Title III Court Keeps Confirmation Schedule in Place While Parties Head to Mediation Over Enabling Legislation Impasse; Oversight Board Says Nothing Left to Put on Table

Judge Laura Taylor Swain today ordered legislative leaders, Gov. Pedro Pierluisi and the PROMESA oversight board into mediation with mediation team leader Judge Barbara Houser to attempt to overcome disagreements regarding Title III exit legislation needed to effectuate the oversight board’s proposed plan of adjustment. Judge Swain set a deadline of next Tuesday, Nov. 2, for Judge Houser to report back on mediation progress.

The court held an emergency status conference this morning after the Puerto Rico Senate on Thursday, Oct. 21, “shelved” the pertinent legislation, House Bill 1003, for failure to garner enough votes to pass the measure, ultimately missing the deadline to enact an acceptable version of the bill imposed by the oversight board. As a result, the oversight board sought to adjourn the confirmation hearing.

Ahead of today’s status conference, the Puerto Rico legislative leaders and Gov. Pierluisi reached an agreement on amended legislation that was submitted in Spanish to the court this morning. The parties insisted that the amended measure would be passed by the House and Senate by Tuesday, Oct. 26, having already secured the necessary support for its enactment. The oversight board does not support the revised bill, finding that it continues to include problematic provisions that are not aligned with the plan of adjustment. Accordingly, the oversight board continued to seek adjournment of confirmation and confirmation-related deadlines, but that request was denied by Judge Swain this morning. The judge said that delay was not in the commonwealth’s best interest, as the plan puts Puerto Rico in its closest position in years to restructure its debt. Judge Swain said her “patience is wearing thin” and cautioned that if there are no prospects for a viable plan in near term, the court will be forced to consider whether the Title III proceedings for the commonwealth, ERS and PBA and the two Title VI proceedings for PRIFA and the CCDA should be dismissed. If that happens, the judge added, “the oversight board wouldn’t go away, but the automatic stay would go away.”

Further, Judge Swain directed the oversight board not to “short circuit the process” by withdrawing the plan from consideration prior to the completion of mediation, a remark made in response to oversight board Executive Director Natalie Jaresko, who told the court that absent an adjournment of the process for “at least a short period of time, the board is willing to withdraw the plan.”

Jaresko said she could “not underline enough how concerned the oversight board is” about the amended legislation, adding that she believed there was no prospect of negotiations yielding a different outcome. She explained that the amended bill contained at least two issues, including a “poison pill” provision that would prevent the new bonds from being issued under the plan if the court were to impose any sort of pension cuts, something to which the oversight board would not agree.

Judge Houser, for her part, stressed that the mediation team has “spent thousands of hours working with constituents” to get Puerto Rico to a place where a plan has been proposed that has significant support. She said that “every agreement in the plan was heavily mediated” and every party was “pushed mightily” during the mediation. “It would be a shame not to bring this plan to you for confirmation on the schedule requested,” Judge Houser said to Judge Swain, who responded that such a result would be “beyond a shame.”

Although the oversight board would agree to participate in the mediation process, its representatives assured Judge Swain that it has “nothing left to put on the table.” Nevertheless, Judge Swain ordered the board to withhold from withdrawing the plan until Judge Houser submits a mediation report, which would state whether the mediation team believes plan confirmation can go forward within the current timetable. The mediator statement is due Tuesday, Nov. 2, at 5 p.m. ET. The oversight board would also have to submit a response addressing whether there can be a confirmation proceeding with respect to a confirmable version of the plan, what sort of amendments would be required and whether resolicitation would be necessary. Further, the report must address the possibility of potential dismissal of the cases. The deadline for the oversight board’s informative motion is Nov. 4 at 2 p.m. ET.

The oversight board expressed confidence that it could craft an alternative plan that did not rely upon the implementation of new legislation, explaining to the judge that the plan enacting legislation was creditor driven and not a PROMESA requirement. The board acknowledged that this process would take some time, given the number of parties that would be involved in the process.

Susheel Kirpalani of Quinn Emanuel, on behalf of the initial PSA creditors, rose to oppose any adjournment in the plan confirmation process, noting that there are still two weeks to go before the scheduled Nov. 8 hearing start date. “Deadlines exist because they work,” he said.

Kirpalani sought to refute the oversight board’s contention that, with additional time, a plan could be confirmed without legislation authorizing the issuance of new GO bonds and CVIs contemplated in the plan. “Constitutional debtholders made their deal and are prepared to live by it. But there is only one deal with the board, and it has always been contemplated that it would include legislation based on the model of the only Title III plan approved by this court previously,” he said.

Calling for the oversight board and the commonwealth “to solve their issues,” Kirpalani noted that they date back to the Title III petition in 2017. “None of them are new, and they need to come together and compromise as we have done,” he said.

In the absence of such resolution, and a resulting lack of a confirmable plan, Kirpalani said the PSA creditors would reserve their rights to seek “all available relief under our bonds and applicable laws, including the alternatives outlined in our deadlines motion from last year.”

Kirpalani downplayed concerns that failure to pass legislation before confirmation would allow the PSA creditors to seek a termination fee under the agreement. “This is not what we have been focusing on at all. It is a tree, not the forest, and we don’t want to go down the road of hypothetical scenarios,” he said.

Picking up on an earlier analogy by AAFAF counsel John Rapisardi of O’Melveny, who said the plan is “on the one-yard line,” Kirpalani added, “The only ones who can carry us across are the board and the elected officials. The bondholders have not been part of that discussion and are not going to contribute to that.”

Martin Bienenstock of Proskauer Rose on behalf of the oversight board outlined the “very narrow” issues that are at the crux of the impasse and what is “essential” to go forward. He reiterated the oversight board’s agreement to strike monthly pension benefit reductions from the plan but stressed that a “freeze” on further benefits would have to stand to avoid saddling the commonwealth with “billions” in future debts that the oversight board believes would not be payable.

While allowing that the oversight board and government could revisit the issue if economic and fiscal conditions improve in the future, Bienenstock said that “for now there must be a freeze to go forward with the plan.” The latest amendments pitched in the Legislature would strike the freeze language from House Bill 1003. He said the oversight board “absolutely” requires what the House approved, which unambiguously states that monthly pension cuts are out and that the freeze would still be in place.

“The answer is yes, probably,” Bienenstock replied. Stating that the legislation is in the plan because the bond creditors wanted it, he said the oversight board “would have liked to have had it but it is not critical,” adding the oversight board’s belief that there are alternatives that would not require legislation that would require considerable time to discuss with the large number of parties involved in the “massive” litigation.

Arguing against adjournment, John Rapisardi of O'Melveny & Myers on behalf of the commonwealth said the Pierluisi administration and Legislature are committed to getting the legislation enacted as quickly as possible. “We’re on the one-yard line and we just can’t fumble the ball. Collaboration and cooperation got us here,” he said, calling on the court and the oversight board to allow the Legislature to “express its will.”

Rapisardi said the bill is not about pension freezes at all and is conditioned on zero pension cuts, “period, end of story.” He argued that “when we get into debate about absolute certainty [that there is no workaround], that is where we get in trouble.” He said the government is not going to advocate a bill and then turn around and undermine it, noting that Judge Swain will have to determine whether the law is enforceable and submit findings of fact.

Rapisardi expressed confidence the government can make the oversight board “comfortable that there will be no end run around the bill as passed.” He expressed concern that mediation now could further “delay and confuse” the process, stating the administration’s preference for direct talks with the oversight board and Proskauer.

Counsel for Senate President José Luis Dalmau, former PDP Rep. Luis Vega Ramos, argued against adjournment and in favor of letting the “political process continue,” as an amended House Bill 1003 is “very close” to being passed in both chambers.

Judge Swain asked the Senate counsel whether the modified legislation would be “consistent” with the position stated by the oversight board and what it is prepared to propose. Vega Ramos responded that the bill would be “substantially close” and urged the court to let the legislative process play out. “Then the oversight board can express itself,” he said. Queried by Judge Swain, Dalmau endorsed the comments of counsel and said he is willing to engage in mediation.

House Speaker Rafael “Tatito” Hernández told the court the lower chamber would pass amended Title III exit legislation within 24 hours, pledging that a reworked House Bill 1003 would not affect the fiscal plan or the plan of adjustment.

Hernández contended that the amendments agreed on between legislative leaders from the Popular Democratic Party and New Progressive Party in both chambers, as well as the NPP administration of Gov. Pedro Pierluisi, “do not have any fiscal impact” but rather entail new language that simply clarifies concerns among senators by establishing a “clear position that there won’t be any pension cuts.”

Hearing from Hernández and counsel Jorge Martinez Luciano, Judge Swain expressed a sense that the oversight board’s sole authority over the proposing of a plan of adjustment “is a crucial factor here,” adding that her understanding is that the anticipated legislation “being devised” between lawmakers and the executive branch would not be wholly “responsive” to the acceptable parameters as laid out by the oversight board.