Puerto Rico bankruptcy judge Laura Taylor Swain displayed some interest to objections to the solicitation procedures for retail bondholder votes and proposed pension rules Monday, both challenges to the proposed Puerto Rico Plan of Adjustment.
The Puerto Rico Oversight Board submitted its third proposed version of the plan confirmation order Friday night.
The board says the local government would be barred from increasing its defined benefit pension plan payments for 10 years. The board had already made clear that it would seek a ban on all cost-of-living increases for these and other pension plans.
At Monday's confirmation hearing, the attorney for United Auto Workers and Service Employees International Union employees objected to the pension language.
The union’s attorney, Peter DeChiara, said the union objected to the language, which does not appear in the Plan of Adjustment but adds a material term; the Puerto Rico, Oversight, Management, and Economic Stability Act provides no basis for such a restriction that is not in the Plan of Adjustment; and it violates the union members’ due process rights since they received no notice of it before voting on the Plan of Adjustment.
Board attorney Martin Bienenstock said the local legislature has a history of trying to legislate increases to the pensions, and offered that the language allows the local government to increase the pension in the next 10 years if it meets six conditions.
Bienenstock argued the language was not “material and adverse” to the employees’ interests. It “protects the feasibility of the plan going forward.”
However, Swain asked if it is necessary to the success of the Plan of Adjustment, “Why isn’t it in the plan?”
Bienenstock said Puerto Rico was an unusual creditor in a bankruptcy. One does not normally fear debtors will offer substantially better terms to those to whom they owe money immediately after the approval of a bankruptcy deal, but in this case, it was a real possibility.
On another topic at Monday’s hearing, Swain showed some interest in arguments that the procedures for soliciting individual “retail” bondholder votes for the Plan of Adjustment were unfair.
Bondholder Arthur Samodovitz said only 27 bondholders voted in Class 47 for retail holders of the Series 2014 general obligation bonds, when there must be many more retail holders of the bonds.
Other issues, he said, were his broker's claim of a $30 charge to vote and confusion about the voting procedures, which cause Samodovitz to not vote.
Bondholder Peter Hein said on July 27 there was an exchange offer sent out to bondholders to join the Plan Support Agreement and support the Plan of Adjustment before the court approved the disclosure statement, which is barred by law.
The disclosure statement, Hein asserted, basically said that for retail holders to get a retail bonus of 1.32% they had to support the deal. They were told Plan Support Agreement supporters — hedge and investment funds — had already signed on and that if the retail holders did not sign on to the deal, it would probably happen anyway.
“Payment was offered for a vote,” Hein said.
The voting materials were not distributed until the end of September, leaving bondholders little time to review them, Hein said, and they were “way too complex” for the average investor.
Several options could remedy the situation, Hein told Swain, including denying confirmation.
Board Attorney Brian Rosen said more than 95% of all bondholders voted in favor of the Plan of Adjustment, which showed clear support. Neither the soliciting agent, Prime Clerk, nor Puerto Rico’s government charged a fee for voting, he said.
Rosen said Hein was wrong about the retail fee. Retail holders who did not vote but were in classes that voted in favor will get the bonus, as will those who voted against the Plan of Adjustment but are part of classes that voted in favor, Rosen said.
Hein said his broker charged a voting fee and provided a statement saying he would not get his share of the bonus if he voted against the Plan of Adjustment.
Swain told Rosen and Hein to talk with each other and file a motion with the court on whether there is a disagreement on how the retail bonus was handled and explained.
In a discussion of the laws the Plan of Adjustment would preempt, Bienenstock said Article 6 of Puerto Rico’s constitution, which guarantees first payment of the debt from available revenue, was preempted until the new bonds would be issued but would be effective after that.
In response, Hein said he was confused by the board’s argument on Article 6, and argued the board’s shifting plans and answers should be very concerning to Swain and was another reason she should reject the Plan of Adjustment.
Several parties said the Plan of Adjustment would impinge on their rights under the “takings clause” of the U.S. Bill of Rights, which says the U.S. government cannot take parties’ property without compensating them.
Other than Hein, most of the objecting parties complained of uncompensated eminent domain actions that Puerto Rico had taken against them before the bankruptcy.
Swain had ordered the parties to speak about, among other things, whether she could amend the Plan of Adjustment to address their concerns while still maintaining the plan as financially feasible.
Suiza Dairy’s attorney Rafael Gonzalez Valiente said Swain could amend it.
Bienenstock said paying the eminent domain claims would cost the commonwealth government $400 million. The board could accommodate this by reducing the amount paid into the pension trust and other reserve accounts. If Swain were to order this, it would not in itself cause the board to withdraw the Plan of Adjustment on feasibility grounds.
However, if Swain agreed with Hein’s claim that if all guaranteed bonds would have to be paid in full or the bondholders would have to be compensated in full, it would cost the commonwealth government billions and the board would have to withdraw the plan.
Gonzalez Valiente and other lawyers representing eminent domain-affected parties said courts have said all forms of takings are equal and are protected by the takings clause.
Bienenstock said judicial rulings indicate there is a difference in how United States bankruptcy law treats general unsecured claims and secured claims (like those with liens). The eminent domain claims should be considered a general unsecured claim, he said.
Finally, Puerto Rico credit union attorney Enrique Almeida made a different argument for the compensation of his clients. He said in the years leading up to the bankruptcy the Government Development Bank for Puerto Rico, and COSSEC (Puerto Rico’s government regulator of the credit unions) had pressured the credit unions into Puerto Rico debt instruments even though the commonwealth government knew they were unsafe.
Now the credit unions have bonds of considerably smaller value than what they purchased, the attorney said.
