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UNITED STATES DISTRICT COURT 

DISTRICT OF PUERTO RICO 

-----------------------------------x 

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. 

------------------------------------x 

THE OFFICIAL COMMITTEE OF UNSECURED 

CREDITORS OF THE COMMONWEALTH OF 

PUERTO RICO, 

 as agent of 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO 

 as representative of Adv. Proc. No. 17-00257-LTS 

THE COMMONWEALTH OF PUERTO RICO, 

 Plaintiff, 

 -v- Oral Argument 

BETTINA WHYTE, 

 as agent of 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO 

 as representative of 

THE PUERTO RICO SALES TAX FINANCING 

CORPORATION, 

 Defendant. 

-----------------------------------x 

 New York, N.Y. 

 May 9, 2018

 9:30 a.m. 

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Before: 

HON. LAURA TAYLOR SWAIN, 

 District Judge 

APPEARANCES: 

For the Financial 

Oversight and Management 

Board for Puerto Rico: Martin J. Bienenstock, Esq. 

 Salvador Antonetti, Esq. 

For the Official Committee 

of Unsecured Creditors of 

l Title III Debtors 

(other than COFINA) 

(the "Committee"): Luc A. Despins, Esq. 

 James Bliss, Esq. 

 Juan Casillas, Esq. 

For Creditor Ad Hoc 

Group of General 

Obligation Bondholders: Mark T. Stancil, Esq. 

 Donald Burke, Esq. 

For COFINA Agent: Antonio Yanez, Jr., Esq. 

 Alexander Cheney, Esq. 

 Nilda Navarro-Cabrer, Esq. 

 Kenneth N. Klee, Esq. 

For Creditor COFINA 

Senior Bondholder 

Coalition: Susheel Kirpalani, Esq.

 Eric Kay, Esq. 

 Rafael Escalera, Esq. 

For Creditor Ambac 

Assurance Corporation: Eric Weiss, Esq. 

 Atara Miller, Esq. 

For Creditor National 

Public Finance 

Guarantee Corporation: Gregory Silbert, Esq. 

 Gabriel Morgan, Esq. 

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For Creditor Mutual 

Fund Group: Philip Bentley, Esq. 

 Philip M. Guffy, Esq. 

 Thomas Moers Mayer, Esq. 

For the Puerto-Rico 

based Mutual Funds: Jason Zakia, Esq. 

Proceedings recorded by stenography. Transcript produced by 

CAT. 

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(In open court) 

THE COURT: Buenos Dias. Please be seated.

(Case called)

THE COURT: Again, good morning.

Welcome, counsel, parties of interest, members of the 

public, press, those in San Juan and observers by telephone. 

We have in mind the people of Puerto Rico and all 

those interested in Puerto Rico's future, including GO and 

COFINA bondholders on the island and on the mainland; and we 

have in mind the continuing daily challenges faced by those who 

live in Puerto Rico. 

I remind you that, consistent with court and Judicial 

Conference policies, and the orders that have been issued, 

there is to be no use of any electronic devices in the 

courtroom to communicate with any person, source, or outside 

repository of information, nor to record any part of the 

proceedings. Thus, all electronic devices must be turned off 

unless you are using a particular device to take notes or to 

refer to notes or documents already loaded on the device. All 

audible signals, including vibration features, must be turned 

off. 

As provided in this court's standing order, no

recording or retransmission of the hearing is permitted by any

person, including but not limited to the parties or the press.

Anyone who is observed or otherwise found to have been

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texting, e-mailing, or otherwise communicating with a device in

the courtroom during the court proceeding will be subject to

sanctions, including, but not limited to, confiscation of the

device and denial of future requests to bring devices into the

courtroom.

Please be mindful of your other possessions, and take

all of them with you, including any trash, when you leave the

courtroom at the conclusion of these proceedings.

Today the Court is hearing oral argument in connection

with the Commonwealth COFINA dispute, which is Adversary 17-257

in the Commonwealth's case.

Specifically, today's argument is on the motions filed 

by the COFINA agent and the Mutual Fund Group to certify 

certain questions to the Puerto Rico Supreme Court.

I note that in their submissions parties have cited

Puerto Rico's Supreme Court decisions of which official

translations do not appear to be readily available. Therefore,

I am directing all parties who have made submissions to file a

joint informative motion compiling certified translations of

all such cited decisions by next Friday, which is May 18.

In the future, the fact that something may be a link

to a Spanish document does not exempt it from the requirement

that filings be in the English language, and so please bear

that in mind for future briefing submissions.

At this point I'm ready to begin with the arguments.

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The pro certification arguments will of course go first, the

movants' arguments, and Mr. Yanez, I have you up for ten

minutes.

MR. YANEZ: Good morning, your Honor, and may it

please the Court. For the record, Antonio Yanez on behalf of

the COFINA agent.

Your Honor, we seek certification to the Puerto Rico 

Supreme Court because this case, and the questions that we seek 

to certify, turn entirely on novel issues of Puerto Rico law, 

and because of the far-reaching consequences this case has for 

Puerto Rico. I will start with the consequences, and I will be 

brief, because no one really disputes the point. 

Resolution of this case involves defining the taxing

and spending powers of the legislative assembly. That goes to

the heart of the legislative function, and it will have

long-lasting effects on the operation of the government of

Puerto Rico well beyond these Title III cases.

This case will also determine whether financing

through tax-backed securitization is available to Puerto Rico,

which will have a direct and immediate impact on the ongoing

recovery efforts in the wake of Hurricane Maria.

The significance of the case to Puerto Rico, these 

factors that I have just mentioned, in themselves are important 

reasons weighing in favor of having a Puerto Rico court resolve 

the dispute. 

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Certification is also appropriate because, as I say,

the case turns entirely on Puerto Rico law.

THE COURT: Now, it has been argued that there are

federal issues that must necessarily be processed in connection

with these decisions, and particularly I will just give you

one. On the balanced budget clause arguments there is the

language, the translation, as opposed to Spanish language

issue, and the arguments on that turn on congressional action.

That's a matter of interpreting federal law before you can get

to Puerto Rico law; and then of course there are the arguments

regarding Section 306 and the arguments regarding disguised

loans. How can you separate those issues from the decision

that has to be made to be definitive of the binary Commonwealth

COFINA dispute?

MR. YANEZ: So, let me address that, your Honor, and I

will begin with the arguments that are based on PROMESA.

The objectors, and principally the Oversight Board,

say that the case, as your Honor just mentioned, is about 

whether the pledged sales tax is the property of the estate 

under PROMESA Section 306 and whether the transfer frustrates 

PROMESA. That's wrong, your Honor. It's incorrect for two 

reasons. 

The first is that federal law questions about what is

property of the estate and frustration of PROMESA are not

controlling here; in fact, they're not even relevant. No one

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moved for summary judgment on those grounds. None of the

parties here has ever raised PROMESA Section 306 in connection

with summary judgment or otherwise; and those issues are not in

scope.

Pursuant to this court's scope rulings, what is in

dispute here is whether the pledged sales tax is property of

the Commonwealth or COFINA and matters antecedent to that

issue. That's what this court ruled.

THE COURT: But for the Title III, at the end of the

day I can only approve a plan that distributes assets that are

property of the estate within the meaning of PROMESA.

The whole purpose of PROMESA and the incorporated 

bankruptcy provisions is to deal with property of the estate, 

so at some level I have to make a federal law determination 

that the property is property of the debtor under PROMESA. So 

how could I avoid that? 

MR. YANEZ: That is correct, your Honor, but not in

this case, not in this adversary proceeding.

This adversary proceeding, as commenced by the 

Commonwealth agent's complaint, and as modified by this court's 

scope rulings, is about a very narrow set of issues, and those 

issues turn exclusively on Puerto Rico law. 

There are, to be sure, issues to be decided afterwards

outside of the context of this adversary proceeding, but this

case is just about Puerto Rico law; it's about the

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interpretation of the COFINA enabling legislation and in

particular whether it effected a transfer of the pledged sales

tax, and it's about the constitutionality under the Puerto Rico

Constitution of the transfer that was effected. That's all

that is at issue here. The other issues will come later.

THE COURT: Thank you. You may proceed.

MR. YANEZ: Further, to the point that all that is at

issue here is Puerto Rico law, I want to emphasize that the

issues that I've just mentioned -- the transfer of ownership

under the COFINA legislation, and whether the transfer was

constitutional -- those are novel issues, Judge.

The COFINA enabling legislation has never been 

interpreted by any court, and the constitutional challenges 

that are being raised have never been ruled upon. And those 

factors make the questions that we seek to have certified 

particularly appropriate for certification under the 

controlling precedent here as matters of comity and deference 

to local construction of local law. The Supreme Court has held 

that, so has the First Circuit, and so has the District of 

Puerto Rico. 

And I'd like to pause on the subject of deference to 

local courts, because Puerto Rico is unique in that regard. In 

the Fonaris v. Ridge Tool case, where the United States Supreme 

Court deferred to the Puerto Rico courts, the Supreme Court of 

the United States explained, and I'm quoting now, "The 

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relations of the federal courts to Puerto Rico have often 

raised delicate problems. It is a Spanish-speaking

Commonwealth with a set of laws still impregnated with the 

Spanish tradition." 

The Supreme Court of the United States made the same

point in the Posadas de Puerto Rico case, again quoting, "A

rigid rule of deference to interpretations of Puerto Rico

courts is particularly appropriate, given the unique cultural

and legal history of Puerto Rico."

And, Judge, the same factors that the Supreme Court

was talking about in the Fonaris case and in the Posadas case

are present here. As the Court knows -- and as the Court

mentioned -- there are questions about the proper translation

of terms from Spanish to English; there are questions about the

applicability of the Puerto Rico Civil Code; there are

questions about the interpretation of the Puerto Rico Civil

Code. So, all of these factors -- comity and deference, the

fact that these are issues of Puerto Rico law, the fact that

they are novel issues, and the significance of this case to the

Commonwealth -- all weigh in favor of certification.

Your Honor, the objectors have raised arguments about

whether the Supreme Court of Puerto Rico would accept

certification, and they have raised arguments about delays that

supposedly would flow from certification. Mr. Escalera of

Reichard & Escaler is here on behalf of the COFINA senior

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bondholders, and he will speak to those issues.

Before I finish, I do want to address the argument 

that it is somehow inconsistent for us to seek certification, 

having moved for summary judgment. 

Courts hold that summary judgment is in fact the right

point at which to move for certification, because it's at

summary judgment that the issues are defined and the facts are

developed. So, far from being inconsistent with our summary

judgment motion, it's at this point that a motion for

certification is appropriate.

And I want to be clear that we believe the pledged

sales tax is clearly COFINA's property, and we believe that

that's true before this court and it will be true before the

Supreme Court of Puerto Rico, if they have the opportunity to

decide this issue; but it is that opportunity which is what

fundamentally is before the Court today.

By that I mean the issue is which court should have

the opportunity to rule here, which court should have the 

opportunity to be the first to construe the COFINA legislation 

against the backdrop of the significant consequences to Puerto 

Rico and against the backdrop of those long-lasting

consequences, and which court should be the first to evaluate 

the novel interpretations of the Puerto Rico Constitution that 

are being advanced. We submit, Judge, that under the law it 

should be that the Supreme Court of Puerto Rico that has that 

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opportunity. 

THE COURT: Thank you, Mr. Yanez.

MR. YANEZ: Thank you, your Honor.

THE COURT: Mr. Bentley?

MR. BENTLEY: Good morning, your Honor. Philip 

Bentley of Kramer Levin for the Mutual Fund Group. 

Your Honor, I adopt Mr. Yanez's arguments; I won't

repeat them. I would like to focus my brief remarks on one

topic, namely the standard governing your Honor's decision

whether or not to certify. My key point is the standard is not

symmetrical. In considering the merits, your Honor may

conclude that the Constitution is unambiguous and that the

plain meaning of the Constitution's text supports sustaining

the COFINA statute.

If your Honor reached that conclusion, then under the

standards set forth by the First Circuit there would be no bar

to your Honor making that ruling on the merits instead of

certifying.

But the key point I'd like to make, your Honor, is the 

opposite is not true. There are multiple reasons why if your 

Honor concluded the text of the Constitution is ambiguous, in 

that event you should send the resolution of the ambiguity to 

the Puerto Rico Supreme Court to decide. 

THE COURT: Not just because you want an advanced

second bite at the apple in the case it's not going your way?

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MR. BENTLEY: Correct, your Honor. This is why I'm

hitting this head on, because it does sound convenient.

There are multiple reasons -- I won't dwell on the

first one, which, as we say, the law is clear for supporting

the statute, whereas it's not sufficiently clear to invalidate

the statute under the First Circuit standards.

I'd like to move on to three additional reasons, each 

of which revolves around the point. In looking at 

certification decisions, courts have focused on the need to 

respect the internal affairs, the self government of the state, 

and, as Mr. Yanez emphasized, those considerations apply 

perhaps even more powerfully with respect to Puerto Rico. 

Now, an order sustaining a statute does not affront

the state's internal affairs. It leaves a statute in place; it

doesn't disrupt the status quo. Striking down the statute does

the opposite, which is why the circuit courts have held that

courts should strike down a state statute based on the state's

Constitution only as a last resort, as an unavoidable matter.

In fact, the parties have pointed to not a single case where a

federal court has done that, has invalidated a state statute

based on the state constitution.

Now, in this case there are two additional reasons

specific to this case why striking down the Puerto Rico statute

would be particularly an affront to self governance. One is

the Court couldn't do that based on the plain text of the

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statute -- sorry -- of the Constitution. The Court would need

to look to the purposes, the supposed purposes of the

Constitution -- which our friends in the front row have pointed

to -- and, in so doing, the Court would need to make choices

between policies: The policy of giving broad range, broad

deference to the legislature of Puerto Rico, versus the

no-invasion policy that our friends in the front row are

speaking to. Policy choices like that are uniquely the

prerogative of the local court.

Finally, a matter of such enormous consequence -- I

won't belabor or repeat the arguments the parties have made

about the huge financial consequences that a ruling striking

down COFINA would have -- I will simply say that a ruling on a

matter like that cuts to the heart of the self governance of

the Island, and that's a powerful additional reason why that's

a decision that shouldn't be made by a federal court; it should

be made only by the Puerto Rico Supreme Court.

THE COURT: Thank you, Mr. Bentley.

MR. BENTLEY: Thank you, your Honor. 

THE COURT: Mr. Zakia?

MR. ZAKIA: Your Honor, good morning. Jason Zakia of

White & Case on behalf of the Puerto Rico Funds. I will be

extremely brief; my light started red.

So, the reason I rise today, your Honor, is we are a 

little bit different than some of the other creditor parties in 

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that our clients are based in Puerto Rico, and our shareholders 

are residents of Puerto Rico. And I agree with everything 

Mr. Yanez and Mr. Bentley said, but I wanted to add one other 

point, which is, this is extremely important -- and I know all 

the matters in these cases are important to everybody -- but 

extremely important to the Island of Puerto Rico, because my 

clients aren't the only COFINA bondholders on Puerto Rico. In 

fact, the COFINA bonds are the most widely held bond on the 

Island. So, when you compare all of the reasons why this is 

important, that's another one. 

And you combine it with the fact that the arguments

made in opposition to this COFINA regime put in place by the 

government of Puerto Rico are based on the laws and the 

Constitution of the Commonwealth, that really does make it the 

perfect instance in which certification would be appropriate. 

And, in fact, we would submit, your Honor, if this case isn't 

the model case for certification, I don't know what would be. 

Thank you very much. 

THE COURT: Thank you, Mr. Zakia.

Ms. Miller. 

MS. MILLER: Good morning, your Honor. Atara Miller

from Milbank Tweed Hadley & McCloy on behalf of Ambac.

Your Honor, I want to go back to a question which I

think Mr. Yanez responded to quite well, but I want to add one 

point. The question was: Wouldn't I have to make 

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determinations under federal law about whether or not this is 

property of the debtor? This is all happening in the context 

of a Title III proceeding. And I want to point out, as we will 

all recall, that this summary judgment and certification motion 

comes at the end of quite a long procedural process that led up 

to it, and it started many, many months ago, almost a full year 

ago, with the Commonwealth -- with the Oversight Board's motion 

to set up this procedure. 

And in that original motion, the protocol motion, they 

specifically defined the Commonwealth COFINA dispute as "For 

purposes of the Title III cases" -- and this is a Docket 303 -- 

"whether after considering all the procedural and substantive 

defenses the pledged sales tax are either, A, property of the 

Commonwealth within the meaning of PROMESA Section 301(c)(5) 

or, B, subject to an allowable claim of the Commonwealth, 

having priority over all claims of COFINA." 

After many months of negotiation, and a second motion

that was ultimately submitted on consent and approved by your

Honor, that is not the definition of the issue before this

court. And the Oversight Board then stepped out, and the case

was litigated through its agents, and all of the parties to

this dispute recognize that the question of potential overlay

of PROMESA is not part of what is before the Court on this

motion and in this proceeding. It is quite narrowly defined

and limited to what your Honor described as the antecedent

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question of property. Let's figure out whose property it is

under Commonwealth law, and then we can think about what that

means in the context of a Title III.

So, I just wanted to -- 

THE COURT: And so you're comfortable that this is not

a proposed request for an advisory opinion to the Puerto Rico

Supreme Court, in that there are arguments that property that

looks like property under Commonwealth law might not look like

property in the same way under PROMESA and bankruptcy law?

MS. MILLER: Your Honor raises quite a fascinating

question. Because I think to the extent that it is an advisory

opinion to ask the Puerto Rico Supreme Court to decide these

issues, then the questions that have been presented to this

court, and the way the scope has been defined in this court,

similarly calls for an advisory opinion.

THE COURT: If I understand the scope the way you've

parsed the scope.

MS. MILLER: Well, I think we litigated that sort of

many times over, and I think it's fairly clear that none of

these bankruptcy issues are properly before the Court, and for

that reason not a single party moved for summary judgment on

that basis.

So, I think it's quite clear that the parties at least

understand that. And to the extent that your Honor believes

it's broader, quite frankly I think we need a whole new round

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of summary judgment briefing on that issue, because I don't

think it was fully addressed.

But I think it's an interesting question whether this

is setting up an advisory opinion, but I think if it is before

the Puerto Rico Supreme Court, it is equally as much here. So,

to me that's not a bar to certification. It may raise

questions about the protocol as adoptive.

I want to make clear that our position, frankly we're

standing up on the COFINA side as proponents of certification,

but as your Honor I think knows we actually oppose

certification because we believe -- similar to Mr. Bentley --

that the question is really one of the plain text of the

statute and the plain purpose of the statute.

Federal courts are well practiced in interpreting and 

applying state laws, and this is true even if it's a novel 

question of state law, if the statutory tax purpose and related 

or analogous case law is sufficiently clear. So that was 

consistent with the First Circuit's decision in Armacost v. 

Amica Mutual Insurance Company, 11 F.3d 267 at 269.

I join in Mr. Bentley's arguments about why, if the

Court were to find that the constitutional issues raised -- or

any of the arguments raised, frankly -- create a basis to

strike down, modify, invalidate, declare unconstitutional

either all or portions of the COFINA legislation, that that

issue should be sent to the Supreme Court. As Mr. Bentley

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noted, there is not a single case that the opponents have cited

to where a federal court has struck down a state statute based

on a conflict with the state constitution rather than a federal

constitutional conflict.

I want to take my last 30 seconds just to address the

questions which, in the alternative, if your Honor is inclined

to certify, we proposed alternative questions, and I just want

to briefly explain what the heart of our objection is, which

is, that the questions as framed by the COFINA agent assume in

their language that the COFINA legislation in fact violates

certain provisions of the Puerto Rico Constitution. We believe

that that underlying question of whether the statute violates

those provisions must also be sent to the Puerto Rico Supreme

Court, if you're going to certify the property question.

THE COURT: Thank you.

MS. MILLER: Thank you.

THE COURT: Mr. Silbert?

MR. SILBERT: Good morning, your Honor. Greg Silbert

from Weil for National.

We adopt Ms. Miller's and Mr. Bentley's arguments as 

well. In the short time that I have available to me, I just 

want to emphasize that as we read all of these briefs, there is 

no dispute by any of the parties about the certification 

standard in at least one respect, and that is that if the path 

that the Puerto Rico court would follow is reasonably clear, 

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then there is no reason to certify. 

And we think that with respect to the issues that are 

on scope, on the issues that are properly before you -- which 

we understand to be pure questions of Puerto Rico law -- the 

path is clear, and the path is clear because the COFINA statute 

says what it says; and we read that statute to say quite 

clearly that the SUT revenues belong to COFINA and are not 

available resources of the Commonwealth. 

We note that at least with respect to the Commonwealth 

law questions that are in scope, the Oversight Board agrees 

with us. It also says that under Puerto Rico law the SUT 

revenues belong to COFINA and are not available resources. So, 

because the outcome is clear, you should not certify. 

But if you disagree with us and you think that the 

path is not reasonably clear -- and let me make a distinction 

which is subtle and important, it's not necessarily that you 

disagree with us on the merits. In other words, you don't have 

to get to the end of writing your decision and find, no, I'm 

going to strike down the statute and at that point certify. 

You would look at the question; you would decide essentially, 

you know, is this an easy case or a hard case. 

We think it's an easy case because the language is 

expressly in our favor. But if you think it's a hard case, you 

should certify it, and you should certify it because it's a 

very serious thing for a federal court to strike down a 

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Commonwealth statute under the Commonwealth Constitution, 

especially a Commonwealth statute as consequential as this one. 

And it is consequential not only to COFINA bondholders and the 

stakeholders here but to the future of the Commonwealth and to 

the Commonwealth's ability to use these kinds of securitization 

structures in the future. 

In my 33 seconds that I have left, I just want to

respond to your question. It would not be an advisory opinion

issued by the Supreme Court. I think your Honor raised the

question appropriately would you have to apply PROMESA to

determine the property of the estate at the time of

distribution. Well, let's say you would. Nobody is asking the

Puerto Rico Supreme Court to make a distribution from the

COFINA estate or from the Commonwealth estate. The question

that you would certify, if you believe certification is

appropriate, is a question under Commonwealth law as to who

owns these revenues -- the SUT revenues -- and whether the

COFINA legislation was constitutional.

The answer to that question would surely inform your 

Honor's decisions ultimately about what to do with the property 

of the estate, but it would not itself order any distribution 

from the property of the estate, and it would not be an 

advisory opinion. 

Thank you.

THE COURT: Thank you.

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Mr. Kirpalani.

MR. KIRPALANI: Good morning, your Honor. Susheel

Kirpalani of Quinn Emanuel Urquhart & Sullivan for the COFINA

Senior Bondholders Coalition.

Judge, today I'm joined by my colleague and teacher on

a lot of cultural matters, by my friend Rafael Escalera, who

will be handling most of this argument. I just wanted to make

a few quick points about PROMESA and federal versus state law,

and maybe a little bankruptcy.

The last time I was before the Court I was asking your 

Honor to resist the Commonwealth side's invitation to find an 

intention by Congress to preempt Puerto Rico law on property 

rights. We talked about the presumption against preemption, 

the BFP v. Resolution Trust Corp. case; we talked about Butner 

and how state law governs property rights even in bankruptcy 

cases; we talked about Barnhill v. Johnson that says you need 

to find that there is some controlling federal principle that 

would override state law. And I remember I mentioned Justice 

Sotomayor's Merit Management's decision from earlier this year 

which cautioned all jurists not to look for congressional 

intent that's not there in the text, even if it would be great 

bankruptcy policy in the judge's mind to do so. 

And then what I did was I walked through various

sections of PROMESA -- and just to refresh, 201(b)(1)(M),

201(b)(1)(N), 303, 305, 314(b)(6) and 407(a) -- and I don't

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think anyone in this courtroom responded to when your Honor

asked for an answer to my question as to why Congress would

have so thoughtfully, carefully and systematically referred to

Puerto Rico law if it was preempting it with some federal

interest.

And while no litigant in this courtroom grappled with 

this question, your brother on the bench in San Juan has done 

so. Judge Garcia-Gregory did this and issued a decision a few 

days ago, on May 4, in the civil action 17-1743, a 35-page 

decision in the Centro de Periodismo Investigativo case, where 

he went through in great detail the presumption against 

preemption on whether or not the Oversight Board was right that 

PROMESA preempted state law on the public access to documents. 

The reasoning of this case by Judge Garcia-Gregory is highly 

persuasive on this precise issue of whether there is 

congressional intent to preempt state law and whether you can 

find it in PROMESA. And it's the first case to consider the 

question. 

As you may expect from my set-up your Honor, Judge 

Garcia-Gregory noted Congress' repeated allusions to the 

Constitution of Puerto Rico and territorial law and cited many 

of the same provisions that I just went through. 

I have to say one thing about the bankruptcy questions

your Honor asked, because at bottom that's what I do. I want

to highlight that even in the bankruptcy context where there is

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an estate, and there is property of the estate -- which doesn't

exist in PROMESA -- the First Circuit has held sua sponte that

certification is the appropriate route to determine novel state

law property questions. Property of a debtor is not a federal

question. The Oversight Board cites Section 306(b). That

citation is way off base. Section 306(b) -- I know your

Honor's history with the procedural aspects of bankruptcy, you

know this -- it is just tracking the language of 28 U.S.C.

1334(e)(1). It's about jurisdiction; it's not about what is

the substantive source of law for determining who owns

property.

And the First Circuit cases we cited are In Re 

Hundley; In Re Engage, Inc., and although those involved the 

First Circuit certifying questions to the Massachusetts Supreme 

Court and not Puerto Rico's Supreme Court, the Segovia 

Development Corp. case, 628 F.2d 724, at footnote 4, from 1980, 

that shows that Puerto Rico should be treated with no less 

respect than Massachusetts, your Honor. 

Thank you. 

THE COURT: Thank you.

Mr. Escalera. 

MR. ESCALERA: Good morning, your Honor. Rafael

Escalera on behalf the Senior Bondholders Coalition. 

Your Honor, I would like to begin by making reference 

to an argument that I think illustrates what is before the 

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Court here. The opponents of certification have said that you 

shouldn't certify the questions because the Supreme Court of 

Puerto Rico would not accept the certification, and they make 

that argument by referring to Rule 25. I think that argument 

underlies what we're discussing here. They are asking you not 

only to rule on substantive novel questions of Puerto Rico law; 

they're asking you even to read the regulations of the Supreme 

Court and construe what the Supreme Court would do reading 

their own regulations faced with a case of this nature. I 

think that is too much to ask from a federal court.

Secondly, your Honor, the interpretation of Rule 25 is

wrong. All that Rule 25(a) requires is that the judicial

matter that is referred to the Supreme Court may be

determinative of the -- the decision may be determinative of

that matter that is referred, not of the case.

And while I'm talking about Rule 25, your Honor, I 

want to use the rule to illustrate another point, which is the 

difficulties and complexities of ruling on a Spanish 

language-based Puerto Rico issues. I think Congress was very 

much aware that the law is cultural and culture cannot be 

divorced from language. 

And if you look at the translation of the rule that is 

part of Docket 437-1, you will see that the translator in 

subsection B simply made its own contribution. The phrase "in 

which case" doesn't appear in the original Spanish language 

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translation at all, and that phrase makes possible an 

interpretation that is not necessarily a reasonable

interpretation without the phrase. And the phrase is simply an 

addition by the translator, and it's a certified translation. 

This, your Honor, is not unusual. For those of us --

there are many here -- who have litigated in English in federal

courts in Puerto Rico and in Spanish in local courts in Puerto

Rico, we face those issues every day, and the Supreme Court of

Puerto Rico faces them too. The correct interpretation cannot

be dependent on a faulty translation. And we have them all

over the place in this case. And that is not saved by simply

saying the translation has been certified.

For example, your Honor, you had in mind probably when

you asked the question of language in the Constitution the use

of the word "revenues" in English versus "resources" in

Spanish. Well, your Honor, I cannot speak for the Supreme

Court of Puerto Rico, of course, but I have a strong impression

that they would say that there is no direct equivalent to the

word "revenues" in English in the Spanish language. And if

that is the case, the Supreme Court can say so and determine

whether there is a different interpretation in the context of

the totality of the Constitution whether you use one term or

the other.

In terms of the format of the questions to be

certified, your Honor, I don't want to spend much time on that,

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because certification is discretional on your part, of course,

but also the way the questions are going to be framed is

discretional on your part too; and it is for the Court to

decide which way to frame the questions; and it has a lot of

materials to work on. The parties have submitted different

versions of the questions to be certified, and the Court can by

itself frame whatever it thinks is most appropriate to get the

answer the Court needs.

I want to pause a minute and make reference, as my

colleague Mr. Kirpalani did, to the decision by Judge

Garcia-Gregory, because I think that decision recognizes

something that is very important in PROMESA. PROMESA

incorporates Puerto Rico law, and Judge Garcia-Gregory

recognized very recently as much. But in incorporating Puerto

Rico law, it cannot be reasonably said that it closed the door

to the interpretation of that law by the judicial bodies of

Puerto Rico.

I think that opening the door to Puerto Rico law is

not to Puerto Rico law as may be construed by someone else; it 

is Puerto Rico law as might be construed by Puerto Rico 

judicial institutions who are in the ultimate case the last 

word on what those provisions mean. 

Furthermore, your Honor, I want to address the issue

of timeliness of the petition. I think that the only

requirement is that we do so before you rule on the matters

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that would otherwise be certified. We have done so. And, most

importantly, your Honor, the timeliness issue cannot override

the comity and federalism considerations that are behind any

certification. If that were the case, you would never have a

certification like you had in the Fonaris case by the U.S.

Supreme Court years after the case had been initiated.

In terms of future delays, the situation is similar.

The riskiest way of doing this is by having the possibility of

a certification on appeal even at the Supreme Court level -- as

occurred in the Fonaris case -- lingering over the procedures.

Once you certify and the matters are answered, that's it,

that's the last word on those matters that you decided to

certify, and that would give a very efficient method of

resolving these issues.

I cannot leave this podium without addressing the

issue of how long would it take for the Supreme Court. I don't

think it is at all justified to say that the Supreme Court will

not take this matter into consideration quickly. The judges of

the Supreme Court live in Puerto Rico, they face the problems

that every Puerto Rican faces, and I know by experience --

because we have cited the cases of intra-jurisdictional

certification in our briefs, and I have been involved in all of

them -- and I know that they take this particular matter of

very public importance with all deliberate speed, and that is

what I am sure they will do in this case, your Honor. The

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averages we have shown in the cases that are cited in our reply

brief go from three days to four months.

THE COURT: I did notice that at least some of those

cases -- to the extent the substance of them was accessible to

me -- dealt with elections and a situation in which there is a

fixed timetable, and here with this, you know, multi-part,

multi-issue bankruptcy proceeding, which has to move forward as

expeditiously as possible, there isn't a particular fixed

timetable or target. So, are you aware of cases that have gone

on accelerated schedules at the Puerto Rico Supreme Court that

were not working against a particular national event?

MR. ESCALERA: I don't think you can say, for example, 

in 2004, in Arturio Reyes -- which is a case I was involved 

in -- had a timetable at the local level. I mean it was 

litigated at the same time in federal court, and the Supreme 

Court took the intra-jurisdictional certification of a similar 

issue immediately, but it wasn't running against a fixed 

deadline. And I think that in a case of this importance, the 

Supreme Court will pay attention to it very quickly, and the 

Court can in the certification process make sure that that is 

the case. 

Finally, your Honor, I don't want to deal with the

impact of this situation; I just want to say that in terms of

what would happen in the Supreme Court, the Supreme Court would

accept briefing in English; the record of this case can be

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certified in English; and it would be very easy -- if the Court

doesn't allow an exception to the ruling of format -- to turn

the motions for summary judgment into the briefing that would

be filed before the Supreme Court either in English or in

Spanish.

The difference is that original materials -- because 

this is a controversy of law, not a factual case -- the 

original materials would be read and studied by the Supreme 

Court in their original Spanish language version. 

Thank you, your Honor.

THE COURT: We now turn to the opponent's arguments,

and Mr. Bienenstock, you may start.

MR. BIENENSTOCK: Thank you, and good morning, your

Honor.

THE COURT: Good morning.

MR. BIENENSTOCK: Martin Bienenstock of Proskauer Rose

LLP for the Oversight Board.

Your Honor, the stipulation that started all of this

provides the issue is whether the taxes are property of COFINA

or the Commonwealth under applicable law. The COFINA agents in

scope cause of action request a declaration that the dedicated

sales tax fund are property of COFINA under applicable law. I

plan to cover only the issue of whether federal law is

involved, because that impacts whether the issue should be

certified to the Puerto Rico Supreme Court.

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Your Honor's very initial questions at the outset of

the hearing covered the first several points I wanted to make.

In brief, neither COFINA nor the Commonwealth can have 

a plan of adjustment without the plan proponent, the Board, 

knowing what is the property of that debtor, so we need to know 

whether the taxes in dispute are property of the Commonwealth 

debtor or the COFINA debtor. 

Anything that doesn't answer that question makes this

whole exercise useless. And that was the only reason to have

this question decided early on, so that we knew what assets

there were to distribute in a COFINA plan and in a Commonwealth

plan.

Section 1123 of the Bankruptcy Code (a)(5)(A), (B) and

(D) and (b) -- all made applicable by PROMESA Section 301(a) --

provide that the plan should transfer property of the debtor,

with Section 301(c)(5) saying wherever in the bankruptcy code

it refers to property of the estate it should be interpreted in

PROMESA as property of the debtor.

So, there can't be any resolution of these cases

without answering that question. And that question is

inherently a federal question as to what is property of the

debtor.

It's first mentioned in 306(b) -- and Mr. Kirpalani is

correct that that's a jurisdictional statute -- but property of

the debtor is also mentioned in 1123. So, we can't distribute

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it without knowing what it is.

And as for whether PROMESA recognizes Puerto Rico law,

no different than the Bankruptcy Code recognizing every state's

law. The Bankruptcy Code in PROMESA looked to state law and

territory law for what is property. There are federal

questions that relate to what is property of the estate or what

is property of the debtor. That's really the issue I will

spend the balance of my time on.

Some litigants -- including this morning -- have

contended that the federal issues were not invoked in these

summary judgment motions. They simply overlook pages 21

through 25 of the Commonwealth agent's omnibus opposition to

the COFINA agent summary judgment motion, which is docket

number 371. On those pages the Commonwealth agent spells out

the federal questions and cites the cases -- some of which the

Oversight Board has also cited in its opposition here --

primarily In Re Gull Air, Ground Round and Colonial Realty, all

First Circuit decisions.

Your Honor, we submit that what makes this such an

intriguing case is that both the Commonwealth and COFINA have

certain indicia of ownership of the taxes. Normally when you

own something you can do whatever you want with it, you own all

of it. Here the Commonwealth has certain indicia of ownership

and COFINA has certain indicia of ownership, and that is why in

one of our pleadings the Board said the Commonwealth doesn't

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own it. Now, National says to your Honor we said that COFINA

owns it. That is a totally incorrect statement. They can't

cite anything where we said COFINA owns it. COFINA has no more

ownership rights -- well, your Honor is going to decide -- but

our point is that the Puerto Rico legislature has split up

indicia of ownership between the Commonwealth and COFINA.

Now, what do I mean by that? Well, what I mean is

this: The power to Levy the tax, repeal the tax, collect the

tax, those are all still with the Commonwealth, and we know

that because the COFINA agent cites in its own summary judgment

papers the statute in Section 5(d) of Act 56, Docket Number

317, where the Commonwealth promises not to interfere with

that. Well, it's a promise like a promise to pay in

bankruptcy, it's a claim. So, they recognize that the

Commonwealth has these powers.

In addition, the Commonwealth has at a minimum

something akin to a remainder interest. The Commonwealth agent

cites the statute where the Commonwealth is entitled to all of

the tax proceeds not used to pay the debt. Normally when you

own something you can do what you want with it. Here the

COFINA agent says it owns the taxes, but it's restricted to

using them to pay the COFINA debt, and if it has taxes not

necessary for that, it has to give them back to the

Commonwealth.

Now, on the negative side for the Commonwealth, as we

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all know the legislature passed a law that says that the taxes

are not available resources, passed a law purporting to

transfer taxes -- and the parties have litigated whether you

can transfer something that doesn't exist yet -- but the

Commonwealth has the lack of indicia of ownership, which in

turn COFINA does have; when it gets them, it can use them to

pay its debt.

The relevance of the federal jurisprudence -- Gull

Air, Ground Round and Colonial Realty -- they're virtually

right on point. In each of those cases the state legislature

had given certain indicia of ownership to the debtor but said

that the property was really property of a nondebtor. And it

became a federal question as to for purposes of Chapter 11

should the property be deemed property of the estate or not.

And in virtually each of those cases, when the Court balanced

the various indicia of ownership, the Court concluded that it

was property of the estate. And that's the point that the

Commonwealth agent made in its papers.

To emphasize, we're not urging the Court to come out

one way or the other on that. What we are saying is that is

the question that is in front of this court. Under that

jurisprudence, are the indicia of ownership of the Commonwealth

sufficient that it become property of that debtor or the

reverse?

Now, other federal questions could well arise, because

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when one looks at the fact that the Puerto Rico legislature

said these taxes are not available resources of the

Commonwealth, they were basically based on the language of the

Commonwealth Constitution, saying, well, OK, then they're not

among the assets that go to creditors when their debt is in

default -- the general obligation creditors -- and they can

tell the Secretary Treasurer to turn over all the available

resources. They're saying those taxes, since they are not

available resources, aren't available to the GO creditors.

There is an obvious question there: Is that a

territory priority that's preempted by the Bankruptcy Code?

So, that's yet another federal question in addition to the

questions raised in the jurisprudence I mentioned.

Also, although --

THE COURT: But the priority question is one that is

subsequent to a determination of Commonwealth ownership,

correct?

MR. BIENENSTOCK: That would be right.

THE COURT: So that is clearly outside the scope here,

because we're only dealing with questions antecedent to the

binary ownership question. Yes?

MR. BIENENSTOCK: OK, your Honor, I'm not going to

take more time on something out of scope, that's fine.

And a point was made earlier, your Honor --

Mr. Kirpalani made it on behalf of the COFINA senior

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bondholders -- that there is a notion in PROMESA against

preempting territory law. And the point I'd like to make --

well, two points.

(Continued on next page)

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MR. BIENENSTOCK: First, PROMESA, as the Court has

cited numerous times, expressly says PROMESA preempts all

territory law, but more important --

THE COURT: That is inconsistent.

MR. BIENENSTOCK: Pardon me?

THE COURT: It preempts territory law that's

inconsistent with PROMESA.

MR. BIENENSTOCK: Oh, of course.

THE COURT: Not all territory law.

MR. BIENENSTOCK: Right.

Well, it wouldn't have to preempt it if it's not 

inconsistent, but I agree; we're talking about inconsistent 

territory law. But my major point on this, your Honor, is 

we're not talking about preemption. 

As I said at the outset, all of the Bankruptcy Code, 

as well as PROMESA, recognizes state law and territory law to 

establish what is property in the first instance, and the 

complication here is that the indicia of ownership of that 

property are basically split between COFINA and the

Commonwealth. 

From the board's point of view, the Court's not being 

asked to say that anything in PROMESA preempts any statute of 

the Commonwealth. The Court is being asked to say, recognizing 

what the Commonwealth statutes have done, which is to split the 

indicia of ownership between COFINA and the Commonwealth, whose 

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property is it for purposes of distribution under Section 1123? 

It's not a matter of preempting or overruling or holding 

unconstitutional; it's a matter of applying federal

jurisprudence to which estate should be distributing that 

property. 

Your Honor, unless the Court has any additional

questions, I didn't have anything more.

THE COURT: Thank you, Mr. Bienenstock.

MR. BIENENSTOCK: Thank you.

THE COURT: Good morning, Mr. Stancil.

MR. STANCIL: Good morning, your Honor. Mark Stancil,

for the Ad Hoc Group of General Obligation Bondholders.

I'm going to try very hard not to repeat points we've 

covered in Mr. Bienenstock's presentation. Let me start, if I 

may, with a point Mr. Yanez and Mr. Bentley both harped on. 

Their suggestion is that this question should be 

certified because the considerations here are unique to Puerto 

Rico or they are special to Puerto Rico, and I think that 

overlooks a critical point, which is PROMESA speaks to which 

court should be deciding difficult questions. 

This is not a garden-variety certification question. 

This is, I think, by all accounts, an unusual one. What 

Congress has said, and it enacted a statute specifically 

designed to address a very challenging situation, and Congress 

made a choice and, in turn, the chief justice made a choice, 

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your Honor, and that is, by statute, that a district judge 

selected by the chief justice will decide these questions. So 

we have, I think, a unique set of circumstances. Insofar as 

PROMESA, we don't need to get into what is preemption as a 

matter of state law and federal law. PROMESA, with respect, 

your Honor, means for you to decide difficult questions. 

It's been suggested that this has particular 

consequences for Puerto Rico, and indeed it does, in both 

directions, but that is also known to Congress. For example, 

one of the provisions of PROMESA that Mr. Kirpalani cited, and 

we will cite many times as well, Section 201(b)(1)(N) requires 

respect for lawful liens and lawful priorities. Lawful is the 

question, right? 

Well, we're here to determine whether the COFINA claim 

is a lawful claim, and so Congress was well aware -- in fact, 

everyone has been well aware -- of the COFINA question in this 

case since the moment PROMESA, before PROMESA was enacted, and 

yet Congress determined that the correct court to send these 

issues to was your Honor through the designation by the chief 

justice. 

THE COURT: But as Mr. Kirpalani, I think it was,

pointed out, 306 essentially incorporates 1334, and it

incorporates, therefore, nonexclusive jurisdiction of the Title

III court for proceedings as opposed to cases. The fact that

it required the designation of someone like me to preside over

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the Title III cases doesn't mean that it excludes other

interpretive authority.

MR. STANCIL: First of all, your Honor, we're talking

about two different provisions. Mr. Bienenstock invokes 306.

We do not.

I'm referring to 308, which is which federal court,

which district court, is going to decide this issue. And it 

was a determination, it doesn't say that it should be a judge 

sitting in Puerto Rico. You sit in the district of Puerto Rico 

by designation, but it's quite clear in saying it should be any 

judge, federal district judge that the chief justice selects, 

and I think if Congress had concerns about -- 

THE COURT: I thought that it said to preside over the

Title III.

MR. STANCIL: Yes.

THE COURT: I'm trying to drill down on your assertion

that PROMESA says that every single issue in the Title III,

which is what I think I'm hearing you say, every single issue

in the Title III, no matter whether its origin is local or

federal, has to be decided by the judge designated pursuant to

308, and I didn't recall 308 going quite that far.

MR. STANCIL: I agree, your Honor. It doesn't go that

far, but I do think it reflects a judgment by Congress that

there are going to be difficult questions affecting Puerto Rico

directly that are going to land squarely on your Honor's desk,

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and that's why I referenced 201(b)(1)(N), which talks about

lawful liens and lawful priorities. 

Everybody's known this was coming, and I do think, 

your Honor, it is a matter of your discretion at the end of the 

day, and I think in considering how to exercise that 

discretion, I think 308, the fact that you are chosen by the 

chief justice and with awareness that you will be wading into 

all manner of issues affecting Puerto Rico quite directly, I 

think that deserves some consideration. 

I'd like to turn next just to some of the practical

considerations.

None of us knows, of course, how the Puerto Rico

Supreme Court would respond. We can suppose and we can hope

that if it were to certify, it would be decided quickly, but I

don't think we can know that in any way, and I think what we

have are extremes in a variety of ways.

We have some instances involving intra-jurisdictional, 

largely intra-jurisdictional -- certification up against 

deadlines in which certification has been accomplished 

relatively expeditiously. On the other extreme, we have some 

very long questions, very long proceedings. 

With respect, your Honor, this is a very difficult

issue on which to gamble. Mr. Bienenstock, I think, has

mentioned claims of adjustment are not going to be filed and

submitted and litigated and debated until we know what this

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issue looks like, and we can't afford for this one to be the

18-month, 24-month variety. I think that would be crippling,

in large part, just because of everything else that needs to

get done in addition to this issue. 

We would have the hope that it would be decided 

expeditiously, but this is a politically very sensitive and 

charged issue, and I think for all of the reasons that have 

been offered by the movants that this issue is uniquely of 

concern to Puerto Rico sort of cut against the assumption that 

it would necessarily be decided expeditiously. This is a 

politically charged issue that COFINA Senior Bondholders are 

running full-page newspaper ads praising COFINA. This is not a 

garden-variety issue that's just going to sort of come up and 

down, at least I wouldn't expect it to. 

Moving on to whether this is a purely state law or

purely federal question, I think this morning has given your

Honor just a taste of the disagreement on that question.

There is no question that in the course of the summary

judgment proceedings, the COFINA side says this is a question

purely of state law and the Commonwealth side has said, No,

there are federal principles bound up in that. We don't agree

exactly as to which federal principles, but there's no question

that we have all argued that the label affixed to the nature of

the COFINA claim is not controlling, and so I think this is a

question that is mixed, at bottom. And I think the suggestion

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that, well, this has been reduced to a purely state law

question in an adversary proceeding is wrong.

The COFINA issue, as stated by this Court, the COFINA 

Commonwealth dispute, as defined in the stipulation, doesn't 

say whether it shall be the property of the Commonwealth of 

COFINA under Puerto Rico law. It says under applicable law. 

It is not limited to Puerto Rico law, and that's why we're 

having these debates, and that will continue. 

I want to briefly touch on the suggestion that the

local ownership or the purported local ownership of COFINA

bonds has anything to do with this.

We think that is absolutely irrelevant whether or 

where a bond is held, and that is a hotly disputed factual 

assertion, your Honor. They've said it many, many times, but 

it's the kind of thing that no matter how often you repeat it, 

it doesn't make it so. 

If your Honor would refer to docket 363, at pages 16 

to 17, this is our dispute as to supposedly undisputed material 

facts. We hotly dispute that question. It should have no 

legal bearing on not only how the issue is resolved but 

certainly over which court decides it, and we think it's wrong, 

and there's no basis for it. 

THE COURT: As I indicated in my opening remarks this

morning, I'm aware that there are island and mainland holders

of both types of bonds. This is a situation in which you don't

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have distinct areas of a venn diagram, and the location of the

bondholders can't drive my decision as to the interpretation of

the law, for many reasons.

MR. STANCIL: With that, I'll quit while I'm ahead,

your Honor. If the Court has any further questions?

THE COURT: No. Thank you.

MR. STANCIL: OK. Thank you.

THE COURT: Good morning, Mr. Despins.

MR. DESPINS: Good morning, your Honor. Luc Despins,

with Paul Hastings, on behalf of the Official Creditors

Committee acting as agent for the Oversight Board for

Commonwealth.

Your Honor, a lot of the points have already been

covered, so I will see, but I don't think I will have to use

all of my time.

The first point I want to address is the timeliness of

this. Mr. Yanez says that it's not inconsistent to seek to

summary judgment and to also at the same time want to have

these issues certified before the Puerto Rico Supreme Court.

We've never said there's been a waiver that's not 

consistent. The point, though, is that there is an element of 

gamesmanship, we believe, here, because when they say the 

issues are very clear, but if you're thinking of ruling against 

us, you need to send it over there, that's not determinative in 

your decision, but since I think this involves your discretion, 

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that is a factor that should be considered. 

The second point I want to address is the federal law

issue. Your Honor, this has been addressed already, but I want

to make sure that we have a complete record on this.

Obviously this is relevant to the issue of whether

there's a mixed question of local law and federal law. We

believe there is, and we believe that's why this is not

appropriate for certification. This is not an issue of

reaching preemption or not, because if you look at the First

Circuit cases that we've cited and we argued in the oral

argument on summary judgment, these First Circuit decisions,

Colonial Realty, Ground Round, don't refer to preemption but

rather to a general principle that we're not going to have

local law labels govern what is property of the estate in

bankruptcy. Therefore, even if you don't believe preemption is

appropriate, and I don't want to get into that issue, because

we don't need to get to that point, it is clearly a mixed issue

of local law and federal law here based on these First Circuit

cases.

The argument that is being made, and I think it's very 

important to address this, Well, but there's no federal claim 

left in the Commonwealth agent's complaint, because you've 

decided that a number of our claims were out of scope -- and 

you did; there's no debate about that -- but the assumption 

there is that Counts One and Two of our complaint, where we 

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allege that the SUT, the sales and use tax, is property of the 

Commonwealth, that somehow that does not trigger the 

application of these First Circuit cases. And honestly, it 

does, because one, the stipulation itself says that it's under 

applicable law. It doesn't say Puerto Rico law. We never 

said, if you look at our complaint, this is governed by Puerto 

Rico law. We said under applicable law. 

The COFINA agent also refers to applicable law, not

purely Puerto Rico law, and in the briefing, from the 

beginning, and you have this not only the complaint but in the 

briefs themselves, there are references in the opening briefs 

to all these issues involving property of the estate, and we 

explained that property of the estate means property of the 

debtor, under PROMESA. So unless the Court were to adopt the 

rules of pleading that applied before the Federal Rules of 

Civil Procedure were adopted, where you needed to, in fact, 

cite to a particular section to get relief, unless the Court 

were to adopt that, which obviously we think would be wrong, 

there's no issue that the federal law issue is alive and it's 

in our complaint. 

It's in all of our briefing, and I'll just refer your 

Honor to an old case, Johnson v. City of Shelby, 135 S.Ct. 346, 

which cites to Wright & Miller. This was a 1983 case, a 

different case, but basically there the plaintiffs did not make 

a reference to Section 1983 in the complaint, and the Supreme 

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Court reversed the Fifth Circuit on the basis that it's not 

necessary to refer to any section of any statute in the 

complaint as long as you lay out the facts that support the 

relief you're seeking, which is exactly what we've done in our 

complaint, and we've done that in detail. Clearly, we believe 

that the federal issue is alive in the complaint and in 

subsequent briefing. 

As Mr. Bienenstock pointed out, it's not only a

reference to the jurisdictional provision of PROMESA. 1123,

which is cited in our summary judgment papers, says that the

plan of adjustment needs to deal with property of the debtor,

or property of the estate, under 1123, but because of PROMESA,

that means property of the debtor, and therefore, it's

inescapable that that issue is built into the stipulation. It

makes no sense.

Then the argument that's made is that, and we need to

really address that precisely, is the issue of, well, the

concept of property of the estate is not in PROMESA, and

therefore -- and therefore what? The reason why -- and by the

way, it's very important, if you have a chance, your Honor, to

look at the case we cited at oral argument last time, which is

the Orange County decision, the court explained there why the

fact that the concept of property of the estate is not in

chapter 9 doesn't change the analysis that we're dealing with

here. But the point is that there is zero evidence of any

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congressional intent to give municipal debtors less rights

under the property-of-the-debtor concept than corporate debtors

would have under property-of-the-estate concept. There's none

of that.

The reason why you can't have the concept of property 

of the estate is because it would be directly in conflict with 

305 of PROMESA and the equivalent under chapter 9, which 

basically said the court will respect the political

determination of the municipality. That's why these provisions 

are not there, but there's zero evidence that because there's a 

concept of property of the debtor rather than property of the 

estate means that a municipal debtor has less rights than a 

corporate debtor, and that the First Circuit line of cases, 

which refers to other circuits as well, regarding state law 

labels not being controlling, that those would not apply in a 

municipal case; there's just zero evidence of that.

The point I want to talk about also is losing control

of the case. Mr. Stancil touched on this, and it's true that

308 does not say that no other court has jurisdiction. We're

not saying that you are precluded by statute from sending this

to the Puerto Rico Supreme Court.

What we're saying is that there is a congressional 

intent here of having this Court, which was selected by the 

chief justice of the Supreme Court of the United States, 

pursuant to the statute, deal with the crux of the case, and 

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it's hard to not think of the COFINA issue as one of the top 

three or four or five issues in the case. And therefore, it 

would be counterintuitive to say, OK, we have this whole, 

elaborate system where we created the statute just for Puerto 

Rico and we went out of our way to say that venue rules will 

not apply -- right? That's what they did. They created a 

special provision saying that the chief justice picks, which 

first of all, cannot be a bankruptcy judge but has to be a 

district court judge and the chief justice of the Supreme Court 

judge picks the judge, it would be bizarre, it would be 

counterintuitive to say, OK, we have all of that, but let's 

send the top one, two, or three issues to the Puerto Rico 

Supreme Court. It is counterintuitive, your Honor.

Then the issue of, OK, the risk of losing control.

Counsel for the COFINA Seniors said, I'm pretty comfortable

that the Supreme Court will handle this with all due, basically

will handle it promptly, but we have no assurances of that. If

anything, all the cases that are there, and I think you've

pointed that out, that they rely on are in the

intra-jurisdictional referral system or certification system

all deal with an election, a preliminary injunction or a law

that would deprive retirees of their benefits that's coming

into effect in two weeks or something like that, all the other

cases, and if you look at the appendix to the pleading filed by

the Oversight Board that list probably 20, not 20, but at least

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15 cases, the average is 17 months. 

Therefore, when they say, Don't worry, the Supreme 

Court of Puerto Rico will deal with this quickly, I hope so 

too, but we have no assurance of that. And this is not 

something you can reel back, where you send it there and three 

months down the road, four months down the road, nothing has 

happened, I don't think you can just say, let's just bring this 

back here, it was a mistake to send it. There's no recall on 

this procedure. 

I think it's important to look at all the cases they 

cite. They all involve preliminary injunction, elections in 

the middle of an election process, or a law that's about to 

come into effect. 

Another point that was made, your Honor, is that this

is appropriate to send to the Puerto Rico Supreme Court because

there are huge consequences and there will be long-lasting

effects. First of all, there's no evidence of that. This

reminds me, and I know people are sick and tired of me telling

the story, but 20 years ago, we challenged financing leases

that looked like they were true leases but turned out they were

financing leases and the whole lease financing industry was up

in arms saying, you're destroying the business, etc., etc.,

we'll never be able to fix this again, and courts at the end of

the day did rule that they were not true leases, they were

financing leases and there were consequences from that. And

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did that stop anything? No.

Wall Street is very resourceful. They will find a way 

to create another structure that will work even if your Honor 

decides that this structure does not, so the argument that 

somehow this is the end of the process, and therefore, the 

Puerto Rico Supreme Court should be the sole arbiter of that I 

don't think should be applied here. 

Then briefly, your Honor, the issue of these other

provisions of PROMESA -- Mr. Stancil has already dealt with

201; Mr. Kirpalani referred to 407 as well -- beg the question.

They say that you can't take property of one debtor to give to

another. Well, nobody's saying that's the case. We're just

saying that it's our property, so the point is the fact that

that is being protected begs the question of whose property is

it?

Your Honor, the cite to the First Circuit decision,

Segovia, 1980, first -- this is in a footnote to the

decision -- it was a diversity case. The Court was sitting in

diversity. It was not a bankruptcy case, and I don't know why

we need to refer to 1980 decisions when we have very clear

precedents like Ground Round, Colonial Realty, etc., and a

number of other courts that postdate Butner and that say,

despite Butner that a court sitting in bankruptcy must not be

bound by the labels used by state law. That issue is the crux

of the case here, and for that reason, we believe that this

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case is not appropriate to be certified to the Puerto Rico

Supreme Court.

Thank you, your Honor. 

THE COURT: Thank you, Mr. Despins.

Mr. Yanez.

MR. YANEZ: Thank you, your Honor. For the record,

Antonio Yanez, on behalf of the COFINA agent.

Your Honor, all of the objectors -- the Oversight

Board, the General Obligation Bondholders and the Commonwealth

agent -- talked about the relevant federal jurisprudence, and

they emphasize the importance of federal questions and federal

issues here. I want to make two points on that subject.

The first is that these same parties, and the 

Oversight Board in particular, argued for a limited scope in 

this action, and they were successful in achieving a limited 

scope that resulted in the dismissal of every single claim and 

every single counterclaim that was premised on federal law. To 

the extent they are now arguing that federal law is central 

here, it is inconsistent with what they argued earlier, and it 

is inconsistent with the Court's ruling on what the scope of 

this dispute is. 

THE COURT: Since I am the one who made the scope

ruling, I would observe that the principle on which scope was

determined was temporal, was based on the sequence of

decisions, and so it was a question of antecedent as opposed to

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subsequent. The causes of action that were excluded invoked

particular provisions of the Bankruptcy Code that would only

apply after a decision as to ownership, and that's why they

were knocked out, not because they were federal as opposed to

state. To the extent there are federal issues bound up in the

antecedent question as to ownership, there is nothing in my

scope decision that categorically knocked those out.

MR. YANEZ: Let me speak to that in particular, Judge.

The issues that are being raised here -- the

frustration of PROMESA, the notion that this is somehow

property of the estate, the assertion that the case is pursuant

to Bankruptcy Code Section 541 -- each of those arguments

similarly assumes that COFINA owns a property under Puerto Rico

law. It only frustrates a scheme established by PROMESA, or

there's only frustration of the scheme established by PROMESA

to the extent that under Puerto Rico law it is determined that

COFINA owns the pledged sales tax. That's when the frustration

issue comes up.

So, too, the analysis in the Section 541 cases, which 

by the way, is not relevant here, because Section 541 was not 

incorporated by PROMESA, but the analysis in the 541 cases 

begins with the state law question and then goes to the 

subsequent question of whether or not what state law holds is 

or is not inconsistent with federal bankruptcy law. And that's 

a central point for two reasons. 

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One is that it's not antecedent and therefore is not 

within scope. The second is that the notion that federal law 

here can somehow control assumes that there is some

inconsistency between federal law and state law, that there is 

some overriding federal law. That's what the cases require, 

and none has been identified here. None has been identified. 

THE COURT: Even if it turns out to be a frivolous

question, it seems to me territory that I'm going to have to

drive through in order to determine, in the words of the

stipulation, who the owner is under applicable law.

It doesn't say Commonwealth law. It says applicable 

law. 

MR. YANEZ: Your Honor, the question is whether the

assertion of these federal law issues, which are not supported

by the law and do not have merit, whether the simple assertion

of those issues should be sufficient to deny certification, and

I would point out, Judge, that when Mr. Bienenstock got up here

and he talked about the summary judgment briefing, what he

referred to was pages 21 through 25 of the omnibus opposition

filed by the Commonwealth. That is significant because the

Commonwealth's opening brief does not rely on federal law.

They only raised the federal law questions, they only made

those supposedly central here after we, on the COFINA side,

filed our briefs and we, on behalf of the COFINA agent,

indicated an intention to seek certification before this Court.

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THE COURT: Thank you, Mr. Yanez. You're in overtime.

MR. YANEZ: Thank you, your Honor.

THE COURT: Ms. Miller.

MS. MILLER: Good afternoon. 

For the record, Atara Miller, Milbank Tweed Hadley & 

McCloy, on behalf of AMBAC. 

I'm going to speak slowly but move quickly so I don't 

go into overtime here. I want to start with one point which is 

fundamental for our position, which is that none of the 

purported federal overlay questions that have been discussed 

relate in any manner to the constitutional questions that have 

been raised in this case, and there's no doubt that certain 

questions can be certified while others are not certified. To 

the extent that the Court believes that it has to reach any of 

the constitutional questions under the Puerto Rico 

constitution, those issues are plainly not mixed questions of 

federal and state law but purely state law questions that 

should be certified. 

Next, I want to say that there's been a lot about this

notion of what governs and whether there's any significance to

the exclusion of the property-of-the-estate concept and whether

the 541 cases cited by the Commonwealth agent and others are

relevant here. I heard Mr. Despins get up and say that it's

not included in chapter 11 and in PROMESA not because there's a

suggestion that municipalities have fewer rights than corporate

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debtors would, but it's just so that it doesn't interfere with

municipal control of property. That is exactly the point here.

The point is that when you're dealing with things in a 

municipal context, you have to recognize that the municipality 

has to retain some element of control of its property, and that 

is effectuated, in part, through legislation, as recognized in 

Section 303 of PROMESA, and I want to highlight something which 

we haven't really touched on before in these cases, which is 

that this case is unique and distinct not only from the chapter 

9 cases but also from the chapter 11 cases, because what we 

have here is not the bankruptcy and restructuring of the 

municipality, which is subject to the laws of the state, but 

what we have here is the restructuring of the state itself. 

This is the Title III restructuring bankruptcy 

proceedings of the Commonwealth, and there is no question that 

Section 303 is intended to give the Commonwealth respect of its 

own laws and its own determinations. To suggest that we 

should, by analogy, take chapter 9 cases, which deal with 

corporate entities, and somehow disregard the Commonwealth's 

own laws in this context, frankly, I think is borderline 

offensive. 

I also want to add that, in my last 11 seconds, your

Honor asked about recharacterization being a federal issue. On

the recharacterization of a transaction as a financing, I want

to make two quick points. One is that there's no federal

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common law that answers that question. Even recharacterization

is an effort to determine whether the state law would reflect

the form of the transaction or not, and I would also close in

my overtime by noting that that issue is out of scope.

Thank you. 

THE COURT: Thank you.

Finally, Mr. Escalera.

MR. ESCALERA: Your Honor, I think it would sound

ironic to many in Puerto Rico that the representatives of the

government of Puerto Rico do not want to involve the Puerto

Rico institutions in this process, but I think that that

attitude goes to the heart of what we're discussing.

As Professor Bickel said, the judicial branch is the 

least dangerous branch simply because its power lies in the 

power of persuasion. But persuasion is the result of trust, 

your Honor. 

In your opening remarks in Puerto Rico, you said 

failure, frankly, is not an option -- that's a quote that I'm 

sure you remember -- and you have shown awareness of these 

issues in your remarks this morning. That trust, which is the 

basis of persuasion, is the basis also of uniting all Puerto 

Ricans behind this process. It's the only way the process is 

going to succeed. If failure is not an option, this 

possibility of success lies in trust, and that trust depends on 

involving Puerto Rican institutions in the decision of Puerto 

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Rico's future. And this is the best opportunity that probably 

the Court will have to do that. 

Thank you, your Honor. 

THE COURT: Thank you, Mr. Escalera.

Counsel, as always, I thank you for your vigorous and

insightful arguments and for engaging with my questions. I

will take this matter under advisement.

I also want to take this opportunity to thank the 

staff of the court in Puerto Rico and also of the Southern 

District for supporting these proceedings and enabling us to be 

able to effectively proceed in both jurisdictions. These 

matters are extraordinary for many reasons, one of them being 

logistical, so I wanted to give credit in that regard where 

credit is due. 

I understand the importance of this issue as well as

the merits issues that were argued, and I will, as always, seek

to expedite determinations in a way that is consistent with

making appropriate determinations. That continues to be my

undertaking.

I think we are next scheduled to see each other in San

Juan the first week of June, and when I issue decisions they're

posted on ECF and you all know about them right away.

I don't think there's anything further we need to take 

up together, so we're adjourned. Be well, everyone. 

(Adjourned)

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UNITED STATES DISTRICT COURT) 

 ) ss. 

OF PUERTO RICO ) 

REPORTERS' CERTIFICATE

I, Steven Griffing and Carol Ganley, do hereby certify 

that the above and foregoing, consisting of the preceding 58 

pages, constitutes a true and accurate transcript of our 

stenographic notes and is a full, true and complete transcript 

of the proceedings to the best of our ability. 

Dated this 9th day of May, 2018. 

S/Steven Griffing ________________ 

Steven Griffing, RDR, CSR, CRR 

Official Court Reporter 

500 Pearl Street 

New York, NY 10007 

212-805-0300 

 S/Carol Ganley _________________ 

 Carol Ganley, RMR, CSR, CRR 

Official Court Reporter 

500 Pearl Street 

New York, NY 10007 

212-805-0300 

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