COURT: Puerto Rico judge OKs order protecting federal disaster relief funds from potential creditor grabs as tension over COFINA agent, AAFAF intensifies – UPDATE - Debtwire

COURT: Puerto Rico judge OKs order protecting federal disaster relief funds from potential creditor grabs as tension over COFINA agent, AAFAF intensifies – UPDATE

01 July 2022 - 08:30 am UTC

Puerto Rico’s Title III bankruptcy judge today signed off on an order protecting federal disaster relief funds from potential recovery efforts by creditors.

 

Judge Laura Taylor Swain signed off on the request from the Financial Oversight and Management Board (FOMB) and Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish acronym) following a hearing in a Manhattan courtroom today. Though certain bondholders were wary of what they said was overly broad language initially proposed by the board and AAFAF, the parties worked on consensual wording during today’s hearing.

 

Suzzanne Uhland of O’Melveny & Myers, representing AAFAF, assured worried bondholders at the outset of the hearing that the order would apply only to federal disaster grants, not loans. The board and AAFAF also agreed to make available to bondholders reports on the use of the funds required by the Federal Emergency Management Agency (FEMA).

 

However, the board and AAFAF encountered some pushback from bondholders over a provision that would provide the commonwealth – as the conduit between FEMA and other entities that may be receiving the relief funds – a super priority claim against the estates of its fellow debtor entities in the event that any FEMA funds they receive are misused. Issues still remain over the amount of the potential super priority claim and who should be on the hook under varying circumstances, AAFAF counsel Uhland said. The parties eventually agreed to bring any dispute over the matter to court if it arises.

 

Additionally, the question of whether the commonwealth will be entitled to a super priority lien – a much more contentious proposal than a claim – under these circumstances was postponed to the 15 November hearing date.

 

One attorney observing today’s hearing via a video feed into San Juan observed that the super priority claim – which was insisted upon by the US Department of Justice – seemed logical.

 

“It looked like this whole matter was all ironed out beforehand, with only a few points of discrepancy,” the attorney said from Puerto Rico, where the courthouse is still powered by a diesel generator in the wake of Hurricane Maria. “It makes sense. It’s the US government worrying they will get their money back [in the case of the misuse of federal emergency funding] and I don’t blame them.”

 

COFINA agent’s immunity and fees granted, but larger issues remain

 

Judge Swain also signed off on a request from the independent agent for the Puerto Rico Sales Tax Financing Corporation (COFINA by its Spanish acronym) for immunity in her role in litigating the interests of COFINA. Agent Bettina Whyte requested the relief under Puerto Rico Oversight, Management, and Economic Stability (PROMESA) section 105, which provides such immunity to the oversight board. Whyte’s lawyers said she needs the same protection to avoid being subjected to personal liability claims.

 

The oversight board challenged her request, arguing that Whyte cannot be afforded immunity to the extent that she may have gone beyond the scope of a stipulation governing the issues to be litigated between the commonwealth and COFINA with respect to interest in sales and use taxes (SUT). Two of the counterclaims she filed in an adversary proceeding over the matter were outside the agreed-upon scope, FOMB lawyer Martin Bienenstock, of Proskauer Rose, said in court today.

 

Judge Swain will likely hear arguments on the scope of the SUT litigation matter at a later time. Until then, the parties agreed that Whyte would be protected under PROMESA Section 105 until the issue of scope comes into play.

 

Though the parties eventually agreed to the immunity to some extent, the back-and-forth among the attorneys involved today suggested the warring commonwealth and COFINA teams are no closer to settling their issues than they were when the Title III cases began five months ago. Senior COFINA bondholder coalition attorney Susheel Kirpalani of Quinn Emanuel, in a dispute over the right of AAFAF to be heard on the Whyte matter, declared that “since before the Title III cases, AAFAF has tried to put its thumb on the scale.” He further argued that while AAFAF may be the representative of the island’s government, the US Congress specifically created a nonpolitical entity in the oversight board because it “did not trust” the Puerto Rico government.

 

Kirpalani later characterized the oversight board’s opposition to Whyte’s immunity as “intimidation by threatening personal liability.” But Judge Swain wouldn’t bite.

 

“Yes, conceptually you have that dramatic issue. Practically, I don’t think so,” she responded.

 

The judge also signed off on Whyte’s request for payment of her professional fees, which after some contention, the parties agreed would be paid out of an account at Banco Popular and would not touch funds sitting at the Bank of New York Mellon that are subject to an interpleader order until outstanding issues between general obligation and COFINA bondholders is resolved.

 

CLICK HERE to view all Commonwealth Title III filings in Debtwire Dockets.

 

by Maria Chutchian and Xavira Neggers Crescioni