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Judge Swain Blocks Request for an Investigation, Asks for Timetable on Debt Plan

By on October 28, 2020

“Figure of Justice from U.S. Courthouse, Alexandria, Virginia” at Daniel Patrick Moynihan U.S. Courthouse, New York, where U.S. District Judge Laura Taylor Swain has her chambers. (Screen capture of

Fiscal Board Supports Referrals to SEC, New York AG but Says Title III Investigation Would Create ‘Gray Area’

SAN JUAN — U.S. District Judge Laura Taylor Swain denied a motion asking the court for an independent investigation into trading activity and possible violations of the confidentiality order by several creditors in the mediation process of the Puerto Rico debt’s restructuring.

In the same Oct. 28 omnibus hearing where Judge Swain denied the motion presented by monoline bond insurer National Public Finance Guarantee Corp., the judge also established that by Feb. 10, the commonwealth’s Financial Oversight and Management Board (FOMB) must submit “at a minimum an informative motion comprising of a term sheet disclosing the material economic and structural features of a Commonwealth and PBA [Public Building Administration] plan of adjustment [POA].”

Judge Swain’s decision to have a term sheet that would set an unofficial timeline to move along a POA and its plan support agreement (PSA) is a partial grant and a partial denial of the joint motion presented by a group denominated the PSA creditors, which comprises the Ad Hoc Group of Constitutional Debtholders, the Ad Hoc Group of General Obligation Bondholders, the  Lawful Constitutional Debt Coalition (LCDC) and the QTCB Noteholder Group. 

Timeline not set in stone 

Although Judge Swain addressed National’s motion first, she expressed disapproval with parts of the PSA Creditors’ motion, which was asking the court to set official deadlines for the approval of the POA and PSA, since the start of the hearing. The process proposed by the PSA Creditors would have started with a Nov. 30 deadline for the fiscal board to file the current POA or an amended one. But as part of her initial remarks, Judge Swain called the deadline draconian and announced she was leaning toward requesting a timesheet from the FOMB instead.

Among the concerns for the judge, who presides over the debt restructuring proceedings established by Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), is that the island is still dealing with the Covid-19 crisis, is in the middle of an election process and there is turnover in the fiscal board. 

FOMB attorney Martin Bienestock expressed similar concerns over setting hard deadlines, and before insisting that the fiscal board needed some flexibility said that a February term sheet could become obsolete. 

“If it turns out that due to the changes in membership of the oversight board or other factors, that a new fiscal plan is required, then the new fiscal plan would unlikely to be certified before April or May, which would make it highly impractical if not impossible to file a term sheet before the new fiscal plan is certified,” Bienestock said. 

Stating stronger criticism over the PSA Creditor’s insistence on setting deadlines, as opposed to a more flexible but still detailed term sheet, Atara Miller, who represents the monoline bond insurer Ambac, argued that it was about either forcing a “sweetheart deal” for PSA Creditors or allowing them to activate the termination clause in the plan that includes a $100 million payout.  

“This motion as much as anything is really about forcing the oversight board to either move forward with the sweetheart deal for the PSA Creditor or to come clean and formally modify the GO [general obligation] bond treatment allowing the termination,” said Miller.

In contrast, Susheel Kirpalani, a lawyer for the LCDC, argued that the goal of establishing deadlines was to move things along because “deadlines make progress,” and compared the coalition’s petition with the deadlines that were set and ultimately led to a confirmation on a POA for the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym). Kirpalani also took issue with the fiscal board’s argument that a new fiscal plan could affect a POA, saying fiscal plans are yearly and the POA is long-term. 

A hard no on the Investigation 

Kirpalani had a harsher tone and words for the discussion of National’s motion, which names LCDC’s trading activities as possible examples of improper market manipulation. The coalition lawyer described National’s motion as “light on the facts or even a coherent thesis” because the insurer’s goal was to disrupt the mediation process. 

“If the current plan became effective, National would be left holding the bag for any amount not paid by Puerto Rico to bondholders and that bag is so heavy that it would likely tip National into insolvency,” Kirpalani said, adding later that the fiscal board was aware of creditors’ particular holdings. 

As for the FOMB, Bienestock said that the fiscal panel supports the referral made by congresswomen Nydia Velázquez and Alexandria Ocasio-Cortez to New York Attorney General Letitia James about possible Martin Act violations from Puerto Rico creditors, as well as the referral from Resident Commissioner Jenniffer González to the Securities and Exchange Commission (SEC).

The FOMB lawyer argued that, contrary to the independent investigator that National is requesting, both James and the SEC can investigate and prosecute and suggested that an independent investigator would “create a gray area with no resolution.”

While the focus of criticism about an independent investigator was on National, the Unsecured Creditors Committee (UCC) had submitted a limited joinder asking to be appointed as such entity, and during the hearing UCC lawyer John Arrastia defended the need for an investigation as a way to ensure the integrity of the entire process. 

Aside from highlighting the increased acquisitions by some PSA creditors in contested but later settled bonds, Arrastia highlighted the increase in price of such debt as the Late Vintage GO bonds. Arrastia indicated that a series of bonds increased in price by 22.5 percent, while another series almost doubled in price. 

Ultimately, Judge Swain sided with and, in some cases, repeated the arguments presented by the fiscal board and the PSA Creditors, which included that National’s allegations are harming their reputations, but her decision was also based on limitations in the Title III structure. 

Judge Swain stated that Promesa “does not explicitly authorize the Court to order to initiate an independent investigation” like the one in National’s motion and added that National did not provide a viable option. 

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