Title III cases will continue at the general hearing on January 30. (semisquare-x3)
Title III cases will continue at the general hearing on January 30. (GFR Media)

Yesterday, after questioning whether she has the authority to give a law previously approved in Puerto Rico, federal status, Judge Laura Taylor Swain reserved her ruling on the plan that would cut the debt of the Sales Tax Financing Corporation (Cofina).

During the second day of hearing regarding Cofina’s adjustment plan, Judge Swain repeatedly asked the attorneys of the Oversight Board, Cofina Bondholders, and the Fiscal Agency and Financial Advisory Authority (FAFAA) what provisions of law or jurisprudence would allow the federal court in charge of Puerto Rico Title III to validate, and state as unquestionable, the law that the legislative assembly passed last year to renegotiate Cofina's debt. This law established that to divide the portion of the Sales and Use Tax (SUT) committed to the debt payment between Cofina and the central government and that is the foundation for the renegotiation of the public corporation's debt and, therefore, for Cofina’s adjustment plan.

The same day that Rafaela Esteves, José Torres Asencio and Nicole Rodríguez opposed to the deal, Swain asked the Board if they were asking her to "rewrite" the Constitution of Puerto Rico and even joked, comparing the approval of a Puerto Rican law through federal court order with the Harry Potter saga. This, when asking if before the lack of data to validate the plan, the Board was asking her to put on "the Hogwarts sorting hat" (which decided which house each student belonged to).

Board attorney Paul Rosen also jokingly replied that Susheel Kirpalani does not belong in Slytherin (the villain team in the saga). Kirpalani is a lawyer of the Cofina Senior Bondholders Coalition and one of the main figures of the agreement - between the Board and creditors - that would cut approximately 32 percent of Cofina´s current principal.

The authority of the court

In an attempt to set the decisive course of the judge, Kirpalani offered Swain three arguments.

He recalled that last year, when the agents appointed by the Board to resolve the dispute over the ownership of SUT could not reach agreements, it was requested to certify the controversy so that the Supreme Court of Puerto Rico could determine if the law that created the SUT and Cofina was constitutional.

Then, Swain put an end to the dispute, noting that the federal court could resolve the matter in light of PROMESA and the plenary powers that Congress has over the U.S .territories.

Kirpalani explained that the island's Supreme Court establishes that every law approved in Puerto Rico is constitutional, unless the opposite is concluded. In addition, he said that Section 305 of PROMESA authorizes it to modify the property of the Puerto Rican government, in this case the distribution of SUT, if the Board approves that.

Before Rosen and Kirpalani's arguments, Ambac Assurance attorney Dennis F. Dunne indicated that his client supported the agreement not because it had a "phenomenal" result but because it was one of the most complex agreements he has signed; This came up in light of the mediation driven by the court and because "the price of a contentious position was simply higher."

However, Swain did not seem convinced. She hinted that the proposed ruling she has before consideration would impregnate the strength of the federal sphere in Cofina co-financed structure, which is included in the new Cofina bonds law and which approval last year is being questioned now.

What's on the table

The Cofina plan could be described as a puzzle that Swain must approve.

The first piece is approving a kind of contract or stipulation between Cofina and the central government. This, based on the Cofina bonds new law that divides SUT revenues committed to pay off bonds and establishes certain limitations and obligations between the parties.

Endorsing that stipulation is necessary for the second piece of the puzzle that is the plan that reduces Cofina's debt. Apart from the cut in the principal, the plan establishes how much senior and subordinate bondholders would receive. Swain must evaluate and certify the agreement if it is reasonable, fair and works in the best interest of the debtor, criteria established in PROMESA and the Bankruptcy Code.

The third piece for Swain to decide is how the money will be distributed and the fees for Cofina's custodian - Bank of New York Mellon - will be paid once the plan comes into effect.

In order to certify the plan, the Board presented Swain with a draft of the court order and it was the language of that document what raised questions.

Among other things, the proposed court order would consider valid certain findings and conclusions of a legal nature that were not justified in the documents filed, according to the judge. The order would also establish that those documents associated with the adjustment plan would have the full force of law.

Above all, according to the judge's line of questions, the ruling would place the weight of a federal court order on the law of the new Cofina bonds, whose provisions regarding the ownership of SUT have never been settled in court. In addition, such a law would be subject to the island´s constitution.

Meanwhile, Swain made it clear that she would not give way to an order exempting government officials ,and other participants in Cofina´s debt adjustment process, from responsibility.

Rosen told Swain that he would make sure to address her concerns regarding the responsibility of present and past government officials, as well as other professionals related to Cofina.

Meanwhile, Rosen and Kirpalani insisted that the order seeks to give "certainty" to bondholders so that the controversy over the ownership of the committed portion ofSUT cannot be questioned in the future.

A confiscatory move

However, for Peter Hein, subordinate bondholder and lawyer, what the Board has asked Swain is to simply validate that SUT belongs to Cofina and that, precisely, is the rule of law that covers Cofina’s current bonds.

For Hein, if as part of the adjustment plan they validate that SUT belongs to Cofina, by redistributing part of this source of revenues to the central government, the Board would alter the concept of insured debt in the United States. This, according to Hein would open the door for states like Illinois, New Jersey and Connecticut do the same.

In addition, Hein said that transferring part of SUT to the central government would be a confiscatory act, against the constitution.

On the other hand, while other insurers such as Assured Guaranty and National Public Finance defended the agreement, Independence representative Manuel Natal Albelo asked Swain not to approve the Cofina plan. He explained that he had filed a lawsuit against the government, since the legislative assembly approved the law of the new Cofina bonds without complying with the required processes. The lawsuit was removed by the Board under legal stay provided in PROMESA.

Swain asked the Board and FAFAA to submit a motion explaining the questions raised in the courtroom not later than next Monday. Title III cases will continue at the general hearing on January 30.


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