Tuesday, December 12, 2017

[Column] Oversight Board’s Strategy Being Tested

By on July 18, 2017

On July 12, all eyes turned to the New York courtroom where mediation commenced between the Commonwealth of Puerto Rico, its Oversight Board and its creditors regarding the GO-COFINA dispute.

The entire process could drag out over the next several weeks, as there is another procedural meeting scheduled for August and possibly actual negotiations in September. Still, given the Paeje trial in August and the October 6 motion pleading deadline for COFINA, there will undoubtedly be important decisions made in the short term.

The mediation, under a strict confidentiality agreement, is one of the first major tests of the Board’s aggressive legal strategy, which hinges on the view that the amount of debt service provided for in the Fiscal Plan and budget cannot be adjusted and the Fiscal Plan itself is unreviewable.

Attorney John Mudd

This strategy is being tested.

During the hearing before Judge Laura Taylor Swain on June 28, the Board’s plan to settle the GO-COFINA dispute was swiftly denied. The Board’s proposal would have provided effective veto power over any settlement reached by parties. Not only was the plan opposed by every creditor, the Judge made her decision without even hearing the arguments of the Board, forcing the Board’s lead lawyer, Marty Bienenstock, to begrudgingly accept her mediation plan to the laughter of those in the courtroom.

This was not the only outcome during the hearing that did not go exactly the Board’s way. Judge Swain denied a motion put forth by junior COFINA creditors to lift the stay on the lawsuit regarding COFINA bondholder seniority, currently in front of Judge Besosa in the U.S. District Court. Swain also moved to delay a judgment on a lien on secured bonds in a motion that was filed by the bondholders of Employees Retirement System, tying up the funds in a segregated account

Despite these initial setbacks, the Board continues to pursue its aggressive legal strategy. Recently, following the disclosure by the Center for Investigative Journalism that the Government could have over $1billion in the Single Treasury Account (TSA), the Board has sought to block future release of these critical financial documents claiming the PROMESA stay allows them to deny the public and creditors access to this information. Not exactly a model of transparency and good government.

And just recently, the Board took PREPA to Title III bankruptcy despite a nearly final agreement between the bondholders and the Commonwealth. Given the deal they tossed was the result of two years of good faith negotiations, this will undoubtedly bring about fresh questions for Judge Swain regarding the Board’s intentions and whether it is adhering to PROMESA.

Financial Oversight and Management Board Chairman José Carrión, left, speaks with the Government of Puerto Rico’s representative before the federally created entity, Elías Sánchez, during the board’s eighth public hearing, on June 30, 2017. (Juan J. Rodríguez/CB)

The clear intent of Congress was for PROMESA to encourage consensual negotiations and agreements between Puerto Rico and its creditors. In its latest moves, the Board clearly is showing its disdain for Title VI of PROMESA.

The Board’s strategy has not gone unnoticed, and has drawn considerable scrutiny from Congress. U.S. House Natural Resources Committee Chairman Rob Bishop recently expressed his frustration with the Board’s deviation from PROMESA, stating, “without a clear path forward, [the rejection of the PREPA RSA] raises more doubts about the economic future of the island.”

Chairman Bishop’s worries have been echoed by U.S. Senator Tom Cotton in an exchange of letters with Board Chairman José Carrión. In their latest round of correspondence, Sen. Cotton expressed his concern that the Fiscal Plan violates PROMESA and the Puerto Rican Constitution, because it does not comply with Puerto Rico’s constitutional priority of payments. And yet in his response, Carrión seemed to dismiss this concern arguing instead that PROMESA allows the Commonwealth to channel these funds to “other public entities” such as the Highway Authority instead of first going to the public debt. Once again, the Board proclaims itself the final arbiter of how funds will be allocated by the island’s government.

These developments are yet another sign that the Board is sticking to their strategy as they face significant challenges in the weeks ahead. Those challenges include the Paeje trial, during which I suspect the Board will attempt to invalidate all bondholder liens, and the GO bondholder’s attempt to regain control of clawback revenue. The Board’s lien strategy is interesting. In the ERS bankruptcy, the Board wavered in its approach as it settled with pension bondholders, a majority of which are held by Puerto Ricans, agreeing to the payment of accrued interest through October 2017. This approach shows the Board was neither confident they’d win their case against the ERS lien, and allowed them to effectively pay off local bondholders. Importantly, though, it did not jeopardize their legal strategy on COFINA.

Of course, the other important revelation here is that the Puerto Rican government, particularly Governor Rosselló, has clearly lost his power and control in this process. Effectively sidelined in many ways by the Board’s strategy, Rosselló has been left to amend internal budgets, soothe over hurt feelings in the legislature and sell Puerto Rico as a safe place to invest all the while the Commonwealth and Board’s strategy is focused on giving investors as little return as possible. Tough sell unless you’re China.

Let’s see.

— John Mudd is an attorney and legal analyst in Puerto Rico with over 30 years of experience. He is admitted in Puerto Rico, the U.S. District Court for Puerto Rico and the First and Fourth Circuit Courts of Appeals. For more than three years, he has been analyzing the possibility of a control board for Puerto Rico. You can follow him on Twitter @muddlaw and on his blog www.johnmuddlaw.com.

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