At the April 10, 2018 hearing, Judge Laura Taylor Swain heard extensive oral arguments in connection with competing summary judgment motions filed in connection with determining the Commonwealth-COFINA Dispute (i.e., whether certain sales-and-use taxes (“SUT”), purportedly pledged by COFINA to secure debt are property of the Commonwealth or COFINA under applicable law).

The COFINA Agent, the COFINA senior bondholders’ coalition, Ambac, and the Mutual Fund Group made opening arguments in support of COFINA’s ownership of the SUT.  Specifically, the COFINA Agent, among other things, rebutted the Commonwealth Agent’s argument that you cannot transfer future revenue by asserting that future revenues, in the form of grants, properties, royalties and rents, are in fact commonly granted.  Further, the COFINA Agent argued that the “effective transfer” of the revenue stream took place when Act 56 became effective in 2007.  The COFINA senior bondholders’ coalition argued, among other things, that Puerto Rico law, rather than federal law, applies to the question of ownership, asserting that, under both U.S. bankruptcy law and PROMESA, the source of property rights stems from state constitutions in the absence of an “express, controlling” federal law or interest.  Ambac argued, among other things, that the language in COFINA’s enabling act referring to a substitute of the SUT and collateral does not mean COFINA lacks a property interest in the pledged revenue, but rather addresses a potential shortfall in COFINA revenue as well as future potential legislative actions.  The Mutual Fund Group argued, among other things, that the court cannot “retroactively” take away COFINA’s interest in the SUT and that “provisions cannot be applied retroactively to destroy property rights under Puerto Rico law.”

The Committee, as Commonwealth Agent, ad hoc group of GO bondholders, and the retiree committee argued in support of the Commonwealth’s ownership of the SUT.  The Committee, as Commonwealth Agent, argued, among other things, that the Commonwealth cannot transfer ownership of an asset that does not yet exist.  Further, the Commonwealth Agent challenged whether COFINA had a property interest in the SUT, noting that such a position cannot be reconciled with the COFINA enabling act provisions authorizing the Commonwealth to eliminate or substitute the SUT, which would also necessarily mean that COFINA would not be able to assert constitutional takings clause claims.  Specifically, the ad hoc group of GO bondholders argued, among other things, that even if the Commonwealth irrevocably transferred the SUT to COFINA, it did not have the authority to do so under Article VI, Section 8 of the Puerto Rico Constitution, which gives constitutional debt, i.e., purportedly the GOs, a first claim on all of the Commonwealth’s available resources.  The retiree committee argued, among other things, that state law typically governs whether there is a transfer of property, unless some federal interest requires a different result, which in this case is the bankruptcy policy of providing a fresh start to debtors.  Further, the retiree committee argued that the transfer is unenforceable because it irrevocably barters away or sells the Commonwealth’s taxing power.

After the parties’ rebuttals, the court noted that the questions raised by this dispute are “obviously very serious, very difficult, and quite consequential for Puerto Rico,” adding that the court will “equally seriously carry this under advisement.”  Meaning, that the Court did not render a decision at the conclusion of the hearing but will further consider the matters prior to issuing a decision.

At a hearing held in New York on February 15, 2018, Judge Laura Taylor Swain heard extensive testimony and oral arguments in connection with PREPA’s motion requesting permission to borrow up to $1 billion in postpetition financing from the Commonwealth. At the end of the hearing, Judge Swain held the motion in abeyance without prejudice to allow PREPA to present an amended financing proposal consistent with her findings on the record. An amended proposed financing order, under which PREPA was authorized to borrow $300 million, was filed on February 16, 2018, and another amended version was filed on February 19, 2018 that included additional revisions. After making certain of its own changes, the court entered the financing order the same day. As entered, the financing order allows PREPA to borrow $300 million on an unsecured superpriority basis from the Commonwealth.

Below is an update from the December 20, 2017, omnibus hearing before Judge Laura Taylor Swain and Magistrate Judge Judith Gail Dein that was held in New York and simultaneously broadcast to the United District Court for the District of Puerto Rico.

  • Puerto Rico Funds’ Motion to Condition the Automatic Stay. A group of Puerto-Rico based mutual funds holding ERS bonds filed a motion seeking to condition the automatic stay on the continuation of interest payments to ERS bondholders allegedly required pursuant to a court-approved stipulation. The Oversight Board and the Puerto Rico government argued the stipulation did not require such payments after October 2017 and objected to the motion, in which objection the Committee joined. At the December 20, 2017 hearing, Judge Swain found that the stipulation contemplated that interest payments would be paid through the date of her ruling on the pending summary judgment motions (now under advisement) in related litigation between ERS and its bondholders over the scope and validity of the ERS bondholders’ liens. Accordingly, Judge Swain directed that ERS continue to transfer funds on a monthly basis to the ERS bondholders’ fiscal agent Bank of New York Mellon to satisfy the interest payments due to the ERS bondholders until she issues her ruling on the summary judgment motions.
  • Ambac 2004 Motion. Ambac filed a Rule 2004 motion seeking discovery of information from the Oversight Board, AAFAF, the Commonwealth, and COFINA concerning the collection of sales and use taxes post-Hurricane Maria. Various parties, including the Committee, supported Ambac’s motion, which was opposed by the Oversight Board and the Puerto Rico Government. Prior to the hearing, however, the parties reached an agreement to continue to meet and confer, and the motion was adjourned. Judge Dein directed the parties to submit a joint status report on the meet and confer process by January 5, 2018.
  • Motion Regarding PREPA Insurance Proceeds. The Oversight Board and the Puerto Rico Government filed a motion requesting entry of an order allowing PREPA to receive insurance proceeds to be utilized to repair, replace, or reconstruct damaged property without interference from creditors as to the receipt and application of such funds, subject to certain conditions. The order also establishes procedures for the future receipt of insurance proceeds and reserved rights for certain notice parties including the Committee. After prior disagreements between the movants and certain of PREPA’s creditors were resolved, this matter went forward on a fully consensual basis (including a joinder in the motion filed by the Committee), and the court granted the motion following the hearing.

At a hearing held in Boston on December 14, 2017, Magistrate Judge Judith Gail Dein stated that she intended to grant a renewed joint motion filed by a number of creditors, including bondholders and monoline insurers, seeking discovery against the Puerto Rico government and the Oversight Board with regard to the financial condition and related fiscal plan of the Commonwealth. The Committee joined the renewed motion on a limited basis with respect to discovery from the government. The order granting the motion was entered on December 15, and the parties are now in the process of negotiating a joint proposal on use of the information received in discovery, which proposal is to be presented to Judge Dein by December 22. The Committee expects to receive information pursuant to the discovery process shortly thereafter.

Below is an update from the November 15, 2017 hearing before Judge Laura Taylor Swain and Magistrate Judge Judith Gail Dein that was held in New York and simultaneously broadcast to the United District Court for the District of Puerto Rico.

  • Committee’s Bankruptcy Rule 2004 Motion for Discovery Program Regarding Debt Issuance Practices.  Significant questions have arisen regarding the role of public and private financial institutions in the structuring, underwriting, repackaging, and selling of the debt obligations that are now burdening Puerto Rico.  As part of its fiduciary duty to maximize recoveries for unsecured creditors, the Committee sought authorization, under Bankruptcy Rule 2004, to seek discovery from certain financial institutions and entities.  The court recognized the Committee’s authority to investigate under the Bankruptcy Rules and the significance of its concerns, but ruled that the motion would be denied as premature at this juncture due to an investigation that is being conducted by the Oversight Board.  The Committee was authorized to submit specific document requests to the Oversight Board’s investigation counsel, Kobre & Kim, which will need to respond as to whether it will adopt such requests or not, after which the Committee may seek further relief from the court.
  • Creditors’ Bankruptcy Rule 2004 Motions for Discovery Against AAFAF and Oversight Board.  A number of creditors, including bondholders and monoline insurers, filed or joined motions seeking discovery against AAFAF and the Oversight Board with regard to the financial condition and related fiscal plan of the Commonwealth.  The Committee also joined these motions on a limited basis with respect to discovery from AAFAF.  The court recognized a right to the discovery that was being requested but ruled that the motions would be denied as they were premature and overbroad.  In accordance with the court’s statements at the hearing, the court issued a subsequent order requiring that any renewed Rule 2004 motion be based on targeted discovery requests.

Financial Guaranty Insurance Company (“FGIC”) Motion for 90-day Stay of Litigation.  FGIC filed a motion requesting a 90-day stay of substantially all of the litigation related to the title III cases based on the devastation caused by Hurricanes Irma and María and related recovery efforts.  Various parties opposed the motion, including the Oversight Board and AAFAF, who argued that a prompt resolution to the title III process would be in the best interests of the people of Puerto Rico.  The Committee joined those parties opposing the motion on the basis that AAFAF, as the representative of the people of Puerto Rico, is better placed than the Committee to assess the desirability of going forward with the title III cases.   Judge Swain denied the motion given the critical need for the restructuring process to move forward and determine parties’ rights and remedies, which can only occur through litigation in the absence of consensual resolutions of disputed issues.

There was only one matter on the docket at the November 13 hearing: Judge Swain after listening to oral argument issued her preliminary ruling denying the motion (“Motion”) of the Oversight Board to confirm the appointment of Noel Zamot as Chief Transformation Officer (“CTO”) for the Puerto Rico Electric Power Authority (“PREPA”).  Through the Motion, the Oversight Board had sought to place its own officer in charge of PREPA.  A number of parties, including the government of Puerto Rico through its fiscal agent, AAFAF, filed oppositions to the Motion and argued in front of the court at the hearing.

In denying the Motion, Judge Swain rejected the Oversight Board’s contention that it possessed the power to appoint a CTO for PREPA, holding that PROMESA does not generally grant the Oversight Board the power to take such action.  Instead, Judge Swain ruled that, while the Oversight Board has the power to approve fiscal plans and budgets, the Oversight Board lacks the power to supplant Commonwealth elected officials, take over instrumentalities, bypass statutory governing structures, or create new positions or relationships within PREPA’s organizational structure.  The judge also rejected the Oversight Board’s contentions that the Motion was supported by its powers to represent the Debtors in title III cases.  A copy of the court’s written decision can be found at the Key Rulings link on this website [Docket No. 1820].

On September 8, 2017, the Committee, as the Commonwealth Agent in the Commonwealth-COFINA Dispute, commenced adversary proceeding number 17-00257 by filing a complaint against the COFINA Agent.  The complaint is intended to resolve the issue of whether certain sales and use taxes purportedly pledged by COFINA to secure debt are property of the Commonwealth or COFINA under applicable law.  A copy of the complaint can be found at the Committee Filed Documents link on this website [Docket No. 1254].

On August 18, 2017, the Committee filed a Reply in Support of the Motion of Committee for Order, Under Bankruptcy Rule 2004, Authorizing Discovery Program with Respect to Certain Causes of Puerto Rico Financial Crisis (the “Rule 2004 Motion”).  The Rule 2004 Motion was heard by the Honorable Magistrate Judge Judith Gail Dein at 1:00 p.m. on August 22, 2017 in Boston, Massachusetts.  A copy of the Reply, and of the Rule 2004 Motion, can be found at the Committee Filed Documents link on this website [Docket Nos. 1080 and 706].  The Rule 2004 Motion remains pending.

Below is an update from the August 9, 2017 hearing before Judge Swain in the United States District Court for the District of Puerto Rico, which highlights a number of the matters heard that day including, among other things, (i) motions filed by the Committee, and (ii) objections filed by the Committee to motions of other parties in interest.

  • Stipulation Approving Procedure to Resolve Commonwealth-COFINA Dispute (“Stipulation”).  One of the most important issues in the Commonwealth’s title III case is whether certain sales and use taxes purportedly pledged by COFINA to secure debt are property of the Commonwealth or COFINA under applicable law (the “Commonwealth-COFINA Dispute”).  Pursuant to the Stipulation, which was approved at the hearing, the Committee has now been appointed as the Agent for the Commonwealth to advocate the position of the Commonwealth and its creditors in the Commonwealth-COFINA Dispute.  A copy of the stipulation can be found at the Key Rulings link on this website [Docket No. 996].
  • Motion of Creditors’ Committee to Intervene in Assured Guaranty Corp. et al. vs. Commonwealth Adversary Proceeding [Adv. Proc. 17-00125].  In the Assured Guaranty Corp. vs. Commonwealth adversary proceeding, the plaintiffs have challenged the legality of the Commonwealth’s fiscal plan—an issue relevant and extremely important to unsecured creditors. Therefore, the Committee moved to intervene in the proceeding to be heard on the issue, but the Court denied our motion.  The Committee filed a notice of appeal on August 11, the day after the order was entered by the Court, and the United States Court of Appeals for the First Circuit reversed Judge Swain’s decision on September 22, 2017. A copy of the decision issued by the court of appeals can be found at the Key Rulings link on this website [Docket No. 9].
  • Motions to Reconstitute or Appoint Additional Committees.  Three parties: (i) the UPR retirement system trust, (ii) the ad hoc Puerto Rico municipalities committee, and (iii) the ad hoc group of general obligation bondholders, each filed motions to reconstitute official committees and/or appoint additional official committees (an official committee being one created pursuant to statute, the expense of which is paid for by the debtors).  A summary of each motion is below.
  • UPR retirement system trust (“UPR Trust”) sought an additional official committee for active UPR retirement system participants or the reconstitution of the official retiree committee to include a representative of such participants.  We objected to this motion asserting, among other things, that such retirees are already adequately represented by the Committee and the official retiree committee.  The Court agreed with our arguments ruling that the UPR Trust had failed to establish a lack of “adequate representation” by an existing committee.
  • The ad hoc Puerto Rico municipalities committee (“Municipalities”) sought the appointment of an official committee of municipalities.  The Committee objected to this motion asserting that, among other things, (i) the Municipalities’ claims are against a non-Debtor, and (ii) if the Municipalities were unsecured creditors of the Commonwealth, the Committee adequately represents their interests since the Committee is a fiduciary for all unsecured creditors of the Commonwealth.  The Court agreed with our arguments and denied this motion for the same reasons.
  • The ad hoc group of general obligation bondholders (“GO Bondholders”) filed a motion seeking an order from the Court appointing GO Bondholders to the Committee or establishing a new official committee to represent the GO Bondholders.  The Committee objected asserting, among other things, that the GO Bondholders, to the extent unsecured (and the GO Bondholders assert that they are fully secured), are already adequately represented by the Committee.  The Court denied the motion and stated, among other things, that to the extent the GO Bondholders are unsecured, their interests are already sufficiently represented by the “robust Unsecured Creditors’ Committee.”
  • Moción para reconstituir o nombrar comités adicionales. Tres partes: (i) el Sistema de Fondo de Retiro de la UPR, (ii) el comité ad hoc de los municipios de Puerto Rico, y (iii) el comité ad hoc del grupo de tenedores de bonos de obligaciones generales, individualmente, sometieron mociones para reconstituir comités oficiales y/o nombrar comités oficiales adicionales (un comité oficial siendo uno que es creado bajo estatuto cuyos gastos serán pagados por los deudores). Adelante se encuentra una descripción sumaria de cada moción.
  • El Sistema de Fondo de Retiro de la UPR (“Fondo UPR”) solicitó que se ordenara la constitución de un comité oficial adicional para participantes activos del Fondo UPR o la reconstitución del comité oficial de jubilados para incluir un representante de dichos participantes. Objetamos dicha solicitud, enfatizando, entre otras cosas, que dichos jubilados ya están representados adecuadamente por el Comité y el comité oficial de jubilados. El Tribunal estuvo de acuerdo con nuestros argumentos, dictaminando que el Fondo UPR había fallado en establecer una falta de “representación adecuada” por parte de un comité existente.
  • El comité ad hoc de los municipios de Puerto Rico (“Municipios”) solicitó el nombramiento de un Comité oficial de municipios. El Comité objetó dicha moción, aseverando, entre otras cosas, que (i) las reclamaciones de los Municipios van en contra a un no-Deudor, y (ii) si los Municipios fueran acreedores sin garantía del Estado Libre Asociado, el Comité representa adecuadamente sus intereses ya que el Comité es un fiduciario de todos los acreedores no asegurados del Estado Libre Asociado. El Tribunal estuvo de acuerdo con nuestros argumentos y denegó dicha solicitud por las mismas razones.
  • El comité ad hoc del grupo de tenedores de bonos de obligaciones generales (“Tenedores de Bonos GO”) presentó una moción solicitando una orden del Tribunal para que se nombrara a los Tenedores de Bonos GO al Comité o estableciera un nuevo comité oficial para representar a los Tenedores de Bonos GO. El Comité objetó dicha moción aseverando, entre otras cosas, que los Tenedores de Bonos GO, en la medida de no ser garantizados (y los Tenedores de Bonos aseveran estar completamente garantizados) están adecuadamente representados por el Comité. El Tribunal rechazó la moción y declaró, entre otras cosas, que en la medida en que los Tenedores los Bonos no están garantizados, sus intereses ya están suficientemente representados por el “robusto Comité de Acreedores No Asegurados”.