2015, se reveló que el Gobierno no va cerrar operaciones ese mes. Eso puede querer decir que el Gobierno no pagará la deuda en diciembre o la pagará parcialmente. Recordemos que el Gobernador, a preguntas (obviamente plantadas) de Bernie Sanders, dijo que alguna de la deuda se había emitido en violación de la Constitución, probablemente el Artículo VI, sección 2. Esta posibilidad lleva meses sobre el tapete y puede ser develada en diciembre.

El escenario sería así. En diciembre, el BGF, que es quien debe la cantidad mayor, $354.7 millones, hace un pago parcial, diciendo que a base de su análisis, esto es lo que constitucionalmente debe ya que la mayor parte fue emitida en violación de la Carta Magna. Los bonistas entonces tendrían que decidir entre demandar o sentarse con Melba Acosta para que les explique la teoría. Exactamente lo mismo ocurriría en enero de 2016, cuando se vencen muchos pagos, incluyendo $331.6 millones de bonos de obligación general (GO’s).

La maniobra tiene varias ventajas para el Gobernador. Al hacer esto, acalla a aquellos sectores de izquierda que están clamando por que no corra para la reelección, se queda con millones de dólares para utilizar en proyectos para comprar votos y tal vez, solo tal vez, lograr la reelección. El que la maniobra falle e impida a PR volver al Mercado por varios años no le importará por que cuando todo acabe, o es gobernador de PR o esta fuera del gobierno. Así es la política Boricua.

THE SENIOR COFINA BONDHOLDERS’ LETTER

On September 24, 2015, a group of senior bondholders of COFINA, which claim to hold 25% of the principal amount of the debt, sent the Government Development Bank (GDB) a letter objecting to the Puerto Rico Fiscal and Economic Growth Plan’s supposed comingling of COFINA and Commonwealth debt. COFINA bondholders’ position is that this debt is totally separate from Commonwealth debt and by lumping them together, PR Government is violating the Amended and Restated Sales Tax Revenue Bond Resolution. The letter states, inter alia,

Moreover, pages 6 and 65 of the Working Group Plan assume “the clawback of revenues supporting certain Commonwealth tax supported debt” may be available to “service all principal and interest on debt that has a constitutional priority.” While the only lawful interpretation of those passages is that they refer to those bonds that are expressly subject to “clawback,” such significant statements by the Commonwealth should not be left open to interpretation.

These are not minor errors or mere oversights. Rather, the Working Group Plan materially misrepresents the essential nature of COFINA’s indebtedness to the investing public, and materially harms COFINA and its bondholders. It misleads the public by lumping the Commonwealth’s own debt together with COFINA’s (and thus should be treated similar to other Commonwealth debt) when in fact the opposite is true. Specifically, in the Working Group Plan, the GDB and the Commonwealth attempt to consolidate assets and liabilities of COFINA with that of the Commonwealth. There is no doubt that this is intended as a signal to the investing public at large that the Commonwealth’s struggling fiscal health threatens the health of COFINA, ignoring the fact that insulation from the Commonwealth’s other liabilities prompted the creation of COFINA in the first place. Consolidation of COFINA’s debts with the Commonwealth’s obligations will raise future borrowing costs and limit the Commonwealth’s revitalization.

The Working Group Plan’s material misstatements could open up the Commonwealth and all those responsible for the statements to potential liability. . .

Consistent with section 704 of the Resolution, COFINA should promptly cure the misstatements and provide the necessary assurances of rights of bondholders under the Resolution. It is important that you promptly perform your ministerial duty to untangle the COFINA debt and revenue from that of the Commonwealth. Doing so is necessary to avoid a breach of the Resolution and potential liability, and to fulfill the clear legal commitments made by the Commonwealth.

The purpose of the letter is not clear at first glance and an explanation is needed. The PR Government, probably under the advice of Millco Advisors and Cleary Gottlieb, has been trying to create a conflict between COFINA bondholders and GO bondholders. The old idea of “divide and conquer”. Each time a COFINA bond issue was done, there were three legal opinions stating that the revenue from the sales tax would not be part of the available revenues for payment of GO’s as per the Constitution. In other words, COFINA funds could not be used to pay GO’s. Whether this is true, it is irrelevant at this stage, but COFINA bondholders do not want the Government hinting that it could happen as the Puerto Rico Fiscal and Economic Growth Plan hints.

In the letter, COFINA bondholders demand that PR make a clear statement that their funds cannot be used to pay GO’s (as the PR Department of Justice has said every time there is a bond issue). What if PR does not make this clear statement? Here is where the COFINA AMENDED AND RESTATED BOND RESOLUTION comes in.

The letter requires the GDB to comply with its ministerial duty, i.e., if you don’t comply, I am going to slap you with a mandamus, which is a special writ in equity or complaint to require the Government to do something which is part of its ministerial duties, this duty being, protecting bondholders’ position of NO CLAWBACK. Moreover, the COFINA Bondholders’ Resolution at page 79, states as follows:

In addition, the Trustee may, and upon the written request of the Owners of not less than twenty-five per centum (25%) in principal amount of the Outstanding Bonds, shall, proceed to protect and enforce its rights and the rights of the Bondowners by such of the following remedies, as the Trustee, being advised by counsel shall deem most effectual to protect and enforce such rights subject to the provisions of Sections 201, 803 and 1206:

. . .

(iv) by action or suit in equity, to enjoin any acts or things which may be unlawful or in violation of the rights of the Bondowners or the Beneficiaries.

The COFINA bondholders have a very solid legal point that they can sue in equity to force the GDB and COFINA to make such statement. If a suit ensues, it will be difficult for PR to claim that clawback is possible since the Secretary of Justice has said time and again it cannot occur. Question now is, will COFINA bondholders follow through on their threat, and if so, in which court?