Puerto Rico and Cofina filed for bankruptcy

On May 3, 2017, the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO (the “Oversight Board”) filed a petition requesting the protection of Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) for the GOVERNMENT OF PUERTO RICO (the “Petition”). More so, on May 5, 2017, the Oversight Board filed a petition requesting the protection of Title III of PROMESA for the PUERTO RICO SALES TAX FINANCING CORPORATION (“COFINA”). Puerto Rico’s Bankruptcy is considered the biggest bankruptcy case in United States History. The purpose of this Client Newsletter is to provide you with an overview of the current situation.


On 2016, the U.S. Congress passed PROMESA, which, among other things, created the Oversight
Board and imposed an automatic stay on creditor lawsuits against the government, which stay was
extended to May 1, 2017, but has now expired.

According to PROMESA, “[t]he purpose of the Oversight Board is to provide a method for a
covered territory to achieve fiscal responsibility and access to the capital markets.” PROMESA
provides the Oversight Board with the critical tools necessary to satisfy its mandate, including the
ability to certify a fiscal plan for the Commonwealth and “covered entities,” as well as two different
processes (Title III and Title VI) that can be used to restructure the Commonwealth’s debts.

On June 30, 2016, the Oversight Board was established under PROMESA section 101(b). On
August 31, 2016, President Obama appointed the Oversight Board’s seven voting members.

From December 2016 through March 2017, the Oversight Board and the Commonwealth held
more than thirty meetings with creditor representatives to better understand their perspectives and
work towards achieving a consensual financial restructuring. On March 13, 2017, after almost six
months and numerous internal and external meetings between the Oversight Board and its advisors,
the Oversight Board certified an amended version of the current Governor’s fiscal plan. Not happy
with the result and the projected level of debt service, creditors requested the decertification of the
current fiscal plan and the certification of a new fiscal plan that would have exceeded the certified fiscal plan’s debt sustainability analysis. The Oversight Board and the Commonwealth convened
mediation on April 13, 2017, to find common ground and a consensual resolution.

As previously mentioned, on May 3, 2017, the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD
FOR PUERTO RICO (the “Oversight Board”) filed the Petition. More so, on May 5, 2017, the
Oversight Board filed a petition requesting the protection of Title III of PROMESA for the PUERTO
Bankruptcy is considered the biggest bankruptcy case in United States History.

Presently, only the Puerto Rico General Fund and COFINA are under the protection of Title III of
PROMESA. However, other government instrumentalities may request to join the Title III
proceedings as affiliates of the Government. Whether a particular agency is considered to be part
of the Puerto Rico General Fund, and as such included in the Title III Case, is a determination that
must be made pursuant to the agency’s organic act.

According to Exhibit II of the Petition, the Government of Puerto Rico is defined to include: “all
departments, offices, programs, etc. and all funds related to the Governmental and Business
Activities of the [Commonwealth of Puerto Rico (Primary Government)] such as the General Fund
Operating Budget and Non-Budgetary Funds”. Please be aware that the fact that an agency was
listed as a “Covered Entity” by the Oversight Board on its September 30, 2016 meeting, does not
mean that such entity is subject to Title III Case filed.


Title III of PROMESA extends to Puerto Rico and its instrumentalities various of the benefits of
a bankruptcy proceeding. See Section 301 of PROMESA. To this effect, the mentioned title
incorporates by reference various sections of the United States Bankruptcy Code. In general terms,
the cited provision makes a proceeding under the mentioned title one similar to a bankruptcy
reorganization or Chapter 11 proceeding. However, due to the nature of the entity requesting the
relief, it also incorporates dispositions applicable to a governmental entities bankruptcy proceeding
(Chapter 9).

Therefore, Title III of PROMESA creates a sui generis procedure to manage the reorganization of
Puerto Rico’s debt obligations. Nevertheless, as it can be seen, this procedure is extremely similar
to that of a reorganization bankruptcy. Please note that the rules that govern the Title III Case are
those applicable to bankruptcy proceedings. See Section 310 of PROMESA.

As of the date of this Newsletter, the presiding judge of the case issued an order transferring the
case docket to the Puerto Rico Bankruptcy Court Docket. This is the only procedural order and/or instruction regarding the Title III Case management issued by the mentioned judge. Still, it is
expected that she will issue various procedural orders prior to the commencement of the case.
Please be aware that PROMESA does not set a time table for the completion of the proceeding.

Pursuant to the nature of the proceedings, the Oversight Board, on behalf of Puerto Rico, should
present a plan for the adjustment of its debts. If the plan is confirmed, it will be binding upon all
Puerto Rico’s Creditors and the Commonwealth will be able to discharge its debts, prohibiting any
collection efforts, beyond the amounts owed pursuant to the Plan. Notice concerning any such plan
will be provided pursuant to the form and manner of notice ordered by the Court.

As of the filing of the petition, there is a stay on any action to collect against the Government of
Puerto Rico. Ordinarily, the effect of the automatic stay is that collection efforts against a debtor
are precluded. This stay had a direct impact on over 22 cases that were filed against the
Government or its instrumentalities. Please be aware that the Commonwealth’s Constitution
provides that general obligation debts must be paid before paying any other creditor of Puerto
Rico. See Art. VI Sec. 8 P.R. Const. The priority in which all other creditors are to be paid is
established by 23 L.P.R.A. § 124a.

According to Section 301 of PROMESA, the bankruptcy petition cannot be dismissed until 120
days from the date of the filling of the petition have elapsed.


The immediate effect of the filing of the petition is yet unknown, especially for government
contracts. Notwithstanding, based on the available information and the contents of various motions
filed by attorneys of Oversight Board, it appears that the immediate effect of the filling of the
Petition in regard to the government operations is to stay the collection proceedings by government
general obligation debt holders, but at this stage, the impact is limited in regard to government
operations. As an example, counsel for Oversight Board requested the Court to issue an order
confirming that banks can cash government issued checks. In said motion, the Oversight Board
states, in accordance with Section 305 (2) and 305(3) of PROMESA, that Puerto Rico is in control
of its property and, as such, may use the same in any manner it sees fit.

Based on the foregoing, unless otherwise instructed, pursuant to 11 U.S.C. § 501, all Government
Creditors must timely file a Proof of Claim (“PoC”) in the case. Ordinarily, the PoC sets out the
amount that is owed to the creditor as of the date of the bankruptcy filing and, if relevant, any
priority status. Failure to file a PoC can expose the creditor from being excluded from its rights to
receive a distribution (pay out) from the bankruptcy estate. The classification (secured or
unsecured) and the priority that a PoC will receive in the proceeding is determined pursuant to the
Bankruptcy Code and PROMESA.

With regards to current contracts, the Oversight Board has the authority to assume or reject
executory contracts. Upon assumption of an executory contract, the Government must provide
some assurances as to the cure of any defaults, compensation for pecuniary losses occurred as a
consequence of the default, and future performance of the contract. If an executory contract is
rejected, a claim may be filed for damages or losses suffered as result of such action.

Whether a creditor can discontinue providing goods or services to the Government of Puerto Rico
is a determination that must be made on a case by case basis. This determination involves various
that must be carefully evaluated.

Please be aware that the filling of the Title III Case does not preclude Puerto Rico from engaging
in efforts to implement consensual debt restructurings if possible and practicable.


Pursuant to Section 308 of PROMESA, on May 4, 2017, the Chief Justice of the United States
Supreme Court appointed United States District Judge, Hon. Laura Taylor Swain, form the
Southern District of New York as the presiding judge for the Puerto Rico Title III Case. The
mentioned judge is Harvard Law graduate. Prior to being appointed District Judge she served as a
Bankruptcy Court in the Eastern District of New York. Before this, she worked on the private

The venue of the Title III Case is the United States District Court for the District of Puerto Rico.
However, the Oversight Board can request a change of venue to the United States District Court
for the Southern District of New York. See Section 307 of PROMESA.

We will keep you posted with the developments of this important and historic situation.


For further information on these matters, you may contact any of the attorneys listed below:

Juan J. Casillas Ayala(787) 523-3439jcasillas@cstlawpr.com
Luis L. Torres- Marrero(787) 523-3438ltorres@cstlawpr.com
Miguel A. Santiago-Rivera(787) 523-3436msantiago@cstlawpr.com
Luis F. Llach-Zúñiga(787) 523-3498lllach@cstlawpr.com
Alberto J. E. Añeses-Negrón(787) 523-3466aaneses@cstlawpr.com


The content of this Newsletter has been prepared for information purposes only. It is not intended as, does not constitute and should not be construed as either legal advice or solicitation of any prospective client. An attorney-client relationship with Casillas, Santiago & Torres LLC (CST) cannot be formed by reading or responding to this Newsletter. Such a relationship may be formed only by express engagement with CST.