Judge Laura Taylor Swain, overseeing Puerto Rico's Title III bankrupcty case, promised to release Wednesday a consensus-based order on the legal status of the island’s post-hurricane federal aid.

On Oct. 15 Puerto Rico, its power and highway authorities, and the Puerto Rico Fiscal Agency and Financial Advisory Authority filed a motion to “clarify that the federal disaster relief funds being provided to Puerto Rico will be used solely for their intended and required purposes, will be deposited into segregated and non-commingled accounts, and will not be subject to any existing creditor or third-party claims,” according to the court summary.

Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday.
Judge Laura Taylor Swain was open to attorney suggestions at Wednesday's Title III bankruptcy hearing. U.S. Courts

Wednesday’s hearing was to come up with an order to do this while addressing some limited concerns of the Ad Hoc Group of General Obligation Bondholders and two bond insurers.

If the federal government finds that a Puerto Rico authority has misused some of the federal grant or loan money, then the money may become “dis-obligated.” Since the federal government is technically lending the money to Puerto Rico’s central government and the central government is just the conduit of these funds to the authorities, the federal government would go after the funds from the central government. To be ready for this possibility, Puerto Rico’s government asked for a “superpriority” on the authorities’ funds.

Bond insurer National Public Finance Guarantee, which insures Puerto Rico and Puerto Rico authority bonds, said through its attorney Marcia Goldstein that it would be wrong to grant the superpriority in Wednesday’s court order.

After both Puerto Rico and creditor attorneys made presentations to Judge Laura Taylor Swain, the proceedings came to a turning point when Puerto Rico Fiscal Agency and Financial Advisory Authority attorney Peter Friedman asked the judge for a “few seconds” break so that the attorneys could discuss changes to the proposed order.
Swain agreed to the break and said it would last five minutes. For the next roughly 40 minutes about 40 attorneys discussed ways to change the order agreeable to all sides.

After the break Suzzanne Uhland, representing the Puerto Rico Fiscal Agency and Financial Advisory Authority, explained the agreed-to changes to the judge. Many of the changes were minor changes involving the addition of a few words.

The negotiating attorneys agreed to make some minor changes to the proposed order, adding language to certain lines about aid to make sure they were clearly referring to federal government aid.
In her summary of the consensus position, Uhland said the order’s paragraph on superpriority should indicate as to which party and for what amount, would be on the hook for returning the money.

U.S. Department of Justice attorney Matthew Troy told Swain that the U.S. government is requiring that Puerto Rico’s government have the superpriority claim. He said it would only become relevant if the federal government disallowed certain funds because of misuse.

Uhland also said the attorneys had come to an “agreement in principal” on changing the order’s adequate protection language. Prior to Wednesday’s hearing, the proposed order read: “No creditor shall be entitled to adequate protection premised on the commonwealth’s or any Non-Federal Entity’s use of federal disaster relief funds or commonwealth disaster relief advances.”

Swain said she would incorporate Uhland’s specific changes, negotiated with the creditors, in her order. She said she would incorporate the revisions to the adequate protections and superpriority passages later in the day. She overruled existing objections to the proposed order.

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