Judge Taylor Swain

WANDA STRIKES BACK

 

 

”All politics are local.” Thomas “Tip” O’Neill

 

For several weeks now, the Board has admonished the  Commonwealth stating that some of the laws it has approved violate  PROMESA in some way. It also informs the Commonwealth that these laws are not in effect. Although the Commonwealth knows that pursuant to PROMESA and Judge Swain’s decision of April 15, 2020 on Law 29, the Board must go to the Federal District Court in order to invalidate any law, on June 12, 2020, it filed not one but SIX complaints against the agency. In essence, the six complaints argue that the  Board’s actions are  “unreasonable from a public policy standpoint” but if not checked, “the  people of Puerto Rico will be disenfranchised because their local elected Government will be stripped of its policy making powers.” Although they are six complaints having to do with six different local laws, the legal argument is the same; the Commonwealth explained in compliance with PROMESA section 204 why these laws did not “substantially inconsistent with the fiscal plan.” Obviously, the Board did not agree.

 

What will happen now? After the proper briefing, the Court will likely dismiss these cases, probably sometime after August 9. In the law 29 case, decided on April 15, 2020, Judge Swain discussed the process for the certifications by the Commonwealth of laws that are not inconsistent with the Fiscal Plan. She decided that the Board’s decision was reviewable but that the standard of review is to be the deferential “arbitrary and capricious” standard used to review federal agencies’ interpretation of its own laws. PROMESA does not define what evidence is sufficient for the Board to be convinced that a particular law is not “substantially inconsistent with the Fiscal Plan” and she will give great deference to the Board’s interpretation. Since I was not privy to the evidence the Commonwealth presented to the Board, I cannot comment on it, but it seems likely Swain will side with the Board. Moreover, we must remember that in the Aurelius SCOTUS decision, Judge Breyer stated at page 17 “[i]n short, the Board possesses considerable power—in­cluding the authority to substitute its own judgment for the considered judgment of the Governor and other elected offi­cials.” Since that is precisely what the Board is  doing here, likelihood of success for the Commonwealth is not high. If so, why file not one but six complaints? I will explain.

I have the highest regard for Peter Friedman, the  Commonwealth’s attorney, who successfully opposed the appointment of Mr. Zamot as CEO of PREPA. He, as all attorneys, however, is bound by his client’s desires and as long as the proper warnings are issued, it is totally ethical to continue with a case that is not likely to succeed. The Governor’s motivations, however, are quite different. She has been a petty and supercilious politician all of her career in the Government. She, as all PR politicians, believe that the voter wants them to oppose the Board and since in the past she had been quoted as cooperating, this is, in her view, a necessary change. Also, the challenged laws are populistic in nature and she wants to be able to claim she tried her utmost to have them put into effect, but the evil Board” prevented her. Since Judge Swain is not likely to decide the issues before August 9, the day of the PNP primaries, she can claim the high ground against Pedro Pierluisi who, irrespective of what he says, is viewed as pro-Board and is (or was) related to one of its members. Also, if she were to win the PNP nomination, even if Judge Swain dismisses the complaints before the November election, she will appeal and still claim the high ground.

 

The sad part of this is that the Puertorrican taxpayer will pay the Commonwealth and the Board’s lawyers in these SIX CASES, money better put to use in other, more important endeavors. But that is the way the Puertorrican politicians operate.

That is why we are in Bankruptcy.

 

Let’s see what happens.

 

 

 

GRIJALVA’S AMENDMENTS TO PROMESA

 

 

The Chair of the House Natural Resources Committee, in cahoots with Nydia Velázquez, have introduced a bill on May 21, 2020 for the purported purpose of amending PROMESA. With the 2020 November election looming large, it is highly unlikely that the House, much less the Senate, will have the time or the inclination to evaluate such an important legislation, much less approve it, this year. In reality, the Bill is nothing less than an attempt to please the Puertorrican “diaspora” in NYC, without in reality making any meaningful changes. I will attempt to explore this Bill, examining its salient points.

 

Section 3 of the Bill, quite correctly, prohibits those who issued debt in the past for the territorial government, its corporations or who was a part of the financial entities who purchased or insured the bonds, from serving as Board members, Executive Directors or Staff. It also forces the Board to create an Ethics Board within to consider its compliance with “applicable Federal laws regulating the conduct of the Oversight Board, including conflict of interest, financial disclosure and open government laws.” Problem is, this section does not explain what this Committee may do about said violations. Total waste of time.

 

Section 3(c)(there are two c’s in section 3), limits the total cost of the contracts entered by the Board for any fiscal year to 5%  of the operating budget. In other words, if the Board has a $60 million budget, it cannot enter into contracts above $3 million, which would immediately eliminate its lawyers, to say nothing of all other experts. You may argue that the Board has spent too much on lawyers and experts but on the other hand, restructuring $72 billion in bond debt, another $45 billion in pension debt and a few other billions in unsecured debt cannot be done on that budget.

 

Section 3(d)(and another c) requires that each individual Board member or potential Board member do the following before serving:

 

‘‘(1) has issued a formal statement regarding  that individual’s past and present compliance, and intent of future compliance with all applicable Federal laws regulating the individual’s conduct, including conflict of interest, financial disclosure, and open government laws; and

 

‘‘(2) has committed in writing to strictly abide by section 208 of title 18, United States Code, and other applicable Federal laws regulating their conduct, including conflict of interest, financial disclosure, and open government laws.

 

How can an individual certify compliance with past federal laws that did not apply to him? Why does he have to certify compliance with federal laws that apply to him since he has a legal obligation to do so  anyway. This is something that has no value except to make sectors of the “diaspora” feel empowered. There are other ethical requirements which are good ideas that won’t make a real difference if members want to lie, but there is a requirement of an annual ethics report to the President and Congress. Don’t see the use of it either.

 

Section 4 requires federal appropriations for the Board, which Congress will never approve. Section 5 requires that essential services be fully funded, which is no real change since the Board is the one who determines what this means in the Fiscal Plan and it cannot be reviewed by the District Court until the plan of adjustment, if at all. This section also includes public education, public safety, public health and pensions purportedly as essential services. Are pensions an essential service? Who does paying pensions serve? Not general public for sure.

 

Section 6 adds a list of other things in which the Fiscal Plan must provide as investment, which is fine, but again, it is determined by the Board and is unreviewable.

 

Section 213 is new purports to give back the UPR its previous funding but in a dwindling student population, does this make sense?

 

Section 318 is amended to include important disclosures by professionals employed by Court order, which is a good idea. Problem is that this is required retroactively by section d and this may be problematic.

 

Section 319 is added requiring disclosures by professionals hired by debtor, which is also a good idea, but 319(a) at the end  requires that the  professional disclose individual connections with debtors, creditors, etc. Problem is, what does connections mean? If I went to high school or played little league as a child with the person, does this count? Further refining is needed. Also, section 319(b) prohibits the claim of privilege in this endeavor, defeating federal and state public policies. Makes more sense to limit it to certain privileges such as deliberative process or maybe business secrets. Or it should be left to the discretion of the Court to decide in a balancing of interests. Another example of this Bill not been thought through but rather one that is to please certain constituents. Also, the disclosures are retroactive to June 30, 2016, when PROMESA was originally enacted.

 

Section 320 is new and requires that public information be readily available. Being one of the persons that objected to the secrets in the PR bankruptcy, this is a good idea. Section 110 is added requiring the Comptroller General of the United States to report to the President and the House Natural Resources Committee on an audit on the use of federal funds etc. Not a bad idea. Also, a good idea was the repeal of Title V of PROMESA, the Puerto Rico Infrastructure Revitalization which has been totally unproductive to date.

 

Title VIII is added for allegedly Territorial Relief, in other words, a non-Court centered way in which the territory can get rid of debt. When you read it, however, you see it is not as terrible as it seems. It only applies to non-secured financial obligations (security or loan, swap, repurchase agreement, guaranty). It does not apply to claims by vendors, service providers, employees, pending tax refunds or credits. In essence, the procedure would relieve the Territory of this debt (small as it would be) once every 7 years, a territorial Shemittah. If you give this power to politicians, do you have any doubt they will use it? Of course, it can only be used for small amounts of money in practical terms, but it is still something ripe for abuse. Also, only a territory whose population has decreased by 10% in a 10-year period or has received major disaster assistance via the Robert T. Stafford Disaster Relief and Emergency Assistance Act during the 5-year period ending on the date of the discharge and that has a per capita debt greater  than $15,000 (as defined by the section). What a coincidence that PR qualifies in all of them. This discharge requires the vote of both over 50% of both houses of the legislature and the signature of the Governor and works similarly to a bankruptcy discharge. According to section 802(c):

 

Notwithstanding any other provision of Federal, State, or territorial law, the ability of a qualifying territory to obtain a discharge under this title shall not be stayed, avoided, or otherwise limited by operation of any provision of law or by order of a court, an Oversight Board, or an administrative agency in any proceeding.

 

In other words, only future Congressional law will prohibit this practice, which again, will affect an infinitesimal amount of the Territories debt and will only affect bondholders. Talk about discrimination.

 

Section 804(a) reverses the general presumption that all transactions have been conducted in a lawful way by stating that:

 

Any financial obligation is conclusively deemed to be an unsecured financial obligation except to the extent that the holder of that obligation proves that the financial obligation is a secured financial obligation in an action for a declaratory judgment that is filed—

“(1) in—

 

‘‘(A) an appropriate territorial court of the qualifying territory; or

   (B) a district court of the United States  in the qualifying territory; and

 

2) not later than 180 days after the date of  a discharge under section 802.

 

Hence, after the Territory conducts its unilateral discharge of said debt, the affected party has only 180-days to rush to Court and object and can go to federal or territorial court. In addition, section 804(b) changes the burden of proof of the person challenging the unilateral action of the Territorial Government, used in both federal and territorial courts in civil cases, from a preponderance of the evidence (50+1) to clear and convincing evidence (probably between 65-70% probability). Talk about empowering the Government. Moreover, section 804(c) provides:

 

Notwithstanding title 28 [Federal Court Jurisdiction and Venue statutes], United States Code, a court described in subsection (a)(1) shall have exclusive jurisdiction over an action involving, arising from, or related to the status of a financial obligation as a secured or an unsecured financial obligation under subsection (a), including—

 

‘‘(1) any action asserting a taking under the fifth article of amendment to the Constitution of the  United States; and

   (2) any action for declaratory judgment.

 

Therefore, if a party sues to question the discharge and has to include as defendants others who are indispensable parties (legalese, trust me on this), those parties, if sued in territorial court, could not remove the case to federal court. Also, if one party goes to territorial court, can another go to federal court or is it prohibited by this section. Very unclear.

 

Also, section 804(h) provides the territory with a procedure for avoidance of security interests as if it were a Trustee in a Chapter 7 case. So now we have Title III, a bankruptcy like procedure based on Chapter 9 and this avoidance based on Chapter 7. The  territory has two years after the date of the discharge in 804 to do this and can file in territorial or federal court. Most territorial courts, however, have no idea how bankruptcy law works so filing there may be an enormous headache.

A very  important limitation is contained in Section 806. This Title does not apply to American Samoa, the Commonwealth of the Northern Mariana, Guam or the Virgin Islands. Considering that the United States has only 5 permanently populated territories, this means that Title VIII applies only to Puerto Rico, violating the doctrine of Railway Labor Executives’ Assn. v. Gibbons, 455 U.S. 457 (1982). In that case, Congress passed a bankruptcy law that would benefit only one railroad and the Court decided this violated the provision of the Constitution where Congress could enact “uniform” bankruptcy laws, and this was not uniform. To the argument of Congressional power over interstate commerce, the Court scoffed at the idea that Congress could use one power to defeat limitations of said power. As it is, this section is probably unconstitutional but even if applied to all territories, this bankruptcy like procedures seem to violate the uniformity clause. As some bondholders have told me, PROMESA is likely unconstitutional for the same reason, although until this date, no party has actually filed such challenge. But as Curly in City Slickers said “Day ain’t over yet.”

Finally, we come to one of the “diasporas” most cherished ideas, “The Puerto Rico Credit Comprehensive Audit Commission.” In spite of the Kobre & Kim Report on the debt and many (including myself) mentioning that all politicians since 1974 are responsible for the debt, the “diaspora” (and the Puertorrican left) have wanted a Commission would audit the debt to discover who is responsible for it and what debt is illegal. Congresspersons Grijalva and Velázquez heeded their cries with this section. The Commission would be part of the Puerto Rico Government and proceed to:

‘‘(1) order a comprehensive audit of all public debt of Puerto Rico and its instrumentalities, in conformity with the Government Accountability Office’s Generally Accepted Government Auditing Standards (also known as the ‘Yellow Book’); and

‘(2) audit all public debt issued during the period beginning on the first day of fiscal year 1972 and ending on the date of enactment of this section, including—

 

‘‘(A) a current and complete accounting as to the amount of outstanding indebtedness as of the date of the enactment of this section;

‘‘(B) an analysis of the sustainability of outstanding debts;

‘‘(C) an assessment of how rules, policies, and controls over the use of debt can be improved upon to ensure that in the future Puerto Rico’s debt load is sustainable and issued in a manner that effectively protects the legal and financial interests of the Government of Puerto Rico; and

‘‘(D) an investigation into any irregularities, apparent or alleged, wherein probable cause of malfeasance or misfeasance is found.

 

The Commission would be comprised of individuals from the unions, cooperativists, economics, finance, accounting, statistics, law, sociology (I am sure a certain professor of sociology in NYC was instrumental in this) professors from a university in PR, a business community representative, preferably small business and a certified translator. They will be appointed by the Governor no later than 360-days after the amendments are approved and if the does not act, the President of the Senate and the Speaker of the House shall jointly appoint them. The Bill requires that there be sufficient funding but does not say who had to fund it or if its members will be compensated. Give the duties and responsibilities they are entrusted with, not many will accept this appointment.

 

There are several problems with this section. What does probable cause mean? Rule 6 of the Puerto Rico Rules of Criminal Procedure  or Rules 5.1 or 41  of the Federal Rules of Criminal Procedure? Moreover, much of what the Bill requires was done by Kobre & Kim, so why do it again? Also, much as I would love to  put the culprits behind bars, the 5-year statute of limitations of both Puerto Rico and Federal Criminal Codes have long expired. What would a declaration of a Commission of this nature do? What weight would it have? Who will pay for it? How much will it cost? Finally, by the time the persons are appointed, and they have done their duty, the Puerto Rico Title III cases will have been completed or the cases dismissed.

 

Also, nothing is done in this Bill about the Puerto Rico’s Government’s objections to PROMESA, to wit, the Board’s control over it. It does nothing to weaken it or strengthen it. It provides no funding for PR except to say that the Federal Government will pay the Board’s expenses. It is not, like a local politician dubbed it, “a step in the right direction.”  Why do all this, then? To please the NYC Puertorrican “diaspora,” nothing else. The Bill is not even to get serious consideration given the time constraints. This is not the purpose of  Congress.

 

 

 

 

 

LOS POLITICOS Y LO QUE VIENE EN PROMESA

En Puerto Rico, los políticos actúan como si ellos fueran los que decidieran cuanto se va a pagar por servicio a la deuda. Más aún, continúan con la actitud que cualquier aumento en ingresos del erario hay que gastarlo en tal o más cual grupo lo que los va a ayudar a revalidar en las elecciones. El mejor ejemplo es los municipios que confeccionaron sus presupuestos a base de la validez de la ley 29 a pesar que la Junta les dijo que iba a impugnarla.  La argumentación oral de la Junta sobre la ley 29 demuestra que al fin entiende que tiene muchos más poderes de lo que antes pensaba y la decisión de la Juez Swain de no desestimar su demanda es el preámbulo de una decisión en contra del Gobierno de P.R.

 

Más aún, el  24 de julio de 2019, la Juez Swain nos tiró a todos los que estamos en el  caso una  curva y mandó a mediación por 120-días, entre otros, lo siguiente:

 

  • Las demandas recientes de la Junta contra  bonos de Retiro,  GO’s, PBA y Carreteras;
  • Asuntos relacionados al impuesto al ron y los bonos de PRIFA;
  • La validez e impacto de los clawbacks de ingresos;
  • Reclamaciones contra los que proveyeron servicios para emisión de deuda;
  • Reclamos anticipados a la clasificación, incluyendo los issues de los “securities” y entre reclamaciones no aseguradas, i.e., pensiones v. reclamaciones no aseguradas en general;
  • Identificación y trato de los servicios esenciales bajo un plan de ajuste;
  • Tratamiento de reclamaciones basadas en alegaciones de violaciones de la Constitución Federal bajo el plan de ajuste (más no de las violaciones de la Constitución de PR);

 

Creo que hay un mensaje claro a todos en el caso. La Juez Swain no interesa tener que decidir todos estos issues y quiere que se llegue a acuerdos. Como todo en la vida, puede que si, puede que no. Pero los acuerdos que se logren, si alguno, serán el esqueleto del plan de ajuste del ELA. A finales de noviembre sabremos que acuerdos se han logrado.

 

Les recuerdo a los lectores que una vez se establezca que son servicios esenciales, eso no quiere decir que estos recibirán todos los fondos que los políticos quieren. La Junta también limitará esto bajo su control del presupuesto. Además, la premisa inarticulada es que lo que sea servicios no esenciales se podrán limitar, forzando despidos o reducción de jornada. Más aún, si la ley 29, como creo que va a ocurrir, es inhabilitada por la Juez Swain, los Municipios menos afortunados económicamente tendrán que hacer lo mismo o ver sus funciones puestas en consorcios, disminuyendo dramáticamente el poder del Alcalde.

 

Si se logran sufiicientes acuerdos, especialmente sobre bonos, el plan de ajuste se puede radicar para enero de 2020 y ser aprobado para Verano del 2020, justo antes de las elecciones. Habrá mucho crujir de dientes y rasgaduras de vestimentas por nuestros políticos cuando ocurra. El momento del pago de la deuda se acerca y estoy seguro que ni el Gobierno ni los Municipios están preparados. Como he dicho muchas veces, PROMESA obliga a los boricuas a redefinir que gobierno pueden tener y la Junta esta lista para hacerlo.

 

No quiero terminar sin antes mencionar  el  caso de Aurelius ante el SCOTUS. La cobertura de la  prensa Boricua ha sido limitada y hay que poner las cosas en sus justa perspectiva. El argumento oral va a ser el 15 de octubre y la decisión puede venir tan temprano como finales de noviembre a principios de diciembre de 2019. Si  el SCOTUS decide  que el nombramiento de la Junta fue constitucional, todo sigue igual. Si el SCOTUS decide que el Primer Circuito tenia razón, todo sigue igual. PERO, el SCOTUS puede decidir  que el nombramiento de los miembros de la Junta fue inconstitucional y  determinar que todas sus acciones fueron ilegales. Aurelius argumenta que entonces habría un stay para la nueva Junta ser nombrada y  esta  decidir si  lo que hizo la anterior fue válido, lo cual nada cambia. La Utier, sin embargo, argumenta, con mucha razón, que todas las actuaciones de la  Junta se deben invalidar y  eso  sería un game changer, aunque dudo que ocurra.  Debo mencionar además, ya que pocos lo mencionan, que la Utier también argumentan que los casos insulares deben ser revocados. En  mi  opinión el SCOTUS va a ignorar este argumento.

 

Hay muchas cosas que pueden pasar  pero nuestros políticos y mucha de la prensa  continua en discutir asuntos sin importancia. A ver que pasa.