Judge sets rules for Puerto Rico Title III process as more entities to file for bankruptcy
SAN JUAN – During the case’s first hearing, Judge Laura Taylor Swain granted, but with amendments, most of the Puerto Rico fiscal oversight board’s requests involving the handling of the Title III bankruptcy case of the commonwealth and the Sales Tax Financing Corp. (Cofina by its Spanish acronym).
However, she postponed ruling on a request by the oversight board for an order confirming the authority of the banks in which the government has its accounts to continue honoring instructions and payment instruments without any liability.
Susheel Kirpalani, an attorney who represents senior Cofina bondholders, noted that while the entity’s creditors will get paid, banks should be limited in their authority because, in July, money from the sales and use tax (IVU by its Spanish acronym) that goes to Cofina may be used to pay for general fund spending.
“It should be a more organized process,” he said.
The judge did not issue a ruling regarding a commonwealth request for an order prohibiting utility providers from altering, refusing or discontinuing service because the government was providing some payment assurances.
Despite the insistence of lawyers, she also did not issue a ruling on a request filed by Bank of New York Mellon (BNYM), the trustee of Cofina money, which was seeking an order relating to what it should do with a $16.3 million payment due June 1 and to determine the rights of the different parties disputing the funds.
Kurt F. Gwynne, a lawyer for the bank, said that there are disputes between the different levels of Cofina creditors. IN addition, general obligation (GO) bondholders sued BNYM contending that the transfer of the pledged taxes from the commonwealth to Cofina and then to BNYM as security for payment of the bonds was unconstitutional. On the other hand, Kirpalani accused the government of trying to be “grabby” with those funds.
If the judge does not issue a ruling on what to do with the $16.3 million it owes in June, Cofina may default.
At the beginning of the hearing, the judge emphasized that the process ahead was going to be long and difficult, with “no easy solutions.” Wednesday’s hearing was punctuated by creditor claims of conflict of interest against the oversight board and Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) as well as its lack of transparency.
The hearing began with a status hearing provided by a Proskaeur Rose attorney representing FAFAA, Martin Bienenstock, on the status of its case and timetable. He listed that Cofina was liable for $17 billion, the Aqueduct and Sewer Authority (Prasa) for $4.6 billion, the Employee Retirement System for $3.1 billion, the University of Puerto Rico (UPR) for $572 million, the Government Development Bank (GDB) for $4 billion and the Electric Power Authority (Prepa) for $9 billion. The latter two reached restructuring support agreements.
In addition, he said there was debt from four clawed-back entities, which means their funds are separate, such as the Highway and Transportation Authority (HTA), which has a $6 billion liability even though it is not yet part of the Title III process; the Metropolitan Bus Authority (MBA), which has $128 million debt; the Convention Center, with a $531 million in liability; and the Infrastructure Financing Authority (Prifa), which has a $2 billion indebtedness.
Government officials outside the courtroom said Prifa, the MBA, the Convention Center and the HTA could be the next entities to file for Title III bankruptcy.
Bienenstock also spoke about some of the issues affecting the possibility of reaching a debt adjustment plan. Chief among these issues is the dispute between Cofina and GO bondholders regarding the legality of Cofina’s structure. GO bondholders say the commonwealth’s constitution provides that Cofina revenue should be used to pay them. He said the oversight board was trying to make all parties negotiate.
“The board is not taking sides on this,” Bienenstock said.
He also said some creditors are challenging clawback provisions, which allowed the government to divert funds for services, as well as claims that the fiscal plan violates Promesa because it does not respect lawful liens and priorities.
Monsita Lecaroz Arribas, assistant U.S. Trustee for the District of Puerto Rico, said the only role the trustee had in the case was to appoint committees and the compensation for professional services. The trustee has before it requests to appoint a committee representing retirees and whether there should be a separate committee for unsecured creditors. She added they would be presenting objections to the appointment of a retirees’ committee.
The judge also approved, with amendments, the board’s method to notify creditors and other parties of the commencement of these Title III cases and related matters, the manner of service and circulation of such notice.
In addition, she agreed to a board request, setting June 30 as the date by which debtors must file the creditor mailing matrix and Aug. 30 as the date by which they must file the full list of creditors with claim amounts. She also agreed to making Prime Clerk LLC the official solicitation, notice and claims agent.
Despite objections by lawyers representing Cofina bondholders, the judge agreed to consolidate all claims, solely for procedural purposes, under the lead commonwealth case. Lawyers for Cofina bondholders insisted on having a separate process, as their interests go against those of the commonwealth bonds, which are at the center of the Title III process. Both entities are being represented by FAFAA and the oversight board.
Taylor Swain said that while the claims would be consolidated for procedural purposes, creditors would still be able to carry out filings in other case dockets besides the main bankruptcy case.
Dennis Dunn, a lawyer for Ambac Assurance Corp., which insures both Cofina and GO bonds, noted the potential conflict of interest as the debtors have different interests in dispute. There is an adversary dispute at the courts between Cofina and the GOs, which want IVU funds to be paid to them. Cofina bonds are not backed by the full faith and credit of the commonwealth like GOs and are paid by a separate fund, he said.
Kirpalani noted that the board and FAFAA had “many representations” and that he hoped they would be responsible.
The confusion as to whether Cofina’s board was independent enough to represent the interest of its bondholders was highlighted when Bienenenstock said there was a separate fiduciary agent for Cofina, only to clarify that the entity was being represented by its own board, which was separate and independent and could represent the bondholders. However, O’Melveny firm attorney John Rapisardi, who represents FAFAA, said local law gave the fiscal agent the authority to negotiate on behalf of Cofina.
The judge, however, said the joint administration of cases was not going to preclude creditors from defending their rights vigorously.
Regarding the notices to creditors informing them about the start of the Title III bankruptcy process, the government is proposing publishing notices in El Nuevo Día, Caribbean Business and Bond Buyer, but Taylor Swain said notices should be mailed in English and Spanish “for the benefit of people who are not daily readers of newspapers.”
The judge also extended some deadlines, giving 10 days instead of seven to file objections to motions, five days for parties to reply and four days for debtors and committees to file replies.
Another objection involved the government’s petition for creditors to waive rights to present matters outside “omnibus” or interim hearings the Judge Taylor Swain has to hold to get all motions. She announced that she was scheduling omnibus hearings for the last week of June, Aug. 7 or 14, September and November. She added that hearings involving urgent matters would be allowed in between, and that hardship did not have to be proved after some creditors said they wanted to be able to expedite issues if needed.
“We didn’t plan on filing things outside the omnibus hearing,” oversight board lawyer Scott Rutsky said.
During the hearing, Marcia Goldstein, a lawyer for National Public Finance, which insures more than $3 billion in Cofina and GO bonds, complained about the lack of transparency by the oversight board in providing financial data and documents to creditors. She also expressed concern that FAFFA was representing Cofina. “We found that stunning,” she said.
Ellen Halstead, a lawyer for Assured Guaranty Corp., which insures about $5.4 billion in bonds, complained about the government’s unwillingness to negotiate, as well as its lack of transparency in providing information.
Rapisardi clarified that a database for creditors would be made available and denied assertions that the fiscal agent was not being transparent with the information. The judge requested a status report by mid-June on the progress of the information’s disclosure.