Puerto Rico bankruptcy judge Laura Taylor Swain this week pressed lawyers to tie up some legal loose ends in the plan of adjustment for $17.6 billion of sales tax bonds.
At what may have been the final hearing in the Title III case, Swain heard arguments about a settlement of revenue between the commonwealth and the Puerto Rico Sales Tax Financing Corp. (COFINA) and about the restructuring of the bonds. The hearing was held Wednesday and Thursday in San Juan with some arguments also heard by closed circuit television from a New York City courtroom.
The $17.6 billion in COFINA bonds constitute largest category of Puerto Rico public sector debt. A ruling on the settlement affecting the flow of sales and use tax revenue to COFINA and the Puerto Rico government would also affect the amount of revenue available to pay other bonds.
According to the current settlement, the claims of bondholders are reduced from having first claim on the proceeds of a 5.5% sales and use tax to having first claim on 53.65% of this revenue stream. The balance goes to the Commonwealth government.
The Puerto Rico Oversight Board said this summer that with the proposed deal, if bond trustee money was included as the plan specifies, there would be recoveries of 93% for COFINA senior bondholders and 56.4% for COFINA subordinate bondholders.
Several objectors tried to deliver mortal blows to the proposed COFINA plan of adjustment with arguments from the U.S. Constitution or lack of participation by subordinate bondholders in the mediation process that created the plan. Swain entertained little discussion of these topics.
Instead, at the start of the second day of the hearings Swain asked the attorneys favoring the deal to answer questions about narrow legal issues she had with paragraphs of first, the proposed findings of fact and conclusions of law, and second, the proposed order and judgment confirming the plan of adjustment, both for COFINA. The paragraph from the proposed order says in part, “the plan and related documents or any amendments or modifications thereto shall apply and be enforceable notwithstanding any otherwise applicable nonbankruptcy law.”
She said she was also concerned with a similar paragraph at the end of the findings of fact and conclusions of law.
Swain indicated that some of the related documents were governed by New York or Puerto Rico law and that she was concerned about her ability as a federal judge to declare them enforceable.
Susheel Kirpalani, the chief lawyer for the group representing the COFINA Seniors, told Swain that the related documents were supposed to protect the property rights of the owners of the new COFINA bonds. “I don’t know if there’s a substantive problem,” he said.
The Puerto Rico Oversight Board and the COFINA Seniors are supporting the deal.
Swain asked Kirpalani if he wanted her to find the new bonds consistent with the Puerto Rico Constitution or for her to rewrite the Puerto Rico constitution. She said she couldn’t do the latter.
Kirpalani responded that the new bonds would be consistent with the Puerto Rico Constitution. Instead, he said he wanted her to be sure the new bonds would be consistent with the U.S. Constitution.
Swain told lawyers for the board and COFINA Senior Bondholders Ad Hoc Group to explain their position on this passage of the proposed order.
Swain said she wanted clarification and amplification of passages in the proposed order and findings of fact and conclusions of law on injunctions against prosecuting those involved with COFINA. She told the lawyers she wanted a supplementary submission on indemnification. She said she wanted a document that makes clear who would be free from prosecution. The issue seemed to be whether immunity would just be for those who have helped create the current deal or would extend to those who created the original COFINA bonds.
Swain didn’t give a ruling at the end of the hearings on the proposed COFINA settlement and plan of adjustment. She will release a ruling in written form in the coming weeks.
If she approves the settlement and plan of adjustment, the Puerto Rico Oversight, Management, and Economic Stability Act allows for appeals of the decision.
A ruling in favor of the decision would make the COFINA debt the first Puerto Rico debt restructured through the Title III process, albeit one that involved a negotiated solution. The debt of the Government Development Bank for Puerto Rico has already been restructured through the PROMESA Title VI process.