Tuesday, July 16, 2019

Swain’s World: Title III Bankruptcy Proceedings Alive and Kicking

By on March 8, 2019

Promesa Appointments Clause Violation Remains at Issue, Aafaf Identifies $12 Billion in Bank Balances

Editor’s note: The following was first published in the March 7 – 13, 2019, issue of Caribbean Business.

What has been going on with Puerto Rico’s bankruptcy process? First, Duff & Phelps, the firm hired in February 2018 to complete a forensic analysis of the island’s bank accounts, has yet to issue its report, which will help in the preparation of a cash model for the bankrupt Puerto Rican government.

“No specific date at this point,” said Financial Oversight & Management Board [FOMB] member David Skeel via Twitter, in response to a question from Caribbean Business. According to reports from the Puerto Rico Fiscal Agency & Financial Advisory Authority (Aafaf by its Spanish acronym), the island’s bank accounts have more than $12 billion, of which $3.6 billion is in a restricted account subject to the bankruptcy proceedings and $4.1 billion is in the Treasury Single Account.

Aafaf started its efforts to identify government bank accounts and their balances to obtain a comprehensive view of the Government of Puerto Rico’s cash position. The exercise and inventory obtained information on some 800 bank accounts. Aafaf has designed a five-step process to evaluate the government’s cash position and will continue the other steps to arrive at a comprehensive cash model. On Dec. 18, 2017, the Oversight Board announced it would conduct an independent forensic investigation of the information on government bank accounts. On Feb. 6, 2018, the FOMB announced the retention of Duff & Phelps LLC to conduct this forensic analysis.

Last week, the FOMB announced it was appealing to the U.S. Supreme Court the Feb. 15, 2019, decision by the U.S. Court of Appeals for the First Circuit, which held that members of the Oversight Board are federal officers who have to be appointed pursuant to the Appointments Clause of the U.S. Constitution.

The Oversight Board said it was going to ask for a stay of the First Circuit’s mandate, pending the U.S. Supreme Court consideration of the Oversight Board’s petition for a writ of certiorari. The board argues that the Appointments Clause does not apply to them. The majority of the FOMB voted to appeal.

Federal, in the territorial sense

At issue is whether Congress’ power over territories like Puerto Rico extends as far as creating officers within the territorial government or whether by virtue of being created by Congress itself, it automatically makes any office a federal office. The Appeals Court in Boston gave the White House 90 days to correct the situation. Asked whether he believed the Supreme Court will grant certiorari, Skeel said he did not know but that “it strikes me as a good prospect given that the Circuit Court decision strikes down major legislation as unconstitutional.” The Boston Court upheld the rest of the Promesa law and all the decisions made by the FOMB.

What has been going on with Cofina, the Sales Tax Financing Corp.? Aside from the fact that many retail investors have been complaining that they are getting less for their investment than what was promised in the debt-adjustment plan approved by the court, a group of credit unions also felt hoodwinked.

The credit unions, which had filed an adversary proceeding before the debt-adjustment plan, said the Cofina deal contains contradictory language regarding their surviving claims, which are still pending a decision.

The credit unions said just two words need to be changed in the agreement to be corrected.

Item 30 on page 27 of the Plan of Adjustment said Cooperativa de Ahorro y Crédito Abraham Rosa, et al. v. Commonwealth of Puerto Rico “shall be entitled to continue pursuit of such litigation against all parties other than Cofina and Reorganized Cofina, subject to all available rights and defenses with respect to claims and causes of action asserted therein.”

The cooperatives said that excluding Cofina and Reorganized Cofina from the cited provisions seems to negate the court’s jurisdiction and authority to adjudicate the adversary proceeding.

The FOMB, however, said that in court they had agreed to an order clarifying that the claims by the Credit Unions Action are discharged as to Cofina and Reorganized Cofina only, and there is no release with respect to any other entity or person. “The credit unions did not challenge this proposal to resolve their stated concerns and objection by such clarifying language,” the FOMB said.

What is happening in upcoming weeks? The Title III court is slated to hold an omnibus hearing in March in Courtroom 17C of the U.S. District Court for the Southern District of New York on yet-to-be-determined matters related to the Title III case, which has wound down a little.

As of presstime, the court was expected to deny an Oversight Board request to compel monoline bond insurers to provide certain information about their loss revenues. The insurers have sued to put the Puerto Rico Electric Power Authority under a trustee.

On the other hand, in addition to the issue with the Appointments Clause, the most important matter pending is the restructuring of the general-obligation (GO) bonds, something that cannot happen until the matter of the $6 billion in GO bonds that the board is trying to declare illegal, is resolved. So far, hundreds of creditors of GO and Public Buildings Authority bonds issued after 2012 are filing documents of interest in participating in the proceedings to oppose the repeal. Judge Laura Taylor Swain had allowed participation to avoid a repeat of what occurred with the process to reach a consensus on the Cofina debt as hundreds of investors in that case complained they were not given adequate participation.

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