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Judge Swain limits access to Puerto Rico debt documents, reserves ruling on budget dispute

By on July 25, 2018

SAN JUAN – U.S. District Court Judge Laura Taylor Swain reserved her ruling on the budget wrangling between Puerto Rico Gov. Ricardo Rosselló and the island’s Financial Oversight and Management Board; denied a request by creditors to have unlimited access to debt-related documents; and amended case-management procedures to require the disclosure of economic interests with respect to debtors, all as part of the hearing Wednesday under the Puerto Rico Oversight, Management, and Economic Stability Act’s (Promesa) bankruptcy-like Title III in-court process.

Judge Swain worked together with Magistrate Judge Judith Dein to resolve numerous items in the omnibus hearing, which was held the same day the island celebrated its Constitution Day. The next omnibus hearing is slated for September.

Wednesday’s hearing began with a status report provided by the fiscal oversight board. Brian Rosen, a lawyer with Proskauer Rose, said some 170,000 proofs of claims have been filed against Puerto Rico in the Title III case. About 6,000 late claims were filed. There were 45,000 proofs of claims that have been categorized and sealed, amounting to “$32 trillion,” he said. About $55 billion are claims from retirees. The fiscal board hired two firms, Deloitte & Touche and BDO, to assist in the reconciliation process.

Regarding the Puerto Rico Electric Power Authority (Prepa), the report says the utility will not need additional interim financing from the commonwealth. Early this year, Prepa borrowed $300 million from the commonwealth after Judge Swain rejected an initial request to borrow $1 billion to avoid leaving the island in the dark after Hurricane Maria destroyed its energy grid. The utility is spending about $62 million a week.

A market sounding process on the utility’s privatization was completed in June, and “there is significant amount of interest,” officials said. The fiscal board is working with Filsinger Group to complete a budget for Prepa, which is operating on a temporary budget.

Meanwhile, lawyers for Siemens Transportation Partnership Puerto Rico, which has sued the Puerto Rico Highways & Transportation Authority (HTA) to demand payment of the department’s debt owed from the construction of the Tren Urbano (Urban Train) in the 1990s, told the court that it will work out the dispute under the Title VI restructuring support agreement of the Government Development Bank (GDB), a defendant in the lawsuit.

A lawyer for Siemens said the firm did not want $13 million the GDB is holding to be altered and complained that they did not want to be bound by the Title VI filing date because it has changed several times.

“Siemens understands and supports that the defendants desire for an expeditious resolution of the case, provided that Siemens is provided adequate time to put forth and respond to discovery requests, draft necessary pleadings and memoranda and generally prepare for trial in the case,” the lawyer said.

On the other hand, Judge Swain denied requests from the Official Committee of Unsecured Creditors of all Title III debtors, other than those of the Sales Tax Financing Corp. (Cofina), and from the Committee of Retirees seeking unlimited discovery of documents obtained by Kobre & Kim as independent investigator of the causes of Puerto Rico’s financial crisis.

At a June 6 hearing, Magistrate Dein had said the committees should not be kept in the dark with regard to which materials have been produced to the investigator. The committees said the investigator was “blinding the committees” regarding GDB documents. In particular, the Unsecured Creditors Committee (UCC) contends it does not know whether the investigator “has received specific, discrete categories of items that are supposedly relevant to the committee’s claims such as GDB board materials; GDB directors’ and officers’ liability insurance policies; and board minutes.”

Judge Swain agreed to a motion by the investigator to establish procedures for resolving any confidentiality dispute in connection with publication of the investigator’s final report on the causes of the island’s financial crisis, which is slated to come out next month. The investigator sought to put documents in a depository and requested an order exculpating him from damages related to the report’s publication.

The judge ordered the investigator to be available for any related matter for at least a year after the final report on its probe is completed. It also ordered the firm not to destroy any written documents or reports. The firm is expected to release its report by Aug. 16.

Farrington Yates, a lawyer for Kobre & Kim, insisted that GDB documents acquired from regulatory bodies such as the U.S. Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority Inc. (Finra), as well as highly confidential documents, will be returned to the GDB as they are for attorneys’ eyes only.

He insisted that the committees should wait until the final report is published and then determine which documents are essential.

Luc Despins, a lawyer representing the UCC, said Kobre & Kim should not return the GDB-related documents obtained from regulators. The GDB has already agreed to produce for the UCC and the Retirees’ Committee all non-privileged documents. Judge Swain said any GDB documents that are not in the depository of documents created by Kobre & Kim should be sought from the GDB.

Magistrate Dein said that documents such as GDB board minutes must be provided and that the committees also have right to documents from the SEC. However, “documents provided by the GDB to regulators, that is overruled and so any request of documents not in the depository, should be directed to the GDB,” she said.

On the other hand, Judge Swain denied a motion by certain secured creditors of the Employees Retirement System (ERS), headed by Altair, that sought a relief from Promesa’s automatic stay on lawsuits to “prevent a depletion of their collateral.” Following an agreement last year, the pension system has been paying interest on the debt from a segregated account that is running out of funds.

The judge also agreed to a creditors’ committee request to amend case-management procedures to ensure groups involved in the Title III cases disclose all economic interests with respect to all the Title III debtors.

Despins said the General Obligation (GO) Bondholders were required to disclose their financial interests because they have taken a position in the Cofina Title III case by intervening in the Bank of New York interpleader and signing on to the Commonwealth-Cofina dispute over ownership of the sales and use tax. A lawyer for the GOs said such actions, however, were taken in adversary proceedings–not the Cofina case–and thus do not trigger disclosure requirements.

“I am not persuaded by the argument that you did not have to do it,” Judge Swain said.

In another significant development, she reserved ruling on which budget the government should operate with, the version certified by the fiscal board or the one approved by the legislature, merely said she would have a decision as soon as possible.

Fiscal board lawyer Martin Bienenstock asked the court to dismiss dismissal suits filed by the government, the House and the Senate to stop the implementation of the board’s budget. He argued that the governor’s intention is to make the budget inoperative.

“What the governor is asking for is to spend above what was established without consequences,” Bienenstock said, adding that the court should not allow the governor to change line items in the budget, because it would make the fiscal plan meaningless.

The government maintained its position that the board is trying to impose public policy, with lawyers for the government and the legislature arguing that the board engaged in pressure tactics such as threatening to reduce the legislature’s budget unless the legislature repealed Act 80, known as the unjust dismissals law.

They noted that the government is not obligated to accept recommendations provided by the board, whose budget was greater than the legislature’s. A Puerto Rico Senate lawyer suggested that last year’s budget be enforced to resolve the dispute.

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