UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF PUERTO RICO 

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 : 

In re: : 

 : 

THE FINANCIAL OVERSIGHT AND : PROMESA 

MANAGEMENT BOARD FOR PUERTO RICO, : Title III 

 : 

 as representative of : Case No. 17-BK-3283 (LTS) 

 : 

THE COMMONWEALTH OF PUERTO RICO, et al., : 

: 

(Jointly Administered) 

Debtors.1

 : 

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 : 

In re: : 

 : 

THE FINANCIAL OVERSIGHT AND : PROMESA 

MANAGEMENT BOARD FOR PUERTO RICO, : Title III 

 : 

 as representative of : Case No. 17-BK-4780 (LTS) 

 : 

PUERTO RICO ELECTRIC POWER AUTHOIRTY, : 

: 

 Debtor. : 

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OBJECTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO 

(A) NOTICE OF MEDIATION TEAM’S PROPOSED AMENDED ORDER 

ESTABLISHING TERMS AND CONDITIONS OF MEDIATION AND (B) PROPOSED 

AMENDED ORDER ESTABLISHING TERMS AND CONDITIONS OF MEDIATION 

 

1

 The Debtors in these Title III cases, along with each Debtor’s respective Title III case number and the last four 

(4) digits of each Debtor’s federal tax identification number, as applicable, are the (i) Commonwealth of Puerto 

Rico (Bankruptcy Case No. 17-BK-3283 (LTS)) (Last Four Digits of Federal Tax ID: 3481); (ii) Puerto Rico 

Sales Tax Financing Corporation (“COFINA”) (Bankruptcy Case No. 17-BK-3284 (LTS)) (Last Four Digits of 

Federal Tax ID: 8474); (iii) Puerto Rico Highways and Transportation Authority (“HTA”) (Bankruptcy Case 

No. 17-BK-3567 (LTS)) (Last Four Digits of Federal Tax ID: 3808); (iv) Employees Retirement System of the 

Government of the Commonwealth of Puerto Rico (“ERS”) (Bankruptcy Case No. 17-BK-3566 (LTS)) (Last 

Four Digits of Federal Tax ID: 9686); (v) Puerto Rico Electric Power Authority (“PREPA”) (Bankruptcy Case 

No. 17-BK-4780 (LTS)) (Last Four Digits of Federal Tax ID: 3747); and (vi) Puerto Rico Public Buildings 

Authority (“PBA”) (Bankruptcy Case No. 19-BK-5233 (LTS)) (Last Four Digits of Federal Tax ID: 3801) 

(Title III case numbers are listed as Bankruptcy Case numbers due to software limitations). 

Case:17-03283-LTS Doc#:22372 Filed:09/23/22 Entered:09/23/22 13:54:08 Desc: Main

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To the Honorable United States District Judge Laura Taylor Swain: 

The Official Committee of Unsecured Creditors (the “Committee”)1 respectfully submits 

this objection (the “Objection”) to (a) the Notice of Mediation Team’s Proposed Amended Order 

Establishing Terms and Conditions of Mediation [Docket No. 2997 in Case No. 17-4780 (LTS)] 

(the “Notice”) and (b) the [Proposed] Amended Order Establishing the Terms and Conditions of 

Mediation [Docket No. 2996 in Case No. 17-4780 (LTS)] (the “Proposed Amended Order”).2 In 

support of this Objection, the Committee respectfully states as follows:

OBJECTION 

1. The Committee has a number of concerns with the Mediation Team’s proposals 

regarding the parameters for further mediation. As an initial matter, however, the Committee 

respectfully requests that the Court defer ruling on the Mediation Team’s Proposed Amended 

Order and the Mediation Team’s proposed litigation sequencing until after the Court has had the 

opportunity to hear from the Committee and other parties at the September 28, 2022 hearing on 

the Oversight Board’s motion requesting approval of a litigation schedule [Docket No. 2956 in 

Case No. 17-4780 (LTS)] (the “Scheduling Motion”),3 so that all scheduling and process issues 

can be considered and decided in a holistic fashion. Indeed, whether and to what extent the 

mediation process should be amended should depend, in large part, on the litigation schedule 

ultimately approved by the Court, including the issues to be litigated, the sequencing of such 

 

1

 The Committee is the official committee of unsecured creditors for all Title III Debtors, other than PBA and 

COFINA. 

2

 Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Notice and the 

Proposed Amended Order, as applicable. 

3

 The Court’s scheduling order on the Notice and the Proposed Amended Order [Docket No. 2998 in Case No. 

17-4780 (LTS)] notes that, after the September 23 objection deadline, the Court will take the matter on 

submission. 

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litigation, and whether such litigation should occur prior to, or within the context of, 

confirmation of a plan of adjustment. 

2. In this regard, the Committee reiterates its position, which is also reflected in the 

Oversight Board’s litigation scheduling proposal, that the following two threshold issues (the 

“Threshold Issues”) should be litigated first: (1) whether the PREPA bondholders’ security 

interest is limited to funds actually deposited into specified accounts held by the PREPA bond 

trustee (in the amount of approximately $8.8 million as of PREPA’s petition date); and (2) 

whether the PREPA bonds are non-recourse obligations such that, in accordance with section 

927 of the Bankruptcy Code, the PREPA bondholders have no claim against, and are not entitled 

to distributions from, PREPA for any difference between the face amount of the bonds and the 

funds on deposit in the specified accounts. All other issues that other parties or the Mediation 

Team suggest should be litigated are entirely dependent on the resolution of the Threshold 

Issues. 

3. As it relates to the Mediation Team’s substantive proposals (in the Amended 

Proposed Order and the Notice), the Committee has a number of concerns. First, the Committee 

is concerned about the proposed expansion of the Mediation Team’s powers under the Proposed 

Amended Order that would appear to allow the Mediation Team to (a) determine whether the 

parties themselves have reached a resolution in the Mediation prior to the Termination Date, 

even if the parties do not agree that a resolution has been reached,4

 and (b) determine to what 

extent Mediation Parties other than the Oversight Board would be given access to the new digital 

data room.5 Whether a settlement has been reached should be determined by the affected 

Mediation Parties, not the Mediation Team. Indeed, the Mediation Team very recently stated 

 

4

 Proposed Amended Order at 4. 

5

 Id. at 5-6. 

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that it believed that a settlement was at hand, while the Oversight Board has clearly rejected that 

notion. And access to any digital data room should be open to all Mediation Parties without 

restrictions.6

4. The Committee is also concerned about (a) the Mediation Team’s 

recommendation that the Oversight Board should proceed with filing a Toggle Plan within the 

next 60 days, with the Threshold Issues (and other issues) to be litigated within the context of a 

confirmation hearing to be held no later than June 20237

 and (b) the Mediation Team’s 

suggestion that the Oversight Board should hire another financial advisor with “extensive 

experience in financial restructurings.”8

 

5. The essence of every mediation is to have a neutral party explore whether it is 

possible to bring parties together to a settlement, and, at the end of that process, the mediator(s) 

announces whether the mediation has been successful or not. In this case, however, the 

mediation process seems to have migrated from a traditional mediation process to the Mediation 

Team taking on the role of a quasi-party and perhaps more. The suggestion that the Oversight 

Board should hire another financial advisor encroaches upon the Oversight Board’s choice of its 

advisors. The Committee does not believe the Mediation Team should be attempting to secondguess the choices of professionals made by board members who, as the Court is well aware, 

include, among others, a renowned bankruptcy law professor, an economics scholar, and a 

 

6

 The Proposed Amended Order would also give the Mediation Team the ability to recommend that pending 

litigation “be paused to enable negotiations to proceed with a materially enhanced prospect of success.” 

Proposed Amended Order at 5. The Committee has no objection to the Mediation Team being able to make 

such a recommendation, provided that it is made clear that parties in interest have the right to object to any such 

recommendation, with such issue to be decided by the Court. 

7

 Proposed Amended Order at 5, n.12. 

8

 See Notice at 2-3. 

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former bankruptcy judge that presided over some of the biggest and most complex corporate 

bankruptcies in history.9 

6. The Committee also has serious concerns about the construct of a Toggle Plan 

without the Threshold Issues being determined first. The multitude of alternative scenarios that 

would have to be considered is endless. The treatment of the PREPA bond claims alone would 

have to take into account at least the following eight (8) different potential litigation outcomes 

(and potentially many additional outcomes):10 

(i) The PREPA bondholders hold (a) an allowed secured claim secured only by the 

funds in the specified accounts but (b) no unsecured deficiency claim; 

(ii) The PREPA bondholders hold (a) a claim secured only by the funds in the 

specified accounts, but such security interest is avoidable (i.e., the PREPA 

bondholders hold an unsecured claim with recourse only to the funds in such 

accounts), and (b) no unsecured deficiency claim; 

(iii) The PREPA bondholders hold (a) an allowed secured claims secured only by the 

funds in the specified accounts and (b) an unsecured deficiency claim; 

(iv) The PREPA bondholders hold (a) a claim secured only by funds in the specified 

accounts, but such security interest is avoidable (i.e., the PREPA bondholders 

hold an unsecured claim with recourse only to the funds in such accounts), and (b) 

an unsecured deficiency claim; 

(v) The PREPA bondholders hold an allowed secured claim secured by all of 

PREPA’s gross revenues; 

(vi) The PREPA bondholders hold a claim secured by all of PREPA’s gross revenues 

but such security interest is avoidable or otherwise limited, in whole or in part; 

 

9

 To be clear, the Committee raises this issues not as the Oversight Board’s proxy, but rather as an important 

process issue. Indeed, the Committee has had its share of disagreements with the Oversight Board (and likely 

will continue to have some disagreements in the future). 

10 For example, even if the bond documentation granted the security interests asserted by the PREPA bondholders, 

how are those security interests impacted by sections 552 and 928 of the Bankruptcy Code? Moreover, the 

PREPA bondholders have asserted that they have been granted security interests in various types of collateral 

(such as gross revenues, future revenues, covenants and remedies). If they prevail in litigation, some or all of 

such collateral would have to be valued, which would create countless additional scenarios. And all of this 

ignores that additional toggles would be needed to account for the possibility that the claims (or some portion of 

the claims) of the fuel line lenders and/or the unions qualify as current expenses entitled to priority vis-à-vis the 

PREPA bondholders, but, of course, not over unsecured creditors. 

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(vii) The PREPA bondholders hold an allowed secured claim secured by all of 

PREPA’s net revenues; and 

(viii) The PREPA bondholders hold a claim secured by all of PREPA’s net revenues, 

but such security interest is avoidable or otherwise limited, in whole or in part. 

7. Each scenario would also have repercussions on what PREPA may be able to pay 

other creditors. In other words, the plan treatment for every other creditor class would similarly 

have to take into account the alternative plan treatment for the PREPA bondholders. To make 

matters even more complex, each of these scenarios would raise its own confirmation issues, 

including as to feasibility, classification, unfair discrimination, disparate treatment, and the best 

interests of creditors. Instead of streamlining the plan confirmation process and paving PREPA’s 

way to emergence from Title III, moving forward with a Toggle Plan (without resolution of the 

Threshold Issues) would mire the Oversight Board, PREPA, and PREPA’s creditors in years of 

litigation and, in the end, would be far more costly than litigating the Threshold Issues in 

advance of formulating a plan of adjustment. 

8. Finally, the Committee is concerned, based on its experience to date, that it will 

not be meaningfully involved—or involved at all—in the next phase of the mediation process the 

Mediation Team has proposed.11 The Committee became aware this week that, during the 

Mediation to date, every major creditor constituency in the Mediation other than the Committee

has received or been included in negotiations regarding proposals for the treatment of their 

respective claims. This is not a mere sequencing issue. During the mediation process, creditors 

with inferior or equal rights to the Committee’s constituents12 have, practically, been negotiating 

 

11 For example, the Proposed Amended Order would allow the Mediation Team to establish separate Mediation 

schedules for the various Mediation Parties. See Proposed Amended Order at 4. 

12 The aggregate asserted amount of pending general unsecured claims (after excluding a number of unsecured 

claims that fall outside the Committee’s constituency) is greater than $3 billion. Of course, the Committee 

recognizes that the asserted claim amount is often far in excess of the amount that is ultimately allowed. 

However, proofs of claims are prima facie valid, and parties involved in the Mediation cannot simply wave a 

magic wand and assume that these claims do not exist. 

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over how to split up the proverbial pie. Unless the Committee is allowed to actively participate 

in these negotiations, the Committee will be faced, once again, with the argument that there are 

no funds left for its constituents. The Committee is hopeful that the Court will not tolerate this 

“everyone but the Committee” approach. 

[Remainder of page intentionally left blank.] 

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WHEREFORE, the Committee respectfully requests that the Court deny the relief 

requested by the Mediation Team and grant the Committee relief consistent with the foregoing. 

Dated: September 23, 2022 By: /s/ Luc A. Despins . 

PAUL HASTINGS LLP 

Luc A. Despins, Esq. (Pro Hac Vice) 

Nicholas A. Bassett, Esq. (Pro Hac Vice) 

G. Alexander Bongartz, Esq. (Pro Hac Vice) 

200 Park Avenue 

New York, New York 10166 

Telephone: (212) 318-6000 

lucdespins@paulhastings.com 

nicholasbassett@paulhastings.com 

alexbongartz@paulhastings.com 

Counsel to the Official Committee of Unsecured 

Creditors 

By: /s/ Juan J. Casillas Ayala . 

CASILLAS, SANTIAGO & TORRES LLC 

Juan J. Casillas Ayala, Esq. (USDC - PR 218312) 

Israel Fernández Rodríguez, Esq. (USDC - PR 225004) 

Juan C. Nieves González, Esq. (USDC - PR 231707) 

Cristina B. Fernández Niggemann, Esq. (USDC - PR 

306008) 

PO Box 195075 

San Juan, Puerto Rico 00919-5075 

Telephone: (787) 523-3434 Fax: (787) 523-3433 

jcasillas@cstlawpr.com 

ifernandez@cstlawpr.com 

jnieves@cstlawpr.com 

cfernandez@cstlawpr.com 

Local Counsel to the Official Committee of Unsecured 

Creditors

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