Hearing Date: November 20, 2018 at 10:30 a.m. (Atlantic Standard Time) 

Objection Deadline: November 13, 2018 at 12:00 p.m. (Atlantic Standard Time) 

 US_ACTIVE-143544078.6

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF PUERTO RICO 

IN RE: 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO, 

as representative of 

THE COMMONWEALTH OF PUERTO RICO, et al., 

 Debtors.1

 

PROMESA 

Title III 

No. 17 BK 3283-LTS 

(Jointly Administered) 

IN RE: 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO, 

as representative of 

PUERTO RICO SALES TAX FINANCING 

CORPORATION, 

Debtor. 

PROMESA 

Title III 

No. 17 BK 3284-LTS 

This filing relates to COFINA only 

OBJECTION OF THE BANK OF NEW YORK MELLON, AS TRUSTEE, TO THE 

DISCLOSURE STATEMENT FOR THE TITLE III PLAN OF ADJUSTMENT OF 

THE DEBTS OF PUERTO RICO SALES TAX FINANCING CORPORATION 

 

1

 The Debtors in these title III cases, along with each Debtor’s respective title III case number listed as a 

bankruptcy case number due to software limitations 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 (Bankruptcy Case No. 17 BK 3284-LTS) (Last Four Digits of Federal Tax ID: 8474); 

(iii) Puerto Rico Highways and Transportation Authority (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 (Bankruptcy Case No. 17 BK 3566-LTS) (Last Four Digits of 

Federal Tax ID: 9686); and (v) Puerto Rico Electric Power Authority (Bankruptcy Case No. 17 BK 

4780-LTS) (Last Four Digits of Federal Tax ID: 3747). 

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The Bank of New York Mellon (“BNYM”), as trustee under the Amended and 

Restated Sales Tax Revenue Bond Resolution (as amended and supplemented, the “Existing 

Bond Resolution”), adopted on July 13, 2007, by the Puerto Rico Sales Tax Financing 

Corporation (“COFINA”), through its undersigned counsel, hereby objects to approval of the 

Disclosure Statement for the Title III Plan of Adjustment of the Debts of Puerto Rico Sales Tax 

Financing Corporation [Doc. No. 4073] (the “Disclosure Statement”), accompanying the Title 

III Plan of Adjustment of Puerto Rico Sales Tax Financing Corporation [Doc. No. 4072] (the 

“Plan”), and in support hereof, respectfully represents as follows:2

PRELIMINARY STATEMENT

1. BNYM serves as trustee for all of the Existing Securities issued by 

COFINA under the Existing Bond Resolution. Under the express terms of the Resolution, 

BNYM acts for the equal benefit, protection, and security of all holders of beneficial interests in 

the Existing Securities, all of which are of equal rank without preference, priority, or distinction, 

except as expressly provided in the Existing Bond Resolution. 

2. The Plan provides that certain institutional holders of beneficial interests 

in the Existing Securities, which participated in the mediation process and executed the Plan 

Support Agreement, receive additional compensation over and above that provided to other 

holders in the same class. This payment is to be made from all holders’ shared collateral. The 

Disclosure Statement describes this payment, in the aggregate amount of approximately $332 

million, as compensation for the cost of negotiation, confirmation, and consummation of the 

Term Sheet and the Plan. 

 

2

 Capitalized terms used but not defined in this objection have the meanings given in the Plan.

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3. In its role as trustee for all of the Existing Securities, BNYM seeks to 

ensure that holders who did not participate in the mediation process receive disclosure necessary 

for them to make an informed, intelligent decision with regard to the Plan. BNYM has received 

numerous inquiries from individual retail and other holders of beneficial interests in the Existing 

Securities regarding payment of the Consummation Costs. The Disclosure Statement does not 

explain the basis under PROMESA and applicable provisions of the Bankruptcy Code for 

making this payment from holders’ shared collateral to selected institutional holders generally 

and, more specifically, in the amount of $332 million. 

4. With this in mind, BNYM believes that additional disclosure is required 

with regard to the proposed payment of additional compensation to selected holders of beneficial 

interests in the Existing Securities, notwithstanding the equal and ratable nature of the Existing 

Securities, that is not shared with other holders in the same class. Disclosure of the 

circumstances factually warranting and legally permitting such payment is particularly 

appropriate because the Consummation Costs are being paid from the holders’ shared collateral, 

without reference to actual fees and expenses incurred, and to the exclusion of holders of claims 

in the same class. 

5. Accordingly, BNYM requests that the Title III Court condition approval 

of the Disclosure Statement on amendments that address the issues raised in this objection.3

 

3

 Prior to filing this objection, BNYM raised multiple concerns regarding the adequacy of information 

contained in the Disclosure Statement of importance to holders of beneficial interests in the Existing 

Securities that did not participate in the Title III Court-approved mediation process. BNYM supplied 

COFINA with proposed language addressing these concerns. Based on communications between 

counsel, BNYM anticipates that COFINA will address most of BNYM’s concerns through amendments 

to the Disclosure Statement. To the extent these concerns remain unresolved, BNYM reserves the right 

to supplement this objection or address them at the hearing on the adequacy of the Disclosure 

Statement. 

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FACTUAL BACKGROUND

6. BNYM serves as trustee for multiple series of senior and subordinate 

Existing Securities issued by COFINA under the Existing Bond Resolution. The Existing Bond 

Resolution constitutes a contract, and the covenants and agreements therein are for the “equal 

benefit, protection and security” of all holders of beneficial interests in the Existing Securities, 

“all of which . . . shall be of equal rank without preference, priority or distinction . . . except as 

otherwise provided in or permitted by the [Existing Bond Resolution].” Existing Bond 

Resolution § 103. 

7. In its capacity as trustee, BNYM filed timely master proofs of claim on 

behalf of itself and all holders of beneficial interests in the Existing Securities for principal, 

interest, and other amounts due under the Existing Securities and related documents. See Proof 

of Claim Nos. 16760 and 16284. 

8. On October 19, 2018, the Board filed the Plan and the accompanying 

Disclosure Statement. See Doc. Nos. 4072 and 4073. The Plan and the Disclosure Statement are 

the product of extensive negotiations among the Oversight Board, COFINA, AAFAF, the 

Insurance Parties, Bonistas del Patio, Inc., and certain institutional holders of beneficial interests 

in the Existing Securities, through the Title III Court-authorized mediation process, that resulted 

in those parties’ execution of the Plan Support Agreement and the Term Sheet. Disclosure 

Statement § I.B.1. at 5-6. The Plan Support Agreement and the Term Sheet outlined the terms of 

the Plan, including the settlement of the Commonwealth-COFINA Dispute, the issuance of new 

bonds by Reorganized COFINA to holders of Existing Securities, and the allocation of certain 

existing cash deposits between the Commonwealth and COFINA and, from COFINA’s portion, 

among holders of the Existing Securities. Id. 

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9. As provided in the Plan Support Agreement and the Term Sheet, and 

incorporated into section 3.3 of the Plan, COFINA agreed “to compensate [the] Consummation 

Cost Parties for the cost of negotiation, confirmation and consummation of the Term Sheet and 

the Plan” in an aggregate “amount equal to two percent (2.0%)” of the total amount of bond 

claims minus $1 billion. Plan § 3.3. The Plan classifies the Consummation Costs as an 

Administrative Expense Claim against COFINA. Id. § 1.7(g). 

10. The Consummation Costs are to be paid from the Pre-FY2019 BNYM 

Deposits—proceeds of the Sales Tax deposited with BNYM prior to July 1, 2018, and held in 

trust for the benefit of BNYM and all holders of beneficial interests of the Existing Securities. 

See Plan §§ 1.156, 2.1(b), 3.3; see also Existing Bond Resolution § 5.3. The Plan confirms that 

all holders of the Existing Securities are secured by the Pre-FY2019 BNYM Deposits. Plan 

§ 2.1(d)(iii). 

11. The Disclosure Statement tracks the description of the Consummation 

Costs as set forth in the Plan without providing any additional explanation as to the rationale and 

legal basis for paying the Consummation Costs to select institutional holders generally and, more 

specifically, in the amount of $332 million, and without any reference to or analysis of actual 

fees and expenses incurred. Specifically, section IV.E.4. of the Disclosure Statement provides: 

In order to compensate the parties for the cost of negotiation, confirmation and 

consummation of the Term Sheet and the Plan of Adjustment, and in consideration 

of (a) the execution and delivery of the Amended PSA by certain of the parties 

thereto and (b) the obligations and covenants contained in the Amended PSA 

provides [sic] that each Consummation Cost Party (as defined in the Plan of 

Adjustment) is entitled to receive, in accordance with the terms set forth in the Term 

Sheet and the Plan of Adjustment, based upon such entity’s respective positions 

(insured or otherwise) as of 5:00 p.m. (EDT) on August 7, 2018, a pro rata a [sic] 

share of cash in an amount equal to two percent, truncated to two decimal points, 

of (i) the aggregate amount of the Senior COFINA Bond Claims, Senior COFINA 

Bond Claims (Ambac), Senior COFINA Bond Claims (National), Junior COFINA 

Bond Claims, Junior COFINA Bond Claims (Assured), Senior COFINA Bond 

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Claims (Taxable Election) and Junior COFINA Bond Claims (Taxable Election) 

(calculated without duplication, minus (ii) One Billion Dollars

($1,000,000,000.00). 

Disclosure Statement § IV.E.4. at 69; accord id. § VI.C.3. at 77. The Disclosure Statement 

identifies the Consummation Cost Parties by name, see Disclosure Statement, Ex. B (Plan 

Support Agreement), Ex. C. (Term Sheet), Ex. B (List of Consummation Cost Parties), and 

estimates that the aggregate Consummation Costs distributed under the Plan will be 

$332,742,277.00. See id. Sch. 2 (Application of BNYM Pre-7/1/2018 Debt Service Fund 

Monies). 

12. The Consummation Cost Parties include the Insurance Parties and those 

institutional holders of beneficial interests in the Existing Securities that were included in the 

mediation process and that executed the Plan Support Agreement. The Consummation Cost 

Parties exclude all retail and other institutional holders of beneficial interests in the Existing 

Securities. 

13. The Disclosure Statement provides that COFINA intends to treat receipt of 

the Consummation Costs as an amount paid under the Existing Securities (e.g., principal or 

interest), while also recognizing that the Consummation Costs may be treated for tax purposes as 

a separate fee reported as ordinary income. Disclosure Statement § XIII.B.2(a)i.c.(2) at 191. 

OBJECTION

14. The Title III Court should condition approval of the Disclosure Statement 

on the inclusion of amendments addressing the factual circumstances and legal basis for paying 

the Consummation Costs, from the holders’ shared collateral, without reference to actual fees 

and expenses incurred, and to the exclusion of holders of claims in the same class. Without such 

amendments, the Disclosure Statement fails to provide adequate information under section 1125 

of the Bankruptcy Code. 

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15. A disclosure statement containing adequate information is a prerequisite to 

soliciting votes to accept or reject a plan of adjustment. 11 U.S.C. § 1125(b). The primary 

purpose of a disclosure statement is to provide all material information that creditors affected by 

a plan reasonably may require in order to make an informed, intelligent decision as to whether to 

vote for or against a plan. See In re Clamp-All Corp., 233 B.R. 198, 204 (Bankr. D. Mass. 1999)

(“The purpose of requiring an approved disclosure statement is to ensure that all claim holders 

are provided with adequate information to enable them to make an informed judgment regarding 

whether to vote for or against a reorganization plan.”). The disclosure statement should identify 

“all those factors presently known to the plan proponent that bear upon the success or failure of 

the proposals contained in the plan.” In re Scioto Valley Mortgage Co., 88 B.R. 168, 170 

(Bankr. S.D. Ohio 1988) (citing In re Stanley Hotel, Inc., 13 B.R. 926, 929 (Bankr. D. Colo. 

1981)). 

16. The requirement of adequate disclosure to parties in interest is a key 

feature of the reorganization process, In re Clamp-All Corp., 233 B.R. at 208, and courts have an 

independent obligation to determine whether a disclosure statement includes adequate 

information within the meaning of, and as required by, the Bankruptcy Code. In re Eastern 

Maine Elec. Co-op, Inc., 125 B.R. 329 (Bankr. D. Me. 1991). The Bankruptcy Code defines 

“adequate information,” in relevant part, as: 

information of a kind, and in sufficient detail, as far as is reasonably practicable in 

light of the nature and history of the debtor and the condition of the debtor’s books 

and records . . . that would enable . . . a hypothetical investor of the relevant class 

to make an informed judgment about the plan . . . 

11 U.S.C. § 1125(a); see Momentum Mfg. Corp. v. Employee Creditors Comm. (In re 

Momentum Mfg. Corp), 25 F.3d 1132, 1136 (2d Cir. 1994). What constitutes “adequate 

information” in any particular case must be considered on a case-by-case basis. In re El 

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Comandante Mgmt. Co., LLC, 359 B.R. 410, 414 (Bankr. D.P.R. 2006) (“The determination of 

what is adequate information in a disclosure statement is a practical and variable inquiry made 

on a case-by-case basis.”); In re Ferretti, 128 B.R. 16, 18 (Bankr. D.N.H. 1991); In re Oxford 

Homes, Inc., 204 B.R. 264, 269 (Bankr. D. Me. 1997) (“[W]hat constitutes ‘adequate 

information’ will vary from case to case[.]”). 

17. In order to enable a hypothetical reasonable retail holder of beneficial 

interests in the Existing Securities who was not included in the mediation process to make an 

informed decision to accept or reject the Plan, the Disclosure Statement should disclose the 

factual circumstances and legal basis supporting payment of the Consummation Costs to selected 

institutional investors and others and to the exclusion of all other holders. 

18. Mere disclosure that payment of the Consummation Costs is on account of 

an Administrative Expense Claim and in consideration of “the negotiation, execution and 

delivery of the Amended PSA” and “the obligations and covenants contained in the PSA,” see 

Disclosure Statement § VI.C.3 at 77, without reference to any actual fees and expenses incurred, 

does not satisfy the requirements of the Bankruptcy Code. 

19. Insofar as COFINA proposes to pay the Consummation Costs as 

Administrative Expense Claims under section 503(b) of the Bankruptcy Code, the Disclosure 

Statement fails to provide information sufficient to enable a hypothetical investor in the Existing 

Securities to make an informed judgment about the Plan.4 The Disclosure Statement does not 

 

4

 Section 503(b) of the Bankruptcy Code, made applicable to this Title III Case by section 301 of 

PROMESA, authorizes the Title III Court to allow, as an administrative expense, (i) “the actual, 

necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this 

subsection, incurred by . . . a creditor . . . in making a substantial contribution” in this Title III Case, 11 

U.S.C. § 503(b)(3), and (ii) “reasonable compensation for professional services rendered by an attorney 

or an accountant” of a creditor in making a substantial contribution and “reimbursement for actual, 

necessary expenses incurred by such attorney or accountant.” 11 U.S.C. § 503(b)(4). 

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explain how each Consummation Cost Party made a “substantial contribution” to the Title III 

Case or how the proposed aggregate payment of 2% of bond claims less $1 billion represents 

“reasonable compensation” and “actual, necessary” expenses of the Consummation Cost Parties. 

Explaining the methodology by which COFINA arrived at the aggregate payment amount would 

assist a hypothetical retail investor who did not participate in the mediation process in making an 

informed judgment about the Plan. This should include any contemporary analysis of the 

compensation and expenses sought by each Consummation Cost Party and an explanation for 

transferring approximately $332 million of the holders’ shared collateral to certain institutional 

investors and to the exclusion of others. 

20. Insofar as COFINA proposes to pay the Consummation Costs on account 

of the Existing Securities (e.g., as a recovery of principal or interest), as suggested in the 

discussion of tax implications in the Disclosure Statement, the Disclosure Statement fails to 

provide sufficient information to enable a hypothetical investor in the Existing Securities to 

make an informed judgment about the Plan. Section 1123(a)(4) of the Bankruptcy Code, made 

applicable to this Title III Case by section 301 of PROMESA, provides that a plan shall “provide 

the same treatment for each claim or interest of a particular class, unless the holder of a particular 

claim or interest agrees to a less favorable treatment . . . .” 11 U.S.C. § 1123(a)(4). The 

Disclosure Statement does not explain the factual circumstances and legal basis for the 

Consummation Cost Parties to receive a materially greater recovery under the Plan on account of 

their pre-petition bond claims than other holders of bond claims in the same class. The 

Disclosure Statement also does not explain why holders of claims not entitled to the 

Consummation Costs should vote to accept a plan that treats their claims less favorably than the 

bond claims of Consummation Cost Parties in the same class. 

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21. For all of these reasons, the Disclosure Statement should be amended to 

address the factual circumstances and legal basis justifying payment of the Consummation Costs 

generally and, more specifically, in the stated amount. 

WHEREFORE, the Trustee respectfully requests that the Court enter an order 

(i) sustaining this objection, (ii) conditioning approval of the Disclosure Statement on the 

inclusion of amendments addressing the issues raised in this objection, and (iii) granting such 

other and further relief in favor of the Trustee as may be just and proper. 

[The remainder of this page was intentionally left blank.] 

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Dated: November 13, 2018 Respectfully submitted, 

 San Juan, Puerto Rico 

SEPULVADO, MALDONADO & COURET 

By: /s/ Albéniz Couret-Fuentes 

Elaine Maldonado-Matías 

USDC-PR Bar No. 217309 

Albéniz Couret-Fuentes 

USDC-PR Bar No. 222207 

José Javier Santos Mimoso 

USDC-PR Bar No. 208207 

304 Ponce de León Ave. – Suite 990 

San Juan, PR 00918 

Telephone: (787) 765-5656 

Facsimile: (787) 294-0073 

Email: emaldonado@smclawpr.com 

Email: acouret@smclawpr.com 

Email: jsantos@smclawpr.com 

REED SMITH LLP 

/s/ Eric A. Schaffer 

Eric A. Schaffer 

Luke A. Sizemore 

225 Fifth Avenue, Suite 1200 

Pittsburgh, PA 15222 

Telephone: (412) 288-3131 

Facsimile : (412) 288-3063 

Email : eschaffer@reedsmith.com 

Email : lsizemore@reedsmith.com 

Kurt F. Gwynne 

1201 N. Market Street, Suite 1500 

Wilmington, DE 19801 

Telephone: (302) 778-7550 

Facsimile: (302) 778-7575 

Email: kgwynne@reedsmith.com 

Counsel to The Bank of New York Mellon, 

as indenture trustee

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