Mon 11/08/2021 18:42 PM
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Judge Laura Taylor Swain today presided over opening arguments in the long-awaited confirmation hearing on the modified eighth amended plan of adjustment for the commonwealth, the Employees Retirement System of the Government of Puerto Rico and the Puerto Rico Public Buildings Authority Title III debtors.

Today’s hearing focused largely on the merits of the myriad settlements and legislation underlying the plan, given the overwhelming consensus achieved in the cases through a number of key settlements. The plan has garnered support from virtually all institutional creditors and most retail investors. Among the handful of remaining objectors, retail investor Peter Hein is the lone party seeking to cross-examine witnesses in laying out his case.

The most notable development during the hearing came when U.S. Bank, as trustee for the Puerto Rico Public Finance Corp., or PFC, bonds, announced an agreement in principle with respect to its plan objection, subject to documentation of the deal. The bond trustee had objected to the plan’s classification scheme as improper, because it placed PFC bonds’ purported general unsecured claims within the same class as commonwealth appropriation claims.

Judge Swain had few words for the parties at the outset of the hearing beyond those related to case administration, choosing to delve into a status update from the oversight board followed promptly by opening statements in support of confirmation.

A transcript of today’s live blog of the hearing can be accessed HERE. Tomorrow’s hearing will consist of statements by 25 individuals selected through a lottery to provide their views on the plan to the court and the parties in interest. The hearing will begin at 8:30 a.m. ET. Reorg will provide updates on any significant developments and will resume live blog coverage on Wednesday, Nov. 10.

Brian Rosen of Proskauer Rose provided an update on behalf of the oversight board, briefly addressing the stipulation and agreement between the oversight board and the DRA parties entered into on Nov. 5. Stemming from the accord was the modified eighth amended plan filed on Sunday evening, Nov. 7, as well as a supplemental voting declaration reflecting the DRA parties’ recast votes in favor of the plan.

Oversight Board’s Opening Remarks

After Rosen’s update, Martin Bienenstock of Proskauer appeared to present the oversight board’s opening argument. Bienenstock provided an overview of the state of play, noting the overwhelming support for the plan as well as the rejecting classes. He stressed that the board wishes that the plan could allow “more to be done” for the people of Puerto Rico, while also providing higher payments to creditors. He noted the oversight board’s statutory mission of fiscal responsibility and market access and focused on the potential population-related challenges facing the commonwealth. Bienenstock noted that if the plan can allow Puerto Rico to become a “land of opportunity,” its population trends can change “in a hurry” and “for the better.” He also focused on the contingent value instruments, or CVIs, provided under the plan, which allow for a substantial upside to holders and align bondholders with the commonwealth.

Bienenstock outlined the relationship between the fiscal plan and the plan of adjustment under PROMESA, noting that even though the current fiscal plan does not provide for payment of the obligations under the plan, it has the “elbow room” to make all of the payments contemplated under the plan of adjustment. Bienenstock added that the plan will not be amended “unless and until” the court confirms it. However, if the plan is confirmed, fiscal plan certification will be done after the court enters a confirmation order and before the effective date so that a budget can address the plan-related payments.

Bienenstock then addressed the benefits of preemption and the commonwealth’s ability to partially eschew its obligations under Puerto Rico law to pay all outstanding debts of the commonwealth because PROMESA, as a federal law, preempts that requirement. The oversight board attorney also reviewed how preemption enabled the parties to resolve GO and PBA priority litigation. Briefly touching on other matters raised by objectors, including the interplay between the Contract Clause of the U.S. Constitution and Puerto Rico Constitution and debt restructurings, myriad arguments filed by retail bondholder Peter Hein and AMPR. Bienenstock also addressed a question raised by Judge Swain related to AMPR’s assertion that it is entitled to an administrative expense claim.

Returning to the podium, Brian Rosen spoke to the efforts of the mediation team, specifically praising the efforts of Judge Barbara Houser and Judge Roberta Colton, in facilitating the discussions and negotiations that ultimately resulted in the initial PSA framework as well as the subsequent plan support agreements. He described the efforts related to addressing the clawback claims as well as the mediation team’s role in reaching an agreement with the ERS bondholders after several years of litigation, which ultimately resulted in the ERS stipulation. Other noteworthy agreements Rosen flagged included the CVI component of the HTA/CCDA plan support agreement, which he characterized as a “giant leap,” and the PRIFA PSA. He said that the “one-thousand piece jigsaw puzzle” also resulted in the Title VI proceedings for PRIFA and CCDA, which are not Title III debtors.

Turning to plan voting, Rosen stressed that every retail class voted to accept the plan. On the retiree side, “substantially all” active and retired employee claims have been rendered unimpaired, according to Rosen.

Additional Statements in Support of Plan Confirmation

Commonwealth of Puerto Rico/AAFAF

John Rapisardi, of O'Melveny on behalf of the Puerto Rico Fiscal Agency and Financial Advisory Authority, or AAFAF, said parties in the case are finally “on the cusp” of realizing PROMESA’s promise following a restructuring process that has played out during the last four years under "terrible challenges," including two hurricanes, a series of earthquakes and a global pandemic.

Rapisardi underlined that collaboration between the parties has allowed the court to reach this “historic” moment. He also reviewed briefly the economic highlights of the plan, and said the significant economic benefits it provides the commonwealth result in a plan that is a “durable solution.” The plan enables the commonwealth to fund “essential services” and no longer requires reductions in pension benefits that the commonwealth opposed. Rapisardi noted that the resolution of the United States’ largest municipal debt restructuring is “within reach,” praising the efforts of the Title III court, the mediation team, the oversight board and creditors in helping the restructuring approach the “finish line.” Rapisardi also expressed his appreciation for work by the commonwealth officials throughout the entire process and said the government is committed to achieving fiscal responsibility.

During his remarks, Rapisardi said that while the commonwealth supports the plan, it is reserving its rights with respect to last minute provisions that were added to the plan and confirmation order and would update the court by Wednesday, Nov. 10 of its position on the changes.

Lawful Constitutional Debt Coalition

Susheel Kirpalani of Quinn Emanuel, on behalf of the LCDC, addressed arguments raised by Peter Hein in his objection, underlining that billions of dollars of claims that would benefit from Hein’s arguments have “agreed to compromise” the issues raised by Hein instead. He also pointed out that the retail class in which Hein is situated voted to accept the plan. Noting that the LCDC disagrees with the oversight board’s position that the GO bond priority turns on the issue of preemption, Kirpalani said bondholders reserve their right to raise arguments referenced by Hein in the event the plan is not consummated. However, as Kirpalani pointed out, these issues have been settled through the plan.

Kirpalani addressed the fees contemplated under the plan, which were also the subject of Hein’s objection, explaining that the fees represent costs incurred by creditors that are being reimbursed, including fees for professionals and opportunities that creditors gave up in exchange. He stressed that the various lockups on bond trading have “served the board well” and allowed the oversight board to achieve broader creditor support.

Kirpalani discussed the “yearslong effort” to reach a consensual resolution of the various disputes between the board and bondholders, pointing out that the LCDC was the first party to the PSA.

He also observed that the plan aligns the interests of bondholders with those of the commonwealth, calling the new GO bonds to be issued the transaction's "currency" and the “first step” to restoring Puerto Rico's access to the capital markets. Kirpalani added that the new GO bonds will have the blessing of a judicial validation and that additional protections around future debt issuances seek to remedy mistakes made in the past.


Dennis Dunne of Milbank on behalf of Ambac noted that Ambac has long advocated for a "comprehensive settlement" and is in "full-throated" support of the plan because that goal was achieved. Dunne said that the introduction of the CVI into the plan was "key" to achieving the settlements under the plan because it allowed the creditors to “sidestep” a potential valuation fight. Noting that the oversight board's revenue and economic projections have been on the "conservative side," he said the CVI established a "floor" for creditor recoveries while providing creditors with potential upside if Puerto Rico outperforms fiscal plan projections.

Dunne called the mediation team's efforts a “virtuoso performance” that built broad creditor support, minimized litigation and settled virtually all of the novel legal issues raised during the Title III case. Calling the opening of the confirmation hearings a “red-letter day” for Puerto Rico, Dunne said the plan discharges billions of dollars of commonwealth debt and positions Puerto Rico for economic growth. Dunne urged the court to confirm the plan and overrule any unresolved objections, warning of legislative chaos that would ensue if the plan of adjustment is rejected.


Martin Sosland of Butler Snow for FGIC said that he “would have drawn the line in a different place” three years ago but ultimately acknowledged that the record will show that the settlements reached through "arms-length negotiations” are "probably the only settlements that could have been reached." He said that the oversight board convinced his clients that they would not have been paid more and that his clients would not have taken less. Sosland agreed that the plan of adjustment was in the best interest not only of creditors but also the commonwealth and its entities. After overseeing several contested issues related to issues resolved by the plan, the court is "best suited" to understand the value of the arm's length negotiations and the complexities of the issues being settled, according to Sosland.

National Public Finance Guarantee

Robert Berezin of Weil, for National Public Finance Guarantee Corp., stressed that his client is one of Puerto Rico's largest creditors, providing insurance on GO, HTA and PREPA bonds, and has a "vested interest in the long-term success of the commonwealth, its instrumentalities and its people." Berezin noted that National is a party to the three major restructuring support agreements for the commonwealth, HTA and PREPA. Berezin then discussed the reasons that National eventually signed on to the PSAs. He also discussed the plan objection filed by the Puerto Rico bond underwriters, who are parties to a lawsuit National brought in local court. He acknowledged that there may be changes to language that relate to the underwriters in the plan, and said that National is looking forward to reviewing any modifications.

Assured Guaranty

Mark Ellenberg of Cadwalader, Wickersham & Taft, counsel for Assured Guaranty, appeared to voice support for the plan, stating that although “it is a long way from the plan we envisioned” when the Title III process started, it represents “an acceptable set” of settlements. Ellenberg stressed Assured’s insistence on a “holistic” resolution across Puerto Rico’s debt stack, pointing out that a piecemeal approach that didn’t address HTA debt and other revenue bonds was never going to be acceptable to the monoline.

Ellenberg said it was "impossible" for Assured to initially support the plan because of multiple interests across credits and the initial plan's simplistic "separate boxes" approach. Assured’s insistence that resolution of its claims had to be done holistically was subsequently adopted by the mediation team, which "understood our problem," the attorney added. While Assured did not always agree with the mediation team's approach, in the end it resolved the problem, according to Ellenberg. The attorney said Assured also believes the plan is in the best interest of Puerto Rico.

Official Retiree Committee

Catherine Steege, of Jenner & Block for the official retiree committee, said that the committee's initial agreement with the oversight board for limited cuts in pension benefits was a "tough" but "key" decision that helped propel resolution of the case. Steege noted that government pensioners account for nearly 5% of the island’s population and the single largest claimholder against the commonwealth at about $50 billion. Despite an awareness that its agreement would not win “any popularity contests,” the committee stood up for retirees and reached the first settlement with the oversight board, in part, hoping that it would spur further deals with other creditor constituencies, according to Steege.

Steege said the retiree committee welcomes the agreement reached between the oversight board and government that eliminates the proposed reduction of pension benefits, noting that retiree benefits were already adjusted prior to PROMESA. The improved treatment is in the best interest of retirees and creditors because of the outsized economic impact of pension cuts in Puerto Rico, according to Steege. Citing the declaration of the retiree committee’s expert Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship at Sloan School of Management at Massachusetts Institute of Technology, Steege asserted that every dollar of pension benefits that are cut has an economic impact across the island economy of $3. Evidence will show that the improved treatment of pensioners will not only benefit retirees, but the island economy in general and other creditors, Steege added.

Official Committee of Unsecured Creditors

Luc Despins, of Paul Hastings for the official committee of unsecured creditors. told the court that while the UCC supports the ultimate settlement, it does not support "every step of the process" that led to the settlement. Despins said it was important to identify this caveat because the same issue may be raised related to the Puerto Rico Electric Power Authority restructuring. The UCC attorney also said the committee has "some issues" with last minute changes to the plan that are likely to be resolved.

Despins called the proposed commonwealth restructuring "a difficult case" for unsecured creditors and noted that while the committee supports the plan, a majority of its members voted against accepting the plan. He said the plan delivers a recovery to his clients in the "20% range," which is far below what other creditors are receiving but significantly higher than the 3% initially offered by the oversight board. Despins noted that only 20% of eligible committee members voted in the ballot process to accept or reject the plan and indicated that it was easier to mobilize those against the plan than those who supported it. Despins also addressed the issue of preemption and GO bonds, noting that the committee wants to act as a “counterweight” to Hein’s objection.

DRA Parties

Doug Mintz of Schulte Roth on behalf of the DRA parties pointed to their fiduciary duty to protect rights related to claims in the vicinity of about $6 billion, including a $2 billion loan to the HTA that makes the DRA the single largest HTA creditor. Mintz said that the DRA was born from the "ashes of the GDB" and that his clients worked for the last three years aiming to maximize the value of its remaining assets in the absence of a call to come to the negotiating table. Mintz said the stipulation filed with the court last Friday, Nov. 5, resolves a range of issues and “tees up” others for resolution at the Ports Authority, HFA, CRIM and other entities.

"To be 100% clear, we are not going forward with any objections to this plan….We support this plan and are prepared to move forward," Mintz stated. He asserted that the proposed settlement is reasonable and appropriate for all parties.

Stating that the plan stems from a historically complex restructuring, Mintz said that the DRA parties “have qualms about how we got here, but we are here.”

Arturo García, also on behalf of the DRA parties, briefly addressed the court, confirming that it "put an end" to its differences with the oversight board through last week's court stipulation to support the plan and withdraw its objections. "At the end of the day, as a Puerto Rican, I am very glad that Puerto Rico is finally beginning to end bankruptcy," García said.

Parties in Opposition

Peter Hein

Peter Hein, the primary remaining objector, made his opening argument in opposition to plan confirmation, touching broadly on arguments ranging from preferential pro rata treatment for large bondholders to the commonwealth’s post-petition spending. Hein, who contends that the commonwealth has more than enough cash on hand to pay GO and PBA bonds in full, was critical that the hundreds of millions of post-petition dollars flowing down the priority scheme to items including employee bonuses and professional services contracts was “setting up Puerto Rico to be a serial defaulter.”

In response to a question from Judge Swain, Hein insisted that even though his class voted to accept the plan, the oversight board cannot be excused from meeting the requirements of confirmation under PROMESA. He disputed the oversight board’s assertion that PROMESA preempts certain Puerto Rico law, insisting that this premise is false. He further asserted that the oversight board must prove that it is admissible to pay lower priority creditors ahead of GO creditors and that it is in the best interests of the creditors. Hein added that Act 53-2021 reverses the priority scheme by paying pensioners before bondholders. As noted above, Hein is expected to be the only objecting creditor to cross-examine any witnesses during the confirmation hearing.


Peter DeChiara of Cohen, Weiss and Simon argued in opposition for both the Service Employees International Union, or SEIU, and the United Auto Workers, UAW, union.

Standing for the SEIU, DeChiara argued that the plan is “far too generous” for bondholders, contending that the “undue generosity” is unsustainable and that deeper haircuts for financial creditors are needed to meet “pressing needs” on the island. He also stated SEIU’s intention to object to the oversight board’s proposed findings with regard to Act 53.

Turning to the UAW, DeChiara said the UAW is reviewing the modified eighth amended plan and revised confirmation order and proposed order related to Act 53 to determine whether it will maintain, modify or withdraw its objections to the plan. DeChiara said the UAW hopes to resolve the matters consensually but reserves the right to pursue any objections that may remain outstanding.


Enrique M. Almeida, arguing on behalf of various state-chartered credit unions, or cooperativas, on the island, asserted arguments in opposition to plan confirmation that were grounded in the Takings Clause of the U.S. Constitution. Almeida maintained that the commonwealth “defrauded” the cooperatives by imposing “an excessive amount of unsound” Puerto Rico government securities on their investment portfolios that did not represent just compensation. He argued further that the plan is being used as a means to “whitewash” government misconduct and urged the court not to construe the Bankruptcy Code in such a way to “reward a dishonest debtor.”

Underwriter Defendants

Howard Steel of Goodwin argued on behalf of certain underwriter defendants involved in the issuance and underwriting of certain Puerto Rico bonds, which object to the plan grounds that seek to preserve their defensive rights in litigation relating to the bonds. Steel stated that they “heard and appreciate” earlier statements by the oversight board that the plan does not contain third party releases and it will make any necessary changes to accomplish that. Until then, Steel contended that the plan is not confirmable if it impairs the underwriter defendants’ defensive rights. He targeted several “provided however” clauses in the plan documents that appear to “eviscerate” defensive rights preservation language and contended that the plan “inexplicably” does not provide for defensive rights in future. Moreover, he stressed that the underwriters are not seeking financial consideration. Instead, according to Steel, the plan should not contain improper provisions that seemingly strip the underwriters of their ability to preserve defensive rights and give third party releases to the monolines.


Appearing as counsel for teachers’ union AMPR, José Luis Barrios explained that teachers, who he characterized as “essential workers that provide an essential service,” earn an average of $1,750 gross with pensions topping out at around $1,500 without participation in Social Security. Targeting the proposed pension benefits freeze for teachers in the plan, Barrios disputed a savings projection cited by the oversight board, countering that the actual savings could be sharply lower even without accounting for additional costs for the government in having to provide services that retired teachers would no longer be able to afford such as health coverage.

Barrios also argued that the plan’s contemplated savings are in nominal dollars, not in cash dollars, adding that such savings could have been achieved by reducing plan support parties’ fees awarded under the plan rather than through the proposed pension freeze. He sought to counter the oversight board’s assertion that AMPR is not entitled to administrative expense claims, arguing that after the filing of the Title III cases, the Act 106 pay-go statute codified that teachers were entitled to defined benefit plans and pensions. Barrios concluded that “teachers are worse off with this plan than without it.”

Other Plan Objectors

The court also heard brief arguments from Charles Cuprill for Sucesión Pastor Mandry Mercado, holder of a condemnation claim against the commonwealth of more than $30 million, and Rafael A. González Valiente for Suiza Dairy, which asserts a claim related to a Takings Clause judgment. Eduardo J. Capdevilia Díaz for Finca Matilde, Inc. also appeared to assert constitutional objections, arguing that the right to just compensation is an irrevocable right and that the plan cannot be “used as the backdoor” to override the commonwealth’s constitutional obligation.

Arthur Samdovitz, a pro se objector who owns $200,000 of 2014 GO bonds, questioned the vote tallies in the 2014 GO retail class and echoed Hein’s contention that the commonwealth has sufficient revenue to pay all GO bonds in full. José Sánchez-Girona appeared for Mapfre PRAICO Insurance Company, asserting claims related to surety bonds associated with the PBA debtor. The final objector, Brett D. Fallon of Faegre Drinker Biddle & Reath appeared for Quest Diagnostics, regarding the preservation of certain defensive rights and also expressed hope that Quest’s limited objection to confirmation could be resolved.
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