COFINA $17.6B deal attacked in appeals court

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Several parties tried to alter an 18-month-old Puerto Rico Sales Tax Restructuring Corp. (COFINA) bond deal in a U.S. Court of Appeals for the First Circuit on Friday.

Attorneys for appellants and defendants presented to a panel of three judges on the status of nearly $18 billion original par value of the COFINA bond deal

At stake is the restructuring of senior and subordinate COFINA bonds with a $17.6 billion original par value. Investors started selling the new restructured bonds on the secondary market Feb. 15, 2019.

The four related cases were conducted telephonically.

FAFAA and O'Melveny and Myers attorney Peter Friedman
Puerto Rico Fiscal Agency and Financial Advisory Athority Peter Friedman said that many of the challenges to the approve COFINA bond deal should be dismissed on equitable mootness grounds.

First, the case of René Pinto Lugo, et al. v. Financial and Oversight Board for Puerto Rico, et al. was argued. Next, the cases Elliot, et al. v. FOMB, et al. and Peter C. Hein v. FOMB, et al. were presented.

Finally, the judges heard Cooperativa de Ahorro Crédito, Dr. Manuel Zeno Gandía, et al. v. FOMB, et al.

The Pinto Lugo case focuses on claims by a member of the Puerto Rico House of Representatives that the chamber didn’t follow Puerto Rico’s constitution in its consideration of the bond deal.

The U.S. District Court for Puerto Rico, which approved the COFINA deal in winter 2018-2019, was aware of the Pinto Lugo legal case when it approved the deal. According to attorneys on Friday, the bonds have since been traded more than 100,000 times.

On Friday, one of the appeals court judges asked attorney Roberto Maldonado Nieves, who represented the Pinto Lugo appellants, why he hadn’t asked the district court for a stay after the court approved the deal. Maldonado Nieves said that it would have been futile to ask for a stay because the District Court had said his argument was “non-justiciable.”

The judge then asked why Maldonado Nieves hadn’t asked for an expedited appeal. The attorney said he hadn’t done so but that it didn’t change that the law wasn’t constitutionally passed.

Concerning the next two cases, attorney Hein argued for a group of holders of subordinate COFINA bonds and for himself, because he also held subordinate COFINAs.

Hein said he was not seeking the total overthrow of the settlement. He said those who voted against the deal should get paid in full.

Hein said the case Mission Product Holdings was dispositive. In its decision on it, the U.S. Supreme Court said that one couldn’t dismiss arguments on equitable mootness grounds unless some sort of rectification is impossible, he said.

In the equitable mootness doctrine, appeals courts try not to undo complicated bankruptcy restructurings because it would be very complicated and would be unfair to those who have operated under the assumptions that the deal was settled.

Hein said that even though he had sent in a proof of claim, he wasn’t given notice of the mediation process that led to the deal. He said he didn’t participate in it and wasn’t invited to participate in it.

Hein said all those who voted against the deal should be given the full value of the original bonds.

One of the appeals court judges told Hein that if someone doesn’t appeal a judgment, they are bound by it.

Attorney Peter Friedman, representing Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said that the Elliot group wants $316 million. If the Circuit Court choses to void the settlement, the entire plan of adjustment would collapse, Friedman said.

Judge Juan Torruella said it would have been better if the local Puerto Rico courts had decided the issues of COFINA’s consistency with Puerto Rico’s constitution. Friedman said constitutional claims could be mooted on equitable mootness grounds.

Attorney David Cooper, representing the a group of investment funds who held COFINA Seniors, said the appellants could have made a motion for a stay that would have prevented the deal from going forward. To follow the appellants’ request the plan would have to be unwound, he said.

One can’t simply draw out some money to give one or more of the appellants, Cooper said. At this point undoing the plan was “virtually impossible.”

Cooper said he believed there had been a nine-day period from when Judge Laura Taylor Swain approved the COFINA deal to when it was implemented.

In his rebuttal, Hein said self-interested parties participated in the mediation that led to the deal. Swain could have formed a committee with fiduciary interest of representing the group. He repeated that he hadn’t been notified that there was a mediation process going on.

In the final case, Attorney Guillermo Ramos Luina argued for a group of Puerto Rico financial cooperatives (credit unions) that held $43 million in original COFINA bonds. The group had filed adversary complaints in the bankruptcy in 2018, before the COFINA deal had been announced. In the complaints they cooperatives said the government had “forced or coerced” them into buying the COFINA bonds.

As part of the COFINA confirmation proves, Swain approved the confirmation order that included a reference to his group of cooperatives in paragraph 30, Ramos Luina said. Paragraph 30 says that his group can continue its claims against any entity except the COFINA entity.

Effectively, the passage bars the group from making claims against the old COFINA entity or the new reorganized COFINA entity, the lawyer said. Swain approved this without investigating or hearing the cooperatives claims and that infringed on his group’s constitutional rights, the lawyer said.

Ramos Luina asked the judges to allow his group to make claims against the old and new COFINA entities.

In response, Friedman said new COFINA didn’t have $43 million to pay the cooperatives. He said all the elements in favor or barring the claim on equitable mootness grounds were present.

Puerto Rico Oversight Board Attorney Martin Bienenstock said the cooperatives have an unsecured claim against a nonexistent entity and, as such, the claim was of no value. Bienenstock said the claim couldn’t properly be against COFINA because it couldn’t mislead them.

Along with Torruella, Appeals Court Judges Jeffrey Howard and William Kayatta Jr. heard the cases.

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