Thursday, July 19, 2018

Puerto Rico Sales Tax trustee asks court to intervene in Commonwealth-Cofina dispute

By on June 20, 2018

The Bank of New York Mellon, the trustee of the Puerto Rico Sales and Use Tax (SUT), asked the court to allow it to intervene in the negotiations for a settlement in the Commonwealth-Cofina dispute, to oppose certain aspects involving the distribution of the funds.

The Commonwealth-Cofina dispute centers on who is the owner of the sales and use tax, whose revenues are currently used to pay for government operations and to back Cofina bonds. A resolution to the dispute is needed as part of the Title III bankruptcy proceeding so the judge can determine how to distribute assets. Recently, representatives of the Commonwealth and of Cofina announced a preliminary settlement.

The Commonwealth representative in the dispute, which is the Official Committee of Unsecured Creditors, asked the court to issue an order establishing certain procedures to dispose of the SUT funds.

The Commonwealth Agent wants the Bank of New York Mellon, to put in separate accounts all 5.5% SUT revenues currently in the bank that were received prior to June 30 and all SUT revenues received after July 1, 2018.

Once a settlement is reached on the dispute, the Post-July 1, 2018 funds shall be allocated and released to the Commonwealth and Cofina in accordance with the percentage shares in the settlement agreement, that is 53.65% for Cofina, which would be the first dollars of the 5.5% SUT, and 46.35% for the Commonwealth.

In the event the Agents do not proceed with the settlement agreement by August 4, 2018 or the effective date of Cofina’s Title III plan of adjustment, all of the funds including the Pre-July 1, 2018 Funds and the Post-July 1, 2018 Funds will continue to be part of the litigation.

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The bank says it takes no position on the full agreement-in-principle but objected to what would happen to the funds in the event both sides are unable to reach a settlement and the court later rules that the Commonwealth owns the sales and use tax.

“The Commonwealth Agent would like the Court to approve an agreement between the Agents now that, in such circumstances, the Court’s hypothetical future ruling would be retroactive to July 1, 2018. In effect, the deposit of Pledged Sales Tax with BNYM after July 1, 2018, could cease to be governed by the Resolution and applicable law,” the bank said that such a possibility would hinder the bank.

Changes to fee examiner’s authority

Judge Laura Taylor Swain has issued a ruling that broadens the Fee Examiner’s scope in the Title III process. The Fee Examiner, Brady Williamson, is in charge of investigating the legal fees charged to the government during the bankruptcy process.

The judge granted a Motion that allows the Fee Examiner and his counsel to undertake the review of fees for services provided outside of the Title III cases and that extends the Fee Examiner’s assignment extends to all fee requests within the Title III cases whether or not the services provided were directly related to the Title III bankruptcy cases. The judge ordered the Fee Examiner, in consultation with counsel for the Financial Oversight and Management Board, FAFAA, and the official committees, to develop and present a proposal to the Court to resolve the concerns the Fee Examiner raised on the fee applications of certain professionals.

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