Docket: No. 17 BK 3283-LTS (Jointly Administered); No. 17 BK 3284-LTS
Court: United States District Court; February 4, 2019; Federal District Court
The Third Amended Title III Plan of Adjustment for the Puerto Rico Sales Tax Financing Corporation (COFINA) was filed on January 9, 2019, and is referenced as Exhibit A to Docket Entry No. 439 in Case No. 17-32842. This Plan has been modified following revisions made during and after the Confirmation Hearing, as outlined in the Confirmation Order, and includes the Second Amended Plan Supplement. Future modifications may occur under section 313 of PROMESA. The filing was made by COFINA through the Financial Oversight and Management Board for Puerto Rico, which acts as the representative of the Debtor as per PROMESA section 315(b).
Several documents have been filed in support of the confirmation of the Plan related to the Commonwealth-COFINA Dispute, which is incorporated into the Plan. These include:
1. Second Amended Plan Supplement and related documents (Docket Entry No. 4956).
2. Certificate of Service of Solicitation Materials (Mailing Affidavit, Docket Entry No. 387).
3. Certificate of Publication (Publication Affidavit, Docket Entry No. 585).
4. Certificate of Service (Garraway Affidavit, Docket Entry No. 429, along with Mailing and Publication Affidavits).
5. Omnibus Reply to objections regarding the Second Amended Title III Plan of Adjustment (Docket Entry No. 4663).
6. Memorandum of Law supporting the Third Amended Title III Plan of Adjustment (Confirmation Brief, Docket Entry No. 4664).
7. Declaration of Natalie A. Jaresko supporting the confirmation (Docket Entry No. 4756).
8. Declaration of David M. Brownstein supporting the confirmation (Docket Entry No. 4757).
9. Declaration of Christina Pullo regarding vote solicitation and ballot tabulation (Docket Entry No. 4794).
10. Statement of COFINA Agent supporting the Second Amended Title III Plan (Docket Entry No. 4656).
11. Declaration of Matthew A. Feldman (Docket Entry No. 4656-1).
12. Omnibus Reply by the COFINA Senior Bondholders’ Coalition to objections (Docket Entry No. 4665, with a joinder by certain mutual funds, Docket Entry No. 4670).
13. Declaration of Matthew Rodrigue supporting the Coalition's Omnibus Reply (Docket Entry No. 4665-1).
14. Declaration of Natalie A. Jaresko supporting a settlement motion (Docket Entry No. 4758).
15. Informative Motion of National Public Finance Guarantee Corporation supporting the COFINA Plan (Docket Entry No. 4888).
16. Statement from Ambac Assurance Corporation regarding the authority to determine the validity of new bond legislation (Docket Entry No. 4889).
17. Supplemental Brief by Plan Support Parties for confirming findings of fact and conclusions of law (Docket Entry No. 4890).
18. Declaration of Susheel Kirpalani supporting the Supplemental Brief (Docket Entry No. 4892).
These documents collectively aim to facilitate the confirmation process of the Plan concerning Puerto Rico’s financial restructuring.
Opposition submissions regarding the confirmation of the COFINA Plan were filed by several parties, including Stephen T. Mangiaracina, the Service Employees International Union and UAW, Peter C. Hein, GMS Group, LLC, PROSOL-UTIER, Mark Elliott, the VAMOS Group, Lawrence B. Dvores, and the Credit Union Group. A Confirmation Hearing took place on January 16 and 17, 2019, where the Court reviewed the Plan, opposition submissions, witness testimony, extensive written evidence, and public comments. Ultimately, the Court confirmed the Plan and overruled the objections.
The Commonwealth of Puerto Rico, through the Oversight Board, initiated these proceedings to restructure its debts under Title III of PROMESA, aiming to find a sustainable path forward for Puerto Rico and its stakeholders. The COFINA Plan is deemed a significant step towards the Commonwealth's financial recovery, despite concerns that the settlement may limit the Commonwealth's ability to serve its citizens. The Court recognized the Plan as legally compliant and essential for restoring Puerto Rico's access to financial markets and promoting economic stability. It emphasized that the Plan pertains solely to COFINA's assets and liabilities, indicating that future plans for the broader Commonwealth will need to address the concerns of its citizens and creditors.
Public participants at the Confirmation Hearing and citizens of Puerto Rico have advocated for a comprehensive audit of Puerto Rico's financial situation before the confirmation of the COFINA Plan. The COFINA Plan is a negotiated resolution aimed at addressing complex litigation issues that predated COFINA's Title III case. It seeks to facilitate the Commonwealth's progress by reducing its obligations to COFINA and enabling COFINA to meet its restructured obligations reliably. The Court deemed the timing of this Plan reasonable and appropriate. Approval of the Settlement and Plan does not preclude further investigations into the origins of Puerto Rico's debt crisis and the use of funds from pre-PROMESA borrowings. The Court’s rationale for confirming the COFINA Plan is detailed in subsequent Findings of Fact and Conclusions of Law.
The Memorandum serves as the Court's findings and conclusions under Federal Rules of Civil Procedure, applicable by Bankruptcy Procedure and PROMESA section 310. The Court affirms its exclusive jurisdiction over the Title III Case under PROMESA section 306(a), with proper venue under section 307(a). The Title III Court maintains exclusive jurisdiction over Commonwealth and COFINA property since the commencement of their Title III Cases. The Oversight Board has consented to the Court's jurisdiction regarding the Debtor's property and revenues necessary for the Settlement Order and Plan's implementation. Additionally, the Court acknowledges the New Bond Legislation, enacted on November 15, 2018, as a matter of judicial notice, emphasizing the federal courts' obligation to recognize state laws.
The New Bond Legislation, certified by the Puerto Rico Department of State, is included as Exhibit A. The Court acknowledges the relevant dockets from the Title III Case and the Commonwealth Title III Case, as well as appeals and adversary proceedings, specifically: a) The Official Committee of Unsecured Creditors of the Commonwealth of Puerto Rico v. Bettina Whyte, Adv. Proc. No. 17-257-LTS, and b) The Bank of New York Mellon v. Puerto Rico Sales Tax Financing Corporation, Adv. Proc. No. 17-133-LTS. The Clerk of the Court maintains all related documents and evidence from these cases.
The Debtor must demonstrate the elements of PROMESA section 314 and, where applicable, Rule 9019 of the Bankruptcy Rules by a preponderance of the evidence. The Debtor has successfully met this burden for both PROMESA section 314 and Bankruptcy Rule 9019 concerning Plan confirmation.
Puerto Rico has been experiencing a severe fiscal and economic crisis for over a decade, exacerbated by actions that led to the loss of capital market access and economic contraction, further worsened by Hurricanes Irma and Maria in 2017. PROMESA was enacted on June 30, 2016, establishing the Oversight Board, which supersedes any conflicting local laws. The Oversight Board's seven voting members were appointed by President Obama on August 31, 2016. COFINA was designated a "covered entity" under PROMESA on September 30, 2016, and the Oversight Board filed a voluntary petition for relief for both the Commonwealth and COFINA on May 3 and May 5, 2017, respectively, commencing Title III cases. The Court granted joint administration of these cases on June 1, 2017. Additionally, the U.S. Trustee appointed a creditors' committee for the Commonwealth's Title III Case on June 15, 2017, but indicated no committee for the COFINA case.
The Commonwealth-COFINA Dispute is pivotal for restructuring approximately $74 billion in Puerto Rico's public debt, with GO Debt and COFINA's Existing Securities comprising about 55% of this indebtedness. The crux of the dispute lies in determining ownership of the general sales and use tax (SUT) funds, specifically those transferred to COFINA under the Act of May 13, 2006. COFINA's pledge of a portion of the SUT, termed the "Pledged Sales Tax Base Amount," to secure its Existing Securities is significant, with approximately $783 million at stake in the current fiscal year, escalating annually by 4% until reaching $1.85 billion by fiscal year 2041. A resolution is essential, as ownership of the Pledged Sales Taxes affects the Commonwealth's ability to fund essential services and COFINA's debt repayment. Without this resolution, the Oversight Board cannot proceed with a Title III plan for the Commonwealth or COFINA.
Additionally, prior to the Title III Case, certain GO Bondholders filed a lawsuit on July 20, 2016, against various government officials, seeking a declaration that the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, which allowed for temporary debt service moratoriums, is preempted by PROMESA section 204(c)(3), and an injunction against measures that permit non-ordinary transfers. Following a second amended complaint on November 4, 2016, which included new causes related to COFINA and additional defendants, COFINA responded on December 16, 2016, denying the allegations and asserting defenses.
Plaintiffs in the Lex Claims Litigation contend that the Puerto Rico Constitution mandates prioritizing the payment of General Obligation (GO) Debt over other expenditures. They cite Article VI, Section 8 of the Constitution, which stipulates that if Puerto Rico's "available resources" are inadequate for all appropriations, public debt interest and amortization must be paid first, followed by other expenditures according to legal priorities. The plaintiffs assert that Pledged Sales Taxes qualify as "available resources," arguing that the establishment of COFINA and its bond issuance aims to circumvent the claims of GO Debt holders on these resources and the constitutional limits on public debt issuance. They seek two declaratory judgments: one affirming that Pledged Sales Taxes are "available resources" not subject to COFINA or its bondholders, and another establishing that the Commonwealth must prioritize GO Debt over COFINA-related deposits.
Conversely, certain COFINA bondholders and insurers argue that the Pledged Sales Taxes were designated as COFINA property from the outset, thus negating their status as "available resources" of the Commonwealth. They reference Act 91, which states that these taxes shall not be available for the Commonwealth's use. These parties request that the Supreme Court of Puerto Rico clarify whether COFINA's property is indeed "available resources," highlighting the significant implications for Puerto Rico's financial landscape. They emphasize COFINA's role in enabling favorable capital market access and claim that the plaintiffs' ability to secure higher interest rates on GO bonds results from COFINA's assets not being available for repayment.
Additionally, on April 12 and May 2, 2017, Whitebox and Ambac initiated separate lawsuits against BNYM, the trustee under the Existing Bond Resolution, alleging defaults had occurred prior to April 29, 2017, which BNYM failed to acknowledge. They argue that if their claims are valid, subordination provisions would prevent payments to holders of "First Subordinate" Existing Securities until "Senior" Securities are fully paid. BNYM responded that the lawsuits lack merit and should be dismissed.
BNYM contended that actions proposed by Whitebox and Ambac should be dismissed for several reasons: (i) no defaults occurred under the Existing Bond Resolution before April 29, 2017; (ii) BNYM was not required to undertake any actions that would incur expenses or liabilities unless satisfactory security or indemnity was provided by the bond owners; and (iii) there was a failure to comply with the no-action clause in Section 1106.1 of the Existing Bond Resolution. Following the certification of the Commonwealth's initial Fiscal Plan on March 13, 2017, the Oversight Board and AAFAF initiated restructuring proposals for major creditors based on the plan's debt sustainability analysis, leading to mediation with holders of GO Debt and COFINA's Existing Securities beginning on April 13, 2017. However, no agreement was reached before the pre-Title III stay expired on May 1, 2017.
In light of ongoing litigation from competing bondholder groups, the Oversight Board, in consultation with AAFAF and at the Governor's request, decided that filing for Title III protection was the best course for resolving the Commonwealth-COFINA Dispute. After the Title III Case was filed, BNYM held hundreds of millions of dollars in trust for the holders of Existing Securities but lacked clarity on fund distribution. On May 16, 2017, BNYM filed an Interpleader Action to resolve competing claims over the Disputed Funds, which included parties such as Whitebox, Ambac, and COFINA. The Title III Court approved this interpleader request on May 30, 2017, mandating that the Disputed Funds remain in trust until a final ruling was made.
During the period from June to September 2017, significant holders of "Senior" and "First Subordinate" Existing Securities intervened in the Interpleader Action, leading to extensive document requests and depositions involving various Puerto Rico government entities and officials. Ultimately, the Court stayed the Interpleader Action without making a determination on whether an event of default had occurred under the Existing Bond Resolution.
An event of default under the Existing Bond Resolution could lead to accelerated repayment for senior bondholders, potentially disadvantaging junior bondholders, as senior holders might require full payment before junior bondholders could declare a default and pursue remedies. The Interpleader Action represents a conflict between junior and senior COFINA creditors regarding their payment rights and priorities. Under PROMESA section 315(b), the Oversight Board represents both the Commonwealth and COFINA in Title III cases. After analyzing options, the Oversight Board opted for an orderly resolution process for the Commonwealth-COFINA Dispute, appointing independent agents to represent each entity.
On June 10, 2017, the Oversight Board filed a motion to establish procedures for resolving this dispute, which was denied by the Court on June 28, 2017, without prejudice. The Court requested the Oversight Board to seek consensus among interested parties for a mediation process with Chief Bankruptcy Judge Barbara Houser and allowed the Oversight Board to submit a revised motion regardless of consensus. Following this, a revised motion was filed on July 21, 2017, proposing a protocol for addressing the dispute, including appointing independent agents to represent the Commonwealth and COFINA in mediation or litigation.
On August 10, 2017, the Court approved the Procedures Order, which designated the Committee to represent the Commonwealth and Bettina Whyte as the representative for COFINA in the dispute. Each agent is required to act with good faith, care, and loyalty to their respective debtor, focusing on outcomes that best serve their debtor's interests rather than the interests of specific creditor types.
On September 8, 2017, the Commonwealth Agent initiated an Adversary Proceeding against the COFINA Agent to address the Commonwealth-COFINA Dispute, while simultaneous mediation efforts were led by Chief Bankruptcy Judge Barbara J. Houser, which ultimately did not succeed. Throughout the following months, the COFINA Agent responded to the complaint with counterclaims, various parties intervened, discovery was conducted, and cross motions for summary judgment were filed. The Court also clarified the Agents' authority regarding litigation and settlement.
After oral arguments on the summary judgment motions, mediation efforts resumed, although the Oversight Board was only informed of these efforts without direct involvement. On June 7, 2018, the Agents announced an Agreement in Principle to resolve the dispute, reached through independent negotiations, which both Agents deemed the best outcome considering the litigation risks.
The Oversight Board later contended that certain aspects of this Agreement extended beyond the original dispute's scope, specifically regarding new securities and fund usage constraints. Despite these concerns, the Oversight Board recognized the 53.65% to 46.35% allocation of disputed sales and use tax revenue as a fair settlement and decided to use it as a foundation for a confirmable COFINA plan of adjustment. Subsequently, in July 2018, the Oversight Board participated in court-sanctioned mediation concerning the COFINA plan of adjustment, leading to an agreement on the economic treatment of COFINA's Existing Securities and new securities terms on August 8, 2018, developed by Citigroup Global Markets, Inc.
At the request of the Oversight Board, a presentation was made that was based on the Agreement in Principle. The involved parties, referred to as the "Settlement Parties," include the Oversight Board, COFINA, AAFAF, certain holders of Senior and Junior COFINA Bonds, and other entities. They entered into a Plan Support Agreement on August 29, 2018, which outlines the compromise of the Commonwealth-COFINA dispute. Key provisions include the allocation of up to 53.65% of the annual Pledged Sales Tax Base Amount to COFINA and confirmation of COFINA’s exclusive ownership of funds held at BNYM as of June 30, 2018. The agreement also addresses the treatment of junior and senior Existing Securities in relation to a potential default.
On September 20, 2018, the Settlement Parties amended the original agreement to include additional holders of Existing Securities and to stipulate that certain significant holders would dismiss claims in the Lex Claims Litigation related to COFINA’s constitutionality and its entitlement to SUT revenues. The amendment is effective upon approval of the Settlement and confirmation of the Plan.
Due to changes in the Commonwealth's fiscal plan, the Commonwealth Agent was initially unwilling to finalize documentation related to the Agreement in Principle. Consequently, the Oversight Board began negotiating the Settlement Agreement terms with the COFINA Agent, adhering to the economic terms of the Agreement in Principle. The Settlement Agreement resulted from good faith negotiations, with the Oversight Board not influencing the COFINA Agent's decision-making or judgment in representing the debtor.
The Settlement Agreement aligns with the previously established Agreement in Principle. On October 19, 2018, following significant discussions, the Oversight Board approved the Settlement Agreement with the COFINA Agent. On the same day, the Debtor submitted the Plan, Disclosure Statement, and a motion for various approvals related to the confirmation process, including voting procedures. Subsequently, on November 5, 2018, the Commonwealth Agent and the COFINA Agent reached a stipulation to withdraw objections to the Settlement Agreement and related approvals, with exceptions outlined in a specific paragraph. By January 10, 2019, the Retiree Committee also withdrew its objections. As of the current date, the COFINA Agent, the GO Representative, and the Retiree Committee have all agreed to the Settlement Agreement's terms, and the Commonwealth Agent has not objected. The Oversight Board's approval of the Settlement Agreement was deemed appropriate.
On November 15, 2018, the Government enacted Act 241-2018, amending the original COFINA creation Act 91. The Court approved the Disclosure Statement on November 29, 2018, confirming it met the Bankruptcy Code's requirements and setting various deadlines for objections, ballot submissions, and elections related to the Plan, with a hearing scheduled for January 16, 2019. In compliance with the Disclosure Statement Order, the Debtor arranged for the distribution of solicitation packages to all eligible claim holders, which included crucial information for the confirmation process and tax-related forms for specific claim classes.
Prime Clerk issued election notices to holders of Claims in Classes 1 and 5, allowing them to elect into Classes 4 and 7 or, for those in Class 2 or 3, to choose trust certificates instead of a commutation alternative from monoline insurers. The Oversight Board must certify the submission or modification of a plan of adjustment under Title III of PROMESA, ensuring it aligns with the certified fiscal plan. On October 18, 2018, the Oversight Board certified COFINA's fiscal plan. The following day, it certified the Original Plan of Adjustment for the Puerto Rico Sales Tax Corporation, determining it was consistent with the COFINA Fiscal Plan. Subsequent modifications of the plan occurred on November 16 and 26, 2018, and January 9, 2019, each time certifying the modifications as consistent with the COFINA Fiscal Plan, culminating in the Third Amended Plan. The Oversight Board has fulfilled its obligations under PROMESA, and the Third Amended Plan, along with its predecessors, complies with PROMESA’s requirements.
The Plan adheres to the Bankruptcy Code provisions applicable under PROMESA, as confirmed by its compliance with Bankruptcy Rule 3016(a) and the requirements of various sections of the Bankruptcy Code (sections 1122 and 1123). Article IV of the Plan classifies Claims, excluding Administrative Expense Claims and Professional Claims, ensuring that each Class consists of substantially similar claims as per section 1122(a). The Plan designates ten Classes of Claims, including Senior and Junior COFINA Bond Claims, categorized based on insurance status and legal nature.
The classification is justified and not intended to manipulate voting outcomes; it reflects differences in claims' legal rights and priority under the law. Senior COFINA Bond Claims (Classes 1-3) are differentiated by insurance coverage (uninsured vs. insured by Ambac or National), while Junior COFINA Bond Claims (Classes 5-6) are classified similarly based on insurance status with Assured.
The distinction between Senior and Junior COFINA Bond Claims arises from their different underlying rights, particularly concerning payment priority in cases of default. Holders of these claims may shift to alternative Classes based on elections made, which are documented in the Plan. Objections have been raised regarding the Taxable Election Class and the treatment of claims that are shifted to the Junior Taxable Election Class (Class 7).
Objections highlight that the bonds in the Junior Taxable Election Class feature distinct payment schedules and maturities. Holders who opt into this class will receive Taxable Election Cash, capped at 60 million, amounting to up to two percent of the combined Senior and Junior COFINA Bond Claims. The Junior Taxable Election Class is classified separately from other bondholder classes, thereby not violating Section 1122(a) of the Bankruptcy Code regarding claim classification.
Class 8 claims stem from an ISDA Master Agreement between Goldman Sachs Bank USA and COFINA, with treatment dependent on the claim's termination value and any rejection damages' status as Parity Obligations. Class 9 encompasses all COFINA liabilities excluding specific claims categorized under Administrative, Professional, Senior, Junior COFINA, GS Derivative, or Section 510(b) Subordinated Claims.
The Plan establishes ten separate classes of claims that comply with Bankruptcy Code Section 1123(a)(1). Classes 1 through 10 are deemed impaired, with holders of Allowed Junior COFINA Bond Claims (Assured) receiving the Acceleration Price on the Effective Date, which effectively renders their claims unimpaired; however, Assured's subrogation rights result in their claims being impaired. Consequently, no classes remain unimpaired under the Plan.
The treatment of all impaired classes is detailed in Articles V through XIV of the Plan, satisfying Section 1123(a)(3). Treatment is uniform within each class unless a holder agrees to less favorable terms. Holders opting for all taxable bonds will be reclassified from Classes 1 or 5 to Classes 4 or 7, respectively. Objections concerning the Taxable Election Class's existence and the treatment of claims within the Junior Taxable Election Class do not contradict Section 1123(a)(4).
Consummation Costs are being allocated to parties involved in the A&R Plan Support Agreement, not to the Consummation Cost Parties based on their Claims against COFINA. During mediation led by Chief Bankruptcy Judge Houser, these parties agreed to several conditions in the A&R Plan Support Agreement, including supporting the Plan, restricting bond transfers, and waiving rights to seek expense reimbursements through other means. In light of their contributions to the Plan's formulation and costs incurred, the Oversight Board deemed it fair to compensate the Consummation Cost Parties with these Costs. The estimated aggregate postpetition fees and expenses for these parties amount to at least $135 million, holding approximately $10 billion of the total $17.6 billion in outstanding Bond Claims. Without the Consummation Costs provision, they would have received about $190 million. Ultimately, the incremental payment to them from the Consummation Costs provision is approximately $140 million, representing about 1.3% of their total Allowed Bond Claims. The Oversight Board anticipates that the total postpetition costs will exceed this net cost. Unlike other Title III debtors, COFINA lacks a statutory creditors' committee, making the PSA Creditors pivotal in negotiating the Plan and ensuring creditor support. The payment of Consummation Costs was essential for the success of the A&R Plan Support Agreement, which, if absent, could have led to a protracted and contentious confirmation process for COFINA.
There is uncertainty regarding the ability to present a confirmable plan to creditors and the Court, which could further delay payments to creditors who have not received any bond payments for over eighteen months. The Oversight Board deemed it appropriate for COFINA to pay the Consummation Costs to facilitate a quicker exit from Title III, considering the benefits of the A&R Plan Support Agreement, mediation outcomes, and the burdens of intensive mediation with the Consummation Cost Parties. The payment to PSA Creditors complies with section 1123(a)(4) of the Bankruptcy Code, which stipulates equal treatment of claims within the same class, not necessarily equal treatment among all claimants. The PSA Creditors’ claims are treated similarly to other bondholders under the Plan, with Senior COFINA Bond Claims receiving a 93.01% recovery and Junior COFINA Bond Claims receiving 56.41%, regardless of the investor type. The Consummation Costs are meant to compensate the PSA Creditors for their significant expenses in achieving a confirmable plan, their commitment to “lock up” their bonds until June 1, 2019, and their support of the Plan, which includes conditions not applicable to non-PSA Creditors. The Plan also outlines adequate means for implementation, including provisions for the issuance of COFINA Bonds and distributions to holders of Allowed Claims, while granting Reorganized COFINA exclusive rights to litigate claims post-Effective Date.
Section 28.1 establishes that, upon the Effective Date, all actions required under the Plan that typically necessitate director approval for COFINA or Reorganized COFINA—including the issuance of COFINA Bonds, execution of Definitive Documents, adoption of By-Laws, and appointment of directors and officers—will be automatically authorized in compliance with New Bond Legislation and new governance documents, without needing additional approval from any person or entity. Section 28.3 outlines that the board of directors for Reorganized COFINA will consist of three members appointed by the Governor of the Commonwealth, who must adhere to independence and qualification standards defined in the Definitive Documents. Section 28.5 states that COFINA Bonds will be issued by Reorganized COFINA as a bankruptcy-remote entity, solely dedicated to the purposes set out in the Plan and Term Sheet. Section 30.1 stipulates that, except as outlined in the Confirmation Order, all assets of COFINA will transfer to Reorganized COFINA on the Effective Date, free from all liens except those securing the COFINA Bonds and Parity Bonds, with the Confirmation Order serving as proof of COFINA’s liability discharge as per the Plan. The Amended Plan Supplement includes final drafts of the New Bond Indenture, COFINA Bonds, By-Laws, and Banking Services Contract, ensuring the Plan's implementation. On January 28, 2019, the Oversight Board submitted a Second Amended Plan Supplement to update certain exhibits. The Plan meets the criteria of Bankruptcy Code sections 1123(a)(5) and 1123(b)(1), with Classes 1 through 10 classified as impaired. Article XVIII notes that all Executory Contracts and Unexpired Leases with COFINA will be rejected as of the Effective Date, unless already addressed by prior court orders or specifically listed for assumption in the Amended Plan Supplement, allowing COFINA to amend schedules regarding these contracts and leases before the Confirmation Date. The Plan is also consistent with sections 1123(b)(2) and 1123(b)(3)(A) of the Bankruptcy Code.
The Plan addresses the settlement of several key disputes, including the Commonwealth-COFINA Dispute, the rights of senior and junior COFINA bondholders involved in the Interpleader Action, and the treatment of Senior COFINA Bond Claims held by Ambac and National. It results from thorough negotiations among Governmental Parties and various creditor groups, represented by skilled legal counsel. These compromises are essential for COFINA’s emergence from Title III, as they prevent delays and additional expenses that could hinder debt adjustment and negatively impact creditor recovery.
Each compromise is made in good faith, aligns with the policies of PROMESA, is fair and reasonable, serves the best interests of COFINA and its creditors, falls within a reasonable litigation outcome range, and meets the criteria for approval under the Bankruptcy Code and applicable laws. The Plan also aims to resolve six adversary proceedings and two appeals currently in the First Circuit Court, as well as another action in the District of Puerto Rico, addressing complex legal issues effectively.
The interrelated nature of these settlements means that their mutual approval is necessary for the Plan's conditions to be met for the Effective Date. The Plan, consistent with sections 1123(b)(3)(A) and (B) of the Bankruptcy Code, is based on a fair and reasonable Settlement of the Commonwealth-COFINA Dispute. After the Effective Date, Reorganized COFINA will have the exclusive right to litigate any claims or causes of action without needing the Title III Court’s approval. Additionally, the Plan modifies the rights of all claim holders, ensuring no class remains unaffected, thus aligning with section 1123(b)(5) of the Bankruptcy Code.
The Plan includes several critical components:
a) Releases, injunctions, and exculpations for COFINA, Reorganized COFINA, the Disbursing Agent, and their Related Persons.
b) Releases provided by PSA Creditors and their Related Persons.
c) A release for BNYM and the Commonwealth.
d) A release for the Commonwealth Agent Releasees.
e) Consensual releases from holders of Claims.
f) Exculpation provisions for Government Parties, PSA Creditors, Bonistas, the COFINA Agent, the Commonwealth Agent, and entities like Ambac, Assured, and National, along with their Related Persons.
g) Assumption of indemnification and reimbursement obligations for directors and officers.
h) An exemption from registration under Bankruptcy Code section 1145 for the issuance of COFINA Bonds, Ambac Certificates, and National Certificates.
These elements are essential to the Plan's implementation and comply with relevant sections of the Bankruptcy Code, including sections 1123(b)(6) and 1123(d). Section 18.4 of the Plan addresses the payment of cure amounts for Executory Contracts, which will be determined per the underlying agreements and applicable law. The Debtor has not identified any monetary defaults to cure.
COFINA has adhered to Bankruptcy Code provisions, including the proper transmission of documents and solicitation of votes on the Plan. The Oversight Board, with professional assistance, prepared the Disclosure Statement, which was approved by the Court as compliant with sections 1125 and 1126 of the Bankruptcy Code. The Debtor has effectively solicited votes and complied with section 1129(a)(2).
The Plan was proposed in good faith to enable fiscal responsibility and access to capital markets, aligning with PROMESA objectives, with the Oversight Board acting as COFINA's representative in the Title III Case.
The Court determined the Plan was proposed in good faith after evaluating the circumstances of the Title III Case, the Plan's details, and the extensive process leading to its formulation, which included various compromises and settlements. Evidence of the Debtor's good faith was found in the Title III Case records, the Disclosure Statement, and proceedings related to the Confirmation Hearing. The Plan resulted from significant arm's-length negotiations among Settlement Parties, mediated by Chief Bankruptcy Judge Houser, and was based on an independent Agreement in Principle developed without Oversight Board involvement.
The Oversight Board furthered the Agreement by engaging in over two weeks of mediation addressing the COFINA plan of adjustment and related issues, including the rights of senior and junior COFINA bondholders involved in an Interpleader Action. Major Classes of Claims were represented in mediation, with the Senior COFINA Bondholders' Coalition advocating for senior bondholders. Insurers Ambac and National, representing over $2 billion in claims, and Assured, with exposure of approximately $274 million in subordinate securities, actively participated in negotiations. Retail COFINA bondholders were also represented by funds and organizations advocating for both mainland and Puerto Rican interests.
The A&R Plan Support Agreement, signed by all parties, detailed the treatment of senior and junior COFINA bondholders, resolving their relative rights. The Plan reflects the outcome of months of negotiations that involved a broad range of stakeholders, collectively holding approximately $5.6 billion in senior and $3.7 billion in junior COFINA bonds.
All entities and constituencies had access to the mediated settlement negotiation process, with the Oversight Board collaborating with any creditor party that wished to participate. The Plan aims to settle the Commonwealth-COFINA Dispute and the Interpleader Action, maximizing value for COFINA's creditors while avoiding lengthy litigation that could hinder or eliminate recoveries. The Plan, along with the Disclosure Statement, reflects substantial input from all representative groups and seeks to rationally adjust COFINA's debts, ensuring proper distribution of value to creditors based on their priorities and choices regarding distributions. The Plan's intent is to enhance the value of COFINA’s property and maximize creditor distributions, complying with section 1129(a)(3) of the Bankruptcy Code.
Section 1129(a)(6) is not applicable as the Plan does not entail any rate changes by COFINA. The Court approved the Disclosure Statement, affirming it contained "adequate information" under section 1125 of the Bankruptcy Code, allowing the Debtor to solicit acceptance and rejection of the Plan. Prior to this, no solicitations for acceptances of the Plan were made to claim holders. The solicitation process, including the Disclosure Statement Order and various notices, met the legal requirements set forth by the Bankruptcy Code and other applicable regulations, ensuring all parties had sufficient notice and a reasonable period to make informed decisions regarding the Plan. No further notice regarding the Plan or Confirmation Hearing is deemed necessary.
The Debtor and its associated parties have acted in "good faith" under section 1125(e) of the Bankruptcy Code, complying with PROMESA, Bankruptcy Rules, Local Bankruptcy Rules, and relevant nonbankruptcy regulations regarding disclosure related to the solicitation of acceptances for the Plan. They are protected from liability concerning any violations of applicable laws during this process and are entitled to exculpation provisions under Section 30.7 of the Plan.
Votes for the Plan were solicited and tabulated fairly, aligning with legal requirements, with all creditor classes entitled to vote having accepted the Plan, satisfying section 1129(a)(8) regarding Classes 1-9. Class 10 holders rejected the Plan, thus failing to meet section 1129(a)(8) for that class; however, the Plan remains confirmable as it complies with sections 1129(b)(2)(A) and 1129(b)(2)(B) concerning Class 10. The Debtor acknowledges the existence of Section 510(b) Subordinated Claims but asserts the Plan's treatment of Class 10 claims is appropriate as all similarly-situated holders receive similar treatment, with no distributions planned for holders of Class 10 claims, which does not constitute unfair discrimination. Lastly, there are no claims junior to Class 10 that would receive distributions under the Plan, affirming its fairness and equity. The Plan is deemed compliant with Title III of PROMESA.
The Debtor has adhered to the relevant provisions of PROMESA, the Bankruptcy Code, Bankruptcy Rules, Local Bankruptcy Rules, and the Disclosure Statement Order in distributing Solicitation Packages and tabulating votes regarding the Plan. The Plan aligns with PROMESA sections 314(b)(2) and 314(b)(3), ensuring no legal prohibitions hinder its implementation. The Commonwealth's Legislative Assembly approved the New Bond Legislation, which facilitates COFINA's bond restructuring. Key elements of this legislation include:
1. Confirmation that Reorganized COFINA will solely own the COFINA Revenues upon the Effective Date.
2. Changes to COFINA's corporate governance enhancing its independence from the Commonwealth.
3. Authorization for Reorganized COFINA to issue COFINA Bonds and COFINA Parity Bonds.
4. Establishment of a statutory lien to secure these bonds.
5. Covenants ensuring the repayment of the COFINA Bonds, including stipulations regarding the use of COFINA Revenues and modifications to the Pledged Sales Tax.
Additionally, the New Bond Legislation specifies that COFINA Revenues do not qualify as "available resources" or "available revenues" of the Puerto Rican government as defined in the Constitution. Puerto Rico case law presumes the validity of laws enacted by the Legislative Assembly and signed by the Governor, requiring any challenges to demonstrate unconstitutionality with supporting evidence and legal arguments.
No objector provided convincing evidence challenging the validity of the New Bond Legislation, either in written submissions or during the Confirmation Hearing. Consequently, the presumption of validity remains intact, as per Puerto Rico case law. The Court concludes that the New Bond Legislation was a legitimate exercise of the Legislative Assembly's constitutional authority, specifically designating a portion of COFINA sales tax revenues to manage the Commonwealth's and COFINA's judicial liabilities through new non-recourse bonds. The legislation is therefore valid, binding, and enforceable, contingent upon the Effective Date of the Plan.
The Plan does not contravene the Contracts Clause of the U.S. Constitution, which prohibits states from enacting laws that impair contractual obligations. While states cannot impair contracts, Congress has the authority to establish bankruptcy laws that may adjust debtor-creditor relationships, which can involve altering contract rights. The Court cites established principles of bankruptcy law, highlighting that while these laws provide orderly treatment of impaired contracts, they inherently accept the possibility of contract impairment.
The Court affirms its authority to approve the Plan under PROMESA, a federal statute aimed at enabling Puerto Rico to achieve fiscal responsibility and access capital markets while complying with constitutional requirements. Mr. Hein's objections regarding the fiscal plans and the New Bond Legislation's constitutionality under the Contracts Clause are overruled, as the legislation is deemed reasonable and necessary given the circumstances. The Contracts Clause's language is strict but does not render every conflicting state law unlawful; courts must balance its provisions with the sovereign powers of states to protect citizen welfare.
Courts utilize a two-pronged test to evaluate the impact of state laws on contractual relationships. Initially, they assess whether the law substantially impairs a contract, and subsequently, if so, whether this impairment is reasonable and necessary to achieve a significant governmental objective. Assuming the New Bond Legislation substantially affects contractual obligations, the reasonableness and necessity of the legislation are scrutinized. The First Circuit's reasonableness inquiry considers the law's rationality in context, while the necessity inquiry examines whether a less severe measure could have sufficed.
Several factors inform this analysis: whether the action was an emergency measure, aimed at protecting a societal interest rather than specific individuals, appropriately tailored to its purpose, imposed reasonable conditions, and limited in duration to the emergency. The New Bond Legislation was enacted by the Commonwealth Legislature in response to a severe fiscal crisis and litigation over the COFINA structure. The Legislature's decision to facilitate a settlement over the Commonwealth-COFINA dispute is deemed reasonable and necessary due to the ongoing fiscal emergency in Puerto Rico, leading the Court to conclude that the Contracts Clause does not prevent the confirmation of the Plan, thus overruling Mr. Hein's objections.
Additionally, the Plan does not infringe upon the Takings Clause of the U.S. Constitution. Bondholders contended that the Plan results in a taking of their property by compromising the lien on COFINA revenues without just compensation. The Court applies the Penn Central framework, which evaluates the economic impact on the claimant, the interference with investment-backed expectations, and the nature of governmental action. The Court determines that the alleged actions do not entirely destroy the value of the claims, as bondholders will gain substantial value through new secured bonds and cash, and resolving legal challenges related to the existing COFINA bonds enhances their value.
The proposed treatment of bondholders' claims may disrupt some bondholders' investment expectations; however, these expectations must consider the claims involved in the significant litigation addressed by the Settlement Agreement and Plan facilitated by the Mediation Team. The court emphasizes that bondholders inherently accepted the risk of public interest considerations when investing in a public utility. The nature of the governmental action supports the conclusion that the Plan and Settlement Agreement do not constitute an unconstitutional taking. These actions do not involve physical property invasions but rather restructure relationships under Congress's powers in PROMESA, aiming to balance economic benefits and burdens for the common good. Even if the Plan results in a Fifth Amendment taking, the court finds that the compensation offered to bondholders, derived from settling the Commonwealth-COFINA dispute, is adequate. Bondholder claims are evaluated based on lien value rather than face debt amount, and the settlement recognizes litigation risks through a comprehensive mediation process. Creditors have endorsed the Plan, indicating that the compensation aligns with the Takings Clause requirements. Consequently, objections to the Plan based on this clause are overruled. The Plan also aligns with PROMESA sections regarding the treatment of administrative claims, ensuring that holders of Allowed Administrative Claims receive full cash payments or other agreed-upon terms on the Effective Date, with specific provisions for ordinary course expenses that must be billed within ninety days to avoid being barred from distribution.
Consummation Costs will be paid in cash on the Effective Date of the Plan, with all other Allowed Administrative Expense Claims settled under Section 3.1 of the Plan. The Plan adheres to PROMESA sections 314(b)(4) and 314(b)(5), having received all necessary legislative, regulatory, and electoral approvals. The enactment of the New Bond Legislation is valid and enforceable, pending the Effective Date. The Oversight Board's approval of the COFINA Fiscal Plan confirms the issuance of securities under PROMESA section 207.
The COFINA Fiscal Plan, certified on October 18, 2018, establishes the Plan's feasibility by demonstrating COFINA's ability to incur and repay obligations. Financial projections indicate that COFINA can meet its obligations under the Plan. COFINA lacks the authority to raise taxes, and the alternative to the Plan involves uncertain and prolonged litigation, which could lead to unfavorable outcomes for COFINA creditors.
The Plan includes protections for COFINA and its creditors, such as a federal court order affirming COFINA's ownership of the Pledged Sales Tax Base Amount and enhanced covenants. If the Plan is rejected, litigation could lead to further complications and potential reductions in sales tax revenues for COFINA, undermining creditor interests. The Plan ensures COFINA's revitalization and defense against ownership challenges, which is in the best interest of its creditors.
Additionally, holders of "First Subordinate" Existing Securities may face risks of bond acceleration upon an event of default, which could delay payments until "Senior" Existing Securities are satisfied, as stipulated in the Existing Bond Resolution.
Upon declaration of an event of default, the principal and accrued interest on "Senior" Existing Securities become immediately due. Holders of "First Subordinate" (junior) Existing Securities cannot declare a default or compel the Trustee to act until the "Senior" Existing Securities are fully retired or defeased per the Existing Bond Resolution. Senior bondholders prioritize their payments if Trustee-held funds are insufficient to cover interest, principal, or redemption amounts due. If the proposed Plan is not confirmed, ongoing litigation could lead to unequal outcomes for creditors. The Plan offers a distribution of approximately 93% to "Senior" Existing Securities holders and about 56% to "First Subordinate" holders, which is likely more favorable compared to potential outcomes without the Plan. The Plan minimizes delays, litigation costs, and uncertainty by implementing a consensual agreement among major stakeholders. The acceptance of the Plan by various creditor classes suggests it is viewed as beneficial. The Oversight Board has engaged Citi as an investment banker and financial advisor to facilitate economic growth and recovery in the Commonwealth. Citi developed Securities Terms to ensure broad market access for Reorganized COFINA and maximize recovery for existing bondholders, addressing concerns about potential "haircuts" to their claims. The Securities Terms provide for COFINA Bonds issued under the Plan to have fixed interest rates, including Current Interest Bonds (CIBs) which pay cash interest and Capital Appreciation Bonds (CABs) which accrue non-cash interest until maturity, with all bonds accruing interest from August 1, 2018.
CIBs are set to mature in 2034, 2040, 2053, and 2058, with a total par value of approximately $9 billion. CABs will mature in 2024, 2027, 2029, 2031, 2033, 2046, and 2051, initially valued at about $3 billion. To protect COFINA Bond holders, the Securities Terms restrict Reorganized COFINA from issuing new parity debt except for refinancing bonds that yield annual debt savings and do not extend maturities. Reorganized COFINA can issue subordinate lien bonds for the Commonwealth only if specific criteria are met, known as the Additional Bonds Test. This includes ensuring that projected 5.5% sales and use tax (SUT) revenue exceeds 1.5 times the annual debt service obligations and that prior fiscal year collections meet a 1.10 times coverage ratio for maximum annual debt service. Additionally, subordinate lien bonds must mature by Fiscal Year 2058, although extensions beyond this date are permissible after June 30, 2028, if the Additional Bonds Test is satisfied.
Repayment of subordinate lien bonds will be secured by a second lien, which is subordinate to COFINA and COFINA Parity Bonds, and will not be funded through COFINA Revenues. To enhance the credit rating of COFINA Bonds, a non-impairment covenant from the Commonwealth stipulates that the pledged SUT percentage cannot be lowered below 5.5% without obtaining a Rating Confirmation from at least two rating agencies, ensuring that the bonds' ratings remain at least A2/A category or higher post-reduction. If the SUT percentage drops below 3%, additional substitution requirements must be met.
Repayment of the COFINA Bonds and COFINA Parity Bonds is secured by a statutory first lien on Reorganized COFINA's interest in the 5.5% pledged Sales and Use Tax (SUT). The Securities Terms, outlined in the Plan and Amended Plan Supplement, allow for amendments and modifications. Each series of Existing Securities was issued under a supplemental resolution adopted by COFINA's Board of Directors, collectively referred to as the "Existing Bond Resolution," which distinguishes between "Subordinate Bonds" and "Senior Bonds." As of the Petition Date, COFINA had approximately $17.64 billion in outstanding bonds, with around $7.76 billion in claims from "Senior" Existing Securities and $9.88 billion from "First Subordinate" Existing Securities. Notably, $1.33 billion of the "Senior" Existing Securities are insured by Ambac and $1.10 billion by National, while $0.25 billion of the "First Subordinate" Existing Securities are insured by Assured.
The Existing Bond Resolution includes provisions for issuing additional subordinate bonds, and many subsequent supplemental resolutions have classified bonds as "First Subordinate" Existing Securities. "First Subordinate" bondholders cannot declare an event of default or control remedies until the "Senior" Existing Securities are fully satisfied. In the event of default, senior bondholders could accelerate their repayment claims, negatively impacting junior bondholders, who would only receive distributions after senior bondholders' claims are settled. The Ambac and National Insurance Policies do not cover losses from prepayment premiums, including "make-whole" provisions. This subordination creates a risk for junior bondholders, as their potential recovery is dependent on the total SUT available, which could be reduced, necessitating that senior bondholders be paid first.
Contractual subordination encompasses risks beyond reduced SUT revenues, including potential defaults triggering acceleration provisions that prioritize senior COFINA bondholders for cash flows, potentially delaying recovery for subordinate bondholders. In cases of default, senior bondholders may recover their principal plus post-petition interest, while subordinate bondholders could face years without any recovery, diminishing the present value of what they might eventually receive under the Plan. A settlement addressing the validity of the COFINA structure alleviates risks for junior bondholders. Currently, senior bondholders are projected to recover approximately 93% of their investments, while junior bondholders are expected to receive a significant recovery. The Plan values claims from Existing Securities based on principal and accrued interest as of the day before COFINA's Title III Case, overriding objections regarding future interest and maturity differentials. There is uncertainty about the tax-exempt status of all COFINA Bonds issued under the Plan; however, Puerto Rico Investors can elect to receive taxable bonds with a supplemental cash recovery, addressing mainland investors' concerns about potential recovery depreciation. Overall, recoveries are optimized for all bondholders when "on island" bondholders opt for taxable bonds in specific classes.
On-island bondholders opting for taxable treatment enhance mainland bondholders' potential to receive a larger share, possibly all, of their distributions in tax-exempt COFINA bonds, thereby improving recoveries for mainland investors. This approach ensures equitable treatment for both local and mainland claimants. The Court concludes that the Oversight Board has proven the plan serves the best interests of creditors as defined by section 314(b)(6) of PROMESA, which differs from the Chapter 11 "best interests" test that focuses on individual creditor recoveries upon liquidation. In contrast, PROMESA's standard assesses whether non-bankruptcy remedies would yield better creditor recoveries than the proposed plan.
The Oversight Board argues that without the Plan and Settlement Agreement, COFINA would face prolonged litigation, incurring significant costs and risks of unfavorable outcomes that could challenge the Commonwealth's transfer of SUT revenues. Additionally, subordinate bondholders risk their claims being addressed only after senior bondholders in the event of default. Given these factors, the proposed adjustment plan complies with PROMESA's creditors' best interests test.
Citi's review of the COFINA Fiscal Plan confirms that debt service on the COFINA Bonds will be 53.65% of the Pledged Sales Tax Base Amount (PSTBA), with terms negotiated to ensure it remains slightly below this threshold. The COFINA Revenues, derived from the 5.50% SUT, are structured to back the entire debt service, as a shortfall would only occur if total SUT collections fall below 53.65% of the PSTBA. Citi's analysis supports the Fiscal Plan’s assumptions, indicating that disaster funds, fiscal reforms, and improved tax collection will sustain personal consumption and, consequently, SUT revenues, which are broadly applicable across goods and services.
Government and private disaster funding, projected to exceed $82 billion from 2018 to 2033, is expected to enhance consumer spending and support sales and use tax (SUT) revenues in Puerto Rico. This funding will aid individuals affected by Hurricane Maria and assist in reconstruction efforts on the island. Economic reforms, including labor and energy improvements, are anticipated to increase Puerto Rico's economic output by 0.95% by FY 2023, contributing to a predicted 5% rise in SUT collections by 2021 due to better tax collection methods.
In FY 2019, the 5.5% SUT is expected to generate approximately $1.4 billion, significantly exceeding the $420 million debt service obligation for COFINA Bonds, resulting in a strong debt service coverage ratio of 3.33x. Although this ratio may decline as the projected SUT taxable base amount (PSTBA) grows by 4% annually, the long-term average coverage ratio remains a solid 2.46x. After FY 2041, any increases in the SUT will further enhance the coverage ratio, ensuring COFINA can meet its debt obligations through at least FY 2058.
The Oversight Board requested a standalone fiscal plan for COFINA for FY 2019-2023, which underwent revisions and was ultimately certified in October 2018. The plan aligns with PROMESA requirements and aims to resolve the Commonwealth-COFINA dispute, which risks costly litigation. The objective has been to equitably divide the SUT while avoiding protracted legal battles. Ongoing negotiations among stakeholders have led to a consensus supporting a comprehensive resolution, culminating in a settlement agreement that reflects substantial creditor backing.
To incentivize PSA Creditors to grant concessions, the Debtor agreed to pursue releases, exculpation, and injunction provisions outlined in the Plan, which are interdependent and essential for the expedited confirmation of the Plan. The Settlement reflects considerations of legal and factual risks associated with the claims. Modifications or failure to approve the Settlement could lead to termination events under the A&R Plan Support Agreement, complicate the Commonwealth-COFINA Dispute resolution, and delay COFINA's Title III Case, leading to extensive litigation for GO Debt and COFINA's Existing Securities holders.
Under Section 30.5 of the Plan, COFINA, Reorganized COFINA, and others proposed to release the Released Parties from potential claims. This Debtor's Release is deemed fair, reasonable, and in the Debtor's best interest, serving as a critical condition for the Settlement's consummation. In return for these releases, the Debtor obtained significant concessions, while the Released Parties provided essential support throughout COFINA's Title III Case, incurring substantial costs.
Aside from the Commonwealth-COFINA Dispute and specific actions preserved in the Plan, the Debtor is unaware of any viable claims against the Released Parties, nor have creditors suggested any meritorious actions. The assurance of liability protection was crucial for the Released Parties' participation in negotiations, and without the Debtor's Release, the resolution of the Commonwealth-COFINA Dispute and the acceptance of the Plan by voting Classes would have been jeopardized.
Section 30.2 of the Plan outlines Consensual Releases for the Released Parties from holders of Claims, specifically targeting those who significantly contributed to the Plan, including COFINA, Reorganized COFINA, the Government Releasees, and BNYM, from all related claims and causes of action.
Exclusions are made for claims of gross negligence, willful misconduct, and intentional fraud against BNYM and other parties in relation to the Ambac Action and Whitebox Actions. Holders of Existing Securities and their successors are shielded from liability concerning scheduled payments of principal and interest, barring instances of gross negligence or intentional misconduct. The Commonwealth Agent Releasees are also protected from claims related to the Adversary Proceeding, the Agreement in Principle, Settlement Agreement, Settlement Motion, and Settlement Order. The Commonwealth is released from claims held by any creditor in their capacity as a creditor. These consensual releases are deemed essential to the Plan, having been negotiated with key creditor constituencies, indicating substantial creditor consent. The Commonwealth has committed significant assets to the reorganization, which is necessary for the Plan's formulation. The approval of third-party releases for the Commonwealth and BNYM is justified, particularly as BNYM’s release is crucial to prevent withholding distributions to bondholders necessary for the Plan's execution. The releases specifically exclude gross negligence, intentional fraud, or willful misconduct related to the Ambac and Whitebox Actions. The Court finds these third-party releases reasonable and necessary for implementing the Plan. Additionally, an Exculpation Provision in Section 30.7 protects certain parties from claims related to their actions consistent with the Plan, recognizing their contributions to the Debtor's reorganization and the potential litigation risks if the provision is not approved.
An injunction outlined in Sections 30.3, 30.6, and 30.11 of the Plan prohibits all Entities from initiating or continuing any legal actions related to any Claims, demands, or rights released under the Plan or Confirmation Order, both before and after the Effective Date. This injunction is essential for enforcing the releases and exculpations within the Plan and is specifically designed to achieve this goal. The releases, exculpation provisions, and injunctions are critical components of the Plan, and their approval is a prerequisite for the Effective Date. Released Parties have relied on these provisions while making concessions related to their Claims and rights under the Plan.
On November 15, 2018, the Commonwealth enacted the New Bond Legislation, amending Act 91, which legitimizes COFINA and is enforceable upon the Effective Date. The Plan's confirmation signals Puerto Rico's commitment to addressing its financial crisis and regaining access to capital markets, with the restructuring of COFINA's debt acting as a catalyst for broader financial restructuring. Bondholders will gain certainty regarding the security of their investments, as the Plan addresses previous uncertainties regarding the availability of resources for repayment. The Plan will also resolve disputes concerning the Pledged Sales Tax Base Amount and ensure the Court retains jurisdiction over COFINA Bonds compliance matters.
The confirmation of the Plan signifies a judicial determination that the findings will supersede any conflicting local laws or regulations, making them binding and beyond challenge, except as allowed by law. COFINA operates as a separate territorial entity with its own Title III case, fiscal plan, and adjustment plan.
A new public corporation, the Corporacion del Fondo de Interes Apremiante de Puerto Rico (COFINA), has been established as an independent entity separate from the Commonwealth of Puerto Rico. Under the New Bond Legislation, COFINA is recognized as distinct from the Government of Puerto Rico and other governmental entities. The court has previously ruled that the nature of each debtor's interest in the Pledged Sales Taxes involves both federal and Commonwealth law considerations. The Plan outlines an agreed allocation of these taxes, which, upon court approval, will be exclusively owned by COFINA, thereby removing them from Commonwealth property and availability.
The Settlement and allocation of the Pledged Sales Taxes are essential for implementing the Plan, which, according to the Bankruptcy Code, is self-executing and can preempt applicable nonbankruptcy laws. The Plan must provide adequate means for implementation, allowing COFINA to retain its estate property. Additionally, under the Settlement Order, COFINA's creditors release claims against the Commonwealth, which will not be liable for COFINA Bonds, nor will these Bonds have recourse to Commonwealth property.
The court affirms that the COFINA Bonds are legal, valid, binding, and enforceable obligations of Reorganized COFINA, benefiting from protections under both Puerto Rican and federal law. These include the Confirmation Order being conclusive and binding, COFINA being recognized as an independent public corporation upon the Effective Date, and the legal transfer of COFINA Revenues to Reorganized COFINA, free of all liens and claims except for the statutory lien securing the COFINA Bonds.
COFINA Revenues will not be considered "available resources" of the Commonwealth as defined by the Puerto Rico Constitution, effective upon the specified date. Each fiscal year, contingent upon certain conditions, COFINA Pledged Taxes will be transferred to Reorganized COFINA until it receives an amount equal to the COFINA Revenues for that year. Reorganized COFINA holds sole ownership of COFINA Revenues, and any collections made by third parties are on behalf of Reorganized COFINA, which retains exclusive rights to these revenues for the benefit of COFINA Bondholders. A statutory first lien on COFINA Pledged Taxes, established by the New Bond Legislation in favor of COFINA Bondholders, is confirmed to be legal, valid, and enforceable, remaining in effect until the bonds are fully paid. Both COFINA Bonds and COFINA Parity Bonds are secured by this first lien, which will also remain until the bonds are satisfied. The statutory lien, along with other provisions for the payment and security of the bonds, is deemed legally binding and enforceable, including covenants that protect property rights under the Plan. Each COFINA Bond will bear a legend affirming its validity as determined by the U.S. District Court for the District of Puerto Rico. The transfer of the COFINA Portion and any substitution of New Collateral is confirmed as appropriate, binding, and enforceable against Reorganized COFINA and the Commonwealth, thereby creating a valid ownership interest in these properties.
The Commonwealth, representing itself and its governmental entities, has committed not to take actions that could undermine COFINA's rights to receive COFINA Revenues, alter COFINA's rights under the Plan related to COFINA Bonds, adversely affect the collection of COFINA Pledged Taxes, or impair the rights of COFINA Bondholders or the statutory lien per Article 3.2 of the New Bond Legislation. These commitments are designed to protect the interests of Reorganized COFINA and COFINA Bondholders and are legally binding as part of the settlements in the Plan. Specific covenants outlined in the Plan—including those related to rating agencies, tax exemptions, substitutions, non-impairment, and sales taxes—also serve to safeguard these interests.
The Plan and its settlements arose from extensive negotiations among key parties, resolving the Commonwealth-COFINA Dispute and preventing potential objections from creditors that could delay confirmation of the Title III plan. Failure to address this dispute could lead to contested hearings and hinder creditor distributions, ultimately depleting COFINA's resources and increasing claims against it. The Debtor reasonably believes that the Plan will facilitate a quicker resolution than alternatives, benefiting stakeholder recoveries. The Court concludes that the Plan's compromises are fair, reasonable, and in the best interest of COFINA's stakeholders, aligning with Bankruptcy Rule 3019 by not adversely changing the treatment of creditor claims.
Following the Voting Deadline, the Oversight Board submitted the "Third Amended Plan," which includes minor revisions addressing concerns from certain parties without adversely affecting creditor claims. Key amendments include a remarketing agreement between COFINA and Assured regarding COFINA Bonds for holders of Allowed Junior COFINA Bond Claims, ensuring that these holders remain unaffected by the changes. The Plan was also updated to align the releases with the A&R Plan Support Agreement and to prevent the Ambac and Whitebox litigations from hindering bondholder distributions. It clarifies that COFINA or Reorganized COFINA will not bear BNYM's litigation costs post-Effective Date. The modifications do not significantly alter creditor treatment and do not necessitate new solicitations for acceptances or rejections. Therefore, the Plan can be confirmed without a new disclosure statement. The solicitation and tabulation of claims were conducted fairly and in good faith, complying with relevant legal standards. Beneficial holders of Senior COFINA Bond Claims who commute their Ambac or National Insurance Policies will forfeit further rights under those policies, as the Plan represents a settlement for those electing to commute. Notably, neither the Ambac nor National Insurance Policies will cover the COFINA Bonds. Additionally, all documents in the Second Amended Plan Supplement adhere to the Plan's terms and were filed and served according to the applicable legal requirements, negating the need for further notice.
The Plan meets the confirmation requirements under PROMESA section 314. Necessary documents for implementation, including those in the Amended and Second Amended Plan Supplements and the Settlement Agreement, have been negotiated in good faith and are enforceable under federal and state law. The Debtor and Reorganized COFINA are authorized to execute transactions outlined in the Plan, with their actions deemed compliant with the Plan and Confirmation Order.
The Debtor will act in good faith by completing the Plan and associated agreements, while the COFINA Agent Releasees and Commonwealth Agent Releasees have also acted in good faith regarding related proceedings. The Court will retain exclusive jurisdiction over the COFINA Title III Case and related matters post-Effective Date, including actions concerning the COFINA Bonds, implementation of the Plan, and any disputes arising from it.
To implement the Plan, COFINA’s tax revenues will be collected according to the Instruction Agreement and Banking Services Agreement. Banco Popular de Puerto Rico will serve as the Depositary for these revenues, which will be deposited into a SUT Collection Account held jointly by the Treasury Department and Reorganized COFINA, with no legal claim to the COFINA Portion solely based on holding the COFINA Pledged Taxes.
Commingling of COFINA Pledged Taxes in the SUT Collection Account is permitted solely for administrative convenience and does not establish any equitable interest for the Commonwealth in the COFINA Portion, nor does it alter Reorganized COFINA's exclusive ownership of that portion. Furthermore, such commingling does not create an equitable interest for Reorganized COFINA in Commonwealth revenues, which remain solely owned by the Commonwealth. The Depositary is required to transfer the COFINA Portion to the Dedicated Sales Tax Fund Account daily, based on data from the Treasury Department, except when transferring to the Revenue Account at The Bank of New York Mellon (BNYM). Funds in the Dedicated Sales Tax Fund will be transferred daily to BNYM's Revenue Account until 53.65% of the Adjusted Pledged Sales Tax Base Amount (Adjusted PSTBA) is deposited for the Fiscal Year. All trustee accounts at BNYM will be in the name of Reorganized COFINA. After the Adjusted PSTBA is fully deposited, subsequent collections of COFINA Pledged Taxes will go to the Commonwealth's Treasury.
The rights, duties, and obligations under the Plan are governed by PROMESA and applicable federal law, while also adhering to Puerto Rico law where compatible. The provisions outlined in this Memorandum, the Confirmation Order, and the Plan are enforceable despite conflicting non-bankruptcy laws, based on various sections of the Bankruptcy Code. Documents in the Second Amended Plan Supplement will facilitate the Plan's implementation as of the Effective Date and will be valid legal obligations for COFINA and the Commonwealth, ensuring payment of COFINA Bonds under the Bankruptcy Code.
The Court is issuing an Amended Order approving the settlement between the Commonwealth of Puerto Rico and the Puerto Rico Sales Tax Financing Corporation (COFINA). This order includes significant legislative amendments to the bond legislation, involving the renumbering and amendment of various articles within Law 91-2006, which facilitates COFINA's debt restructuring under Title III of PROMESA. Key provisions include authorizing COFINA to issue bonds, defining its powers and governance structure, establishing its ownership of a portion of sales and use tax revenues, creating a statutory lien for bondholders, and allowing for certain agreements to benefit bondholders. The law will take effect upon the completion of COFINA's debt adjustment plan.
The motivation behind these changes is to address Puerto Rico's unprecedented fiscal crisis, ensuring the government can continue to operate and serve its citizens while restoring credibility in the financial markets. Past administration actions led to a loss of access to capital markets and economic contraction, negatively impacting public finance and contributing to population migration. The previous administration's hostile relations with financial market participants resulted in a lack of transparency and unfavorable media coverage, further complicating Puerto Rico's economic challenges.
Las decisiones erróneas de la administración anterior llevaron al Estado Libre Asociado de Puerto Rico a la quiebra, lo que obligó a utilizar recursos para servicios esenciales. Esto provocó una controversia sobre la emisión de bonos por parte de la Corporación del Fondo del Interés Apremiante (COFINA), donde algunos acreedores alegaron que (i) dichas emisiones violaron la Constitución de Puerto Rico y (ii) la contribución sobre ventas y uso (IVU) transferida a COFINA debe considerarse "recursos disponibles" del Gobierno de Puerto Rico según la Constitución, utilizándose para el pago de la deuda pública. Las reclamaciones también incluían debates sobre la interpretación de "recursos disponibles" en las versiones en español e inglés de la Constitución.
El 5 de mayo de 2017, la Junta de Supervisión y Administración Financiera, creada por la Ley PROMESA, inició un proceso de reestructuración de COFINA bajo el Título III de dicha ley. Las partes involucradas comenzaron un proceso para resolver la disputa sobre COFINA y la titularidad del IVU. El 10 de agosto de 2018, el tribunal aprobó un acuerdo que designaba a un Comité Oficial de Acreedores no Asegurados del Gobierno y a Bettina M. Whyte como agentes para facilitar la transacción de la disputa. El 5 de junio de 2018, se anunció un acuerdo preliminar para resolver la disputa, que incluía dividir el IVU entre el Gobierno y COFINA a partir del año fiscal 2019, con COFINA recibiendo el 53.65% y el Gobierno el 46.35%, además de otros ingresos del IVU. Posteriormente, se llegó a un Acuerdo de Reestructuración, que formalizó esta división y estableció un plan de ajuste de deuda para COFINA bajo el Título III de PROMESA.
La Asamblea Legislativa de Puerto Rico debe implementar un acuerdo que enmienda la Ley 91-2006, la cual creó a COFINA y autorizó la emisión de bonos. Estas enmiendas eliminarán el gravamen sobre $17.5 billones de ingresos del IVU, permitiendo que estos fondos sean utilizados por el Gobierno de Puerto Rico para servicios públicos. La legislación también resolverá el litigio costoso entre la Junta de Supervisión y los acreedores de COFINA, clarificando la intención original de la Ley 91-2006 y ahorrando aproximadamente $437.5 millones anuales al Gobierno. Esta medida es un paso hacia la reestructuración de la deuda de COFINA bajo el Título III de PROMESA, facilitando otras reestructuraciones y ayudando a Puerto Rico a salir de la bancarrota. Además, busca reducir costos de litigio y acelerar la disolución de la Junta de Supervisión. La ley reafirma el compromiso de la Asamblea Legislativa de abordar la crisis fiscal, honrar las obligaciones financieras, recuperar acceso a los mercados de capital, y alcanzar un nivel de deuda sostenible. Se establece un nuevo Capítulo I en la Ley 91-2006 con definiciones clave, incluyendo términos como AAFAF, Ley, Acuerdos Complementarios, Actividades Autorizadas y Junta de Directores.
Contrato de Bonos se refiere a los contratos de fideicomiso y bonos emitidos por la Corporación y el Fiduciario, que regulan los derechos y obligaciones de ambas partes respecto a los Bonos del Plan de Ajuste. El Presidente es el líder de la Junta de Directores. Ingresos de la Corporación son los Primeros Ingresos, que representan el 53.65% de la Renta Fija por cada Año Fiscal, incluyendo derechos legales y de equidad relacionados. El Fondo de Ingresos de la Corporación debe ser segregado, propiedad de la Corporación, y administrado por el Fiduciario en beneficio de los tenedores de Bonos, sin control del Gobierno de Puerto Rico. La Corporación es la entidad creada por la ley para el Fondo del Interés Apremiante. El Plan de Ajuste de la Corporación es el acuerdo relacionado con su caso bajo el Título III de PROMESA, confirmado por el Tribunal de Distrito de EE. UU. para el Distrito de Puerto Rico. La Fecha de Efectividad es cuando el Plan de Ajuste entra en vigor. Los Costos de Financiamiento abarcan todos los gastos relacionados con la Transacción de Reestructuración, excluyendo pagos de principal e intereses de los Bonos del Plan de Ajuste, e incluyen honorarios administrativos. Primeros Ingresos son las Contribuciones Pignoradas de cada Año Fiscal. El Año Fiscal del Gobierno de Puerto Rico va del 1 de julio al 30 de junio. Renta Fija para el año fiscal 2018-2019 es de $783,197,251.00, con un incremento del 4% en años subsiguientes hasta alcanzar la Cantidad Máxima.
La Renta Fija se pagará anualmente de los primeros ingresos de las Contribuciones Pignoradas. Se define "Entidad Gubernamental" como cualquier agencia o entidad pública del Gobierno de Puerto Rico, y "Gobierno de Puerto Rico" como el Estado Libre Asociado y su administración. El "Fiduciario del Contrato de Bonos" es la persona designada para administrar dicho contrato, incluyendo sus sucesores. La "Cantidad Máxima" se establece en mil ochocientos cincuenta millones de dólares ($1,850,000,000.00). La "Junta de Supervisión" se refiere a la Junta de Supervisión y Administración Financiera para Puerto Rico, creada bajo PROMESA. "Persona" abarca individuos y entidades legales, incluyendo el Gobierno de Puerto Rico y cualquier entidad pública o privada. Los "Bonos del Plan de Ajuste" incluyen Bonos de Reestructuración y Refinanciamiento. Las "Contribuciones Pignoradas" son ingresos futuros generados por una tasa del IVU del 5.5% y cualquier Colateral Sustituta. "PROMESA" se refiere a la Ley para la Supervisión, Administración y Estabilidad Económica de Puerto Rico. Los "Bonos de Refinanciamiento" son emitidos por la Corporación bajo la Ley y Acuerdos Complementarios, con igualdad de prioridad a los Bonos de Reestructuración, que son bonos emitidos bajo el Plan de Ajuste de la Corporación. La "Resolución de Reestructuración" autoriza la emisión de Bonos del Plan de Ajuste y el pago de Costos de Financiamiento según el Plan de Ajuste. Las "Transacciones de Reestructuración" son las acciones relacionadas con el Plan de Ajuste. El "IVU" es el impuesto de ventas y uso del Gobierno de Puerto Rico.
Acuerdo de Transacción se refiere al acuerdo firmado el 15 de octubre de 2018 entre la Junta de Supervisión en representación del Gobierno de Puerto Rico y el agente de la Corporación, cuyo propósito es resolver la disputa sobre la titularidad del IVU. Colateral Sustituta abarca contribuciones generales legisladas que reemplazan las Contribuciones Pignoradas y sirven como colateral para los Bonos del Plan de Ajuste. Los Requisitos de Sustitución exigen la aprobación de legislación para establecer Colateral Sustituta, asegurando que dicha colateral es propiedad exclusiva de la Corporación y no constituye recursos disponibles del Gobierno de Puerto Rico. Además, se requiere que el Gobierno y las Entidades Gubernamentales mantengan las garantías establecidas, y que se cumplan los requisitos de calificación antes de la sustitución. Se introduce un Capítulo II a la Ley 91-2006, creando la Corporación del Fondo de Interés Apremiante, reconocida como entidad legal independiente del Gobierno de Puerto Rico. Se modifica el Artículo 2, renombrándolo como Artículo 2.1, y se agrega el Artículo 2.2, que establece que todos los derechos sobre los Ingresos de la Corporación son transferidos completamente a ella, asegurando su titularidad exclusiva hasta que se paguen en su totalidad los Bonos del Plan de Ajuste.
Agentes retenedores designados bajo la Ley 1-2011, conocida como el Código de Rentas Internas para un Nuevo Puerto Rico, recaudan el Impuesto de Ventas (IVU) en nombre de la Corporación, manteniendo las obligaciones y responsabilidades establecidas por dicha ley. Los ingresos de la Corporación no se consideran recursos disponibles del Gobierno de Puerto Rico según la Constitución.
Se introduce un nuevo Artículo 2.3 a la Ley 91-2006, definiendo el propósito de la Corporación como: a) emitir Bonos del Plan de Ajuste; b) administrar sus ingresos; y c) emitir otras deudas autorizadas por el Plan de Ajuste y acuerdos complementarios. Además, se añade un Artículo 2.4 que limita las actividades de la Corporación a: a) recibir y poseer sus ingresos; b) aprobar la Resolución de Reestructuración; c) emitir bonos y deudas permitidas; d) cumplir con acuerdos complementarios; e) garantizar el pago de deudas mediante el pignoramiento de ingresos remanentes; y f) realizar acciones necesarias para completar la Transacción de Reestructuración.
Asimismo, se añade un Artículo 2.5 que otorga a la Corporación poderes adicionales para llevar a cabo sus actividades, incluyendo la capacidad de demandar, adoptar un sello, y establecer normas y reglamentos necesarios para la administración de sus asuntos.
- The powers of the Corporation include the authority to open and maintain bank accounts, acquire or sell property, and have full control over its assets, subject to statutory liens as per Article 3.2 of the law.
- The Corporation is empowered to negotiate, execute, and amend contracts necessary for its authorized activities and appoint or remove officers and employees while determining their compensation and authority according to Complementary Agreements.
- The Corporation must pay operational expenses and financing costs, obtain insurance for its activities and properties, manage investments, and maintain reserves as required by Complementary Agreements.
- Indemnification is provided for board members and employees against conduct not constituting gross negligence, fraud, or willful misconduct.
- Additional powers include delegating authority to agents and signing necessary documents with governmental authorities.
Prohibited activities while the Adjustment Bonds are outstanding include:
- Merging or consolidating with any entity.
- Incuring or guaranteeing debts beyond specified operational expenses and authorized debts.
- Creating liens on any property except those explicitly permitted.
- Engaging in business activities not expressly authorized in the law.
- Dissolving or transferring ownership of its property, except as allowed under specific provisions.
- Directors cannot vote to initiate Title III cases under PROMESA or similar restructuring processes.
- Any actions inconsistent with the Corporation's purpose as established by law are also prohibited.
The governance of the Corporation will be conducted through a Board of Directors, which will exercise these powers.
La Junta de Directores estará integrada por tres miembros designados por el Gobernador de Puerto Rico, quienes deben cumplir con los requisitos del Artículo 2.7(b)(iii). Se permite que tenedores de Bonos del Plan de Ajuste sugieran hasta tres candidatos, aunque el Gobernador no está obligado a seleccionar de entre ellos. Cada director será nombrado por un término de tres años, con la posibilidad de reelección, y el Gobernador puede remover a un director por incumplimiento de deberes o conducta inapropiada. Cada miembro tiene un voto y debe cumplir con criterios de independencia y calificación, no pudiendo ser empleado de ninguna entidad gubernamental que no sea la Corporación. Las decisiones requieren la mayoría de votos y los estatutos pueden exigir una mayoría mayor para ciertos asuntos. La Junta elegirá un Presidente entre sus miembros.
En caso de vacantes, el Gobernador nombrará un sucesor que cumpla con los requisitos establecidos. Los miembros recibirán compensación conforme a los Acuerdos Complementarios. Posteriormente a la designación de todos los directores, la Corporación adoptará reglas para su funcionamiento, que podrán ser enmendadas por la Junta. Un quórum se establece con la mayoría de los miembros en funciones, quienes pueden participar en reuniones a través de teleconferencia. Las decisiones pueden ser autorizadas sin reunión si todos los miembros consienten por escrito. La Junta tiene la facultad de delegar poderes y responsabilidades a miembros o empleados de la Corporación.
Se añade un Artículo 2.8 a la Ley 91-2006, que establece que las actividades de la Corporación tienen un propósito público y se declara una exención contributiva.
La Corporación queda exenta de todo tipo de contribuciones, impuestos, licencias, sellos, honorarios u otros cargos impuestos por el Gobierno de Puerto Rico o entidades gubernamentales sobre sus propiedades, actividades, ingresos, pagos o ganancias. Los Bonos del Plan de Ajuste, junto con cualquier ingreso o transferencia relacionados, también estarán exentos de cargas fiscales. Además, los tenedores de estos Bonos no deberán presentar planillas o requisitos similares ante el Gobierno de Puerto Rico.
Se establece el Artículo 2.9 en la Ley 91-2006, que declara la inaplicabilidad de varias leyes, incluyendo la Ley para el Cumplimiento del Plan Fiscal, la Ley de Ética Gubernamental, la Ley de Reforma Fiscal, y otras leyes relacionadas con la contratación y administración pública.
Asimismo, se añade un Capítulo III a la Ley 91-2006, titulado "La Transacción de Reestructuración." Por último, se deroga el Artículo 3 y se sustituye por el nuevo Artículo 3.1, que autoriza a la Corporación a emitir los Bonos del Plan de Ajuste bajo los términos establecidos en los acuerdos de reestructuración.
Los Bonos del Plan de Ajuste serán emitidos con fechas, tasas de interés y vencimientos determinados por la Corporación, conforme a la Resolución de Reestructuración y el Plan de Ajuste. La Corporación definirá la forma, denominaciones, y los lugares de pago de estos bonos, así como términos de redención y otras condiciones, todo alineado con el Plan de Ajuste. Estos bonos se pagarán exclusivamente con los Ingresos de la Corporación, según el Contrato de Bonos y Acuerdos Complementarios. La Corporación tiene la facultad de adquirir sus propios bonos a un precio no superior al de redención, y todos los bonos adquiridos serán cancelados. Es importante destacar que los Bonos del Plan de Ajuste no se considerarán deuda del Gobierno de Puerto Rico ni de otras Entidades Gubernamentales, excepción hecha de la Corporación, y esta declaración será incluida en la documentación relacionada.
Adicionalmente, se introduce un Artículo 3.2 en la Ley 91-2006, estableciendo que los Bonos del Plan de Ajuste estarán garantizados por un primer gravamen estatutario sobre todos los derechos e intereses de la Corporación respecto a las Contribuciones Pignoradas, garantizando así su protección sin necesidad de acciones adicionales para su perfeccionamiento. Este gravamen será automáticamente válido y exigible desde la Fecha de Efectividad y no podrá ser obstaculizado por reclamaciones de terceros. También se añade un Artículo 3.3 a la misma ley que aborda convenios relacionados con los Bonos del Plan de Ajuste y la Transacción de Reestructuración.
El Gobierno de Puerto Rico se compromete a no realizar acciones que afecten negativamente los derechos de la Corporación ni de los tenedores de Bonos del Plan de Ajuste hasta que se paguen completamente las obligaciones relacionadas con dichos Bonos. Esto incluye no menoscabar el derecho a recibir los Ingresos de la Corporación, no limitar los derechos bajo el Plan de Ajuste, y no reducir las Contribuciones Pignoradas a menos de un 5.5% sin cumplir con ciertos requisitos. También se prohíbe modificar los derechos de la Corporación y de los tenedores de Bonos, así como enmendar leyes que afecten sus acuerdos. Se establece un nuevo Capítulo IV en la Ley 91-2006 sobre los ingresos de la Corporación, que especifica que los primeros ingresos de las Contribuciones Pignoradas se depositarán en cuentas controladas por la Corporación hasta alcanzar la cantidad necesaria para cumplir con sus obligaciones por el año fiscal correspondiente.
Los ingresos derivados de las Contribuciones Pignoradas deben ser depositados en cuentas controladas por la Corporación o el Fiduciario del Contrato de Bonos, y no se permitirá la modificación de este requisito. El Contrato de Bonos podrá establecer distribuciones trimestrales de estos ingresos entre la Corporación y el Gobierno de Puerto Rico, cumpliendo con los términos del contrato. La Corporación mantendrá derechos sobre estos ingresos hasta que se paguen en su totalidad los Bonos del Plan de Ajuste y las obligaciones bajo los Acuerdos Complementarios. Durante cada Año Fiscal, el Fiduciario determinará mensualmente si la Corporación ha recibido sus ingresos. Si se confirma el depósito de ingresos, cualquier monto adicional recibido se transferirá al Gobierno de Puerto Rico. Además, ninguna persona que recaude o tenga en posesión las Contribuciones Pignoradas tendrá derechos sobre ellas solo por su recaudación o posesión.
Se introduce el Artículo 4.2, que establece que los ingresos depositados en exceso de lo necesario para cumplir con las obligaciones de los Bonos del Plan de Ajuste se transferirán a la Corporación, libres de gravámenes. Se añade un Capítulo V a la Ley 91-2006 sobre disposiciones misceláneas y se deroga el Artículo 5, que se sustituye por el nuevo Artículo 5.1, que establece la separabilidad de la ley, garantizando que si alguna disposición es anulada, esto no afectará al resto de la ley.
Invalidation or declaration of unconstitutionality of any part of this law shall not affect the application of the remaining provisions to validly applicable persons or circumstances. The legislative assembly explicitly intends for courts to enforce the law notwithstanding any parts that may be annulled or invalidated. A new Article 5.2 has been added to Law 91-2006, stating that this law is adopted in both Spanish and English, with the English text prevailing in cases of conflict. Articles 6 through 11 of Law 91-2006 are repealed. The English version of the law is to be added immediately after the Spanish text. The document outlines Puerto Rico's severe fiscal crisis and the restructuring agreement with creditors, aimed at restoring credibility and enabling the government to continue operations. The previous administration’s actions led to a loss of capital market access, worsened the economy, and increased outmigration. It also developed a negative relationship with financial market participants and led to bankruptcy, prompting challenges to the structure under which the Puerto Rico Sales Tax Financing Corporation (COFINA) issued bonds, with claims that such issuance violated the Puerto Rico Constitution.
The SUT transferred to COFINA is classified as "available resources" under Article VI, Section 8 of the Puerto Rico Constitution, designated for public debt payments. Disputes arose regarding the interpretation of the terms "recursos disponibles" and "available revenues, plus surplus." On May 5, 2017, the Financial Oversight and Management Board initiated a Title III proceeding for COFINA, representing stakeholders seeking resolution in the Commonwealth-COFINA Dispute. On August 10, 2017, the Title III Court appointed the Commonwealth's Official Committee of Unsecured Creditors and Bettina M. Whyte as agents to facilitate a settlement. On June 5, 2018, an Agreement in Principle was reached, outlining a split of the SUT transferred to COFINA starting fiscal year 2019, with COFINA receiving 53.65% and the Commonwealth 46.35%, alongside all other SUT revenues. This agreement was incorporated into a Plan Support Agreement, which aimed to settle the dispute and implement a COFINA debt adjustment plan under PROMESA. Legislative amendments to Act No. 91 are needed to finalize the agreement, releasing the lien on $17.5 billion of SUT revenues, enabling access for the Puerto Rican government to better serve citizens. The legislation is projected to save the government $437.5 million annually, facilitate restructuring of COFINA debt, reduce litigation costs, and contribute to Puerto Rico's re-entry into capital markets, ultimately aiding in the territory's emergence from bankruptcy and the dissolution of the Oversight Board.
The Act aims to address Puerto Rico's financial crisis by reaffirming the Legislative Assembly's commitment to meet financial obligations, access capital markets, and ensure economic stability and debt sustainability. It is titled the "Puerto Rico Sales Tax Financing Corporation Act." Key definitions include:
- **AAFAF**: Refers to the Puerto Rico Fiscal Agency and Financial Advisory Authority.
- **Act**: Refers to Act 91-2006, also known as the Puerto Rico Sales Tax Financing Corporation Act.
- **Ancillary Agreements**: Comprises the Corporation Plan of Adjustment, Bond Indenture, and other related agreements involved in the Restructuring Transaction.
- **Authorized Activities**: Activities permitted for the Corporation under Article 2.4 of the Act.
- **Board of Directors**: The governing body of the Corporation.
- **Bond Indenture**: Legal agreements related to the issuance of Plan of Adjustment Bonds, detailing the rights and responsibilities of the Corporation and bondholders.
- **Chair**: The chairperson of the Board of Directors.
- **COFINA Revenues**: A specified percentage of Fixed Income for each Fiscal Year, along with related rights and interests.
- **COFINA Revenues Fund**: The fund where COFINA Revenues are deposited, maintained separately from the Government of Puerto Rico.
- **Corporation**: The entity established by this Act.
- **Corporation Plan of Adjustment**: The plan associated with the Corporation's Title III case under PROMESA.
- **District Court**: The United States District Court for the District of Puerto Rico.
- **Effective Date**: When the Corporation Plan of Adjustment takes effect.
- **Financing Costs**: Expenses related to the Restructuring Transaction, including costs for issuing and managing Plan of Adjustment Bonds, excluding principal and interest payments.
- **First Funds**: Initial funds derived from Pledged Taxes for each Fiscal Year.
- **Fiscal Year**: The financial year for the Government of Puerto Rico, running from July 1 to June 30.
Fixed Income for Fiscal Year 2018-2019 is set at $783,197,251, with subsequent years increasing by 4% from the previous year's amount, capped at a Maximum Amount of $1,850,000,000. Funding for Fixed Income will come from the initial revenues of Pledged Taxes. A Government Entity encompasses any governmental agency or subdivision in Puerto Rico. The Government of Puerto Rico refers to the Commonwealth and its government. The Indenture Trustee is designated under the Bond Indenture, including any successors. The Oversight Board is the Financial Oversight and Management Board for Puerto Rico, established under PROMESA. A Person includes any individual or legal entity, covering various forms of organizations, municipal authorities, and combinations thereof. Plan of Adjustment Bonds consist of Restructuring Bonds and Refunding Bonds. Pledged Taxes include current and future revenues from a 5.5% Sales Tax and any Substituted Collateral. PROMESA refers to the Puerto Rico Oversight, Management, and Economic Stability Act. Refunding Bonds are issued to manage Plan of Adjustment Bonds, while Restructuring Bonds are authorized under the Corporation Plan of Adjustment. The Restructuring Resolution involves Board of Directors' approvals for issuing Plan of Adjustment Bonds and paying Financing Costs. Restructuring Transactions pertain to actions under the Corporation Plan of Adjustment. Sales Tax is defined under specific sections of Puerto Rico's Internal Revenue Code. A Settlement Agreement, dated October 15, 2018, resolves disputes regarding the Sales Tax ownership between the Oversight Board and the Corporation's agent.
Substituted Collateral refers to a tax with general applicability in Puerto Rico that replaces the Pledged Taxes or serves as comparable security for the Plan of Adjustment Bonds. Substitution Requirements necessitate the enactment of legislation that ensures: (1) the Substituted Collateral, equivalent to the COFINA Revenues, is irrevocably transferred to the Corporation, which owns it exclusively; (2) this Substituted Collateral does not count as available resources or revenues for the Government of Puerto Rico; (3) a lien on the Substituted Collateral in favor of the Indenture Trustee for the Plan of Adjustment Bonds; and (4) ongoing covenants from the Government of Puerto Rico regarding the Substituted Collateral. Furthermore, prior to any substitution, the ratings requirements established in the Ancillary Agreements must be satisfied.
The Puerto Rico Sales Tax Financing Corporation is established as a public corporation and an independent entity separate from the Government of Puerto Rico. It operates under the governance of its Board of Directors. All ownership interests and rights to the COFINA Revenues are transferred to the Corporation, representing an absolute transfer rather than a pledge. The Corporation remains the sole owner of these revenues until all obligations related to the Plan of Adjustment Bonds and Ancillary Agreements are fully discharged. Additionally, withholding agents responsible for collecting the Sales Tax must continue to fulfill their obligations under the relevant tax laws on behalf of the Corporation.
COFINA Revenues are not classified as available resources or revenues of the Government of Puerto Rico as defined in the Constitution. The Corporation's purpose, effective immediately, includes issuing Plan of Adjustment Bonds, managing COFINA Revenues, and issuing other bonds as permitted by the Corporation Plan of Adjustment and Ancillary Agreements.
The Corporation's activities are limited to several specific functions: receiving and owning COFINA Revenues and other revenues, adopting a Restructuring Resolution, issuing authorized bonds, entering into Ancillary Agreements, and making payments on bonds while subordinating certain revenues. Additionally, the Corporation can take necessary actions to implement the Restructuring Transaction, including amending prior bonds and agreements.
To facilitate its authorized activities, the Corporation has various ancillary powers, such as the ability to sue, adopt a seal, manage its affairs, maintain bank accounts, handle property transactions, and exercise legal dominion over its assets, including COFINA Revenues. It can also enter contracts, manage its personnel, pay operating expenses, procure insurance, manage investments, indemnify its board members, delegate authority, and file necessary governmental documents.
Prohibited activities under Article 2.6 restrict the Corporation from engaging in several actions while the Plan of Adjustment Bonds are outstanding. Specifically, the Corporation cannot:
a) Merge or consolidate with any individual or entity.
b) Incur or guarantee debts beyond the Plan of Adjustment Bonds, operational costs, and certain permitted financial obligations.
c) Pledge or create liens on its properties, except for the lien securing the Plan of Adjustment Bonds and certain subordinate obligations.
d) Engage in business activities not expressly permitted by the Act.
e) Dissolve, liquidate, sell, or transfer properties unless allowed by specific provisions.
f) Allow directors to authorize a case under Title III of PROMESA or similar judicial restructuring processes.
g) Undertake any actions inconsistent with the Corporation's stated purpose.
Article 2.7 outlines the governance structure of the Board of Directors. It consists of three members appointed by the Governor of Puerto Rico, who may consider recommendations from Plan of Adjustment Bondholders but is not required to appoint them. Each director serves a three-year term, with provisions for removal for specific misconduct. Decisions require a majority vote, though bylaws may stipulate higher thresholds for certain actions. Directors must meet independence standards and cannot be affiliated with any other governmental entities. In the event of vacancies, replacements must also meet established criteria and are appointed by the Governor. Directors receive compensation as per the Ancillary Agreements, and rules can be adopted or amended as needed.
The Corporation is required to adopt rules and procedures for its activities following the appointment of its members and Chair, with the Board of Directors having the authority to amend these rules. A quorum for decision-making is established as a majority of the current Board members, allowing participation via teleconference to count as in-person attendance. Actions can be approved without a formal meeting if all Board members provide written consent.
The Corporation is declared to serve a public purpose, thus exempting it from all taxes, fees, and charges levied by the Government of Puerto Rico on its properties, activities, and any income derived from them. Specifically, the Plan of Adjustment Bonds and related transactions are also exempt from taxation, and holders of these bonds are not subject to tax reporting requirements in Puerto Rico.
Certain laws are explicitly stated as inapplicable to the Corporation, including provisions from the Fiscal Plan Compliance Act, the Puerto Rico Government Ethics Act, and various other statutes related to fiscal reform, human resources, contracting services, government transition, electoral processes, administrative procedures, and government accounting.
Act 3-2017, also known as the Law to Address the Economic, Fiscal and Budgetary Crisis and Ensure the Functioning of the Government of Puerto Rico, along with Act 14 of April 17, 1972, as amended, establishes the framework for the issuance of Plan of Adjustment Bonds by the Corporation.
Article 3.1 authorizes the Corporation to issue these bonds post-Effective Date, in accordance with the Corporation Plan of Adjustment and relevant Restructuring Resolutions and Ancillary Agreements. The bonds will have specified interest rates, maturity dates, and execution terms determined by the Corporation. They can be sold publicly or privately and are payable exclusively from COFINA Revenues, as detailed in the Act and Ancillary Agreements. Importantly, these bonds will not be considered a debt of the Government of Puerto Rico or any related entities.
Article 3.2 introduces a statutory first lien on the Corporation’s rights to Pledged Taxes, which automatically attaches upon issuance of the bonds, ensuring the lien is valid and enforceable without the need for further action. This lien remains unaffected by any commingling of funds or claims from other parties.
Article 3.3 outlines covenants related to the Plan of Adjustment Bonds and the restructuring process, emphasizing the secured and prioritized nature of these financial instruments.
The Government of Puerto Rico commits to a covenant that prohibits any actions by itself or any Government Entity that would negatively affect the rights of the Corporation or the holders of Plan of Adjustment Bonds until all related financial obligations are fully satisfied. Specifically, it will not:
1. Impair the Corporation's right to COFINA Revenues.
2. Alter the rights vested in the Corporation under the Corporation Plan of Adjustment, jeopardizing agreements with bondholders.
3. Adversely affect the collection of Pledged Taxes in any fiscal year.
4. Diminish the rights and remedies of bondholders or the associated collateral security.
Furthermore, the Government cannot reduce the Pledged Taxes below 5.5% without meeting specific credit ratings and requirements, and if reduced below 3%, must comply with Substitution Requirements. The Government also cannot modify the rights of the Corporation or bondholders related to COFINA Revenues or amend the Act in a way that weakens obligations to bondholders. However, it retains the power to change laws regarding the tax structure, provided it meets the necessary requirements.
Regarding funding, each fiscal year, the initial funds from Pledged Taxes must be allocated to the Corporation or designated accounts until the amount equals the COFINA Revenues for that year. This stipulation regarding the first funds cannot be altered, although the Bond Indenture may permit quarterly distributions of Pledged Taxes under certain conditions.
The Corporation retains specific rights until the complete cash payment of the Plan of Adjustment Bonds, including interest, and all obligations under Ancillary Agreements. Each Fiscal Year, the Indenture Trustee or a designated individual will monthly assess whether the Corporation has received COFINA Revenues. Upon confirmation that these revenues have been deposited, any subsequent revenues from Pledged Taxes will be transferred to the Government of Puerto Rico. Collectors of Pledged Taxes lack any legal or equitable claim to these taxes solely due to their role in collection.
Excess funds deposited with the Corporation beyond what is necessary for paying principal and interest on the Plan of Adjustment Bonds, satisfying obligations under the Bond Indenture or Ancillary Agreements, covering Financing Costs, or other related payments will be transferred to the Corporation free from liens established by prior articles or agreements.
The Act includes a severability clause stating that if any part is annulled or deemed unconstitutional, it will not affect the remainder of the Act, ensuring that enforcement remains intact for valid provisions. Additionally, the Act is adopted in both English and Spanish to address any potential language conflicts.
In case of conflict between the English and Spanish texts of this Act, the English version will prevail. Sections 26 and 27 repeal specific Articles of prior laws and amend Article 25-A of Law 44 from June 21, 1988. It details the management of assets in the Corpus Account by the Corporation, stipulating that funds must be used to purchase a capital appreciation bond with specific maturity and interest rate conditions. The Employees’ Retirement System and the Puerto Rico Infrastructure Financing Authority cannot dispose of the Corporation's bonds without authorization from the Financial Advisory Authority and Fiscal Agency of Puerto Rico.
Section 28 establishes the separability of the law, ensuring that if any part is declared unconstitutional, it does not affect the validity of the remaining provisions. It expresses the Legislative Assembly's intent for courts to enforce the law despite any declarations of unconstitutionality regarding parts of it. Section 29 asserts the supremacy of this law over any conflicting laws or regulations in Puerto Rico. Section 30 states that the law will take effect upon the implementation of a restructuring plan related to the Corporation under Title III of PROMESA. The document is certified as a true copy by the Department of State of Puerto Rico, dated December 3, 2018.
Capitalized terms not defined in this document will carry meanings assigned in the Plan, the Disclosure Statement Order, or the Confirmation Brief. "COFINA Revenues" is used to align with New Bond Legislation and is synonymous with "COFINA Portion" as defined in the Plan, including any collateral that may replace COFINA Revenues per the Plan and New Bond Legislation. The Court approved the Disclosure Statement via an order on November 29, 2018, establishing procedures for soliciting, voting, and tabulating votes related to the Plan, and for the notice of the Confirmation Hearing. Additionally, there is a Notice Regarding Submission of Objections to the Proposed COFINA Plan of Adjustment. The term "PROSOL-UTIER" encompasses various Puerto Rican government entities, while "VAMOS Group" includes various labor unions and associated individuals. The "Credit Union Group" consists of multiple credit unions in Puerto Rico. The PDP Amicus Brief, opposing the Plan, was filed by the Popular Democratic Party Caucus of the Puerto Rico Senate, followed by a response from the Financial Oversight and Management Board. The Court also heard arguments on the Commonwealth's Motion for Settlement Approval concerning the Puerto Rico Sales Tax Financing Corporation on January 16 and 17, 2019.
A dispute concerning section 19.5 of the Plan, referred to as the "19.5 Dispute," is noted. On January 29, 2019, the Court reviewed the Autonomous Municipality of San Juan’s Motion for Leave to File an Amicus Brief on the COFINA Plan of Adjustment. The motion was denied because the arguments presented were deemed untimely and did not substantiate a "special interest" justifying the filing. The Settlement is further addressed in a Memorandum Opinion and Order related to the Commonwealth of Puerto Rico and the Puerto Rico Sales Tax Financing Corporation. The New Bond Legislation, available in both English and Spanish, stipulates that the English version prevails in case of conflict.
Mr. Hein argues that the confidentiality of the mediation process for the Settlement and Plan proposals violates the First Amendment right to access judicial proceedings. However, the Court finds this argument unpersuasive, pointing out that the mediation program is accessible to interested parties, unlike the closed proceedings discussed in the cited case, Delaware Coalition for Open Government, Inc. v. Strine. The objection regarding public access to mediation is therefore overruled.
The VAMOS objectors assert that a pending adversary proceeding questioning the constitutionality of the New Bond Legislation must be resolved before confirming the COFINA Plan. They argue that the legislation is unconstitutional due to alleged violations of legislative process rules and limits on public debt imposed by both the U.S. and Puerto Rico Constitutions. The Court overrules these nonjusticiable claims regarding legislative process violations, referencing relevant case law.
Arguments concerning the Commonwealth's public debt limit have been settled through the 9019 Settlement Agreement related to the COFINA bonds. The New Bond Legislation asserts that Reorganized COFINA is an independent entity and specifies that Plan of Adjustment Bonds will be paid exclusively from COFINA Revenues, which are not classified as “available resources” of the Commonwealth under the Puerto Rico Constitution. Objections from the VAMOS group are dismissed. The PDP’s claim that the New Bond Legislation limits the future Legislative Assembly's powers is rejected; the legislation allows for amendments while protecting COFINA's interests. Allegations regarding "payoff" motives behind Consummation Costs lack supporting evidence, and the Court finds the costs legally justified. The Court does not allow an economist's declaration from PROSOL-UTIER due to lack of standing and considers a declaration from municipal finance expert Brownstein sufficient to support the Plan's feasibility. The Court must establish relevant property rights in the context of Title III proceedings, addressing a blend of federal and Puerto Rican law, as required by PROMESA and federal bankruptcy law. Validity of obligations under the debtor's plan must be determined before granting a discharge, referencing 11 U.S.C. 944(b)(3) and related case law.
The federal-state relationship in the restructuring of municipal debt is governed by the U.S. Constitution, specifically the Supremacy Clause, which prioritizes federal bankruptcy law over any conflicting state laws or constitutional provisions. This principle was affirmed in cases such as In re City of Stockton and In re City of Vallejo. A significant aspect of bankruptcy law is the requirement for court validation of bond issuance, which provides assurance to stakeholders and establishes a binding precedent for future cases. Court confirmations of debt adjustment plans, such as those for the City of San Bernardino and the City of Detroit, illustrate that upon the Effective Date, the terms of these plans are binding and enforceable, overriding any contrary state laws due to federal supremacy. This enforceability extends to all related documents and modifications, as established under various sections of the Bankruptcy Code, including sections 1123 and 944.
