Judge approves procedures to manage proposed annulment of $6 billion in Puerto Rico debt
SAN JUAN – Judge Laura Taylor Swain on Wednesday said she will grant an urgent motion establishing procedures to handle a request by the island’s Financial Oversight and Management Board to dismiss $6 billion in general obligation (GO) debt issued by the commonwealth after 2012, but with a “two-stage procedure” that will ensure disagreements over the proposals are worked out.
Judge Swain said the “best thing for me to do” was to ask the objectors and respondents to have a “meet and confer” that would result in a revised procedural order.
Lawyers representing bondholders said the procedures did not provide adequate notice to creditors and potential objectors, and granted the government substantive advantages that were not provided to the holders of the challenged GO bonds. They also noted that the proposed procedures force creditors to file joint responses, compromising their ability to present their arguments adequately; treats creditors differently according to the amount of their claim; and prematurely forces creditors to answer discovery requests.
On Jan. 14, the fiscal oversight board and the Unsecured Creditors Committee filed a motion expressing their intent to challenge $6 billion in GO debt because it violated constitutional debt limits. According to court documents, the determination could impact more than 4,000 creditors. In a separate claim, the board also intends to annul leases issued by the Public Buildings Authority, arguing that the structure is a sham.
Luc Despins, a lawyer for the Unsecured Creditors Committee, which also wants to annul the $6 billion, said handling objections on a claim-by-claim basis would be impractical and highly inefficient. He explained the process aims to facilitate the order of the issues and which parties should participate. He said the “big holders will cover the field of the small holders.”
The judge reminded Despins that case management orders call for all bondholders to receive notices. She said answers were needed regarding whether anyone was at risk of a default judgment and what would happen to those creditors who do not answer notices of the proposed repeal of $6 billion in debt, among other questions.
Despins noted that Prime Clerk, the manager of the process under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), will be able to inform all bondholders whose debt is being challenged. Judge Swain asked for improvements to the language of the notices and for assurances that all bondholders, large and small, be informed.
Mark Stancil, an attorney representing GO bondholders, complained that there should not be differences between small and large bondholders. He insisted that parties must have adequate time to be notified and present their allegations.
The lawsuit to annul $6 billion in GO debt and the proposed annulment of PBA leases are very much linked, Stancil said, adding that parties should have 60 days to announce if they will participate in the process. He also questioned attempts by the government to ask creditors to state their legal defenses because it would give the government “leverage in trying to shake the procedure…[Despins] is asking for substantive information and that is discovery.”
Mark Ellenberg, a lawyer for bond insurer Assured Guaranty, also objected to the procedures and commented that the Puerto Rico government could be accused of committing securities fraud for seeking the annulment of $6 billion in debt.
In defending the procedures, Edward S. Weisfelner, who represents the fiscal board’s Special Claims Commmittee, noted that most of the creditors that purchased the challenged bonds were not retail bondholders, as they were sold in increments of $150,000.
“The idea that we have to wait for inactive bondholders is an excuse…. It does not have to be that complicated,” he said. In turn, Stancil disputed the claim, stating that the 2012 bonds were sold in increments of $5,000.
Peter Hein, an individual bondholder, said he was not informed of the motion to suppress the $6 billion. “There has to be a structure in which the individual bondholders that have little resources can present their views,” he said regarding difficulties in fighting the attempts of the board, which has ample resources at its disposal.
Earlier in the hearing, Michael Luskin, said that by Feb. 18, the board will release a report on the investigation into alleged conflicts of interest by the firm McKinsey, which provides consulting to the board while allegedly holding government debt. The analysis, he said, contains recommendations for the board.
Katherine Stadler, who works with the fee examiner, informed the court that the Treasury Department will start collecting a 29 percent tax for the work performed outside of Puerto Rico by lawyers in the Title III case. Stadler said she told law firms that they cannot change rates to account for the new tax. “If professionals need to make adjustments, it should be accounted for separately,” she said.
Judge Swain also said she will issue an order dismissing certain Cofina claims because no objections were filed.