EXHIBIT F 

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Exhibit F Page 1 of 94
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·1· · · · · ·UNITED STATES COURT OF APPEALS

·2· · · · · · · ·FOR THE FIRST CIRCUIT

·3

·4· ·PEAJE INVESTMENTS, LLC,

·5· · · · · · ·Movant, Appellant,

·6· ·-vs-· · · · · Case No. 16-2377

·7· ·ALEJANDRO GARCIA-PADILLA, ET AL,

·8· · · · · · ·Respondents, Appellees.

·9· ·-----------------------------------

10· ·PEAJE INVESTMENTS, LLC

11· · · · · · ·Movant, Appellee,

12· ·-vs-· · · · · Case No. 16-2430

13· ·ALEJANDRO GARCIA-PADILLA, ET AL,

14· · · · · · ·Respondents, Appellees,

15· · · · · · · ·-----------------

16· ·FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,

17· · · · · · ·Movant, Appellant.

18· ·-----------------------------------

19· · · · · · · · ·DIGITAL TRANSCRIPTION

20· · · · · · · ·ORAL ARGUMENT HELD BEFORE

21· · · · · · ·JEFFREY R. HOWARD, CHIEF JUDGE

22· · · · · O. ROGERIEE THOMPSON, CIRCUIT JUDGE

23· · · · ·WILLIAM J. KAYATTA, JR., CIRCUIT JUDGE

24· · · · · · · ·WEDNESDAY, JANUARY 4, 2017

25· ·Job No. 4622

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·1· ·ASSURED GUARANTY CORPORATION; ASSURED GUARANTY

·2· ·MUNICIPAL CORPORATION,

·3· · · · · · ·Plaintiffs, Appellees,

·4· ·-vs-· · · · · Case No. 16-2431

·5· ·COMMONWEALTH OF PUERTO RICO, ET AL,

·6· · · · · · ·Defendants, Appellees

·7· · · · · · · ·-----------------

·8· ·FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,

·9· · · · · · ·Movant, Appellant

10· ·-----------------------------------

11· ·ALTAIR GLOBAL CREDIT OPPORTUNITIES FUN (A), LLC,

12· ·ET AL,

13· · · · · · ·Movants, Appellants,

14· ·CLAREN ROAD CREDIT MASTER FUND, LTD., ET AL,

15· · · · · · ·Movants,

16· ·-vs-· · · · · Case No. 16-2433

17· ·ALEJANDRO GARCIA-PADILLA, in his official

18· ·capacity as the Governor of Puerto Rico, et al,

19· · · · · · ·Respondents, Appellees

20· · · · · · · ·-----------------

21· ·FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,

22· · · · · · ·Movant, Appellant

23· ·-----------------------------------

24

25

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Exhibit F Page 4 of 94
·1· ·BRIGADE LEVERAGED CAPITAL STRUCTURES FUND, LTD.,

·2· ·ET AL

·3· · · · · · ·Plaintiffs, Appellees,

·4· ·-vs-· · · · · Case No. 16-2437

·5· ·ALEJANDRO GARCIA-PADILLA, in his official

·6· ·capacity as the Governor of Puerto Rico, et al,

·7· · · · · · ·Defendants, Appellees

·8· ·GOVERNMENT DEVELOPMENT BANK OF PUERTO RICO,

·9· · · · · · ·Defendant,

10· · · · · · · ·-----------------

11· ·FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,

12· · · · · · ·Movant, Appellant.

13· ·-----------------------------------

14· ·NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION,

15· · · · · · ·Plaintiff, Appellee,

16· ·-vs-· · · · · Case No. 16-2438

17· ·ALEJANDRO J. GARCIA-PADILLA, et al,

18· · · · · · ·Defendants, Appellees,

19· · · · · · · -----------------

20· ·FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,

21· · · · · · ·Movant, Appellant.

22· ·-----------------------------------

23

24

25

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·1· ·US BANK TRUST NATIONAL ASSOCIATION,

·2· · · · · · ·Plaintiff, Appellee,

·3· ·-vs-· · · · · Case No. 16-2439

·4· ·ALEJANDRO GARCIA-PADILLA, in his official

·5· ·capacity as the Governor of Puerto Rico, et al,

·6· · · · · · ·Defendants, Appellees

·7· · · · · · ·-----------------

·8· ·FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,

·9· · · · · · ·Movant, Appellant.

10· ·-----------------------------------

11· ·DIONISIO TRIGO-GONZALEZ, ET AL,

12· · · · · · ·Plaintiffs, Appellees,

13· ·CARMEN FELICIANO VARGAS, ET AL,

14· · · · · · ·Plaintiffs,

15· ·-vs-· · · · · Case No. 16-2440

16· ·ALEJANDRO GARCIA-PADILLA, in his official

17· ·capacity as the Governor of Puerto Rico, et al,

18· · · · · · ·Defendants, Appellees

19· · · · · · ·-----------------

20· ·FINANCIAL OVERSIGHT AND MANAGEMENT BOARD,

21· · · · · · ·Movant, Appellant.

22· ·-----------------------------------

23

24

25

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·1· ·APPEARANCES:

·2· ·G. ERIC BRUNSTAD, JR.

·3· ·Dechert, LLP

·4· ·90 State House Square

·5· ·Hartford, CT 06103-3702

·6· ·860.524.3999

·7· · · · Appearing on behalf of Peaje Investments,

·8· · · · LLC.

·9

10· ·ERIN E. MURPHY

11· ·Kirkland & Ellis, LLP

12· ·655 Fifteenth Street NW

13· ·Washington, D.C. 20005-5793

14· ·202.879.5036

15· · · · Appearing on behalf of Alejandro

16· · · · Garcia-Padilla, et al.

17

18

19

20

21

22

23

24

25

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·1· ·APPEARANCES, CONTINUED:

·2· ·MICHAEL LUSKIN

·3· ·Luskin, Stern & Eisler, LLP

·4· ·Eleven Times Square

·5· ·8th Ave. & 41st St.

·6· ·New York, New York 10036

·7· ·212.597.8200

·8· · · · Appearing on behalf of Financial

·9· · · · Oversight and Management Board.

10

11· ·RICHARD A. CHESLEY

12· ·DLA Piper LLP

13· ·444 West Lake Street

14· ·Suite 900

15· ·Chicago, Illinois 60606-0089

16· ·312.368.4000

17· · · · Appearing on behalf of Employees

18· · · · Retirement System of the Commonwealth of

19· · · · Puerto Rico.

20

21

22

23

24

25

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·1· ·APPEARANCES, CONTINUED:

·2· ·SPARKLE L. SOOKNANAN

·3· ·Jones Day

·4· ·51 Louisiana Avenue, N.W.

·5· ·Washington, D.C.· 20001-2113

·6· ·202.879.3939

·7· · · · Appearing on behalf of Altair Global Credit

·8· · · · Opportunities Fund (A), et al.

·9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

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·1· · · · · · · · ·INDEX PAGE

·2· ·WITNESS:· · · · · · · · · · · · · · · · ·PAGE

·3· ·(None.)

·4

·5· · · · · · · · · ·EXHIBITS

·6· ·EXHIBIT· · · ·DESCRIPTION· · · · · · · · MARKED

·7· ·(None.)

·8

·9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

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Exhibit F Page 10 of 94
·1· · · · · · · · · · · · · Wednesday, January 4, 2017

·2· · · · · · · · THE CLERK:· The first case today is

·3· ·16-2377, Peaje Investments LLC versus Alejandro

·4· ·Garcia-Padilla et al and consolidated cases.· And

·5· ·Number 16-2437, Brigade Leveraged Capital Structures

·6· ·Fund V Alejandro J. Garcia-Padilla et al and

·7· ·consolidated cases.

·8· · · · · · · · MR. BRUNSTAD:· Good morning, your

·9· ·Honor, Eric Brunstad on behalf of Peaje Investments.

10· ·If I may have about three minutes for rebuttal time,

11· ·your Honor?

12· · · · · · · · THE COURT:· Yes.

13· · · · · · · · MR. BRUNSTAD:· Thank you.· First of

14· ·all, we appreciate being here on expedited review.

15· ·And in the time that I have this morning I'd like to

16· ·touch upon three things.· The first is the harm that

17· ·Peaje is suffering as a result of the taking of its

18· ·collateral.

19· · · · · · · · The second is why adequate protection

20· ·is the correct standard of cause here.

21· · · · · · · · And the third is why the District

22· ·Court erred in failing to hold a hearing.

23· · · · · · · · Focusing on harm, Peaje holds

24· ·$63 million in limited recourse bonds.· By limited

25· ·recourse, I mean that ordinarily Peaje can look only

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·1· ·to its collateral, the Toll Revenues to be paid.

·2· ·When we started back in May of 2016, Peaje's

·3· ·collateral consisted of two buckets.· The first

·4· ·bucket consisted of cash equal to about 10 percent

·5· ·of the principal and interest outstanding on the

·6· ·bonds, on deposit with the fiscal agent.· The second

·7· ·bucket is the future Toll Revenues.

·8· · · · · · · · Now here we are in January, the second

·9· ·payment; I understand first payment in July, second

10· ·payment now has been made from the cash.· The cash

11· ·is gone or almost gone.· That money is gone.· So all

12· ·we have to look forward to now is the future

13· ·payments, the future Toll Revenues, which we don't

14· ·know that much about.· We don't know how much they

15· ·are, what they're actually going to be.· We think

16· ·they're going to be insufficient to both cover the

17· ·future payment obligations and to make up for what

18· ·has been taken.· But the harm is --

19· · · · · · · · THE COURT:· Staying right with that,

20· ·why is that the standard?· I read your briefs below

21· ·and on here you consistently say that the future

22· ·revenue stream won't be enough to cover all of the

23· ·obligations, not just the debt obligation but also

24· ·refunding, in effect, collateral.· And as I

25· ·understand the adequate protection rule which you'd

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·1· ·like us to apply, we don't look at that.· We

·2· ·actually look -- if a creditor is over-secured we

·3· ·will get whether the collateral will be impaired

·4· ·down to the point to eliminate what the Court's call

·5· ·an equity cushion.· And I don't see you ever having

·6· ·argued that either below or even in any brief to us

·7· ·on appeal.

·8· · · · · · · · MR. BRUNSTAD:· Yes, your Honor.· But

·9· ·the critical point there is that it's a question of

10· ·fact.· It depends on the value of the future

11· ·revenues.· They --

12· · · · · · · · THE COURT:· Can you point to anything

13· ·in your filings with the District Court where you

14· ·proposed, where you even alleged that the diminution

15· ·in the value of the collateral would be enough to

16· ·take you down below -- in other words, not just

17· ·impaired the collateral, but reduce it so much that

18· ·it would impair the debt?

19· · · · · · · · MR. BRUNSTAD:· Well, we argued over

20· ·and over again that that was what was going to

21· ·happen.

22· · · · · · · · THE COURT:· I didn't see it.· Can you

23· ·point me towards where you --

24· · · · · · · · MR. BRUNSTAD:· On the (inaudible),

25· ·your Honor, I will give you the page cites to our

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·1· ·brief.· I don't have it right in front of me, but I

·2· ·will do that.

·3· · · · · · · · But the point is that it is a question

·4· ·of fact, and we never had a hearing.· And I also

·5· ·want to point out, it is the debtor here, the

·6· ·Commonwealth's burden to show that there is no harm

·7· ·to us.· It's not our burden to show that when they

·8· ·take our collateral and spend it, that we will be

·9· ·harmed.· It is their burden to show that it won't

10· ·be.· When they take your cash, when they take your

11· ·property, and they dissipate it or they spend it, it

12· ·is their burden to show that we're being adequately

13· ·protected nonetheless.· And the adequate protection

14· ·standard is very simple.· It comes from Morales and

15· ·it's that they must basically show there's a

16· ·reasonable assurance of a suitable replacement.

17· · · · · · · · They have to show that the cash today

18· ·is being replaced by something, and they have to

19· ·show first when they're going to stop taking our

20· ·collateral, because if they keep taking our

21· ·collateral infinitely into the future we'll never be

22· ·paid, we're obviously harmed, and --

23· · · · · · · · THE COURT:· Back to the burden

24· ·question that you just touched on and explain to me

25· ·the basis for your assertion that the burden would

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·1· ·be on them given that the statute -- I know we start

·2· ·out with language that says "For cause shown".

·3· · · · · · · · MR. BRUNSTAD:· Correct, your Honor.

·4· · · · · · · · THE COURT:· That "shown", I think

·5· ·suggests that the party seeking relief will show

·6· ·cause, which kind of sounds like you have some

·7· ·burden here.

·8· · · · · · · · MR. BRUNSTAD:· We do.· We have a

·9· ·burden of showing we have a secured interest.· We

10· ·have a burden of showing that they are taking our

11· ·property and spending it.· Those are undisputed

12· ·facts.· We've established our burden.· The burden

13· ·that exists for them to show, that their taking of

14· ·our property and dissipating it is not causing us

15· ·harm.

16· · · · · · · · This standard of cause is borrowed

17· ·from Section 362 of the Bankruptcy Code.· Section

18· ·362 says that relief from the automatic stay in

19· ·bankruptcy may be granted, including for lack of

20· ·adequate protection.

21· · · · · · · · Then the concept of the cause is

22· ·borrowed there into PROMESA here.· We take the

23· ·subtle meaning of that concept here.· The subtle

24· ·meaning includes that they have the burden of

25· ·showing that they're taking our property and

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·1· ·spending it is not causing us harm.· That's what

·2· ·adequate protection means.· The burden of proof is

·3· ·baked into that very concept.

·4· · · · · · · · Now there's an important reason why

·5· ·that must be the standard here.· PROMESA itself bars

·6· ·us from asserting a remedy to stop them from taking

·7· ·our property.· The statute itself prevents us from

·8· ·asserting a remedy.· That in and of itself generates

·9· ·a conflict with the Constitution, with the Fifth

10· ·Amendment, where somebody is continually taking the

11· ·property and you can do nothing about it.

12· ·Ordinarily we have all kinds of remedies that are

13· ·being prescribed by the statute.· To avoid a

14· ·conflict with the Constitution we must have a

15· ·mechanism that allows us to show that they -- we're

16· ·entitled to relief from the stay unless they can

17· ·show --

18· · · · · · · · THE COURT:· But see, we have not

19· ·confirmed, you just said we must have a mechanism

20· ·that allows us to show.

21· · · · · · · · MR. BRUNSTAD:· Correct.

22· · · · · · · · THE COURT:· All right.· So go back to

23· ·the question.· How much do you have to show and

24· ·when?

25· · · · · · · · MR. BRUNSTAD:· Yes.

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·1· · · · · · · · THE COURT:· And so what do you say to

·2· ·the point that when you take the word "Shown" and

·3· ·you add in the policy considerations that we're

·4· ·talking about, a temporary stay, we're talking about

·5· ·a desire to reduce suits, why wouldn't it

·6· ·potentially lead to an argument that before a suit

·7· ·is going to be allowed a creditor needs to come in

·8· ·and at least make a prima facie claim that its

·9· ·actual debt obligation is being impaired by the

10· ·reduction of collateral --

11· · · · · · · · MR. BRUNSTAD:· Yes.

12· · · · · · · · THE COURT:· -- below -- you have to at

13· ·least claim that in your motion.

14· · · · · · · · MR. BRUNSTAD:· Oh, we did.· And in the

15· ·end it's the same burden we would have under Section

16· ·362.· Under Section 362 we must show cause, same

17· ·idea, all we have to do is come in and say "We have

18· ·a lien, a security interest in this property that's

19· ·undisputed."· Our collateral is being taken and

20· ·spent.· That is undisputed.· The burden then shifts

21· ·to them to demonstrate.

22· · · · · · · · THE COURT:· But there aren't -- there

23· ·are bankruptcy cases, are there not, that say that

24· ·even in that situation, the creditor still has the

25· ·burden of showing that there is no equity cushion?

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·1· ·It's not -- it's not cut and dry; am I right?

·2· · · · · · · · MR. BRUNSTAD:· But actually in this

·3· ·context it is.· First of all, they refuse to tell us

·4· ·what the future revenues are going to be.· We don't

·5· ·have that information.· And if we don't have -- if

·6· ·we -- if we -- the cash was supposed to accumulate.

·7· ·The cash, as we understand it, is now gone.· There

·8· ·will be no money there to make the July payment

·9· ·coming up in 2017, unless they turn those revenues

10· ·back on.· It takes time for those revenues to

11· ·accumulate.

12· · · · · · · · On pages 34 and 35 of our brief, we

13· ·trace the history of the adequate protection concept

14· ·to the Morales holding case that Congress adopted

15· ·when it crafted the adequate protection concept.

16· ·And there the Court was very clear the adequate

17· ·protection concept clearly encapsulates this idea

18· ·that if you take someone's property, a promise of

19· ·future payment, which is all that they're offering

20· ·here, a promise of future payment from the future

21· ·revenues is never adequate protection unless they

22· ·can show, and it's their burden, that the future

23· ·revenues are so great that it doesn't make a

24· ·difference.

25· · · · · · · · Picture the apple farm, where the

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·1· ·farmer has apples, grows apples and they're there

·2· ·and the bank has a lien on the apples to secure a

·3· ·debt.· The farmer sells the apples and now has cash.

·4· ·If the farmer spends the cash what does the creditor

·5· ·have to look to?· Nothing.· The prospect of future

·6· ·apples that may or may not be grown?· Or it might be

·7· ·okay if the farmer can show in bankruptcy "I'm going

·8· ·to grow all these future apples and they're going to

·9· ·have such a great value that it doesn't matter that

10· ·I just spent all of your cash from this crop, it's

11· ·okay to make you wait."

12· · · · · · · · But when the farmer spends the cash,

13· ·sells the apples and spends the cash, which is what

14· ·they have done here, they then have to come forward

15· ·and show you that there is a reasonable prospect of

16· ·a suitable substitute, a suitable replacement that

17· ·will be provided.

18· · · · · · · · THE COURT:· Let me ask you a question

19· ·about that.· If Congress thought that -- that

20· ·the -- sort of the bankruptcy code way of dealing

21· ·with this in terms of adequate security was so

22· ·utterly critical when we're dealing with a sovereign

23· ·or somebody with the ability to tax or otherwise

24· ·raise revenue through fees, tolls, et cetera, why do

25· ·you suppose they didn't put that language in?

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·1· · · · · · · · MR. BRUNSTAD:· Two reasons.· One is --

·2· · · · · · · · THE COURT:· What I'm really asking is

·3· ·how much flexibility do we have?

·4· · · · · · · · MR. BRUNSTAD:· Yes.· I would suggest

·5· ·even though they said cause and didn't specify it,

·6· ·the flexibility I think has to be cabined within the

·7· ·adequate protection concept.· And here's why:

·8· · · · · · · · The adequate protection concept is

·9· ·itself based on the Fifth Amendment.· The adequate

10· ·protection concept recognizes that when a debtor

11· ·files for bankruptcy the automatic stay kicks in and

12· ·prevents the secured creditor from exercising its

13· ·rights when its collateral is being dissipated.· And

14· ·Congress rightfully chose that -- this came from a

15· ·case law before Congress did this in 1978, that

16· ·where the collateral is being taken or dissipated or

17· ·is depreciating in value in bankruptcy, the secured

18· ·creditor has a constitutional right to protection,

19· ·otherwise the automatic stay itself affects the

20· ·taking.

21· · · · · · · · THE COURT:· But if -- but if your --

22· ·if the Fifth Amendment argument hinges on the way

23· ·the reserve account is set up, the way the

24· ·expenditures are made, isn't that essentially a

25· ·contract claim as opposed to a property claim?

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·1· · · · · · · · MR. BRUNSTAD:· No.· Security

·2· ·Industrial Bank, the Supreme Court decision, it's

·3· ·cited on page 1 of our reply brief citing the

·4· ·Radford (ph) case, another other Supreme Court case,

·5· ·illustrate that a lien in collateral is a property

·6· ·right, not a contract right, it's a property right.

·7· ·A lien is a purchase.· Under Article 9 of the

·8· ·Uniform Commercial Code, a security interest is a

·9· ·purchase interest in the collateral, it's an

10· ·ownership interest --

11· · · · · · · · THE COURT:· But the payment that

12· ·you're talking about is a -- is a twice a year

13· ·payment --

14· · · · · · · · MR. BRUNSTAD:· Correct.

15· · · · · · · · THE COURT:· -- that is a result of

16· ·contract.

17· · · · · · · · MR. BRUNSTAD:· That's just how the

18· ·collateral is to be distributed.

19· · · · · · · · THE COURT:· Yeah, so I'm talking about

20· ·the revenue stream.

21· · · · · · · · MR. BRUNSTAD:· In bankruptcy, it is

22· ·true, if we were in a bankruptcy proceeding, and

23· ·we're probably going to get -- go there, there will

24· ·be another stay, one more delay, if -- in the

25· ·bankruptcy proceeding it is true that debtors have

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Exhibit F Page 21 of 94
·1· ·some leeway to alter the terms of payment, but

·2· ·that's not what we're talking about here.· We're

·3· ·talking about the security of payment, the

·4· ·collateral itself, the property.· And when it is

·5· ·dissipated, when it is spent, they have to show in

·6· ·order to be able to spend it, that it's not causing

·7· ·us any harm.· Why?· Because we are prohibited from

·8· ·the platform of the PROMESA of stay from exercising

·9· ·our rights.

10· · · · · · · · So to preserve the Fifth Amendment

11· ·concern, and applying the Canon of Constitutional

12· ·Avoidance, the Court should interpret the cause

13· ·standard under PROMESA to be the same as the cause

14· ·standard under Section 362 of the Bankruptcy Code to

15· ·avoid that conflict with the Constitution where they

16· ·could just continue to take the collateral for as

17· ·long as they want and we can do nothing about it.

18· ·The standard should be the same.· It should also be

19· ·the same under the Borrowed Statute Canon, because

20· ·the -- the cause standard under the bankruptcy code

21· ·was imported here and so, the subtle meaning goes

22· ·with it, including the requirement of adequate

23· ·protection.

24· · · · · · · · Adequate protection requires that they

25· ·show that a suitable substitute will be provided for

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Exhibit F Page 22 of 94
·1· ·what is being taken.· They never showed that below,

·2· ·we never had a hearing.· As the Martin case from the

·3· ·Eighth Circuit establishes, adequate protection is a

·4· ·question of fact.· You cannot have a court decide

·5· ·adequate protection without a hearing, an

·6· ·evidentiary hearing.

·7· · · · · · · · THE COURT:· Thank you.

·8· · · · · · · · MR. BRUNSTAD:· Thank you.

·9· · · · · · · · MS. SOOKNANAN:· Good morning, your

10· ·Honors.· Sparkle Sooknanan for the Altair

11· ·appellants, holders of bonds issued by the Employees

12· ·Retirement System.· May I reserve two minutes for

13· ·rebuttal?

14· · · · · · · · THE COURT:· Yes.

15· · · · · · · · MS. SOOKNANAN:· Thank you.· Your

16· ·Honors, it is undisputed that since July of 2016,

17· ·the ERS has received over $100 million of employer

18· ·contributions that it has diverted from Appellants's

19· ·collateral accounts.· It is also undisputed that

20· ·appellants have a lien on that property and all

21· ·employer contributions received by the ERS.· And in

22· ·the absence of adequate protection to protect that

23· ·property interest, Appellants are entitled to relief

24· ·from the PROMESA state.

25· · · · · · · · Appellants are both statutorily and

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Exhibit F Page 23 of 94
·1· ·constitutionally entitled to adequate protection.

·2· ·What the adequate protection requirement does is it

·3· ·essentially reconciles the competing interests of

·4· ·debtors and creditors.· Debtors get some breathing

·5· ·room, secured creditors are barred from seizing

·6· ·their property during the stay, and in exchange the

·7· ·adequate protection requirement is meant to protect

·8· ·secured creditors from the loss of value of their

·9· ·collateral.· And what the Commonwealth is advocating

10· ·is essentially a one-sided automatic stay where

11· ·debtors's interests are protected and secured

12· ·creditors's rights are essentially disregarded, and

13· ·that is not the statute that Congress enacted.

14· · · · · · · · THE COURT:· I understand that it's

15· ·(indecipherable) that the collateral potentially has

16· ·been reduced here, but let me ask you the same

17· ·question I was previously asking.

18· · · · · · · · Is there a claim here in this case

19· ·that the reduction in collateral is enough to push

20· ·you to the point where there's no equity cushion, or

21· ·even worse, such that the payment of the debt itself

22· ·is now in jeopardy?· Because as I understand it,

23· ·you've I think stipulated that there'll payments

24· ·through the current extension of the Moratorium Act

25· ·and then inflows thereafter will be roughly 19

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Exhibit F Page 24 of 94
·1· ·million a year where the debt obligations are

·2· ·roughly 14 million a year -- or a month, rather.· So

·3· ·it sounds like in 20 months, you build up 100

·4· ·million back up.

·5· · · · · · · · So I'm having trouble seeing where

·6· ·you've alleged the type of impairment of collateral

·7· ·that would rise to the level of inadequate

·8· ·protection.

·9· · · · · · · · MS. SOOKNANAN:· So two responses to

10· ·that, your Honor.· First, if it is in fact true that

11· ·all future employer contributions are going to be

12· ·paid, the bonds may well be over-secured.· The

13· ·problem is here that Appellees themselves have said

14· ·very clearly that future employer contributions are

15· ·uncertain.· And in fact, the only facts in the

16· ·record below, on which the District Court made its

17· ·decision about the certainty of future employer

18· ·contributions, is that they're uncertain.

19· · · · · · · · The ERS has said that in plain terms,

20· ·the Commonwealth just a couple months ago, in

21· ·October when it submitted its fiscal plan to the

22· ·Oversight Board said that, that we can't trust in

23· ·those future employer contributions.· So they cannot

24· ·then say we are protected by those very

25· ·contributions.

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Exhibit F Page 25 of 94
·1· · · · · · · · And the District Court -- remember, a

·2· ·district court found that the reason we are

·3· ·adequately protected is because there is this future

·4· ·revenue stream.· And the only facts in the record

·5· ·about that revenue stream were facts we put forward,

·6· ·statements by Appellees themselves that those

·7· ·payments are not uncertain -- are uncertain. I

·8· ·apologize.· And if those payments are uncertain the

·9· ·bonds are not over-secured.

10· · · · · · · · And the second response to that is, is

11· ·the burden of Appellees to show that in fact

12· ·they're -- the bonds are over-secured?· They have

13· ·not, to this point, and perhaps they will clarify if

14· ·it is their position that the bonds are over-secured

15· ·and if they would like to prove as an evidentiary

16· ·matter that that is the case, but they did not meet

17· ·that showing below and there's no record on which

18· ·this Court to make that showing.· And the District

19· ·Court didn't find that to be the case.

20· · · · · · · · THE COURT:· Could you clear up a

21· ·little confusion regarding -- as I understand it,

22· ·there's 75 million in funds that are in bank X, that

23· ·you would be all fine, everything would be okay if

24· ·it were moved over to a trust account?

25· · · · · · · · MS. SOOKNANAN:· Yes, your Honor.· So

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Exhibit F Page 26 of 94
·1· ·it is our -- so they have diverted -- as of Nov --

·2· ·as of the time of the hearing, as of November it was

·3· ·around 75 million.· The ERS has said it's receiving

·4· ·approximately 18.8 million a month and so there's

·5· ·somewhere more than 100 million now.

·6· · · · · · · · What they are saying is that they're

·7· ·diverting our money, but they don't actually need

·8· ·it.· They're not using it.· The ERS has represented

·9· ·to this Court that it's simply sitting in an account

10· ·being held and not used.

11· · · · · · · · THE COURT:· And does your lien not

12· ·trade -- follow those funds into that account?

13· · · · · · · · MS. SOOKNANAN:· Correct, it does not.

14· ·And what we've said to them is, "If you're not using

15· ·the money, instead of holding the money in an

16· ·operation account where you're free to spend it

17· ·tomorrow, simply place it in a separate account,

18· ·attach a lien, or hold the money for our benefit

19· ·until a court decides who has the right to that

20· ·money."· That's all we have asked for and that would

21· ·have ended this litigation.· That's what we asked

22· ·for in the District Court.

23· · · · · · · · THE COURT:· And do you agree with --

24· ·ERS asserts that its prohibited from making that

25· ·transfer by the Moratorium Act, or executive order

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Exhibit F Page 27 of 94
·1· ·issue pursuant to the Act, and what they cite in

·2· ·their brief simply suspends an obligation to make

·3· ·the transfer, but at least English translation does

·4· ·not indicate that it prohibits them from making a

·5· ·transfer.

·6· · · · · · · · MS. SOOKNANAN:· So, even if the -- the

·7· ·Moratorium Act prohibits them from making that

·8· ·transfer, that is why we are saying "Even if you're

·9· ·not transferring it to our collateral accounts, if

10· ·you're not using it put it in a separate account,

11· ·don't keep it in an operating account where you're

12· ·free to spend it.· Put it in a separate account and

13· ·agree not to touch the money for this stay and when

14· ·a court decides whether we have actual access to the

15· ·money or not, that's when the money can be moved."

16· · · · · · · · So we understand that the -- their

17· ·hands might be tied by the Moratorium Act in some

18· ·respect, but if they're not using the money and they

19· ·have no need for the money they should separate the

20· ·money, and that's all we have asked and they have

21· ·refused to do so to this point.

22· · · · · · · · THE COURT:· And so, do you agree that

23· ·the Moratorium Act not only suspends an obligation,

24· ·but prohibits them from performing that obligation?

25· · · · · · · · MS. SOOKNANAN:· Your Honor, I would

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Exhibit F Page 28 of 94
·1· ·say the Moratorium Act suspends the obligation even

·2· ·if it -- even if it prohibits them that does not

·3· ·prevent them from simply separating the money.

·4· ·Right now the money is sitting in an operating

·5· ·account and they are representing to this Court

·6· ·they're not using it, but they're free tomorrow to

·7· ·spend that money.

·8· · · · · · · · Our lien does not attach to that

·9· ·operating account and they have stipulated that they

10· ·pay expenses out of that operating account.

11· · · · · · · · At the end of the day, Appellants are

12· ·entitled to adequate protection, and in this case,

13· ·they have not proven that we are adequately

14· ·protected by that future lien on employer

15· ·contributions.· And this is not a case where

16· ·Appellants are saying despite -- there's a lot of

17· ·rhetoric in the Commonwealth's brief about the

18· ·financial woes facing the Commonwealth, and that may

19· ·well be true, but this is not a case where the

20· ·Commonwealth is saying to this Court that it needs

21· ·Appellants's property to keep the lights on.· They

22· ·are saying to this Court that they are diverting our

23· ·property, money that is ours, and it is undisputed

24· ·that it is ours, they are diverting that money, just

25· ·keeping it in an account for no reason whatsoever

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Exhibit F Page 29 of 94
·1· ·and holding that money.· We cannot start telling

·2· ·secured creditors that they will have no access to

·3· ·their collateral.· That it will be diverted by a

·4· ·debtor with no adequate protection whatsoever, and

·5· ·in this case, for no reason whatsoever.

·6· · · · · · · · Secured creditors are constitutionally

·7· ·entitled to adequate protection.

·8· · · · · · · · THE COURT:· In your case, do you think

·9· ·it makes any difference -- suppose we agree with you

10· ·about the standard --

11· · · · · · · · MS. SOOKNANAN:· Yes.

12· · · · · · · · THE COURT:· -- that adequate

13· ·protection -- is the Bankruptcy Code adequate

14· ·protection and we look to see whether there's an

15· ·equity cushion of at least 20 percent or more or

16· ·something like that.· Does it make any difference in

17· ·your case to whom the burden of production and the

18· ·burden of persuasion is allocated?

19· · · · · · · · MS. SOOKNANAN:· Your Honor, in this

20· ·case it does, because the appellees below had the

21· ·burden of proving that we are adequately protected.

22· ·They have not contested that and the District Court

23· ·held that to be so.· They did not meet that burden

24· ·below.· They did not even attempt to show that there

25· ·was an equity cushion because no hearing was

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Exhibit F Page 30 of 94
·1· ·conducted.· And for that reason, at a minimum, if it

·2· ·is their claim today that we are adequately

·3· ·protected because there is an equity cushion, and

·4· ·this Court could reman the case so they have the

·5· ·opportunity to prove that.· But on the record that's

·6· ·before this Court, there is nothing that this Court

·7· ·can use to decide that there is an equity cushion,

·8· ·all that's in the record about that future revenue

·9· ·stream are statements from Appellees themselves that

10· ·those payments are uncertain.

11· · · · · · · · And on that record, the Court cannot

12· ·find and the District Court incorrectly found that

13· ·Appellants are adequately protected.· Thank you,

14· ·your Honors.

15· · · · · · · · MS. MURPHY:· Good morning, your

16· ·Honors, and may it please the Court, Erin Murphy on

17· ·behalf of the individual Commonwealth Defendants.

18· · · · · · · · Congress enacted Section 405 of

19· ·PROMESA for the expressly enumerated purpose of

20· ·providing the Commonwealth with immediate but

21· ·temporary reprieve from costly creditor lawsuits.

22· ·Now withstanding Congress's findings that this

23· ·temporary stay is essential to stabilize the region,

24· ·Appellants insist that they should be able to

25· ·litigate their claims immediately even though they

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Exhibit F Page 31 of 94
·1· ·concededly are being paid in full right now, and

·2· ·concededly will continue to be paid in full

·3· ·throughout the duration of PROMESA's stay.

·4· · · · · · · · The District Court's conclusion that

·5· ·they should have to wait out the remainder of the

·6· ·brief stay that's left is a classic interlocutory

·7· ·order over which we believe this Court lacks

·8· ·jurisdiction, but in the event the Court concludes

·9· ·otherwise, should affirm the decision below because

10· ·the District Court was manifestly correct in

11· ·concluding that Appellants failed to demonstrate

12· ·anything that differentiates them from all the other

13· ·creditors to whom this stay is plainly intended to

14· ·apply.

15· · · · · · · · THE COURT:· Let's assume that that

16· ·shows that the debt payments were remaining current

17· ·for now, but the Commonwealth took all of the

18· ·collateral that would secure future debt payments, a

19· ·hundred percent of it, is it your contention that as

20· ·the Commonwealth is in the process of doing that,

21· ·Congress prohibited the creditor from going to court

22· ·to protect itself?

23· · · · · · · · MS. MURPHY:· Well, the creditor can go

24· ·to court and try to demonstrate cause to lift the

25· ·stay, and that's going to depend on the particular

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Exhibit F Page 32 of 94
·1· ·facts that --

·2· · · · · · · · THE COURT:· Are you saying that

·3· ·(inaudible) cause, what I just described?

·4· · · · · · · · MS. MURPHY:· I think it depends on

·5· ·what the collateral is.

·6· · · · · · · · THE COURT:· Assume it's a hundred

·7· ·percent of the collateral.

·8· · · · · · · · MS. MURPHY:· But if the collateral is

·9· ·purely cash, at the end of the stay they get to

10· ·litigate their claims and seek money damages for the

11· ·full amount of what they lost during the stay.

12· · · · · · · · THE COURT:· Well, if the money is

13· ·being given and dispersed to a million people, so

14· ·there's no claim, and they have given unsecured

15· ·claim for money damages against the Commonwealth,

16· ·the whole idea of security seems to me that

17· ·(indecipherable) standards of secured credit rather

18· ·than unsecured.

19· · · · · · · · MS. MURPHY:· Sure.· And these

20· ·creditors will be secured creditors.· They are right

21· ·now and they'll be secured creditors when the stay

22· ·lifts.

23· · · · · · · · THE COURT:· Not in the hypothetical

24· ·I've asked you to address, which as I've proposed in

25· ·the hypothetical that all of the collateral is

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Exhibit F Page 33 of 94
·1· ·taken.

·2· · · · · · · · MS. MURPHY:· Right.· And in that

·3· ·circumstance, you'd be a secured credit -- secured

·4· ·creditor whose security is gone, but you'd have a

·5· ·claim to litigate against the Commonwealth saying

·6· ·"You dissipated my security and therefore you owe me

·7· ·money damages for the full value of my claim."

·8· ·That's what differentiates what's going on here from

·9· ·a bankruptcy case.

10· · · · · · · · THE COURT:· So I think what you're

11· ·saying is tomorrow the Commonwealth could go out and

12· ·take all of the collateral, essentially, of all of

13· ·the creditors in Puerto Rico and there's nothing

14· ·that the creditors can do about it until after the

15· ·fact bring damage claims that themselves would be

16· ·unsecured.· That's what I'm hearing you saying.

17· · · · · · · · MS. MURPHY:· What I'm saying is that a

18· ·creditor would need to come in and make a showing

19· ·about not just that their collateral is being taken

20· ·right now, but that they won't be able to recover

21· ·their collateral once the stay lifts.· And that's

22· ·what these creditors can't show.

23· · · · · · · · THE COURT:· True.· In the hypothetical

24· ·it's being dispersed to the general population.

25· · · · · · · · MS. MURPHY:· And if they could

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Exhibit F Page 34 of 94
·1· ·demonstrate that not only is all of their collateral

·2· ·being dissipated, but there will be nothing left at

·3· ·the end of the day, there will be no ability for

·4· ·them to get money damages to get back the money they

·5· ·have lost, that might be an instance where you could

·6· ·demonstrate cause to lift the stay.

·7· · · · · · · · But that's not what we have here.

·8· ·What we have here is a creditor who's being paid

·9· ·right now, and who hasn't demonstrated that they

10· ·won't be paid once this stay lifts or that even if

11· ·they weren't paid at some point, they wouldn't have

12· ·all the remedies that both PROMESA and Act 21, the

13· ·Moratorium Act, contemplate.· Because both of those

14· ·statutes fully preserve their secured interests and

15· ·their ability to litigate those secured interests

16· ·once the stay lifts.

17· · · · · · · · THE COURT:· Are you aware of any

18· ·bankruptcy case that holds that the elimination of

19· ·collateral is not something that is cause for relief

20· ·merely because you would have an unsecured damage

21· ·claim in which you might or might not recover your

22· ·money?

23· · · · · · · · MS. MURPHY:· In bankruptcy context,

24· ·we're operating under a rule that we don't think is

25· ·the right rule here.· In the bankruptcy context,

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Exhibit F Page 35 of 94
·1· ·there is an adequate protection standard written

·2· ·into 362.· There's also a burden shifting

·3· ·(indecipherable) written into 362 that says it's the

·4· ·debtor's burden to demonstrate adequate protection.

·5· ·Both of those provisions were conspicuously excluded

·6· ·from Section 405 for PROMESA.

·7· · · · · · · · It does not include an adequate

·8· ·protection standard and it does not -- you know,

·9· ·they have repeatedly said that it's our burden.

10· ·Under 362 it's the debtor's burden, but that's

11· ·because the statute expressly says that it's the

12· ·debtor's burden to demonstrate adequate protection.

13· · · · · · · · That is another provision that

14· ·Congress did not import into Section 405.· And we

15· ·would submit the reason Congress didn't import a

16· ·burden shifting regime for proving adequate

17· ·protection is because Congress also did not import

18· ·an adequate protection standard into Section 405 of

19· ·PROMESA.· It didn't intend that standard to apply

20· ·and that's because you don't need an adequate

21· ·protection standard in this context because PROMESA

22· ·is quite different from the bankruptcy stay.

23· · · · · · · · A bankruptcy stay operates for the

24· ·duration of the entire bankruptcy.· So in effect

25· ·what it says is you're never going to get to

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Exhibit F Page 36 of 94
·1· ·effectively foreclose on your collateral, that's

·2· ·what's usually going on in an inadequate protection

·3· ·case, they want to foreclose on the collateral.· And

·4· ·the automatic stay in bankruptcy says you don't get

·5· ·to do that period, we're letting the debtor keep

·6· ·your collateral for the duration of the stay.· That,

·7· ·as courts have recognized, raises some distinct

·8· ·Fifth Amendment concerns that have led to an

·9· ·adequate protection standard that Congress put into

10· ·that provision.

11· · · · · · · · Here, that's not what's going on.

12· ·PROMESA doesn't say that the debt that -- for one

13· ·thing, there is no debtor right now.· There is no

14· ·Title III bankruptcy proceeding here.· The

15· ·Commonwealth is not a debtor.· All that's going on

16· ·is there's essentially a stay put in place for

17· ·everyone to figure out whether we're going to

18· ·proceed to a Title III bankruptcy proceeding,

19· ·whether we're going to have voluntary restructuring,

20· ·whether some of these obligations may continue to

21· ·remain in force in the same shape that they are

22· ·right now.

23· · · · · · · · So this is very different from

24· ·anything you have in the bankruptcy context and it's

25· ·also temporary, it ends February 15th or at the very

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Exhibit F Page 37 of 94
·1· ·latest May 1st.· And at that point, either the

·2· ·Appellants here will be able to litigate their

·3· ·claims in full and seek money damages for whatever

·4· ·injuries they believe they have suffered, or we will

·5· ·be in a Title III proceeding at which point the 362

·6· ·stay will kick in.· Because in Title III, unlike in

·7· ·Section 405 of PROMESA, Congress actually imported

·8· ·362 in its entirety.

·9· · · · · · · · So if we get into a Title III

10· ·bankruptcy proceeding, they'll have a different set

11· ·of arguments that they can make, they'll be able to

12· ·say that they're entitled to adequate protection and

13· ·that we need to make a showing about what is --

14· · · · · · · · THE COURT:· That's closing -- that's

15· ·closing the barn door, right?· A little too late

16· ·here if in seven months all of the collateral has

17· ·been taken.· I keep going back to it and (inaudible)

18· ·the burden, because I don't think the burden is

19· ·constitutionally imposed, so we have a statutory

20· ·instruction.

21· · · · · · · · But I'm just having great difficulty

22· ·with your argument that there's this seven-month

23· ·window where the government can entirely, entirely

24· ·destroy the value of collateral a hundred percent

25· ·and yet that wouldn't in and of itself be good

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Exhibit F Page 38 of 94
·1· ·cause.

·2· · · · · · · · Now, I'm not saying they're entirely

·3· ·destroying it here.· There may be in the future

·4· ·income streams as the court found enough, but you're

·5· ·asking us to take pretty broad proposition that

·6· ·seems to run into a real takings problem.

·7· · · · · · · · MS. MURPHY:· Well, your Honor does not

·8· ·have to resolve the hypothetical that you suggested

·9· ·in order to resolve this case, because as you've

10· ·recognized, that's not the claim here.

11· · · · · · · · THE COURT:· Right, if you reject that

12· ·hypothetical then it turns the argument back to

13· ·whether there is adequate protection here or perhaps

14· ·whether the burden of raising a question of adequate

15· ·protection was or was not met in the allegations

16· ·made, which is a different conversation than you've

17· ·been urging us to have so far.

18· · · · · · · · MS. MURPHY:· Sure.· And we do think

19· ·that the right way for the Court to look at this is

20· ·not -- and I don't think it would be consistent with

21· ·what Connis (ph) was trying to do in PROMESA to say

22· ·that the Commonwealth has to go through elaborate

23· ·hearings where it demonstrates exactly, you know,

24· ·for every dollar that we're spending to try to

25· ·ensure that residents are receiving essential

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Exhibit F Page 39 of 94
·1· ·services, which Congress put express findings into

·2· ·this statute that part of the point of the stay was

·3· ·to give the Commonwealth the resources it needed to

·4· ·ensure that its residents will receive essential

·5· ·services.· So the idea that, you know, for every

·6· ·dollar diverted the Commonwealth has to demonstrate

·7· ·that it's also setting aside the exact equivalent

·8· ·dollar to ensure --

·9· · · · · · · · THE COURT:· That's not the adequate

10· ·protection test.· You just have to show -- someone

11· ·has to address the issue of whether there's an

12· ·equity cushion or not.· And if they're over-secured,

13· ·then they're over-secured and go at it.

14· · · · · · · · MS. MURPHY:· Absolutely, your Honor,

15· ·which is why we don't believe that they could

16· ·satisfy adequate protection even if that were the

17· ·correct standard here.· But, we do believe that the

18· ·right standard for the Court to apply is a more

19· ·traditional equitable balancing of the equities in

20· ·the case, looking at not just whether they're

21· ·suffering some sort of harm as a result of the

22· ·Commonwealth's actions, but whether they are

23· ·suffering irreparable harm that cannot be remedied

24· ·at the end of the stay.

25· · · · · · · · And I think that has to be the right

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Exhibit F Page 40 of 94
·1· ·standard, because we're talking about a statute that

·2· ·was enacted on the express premise that the

·3· ·Commonwealth was using pledged revenues to pay for

·4· ·essential services.· And the executive orders they

·5· ·want to challenge, the first one, Executive Order

·6· ·18, allowing the diversion of Toll Revenues, that

·7· ·was promulgated more than a month before PROMESA was

·8· ·enacted.

·9· · · · · · · · And there were -- it's also implicit

10· ·and explicit in PROMESA that there would be

11· ·creditors who wouldn't be paid during the duration

12· ·of this stay.

13· · · · · · · · So Congress enacted this statute,

14· ·understanding that there were creditors as to who

15· ·the Commonwealth and its instrumentalities wouldn't

16· ·live up to a hundred percent of the bargain that

17· ·they had made during this stay.

18· · · · · · · · THE COURT:· Wait.· How do you suggest

19· ·we deal with Section 405(k)?

20· · · · · · · · MS. MURPHY:· I think section 405(k) as

21· ·a form of -- an additional form of protection for

22· ·Appellants's interests.

23· · · · · · · · THE COURT:· But doesn't it suggest

24· ·that we should not interpret PROMESA in a way as to

25· ·destroy security interests since Congress said

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Exhibit F Page 41 of 94
·1· ·PROMESA wasn't to destroy security interests?

·2· · · · · · · · MS. MURPHY:· No, I think that what

·3· ·405(k) is saying is notwithstanding the fact that

·4· ·the Commonwealth didn't have to live up to its

·5· ·obligations during the stay, that doesn't mean that

·6· ·you don't have all your rights the moment the stay

·7· ·lifts.· So it's a form of protection saying, you

·8· ·know, unlike in a bankruptcy proceeding, we're not

·9· ·actually allowing the Commonwealth to discharge or

10· ·alter your means, your secured interests, your

11· ·contractual rights.· All of those are fully intact

12· ·and the moment the stay expires you can go to court

13· ·and allege and try to prove that, you know, that

14· ·these actions that were taken were inconsistent,

15· ·that they caused you harm, that you're entitled to

16· ·damages.· So I actually think that 405(k) is further

17· ·proof that Congress intended to allow the

18· ·Commonwealth to do the things that it knew the

19· ·Commonwealth was doing when it enacted this statute,

20· ·and instead of creating a broad outlet to basically

21· ·let every creditor out from under the stay, Congress

22· ·said what we're going to do is ensure that your

23· ·rights are fully protected once the stay lifts.· And

24· ·the "For clause" standard is really intended to be a

25· ·safety valve to deal with the extraordinary

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Exhibit F Page 42 of 94
·1· ·creditor, not the creditor who's just making

·2· ·basically the same argument that any creditor, at

·3· ·least any secured creditor could make, which is, you

·4· ·know, "I don't think the Commonwealth is living up

·5· ·to a hundred percent of --"

·6· · · · · · · · THE COURT:· Tell me what -- what an

·7· ·extraordinary creditor would be, in your mind.

·8· · · · · · · · MS. MURPHY:· I think an extraordinary

·9· ·creditor, you know, one, you might have a creditor

10· ·who has a form of collateral that actually cannot be

11· ·remedied if it's lost during the -- it's something

12· ·other than money.· Money can always be remedied with

13· ·money.· If they had a particular form of collateral,

14· ·that was being, you know, diminished and could not

15· ·be made up for after the stay was lifted.

16· · · · · · · · You might also perhaps have a creditor

17· ·who has unique circumstances of their own that make

18· ·it irreparable damage if they aren't getting paid

19· ·now.· Now of course, I do think that you at least

20· ·have to be a creditor who's not getting paid, which

21· ·these creditors aren't.· These creditors are being

22· ·paid in full and conceivably will be paid in full.

23· · · · · · · · So, in -- in our mind, you know, that

24· ·makes them basically the very last creditors that

25· ·Congress would have wanted to be able to lift the

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Exhibit F Page 43 of 94
·1· ·stay and engage in litigation about whether they

·2· ·should be entitled to effectively two lines of

·3· ·security for their interest instead of just one.

·4· · · · · · · · THE COURT:· When you say that the

·5· ·statute should -- or contemplates sort of a

·6· ·traditional balancing of the equities, so shouldn't

·7· ·there be a hearing?

·8· · · · · · · · MS. MURPHY:· I think that the -- the

·9· ·way that this case ended up getting to the Court

10· ·-- I mean, there were stipulated facts that

11· ·basically stipulated to all of the facts that were

12· ·relevant to the analysis here, because they

13· ·stipulated that they've been paid, they will be paid

14· ·throughout the stay and there was stipulations about

15· ·what the revenue streams -- I mean, in the Altair

16· ·case there's specifically the stipulations Judge

17· ·Kayatta referenced about exactly what the levels of

18· ·the revenue streams are.· So everything was there

19· ·that the Court needed.

20· · · · · · · · And in the Peaje case, there had just

21· ·been a hearing from which hundreds of pages of

22· ·testimony were designated on the specific question

23· ·of whether the HTA revenues were going to be

24· ·sufficient in the future.· And one of the claimants

25· ·there was an insurer saying "We think we're going to

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Exhibit F Page 44 of 94
·1· ·have to cover claims in the future because we think

·2· ·these revenues will run out."

·3· · · · · · · · So, you know, it's not as if the

·4· ·District Court made a decision here without facts.

·5· ·And in that particular context, I think really it

·6· ·was incumbent on these parties if they thought

·7· ·given -- you know, given the record that they put

·8· ·before the Court of stipulated facts, of testimony,

·9· ·of the information that the Court recently could

10· ·have viewed as sufficient for it to make its ruling,

11· ·I do think it was incumbent on them to say "Hey,

12· ·hold on, you know, you need to reconsider this

13· ·ruling because we think we had something additional

14· ·beyond what we already put before you that you

15· ·didn't realize would have been relevant."· And

16· ·neither of the appellants here did that.

17· · · · · · · · THE COURT:· What is the result of this

18· ·ongoing litigation had on the whole notion of

19· ·breathing room?

20· · · · · · · · MS. MURPHY:· Well, there is a lot of

21· ·testimony that the Commonwealth put on about that in

22· ·the Brigade hearing, and some of that was designated

23· ·in the Peaje proceedings, regarding about how, you

24· ·know, it has caused the Commonwealth to have to

25· ·divert resources.· And having a hearing not only

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Exhibit F Page 45 of 94
·1· ·requires someone to come testify, it requires

·2· ·pulling people away from what they should be doing

·3· ·under PROMESA, which is, you know, getting the

·4· ·Commonwealth back in fiscal order to prepare for the

·5· ·hearing, to help prepare and review all papers that

·6· ·are being filed in all of this litigation.

·7· · · · · · · · So it really has been a tremendous

·8· ·distraction to the Commonwealth, which is exactly

·9· ·the opposite of what Congress intended when it said

10· ·"We're going to give you this stay precisely because

11· ·we don't want you to be spending your time in costly

12· ·creditor litigation when it would be better to put

13· ·that time to the use of -- and seeing to the needs

14· ·of the people of Puerto Rico and getting Puerto Rico

15· ·back into fiscal order."

16· · · · · · · · THE COURT:· And just one more

17· ·question.

18· · · · · · · · Regardless of who has the burden, if

19· ·we're honing in on the notion of equitable cushion,

20· ·what specifically in the evidence demonstrates that

21· ·there's an equitable cushion, the record stipulated

22· ·record evidence?

23· · · · · · · · MS. MURPHY:· Sure.· I think it's --

24· ·it's -- I mean, the stipulated evidence in Altair

25· ·demonstrates that even without the contributions

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Exhibit F Page 46 of 94
·1· ·from the Commonwealth employees, which are only

·2· ·suspended temporarily pursuant to these executive

·3· ·orders, even the non-Commonwealth contributions are

·4· ·higher than the stipulated amounts necessary to

·5· ·service the debt.

·6· · · · · · · · And as to the HTA Peaje party, you

·7· ·know, I don't understand them to ever have even

·8· ·suggested that they think the HTA revenues are going

·9· ·to be so low that they can't be paid, particularly

10· ·given that Peaje is actually -- they're kind of the

11· ·first priority set of creditors under the HTA,

12· ·because they're the earliest set of bonds.· So

13· ·basically you'd have to have like no HTA revenues

14· ·coming in for them to have any real risk of not

15· ·getting paid.· And that's why, as I understand it,

16· ·really their complaint has only been they don't

17· ·think there will be sufficient revenue to not only

18· ·pay them, but reinstate the reserve accounts and we

19· ·don't think that's the right standard even -- you

20· ·know, we don't think they're entitled to an equity

21· ·cushion that would not only ensure that they're

22· ·being paid, but also kind of ensure that they have a

23· ·secondary line of, you know, kind of security for

24· ·getting paid in the future.· If there are no further

25· ·questions, thank you.

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Exhibit F Page 47 of 94
·1· · · · · · · · MR. CHESLEY:· May it please the Court,

·2· ·Richard Chesley on behalf of ERS, the Employee

·3· ·Retirement System of the Commonwealth of Puerto

·4· ·Rico.

·5· · · · · · · · I appreciate the Court's time here

·6· ·this morning and I will be brief as Counsel for the

·7· ·Commonwealth has covered many of the topics we

·8· ·wanted to raise.· But with respect to the issues

·9· ·before this Court and regardless of how the Court

10· ·resolves certain of the legal challenges, the

11· ·Appellants's appeal with respect to ERS founders on

12· ·one crucial set of facts to which they stipulated

13· ·below, and which the District Court relied upon in

14· ·its holding.· That there are sufficient monies in

15· ·the debt service and reserve accounts to service the

16· ·bold holder debt until April 1st of 2017, after the

17· ·PROMESA stay expires.· And not a single principal

18· ·and interest payment will be missed while the

19· ·PROMESA stay remains in place and therefore, the

20· ·Appellants face no financial harm as a result of the

21· ·stay.

22· · · · · · · · Moreover, based upon the liens that

23· ·are held in the pledged property, and we'll talk

24· ·about that in a moment, the bondholders are secured

25· ·not only until the conclusion of the PROMESA stay,

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Exhibit F Page 48 of 94
·1· ·but for many, many years to come based upon the

·2· ·stipulated record that was before the District

·3· ·Court.

·4· · · · · · · · And again, while Counsel for the

·5· ·Commonwealth has adequately covered many of the

·6· ·issues we want to touch, I do want to raise a couple

·7· ·of points that I think are extremely relevant for

·8· ·this panel's consideration.

·9· · · · · · · · First of all, the Appellants take the

10· ·position that the standards for relief from the

11· ·automatic stay under Article IV of PROMESA, I'm only

12· ·talking about Article IV of PROMESA, should simply

13· ·mirror those under Section 362 of the bankruptcy

14· ·code.· Namely the cause for relief from the

15· ·automatic stay should include, but not be limited

16· ·to, which the bankruptcy code provides, adequate

17· ·protection.· They advanced the position despite the

18· ·fact these two statutory schemes have different

19· ·language and were intended for very different

20· ·purposes.

21· · · · · · · · So then what did Congress intend?· And

22· ·I think the Congressional history underlying Article

23· ·IV of PROMESA is very critical to see what did

24· ·Congress intend.· Well, the house report on Section

25· ·405, which is cited in our brief, states under the

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Exhibit F Page 49 of 94
·1· ·Section 405 automatic stay appoint enactment, "If a

·2· ·party is determined to be subject to irreparable

·3· ·damage because of the imposition of the stay the

·4· ·district court is authorized to grant relief from

·5· ·the stay to such party."

·6· · · · · · · · Of course, if Congress wanted to

·7· ·impute the adequate protection standards under

·8· ·Section 362 and Section 361 into Article IV it

·9· ·certainly could have and it absolutely did that with

10· ·respect to Article III of PROMESA.· But we're not in

11· ·the realm of Article III, we're simply during this

12· ·limited phase of the infirm relief.

13· · · · · · · · THE COURT:· And then how do you

14· ·address the argument that as a constitutional

15· ·matter, taking so much of the collateral as to

16· ·impair the ability to pay the debt is itself

17· ·irreparable harm because it's a taking?

18· · · · · · · · MR. CHESLEY:· And this goes to the

19· ·factual issues that were before the District Court

20· ·on the ERS appeal.

21· · · · · · · · THE COURT:· Well, no, putting aside

22· ·the facts, you are suggesting the use of the

23· ·irreparable harm standard rather than an inadequate

24· ·protection standard.

25· · · · · · · · MR. CHESLEY:· Yes, your Honor.

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Exhibit F Page 50 of 94
·1· · · · · · · · THE COURT:· And I'm having trouble

·2· ·seeing what the difficulty is if we had a true

·3· ·scenario assuming the facts did show blatant lack of

·4· ·adequate protection, wouldn't that be irreparable

·5· ·harm?

·6· · · · · · · · MR. CHESLEY:· Well, fortunately in our

·7· ·case that's not the factual record, but to the

·8· ·extent -- you Honor, I do agree to the extent we had

·9· ·a situation where there was a blatant taking of all

10· ·of the property, then I think there would be a

11· ·compelling argument that that is irreparable harm.

12· · · · · · · · THE COURT:· And then could you also

13· ·address the issue I had asked Counsel about earlier,

14· ·why -- what is it that actually prohibits ERS from

15· ·making the payments?· I understand there's

16· ·legislation that has suspended your obligation to do

17· ·so.

18· · · · · · · · MR. CHESLEY:· The Moratorium Act

19· ·prohibits the transfer of that --

20· · · · · · · · THE COURT:· And what is it in -- can

21· ·you refer to us any language in that --

22· · · · · · · · MR. CHESLEY:· With respect to the

23· ·Moratorium Act, your Honor, I can reference that to

24· ·the Court, but it limits the ability -- limits the

25· ·inflow of contributions from the Commonwealth to

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Exhibit F Page 51 of 94
·1· ·ERS, not the non-Commonwealth employees, and it

·2· ·limits our -- precludes our ability to then transfer

·3· ·amounts that we are holding to the bondholder.

·4· · · · · · · · THE COURT:· Okay.· The cites in the

·5· ·briefs didn't seem to help on finding language that

·6· ·did that.

·7· · · · · · · · MR. CHESLEY:· We apologize for that,

·8· ·your Honor.· We can file a supplement to the extent

·9· ·that is necessary.

10· · · · · · · · But I do want to touch in my last

11· ·minutes on the facts.· Yes, your Honor?

12· · · · · · · · THE COURT:· Please file that.

13· · · · · · · · MR. CHESLEY:· We will, your Honor.

14· ·And if I can, I do want to touch on the facts of our

15· ·case.· Specifically since July of 2016, at the

16· ·beginning of the PROMESA stay, the ERS -- ERS has

17· ·been holding over 75 -- currently holding over 75

18· ·million in the operating account based upon

19· ·contributions from the non-Commonwealth employers.

20· · · · · · · · Counsel for the Appellants made

21· ·mention of the fact that there's all these

22· ·representations or statements as to the uncertainty

23· ·with respect to future contributions.· There is no

24· ·uncertainty with respect to the non-Commonwealth

25· ·contributions which amount to approximately

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Exhibit F Page 52 of 94
·1· ·$20 million per month.· In fact, during 2015, again,

·2· ·this is in the record, ERS received about

·3· ·$224 million.· It solely in non- -- non-Commonwealth

·4· ·employer contributions.· This is in the face of a

·5· ·debt service obligation of $166 million.

·6· · · · · · · · This undisputed evidence was presented

·7· ·before the District Court, that in fact the equity

·8· ·cushion exists.· And with respect to that

·9· ·$20 million, it continues to flow in and the

10· ·Appellants do have the lien.· If you look at the

11· ·pledged property definition that's included in the

12· ·stipulated facts, they have a lien in that

13· ·collateral, they have a lien in the reserve account

14· ·collateral which will pay them, and they have a lien

15· ·in the future revenue.

16· · · · · · · · And the last thing that I think is

17· ·critical is what the judge did with respect to -- if

18· ·I may finish, your Honor.

19· · · · · · · · THE COURT:· Yes.

20· · · · · · · · MR. CHESLEY:· What the judge did, the

21· ·District Court with respect to the balancing of the

22· ·equities, and he made particular mention of the fact

23· ·that once the stay is alleviated the future revenue

24· ·stream, which is an additional $250 million,

25· ·approximately, per year in Commonwealth employer

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Exhibit F Page 53 of 94
·1· ·contributions, will then be made available back to

·2· ·ERS.· This, in combination with more than adequate

·3· ·amounts to pay the debt service based upon the

·4· ·non-Commonwealth gave the District Court more than

·5· ·adequate factual support to grant the relief that he

·6· ·did.· Thank you, your Honor.

·7· · · · · · · · MR. LUSKIN:· May it please the Court,

·8· ·Michael Luskin for the Financial Oversight and

·9· ·Management Board of Puerto Rico, the Appellant in

10· ·seven appeals involving the intervention motions and

11· ·the amicus in the two lift-stay appeals that we've

12· ·been hearing about this morning.

13· · · · · · · · THE COURT:· Mr. Luskin, are there any

14· ·pending cases in the District Court in which you're

15· ·waiting to hear about your intervention status?

16· · · · · · · · MR. LUSKIN:· Yes.

17· · · · · · · · THE COURT:· Okay.

18· · · · · · · · MR. LUSKIN:· One called Lex (ph)

19· ·claims, which is mentioned in our opening brief or

20· ·amicus -- or opening appeal brief.

21· · · · · · · · I know time is limited, but I am going

22· ·to spend a moment on the seven appeals that are

23· ·consolidated here.· We believe that the District

24· ·Court improperly applied a narrow and mechanical

25· ·test of Rule 24, governing intervention, the result

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Exhibit F Page 54 of 94
·1· ·of course was to deny us participation in the seven

·2· ·cases and the order should be reversed.· The

·3· ·District Court found what it referred to as a

·4· ·procedural deficiency, but there was none, the Court

·5· ·apparently believed that what the board was required

·6· ·to do was to file one of the pleadings of the kind

·7· ·listed in Rule 7, answer and answer with

·8· ·counterclaims and so on, but that's wrong.

·9· · · · · · · · What the rule requires is a pleading

10· ·that sets out the claim or defense for which

11· ·intervention is sought and that is precisely what we

12· ·did.

13· · · · · · · · We believe the District Court should

14· ·have taken note of the -- and taken into account the

15· ·specific procedural postures of the cases.· In the

16· ·three consolidated Peaje cases there were no

17· ·complaints on file.· Two of the three parties had

18· ·included proposed complaints with their motion

19· ·papers and one of them, Altair, did not include a

20· ·proposed or draft complaint.· So, there was nothing

21· ·to respond to in the traditional Rule 7 sense.

22· · · · · · · · THE COURT:· In some of the cases where

23· ·there was a complaint filed --

24· · · · · · · · MR. LUSKIN:· Yes, the Brigade cases.

25· · · · · · · · THE COURT:· -- why didn't the Board

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Exhibit F Page 55 of 94
·1· ·just file, I mean it could have been a one-page

·2· ·answer, right, because an answer -- you only need to

·3· ·respond to allegations against you.· There were

·4· ·none.

·5· · · · · · · · MR. LUSKIN:· Well, I think that -- you

·6· ·know, we did struggle with that, your Honor, to tell

·7· ·you the truth.· We did feel that, frankly,

·8· ·responsibly to reply to those, to answer those

·9· ·allegations we would have had to take a position on

10· ·the merits on the preemption, the taking and the

11· ·other constitutional claims.

12· · · · · · · · THE COURT:· Why is that?· Under Rule

13· ·(indecipherable) you don't have to respond to

14· ·allegations that aren't against you, right?

15· · · · · · · · MR. LUSKIN:· Well, I can -- you're

16· ·correct and I will --

17· · · · · · · · THE COURT:· But that was your

18· ·thinking, you thought you might be taking a risk of

19· ·having to respond?

20· · · · · · · · MR. LUSKIN:· Well, we were -- yes, we

21· ·did not want to take a position, frankly, on any

22· ·aspect of these constitutional claims, and that

23· ·relates to the stay issue as well.· Having the

24· ·Oversight Board take a position on the merits, or

25· ·refusing to take a position on the merits, has an

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Exhibit F Page 56 of 94
·1· ·impact on our ability to negotiate.· Our goal as we

·2· ·see, our statutory rule is to operate in a level

·3· ·playing field, frankly, a quiet playing field.

·4· ·That's what the stay is about, and that's what we

·5· ·said in our intervention papers, and that's what we

·6· ·explained to Judge Besosa as to why in our -- in our

·7· ·motion for reconsideration, why we didn't take

·8· ·positions on the merits.· We still have not taken

·9· ·positions on the merits and we believe that during

10· ·this quiet period before Title VI or Title III

11· ·proceedings are filed we should not.

12· · · · · · · · Our goal is to deal with those claims

13· ·in the conference room, not the courtroom, and see

14· ·if we can negotiate restructuring agreements or

15· ·consensual fiscal plans.

16· · · · · · · · What we did do, in all seven cases,

17· ·Judge Kayatta, is -- is to address the sole live

18· ·issue that was then before the Court, which were the

19· ·pending motions to lift the stay.· And there can be

20· ·no doubt about what our position was, and that is

21· ·after all the goal of Rule 24.

22· · · · · · · · We think the District Court should

23· ·have addressed our motions on the merits, not

24· ·relying on the procedural efficiency, to use his

25· ·words.· And had he done so he would have referred to

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Exhibit F Page 57 of 94
·1· ·Section 212(a) of PROMESA which allows us to

·2· ·intervene in any action against the Commonwealth.

·3· ·He could have done so under Rule 24a-2, which allows

·4· ·us to intervene as of right based on our interest,

·5· ·our unique position, the adequacy of representation

·6· ·sensation and so on.· And we would then have

·7· ·participated in the case below.

·8· · · · · · · · We think that the -- this Court's

·9· ·prior decisions support the Oversight Board's view

10· ·on these motions.· The one case cited in the Court

11· ·below was a case where there was no -- no proposed

12· ·pleading at all submitted and we would agree,

13· ·if -- if the punitive intervenor doesn't bother to

14· ·put in a proposed pleading of any kind then I could

15· ·see denying the motion.· But even there in the

16· ·Court's decision in Liggett (ph), there was no

17· ·intervention motion, but intervention was allowed,

18· ·particular facts but the right decision clearly.· So

19· ·those seven orders should be reversed.

20· · · · · · · · Unless the Court has questions on

21· ·intervention I'd like to turn to the merits.· The

22· ·amicus position on the lift-stay motions.· And we

23· ·have suggested, the Oversight Board has suggested a

24· ·standard that is somewhat different than the other

25· ·parties, we do not believe that the sole touchstone

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Exhibit F Page 58 of 94
·1· ·should be adequate protection, though I will say,

·2· ·Judge Kayatta, that your hypothetical would, I

·3· ·believe, present a situation where adequate

·4· ·protection might trump everything else.· But this is

·5· ·nowhere close to a case where a hundred percent of

·6· ·anyone's collateral is being taken and destroyed.

·7· · · · · · · · We also don't believe that irreparable

·8· ·injury alone is the sole touchstone.· And others

·9· ·have pointed out that Bankruptcy Code 362 includes

10· ·adequate protection as reason, as cause for lifting

11· ·the stay.· Certainly Congress knew what it was doing

12· ·when it drafted 405E, it did not copy that language

13· ·notwithstanding the fact that it -- it copied or

14· ·incorporated verbatim 98 other provisions of the

15· ·bankruptcy code in Section 301 of PROMESA.· When it

16· ·wanted to copy it knew how to copy.· And it did not

17· ·do so here and I think that for purposes of

18· ·statutory construction that ought to be enough.

19· · · · · · · · So why should the PROMESA standard be

20· ·a different standard?· And my answer is that PROMESA

21· ·establishes a very different regime than the

22· ·bankruptcy code.· PROMESA establishes what I refer

23· ·to as a quiet time, the breathing room, which is

24· ·actually part of the findings in the statute itself,

25· ·and purposes in the statute itself.· It establishes

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Exhibit F Page 59 of 94
·1· ·breathing room, a quiet time for the Oversight Board

·2· ·to do the very tasks that its mandated to do by the

·3· ·statute, which is to organize, to collect

·4· ·information, to designate covered instrumentalities

·5· ·to develop projections to review budgets.· To

·6· ·develop fiscal plans and to negotiate out-of-court

·7· ·restructuring agreements, and to assess the

·8· ·advisability of going the out-of-court route or the

·9· ·consensual route of Title 6 of PROMESA or the

10· ·nonconsensual or only partially consensual route of

11· ·Title III bankruptcy.· And it's supposed to do -- we

12· ·are charged with doing all of that during the quiet

13· ·period.

14· · · · · · · · Only after we decide which way to go

15· ·do we commence a bankruptcy proceeding if that's the

16· ·decision, to go into chapter -- a Title III and in

17· ·Title III-362 of the bankruptcy code along with 97

18· ·other provisions, expressly govern verbatim.· But

19· ·that's not where we are, we're in Title IV in the

20· ·quiet period.· And it is very important.

21· · · · · · · · Forcing decisions on constitutional

22· ·issues to go to the intervention point would impede

23· ·negotiations, if not render them outright

24· ·impossible.

25· · · · · · · · THE COURT:· In Congress --

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·1· · · · · · · · MR. LUSKIN:· Yes?

·2· · · · · · · · THE COURT:· And I realize it was quite

·3· ·a concession because you used the word "Might", but

·4· ·you're attempting that a complete elimination of the

·5· ·collateral might be enough to overweigh everything

·6· ·else.· Stay with that for a second --

·7· · · · · · · · MR. LUSKIN:· Yes.

·8· · · · · · · · THE COURT:· -- and not treat it as a

·9· ·concession, but treat it as a talking point.· Why

10· ·wouldn't Congress have wanted to say "Well, that's

11· ·enough, but if you just take half the collateral,

12· ·well below the equity position, that's not enough"?

13· ·It's -- it's a -- it's a taking just as much.

14· · · · · · · · MR. LUSKIN:· Well, but for adequate

15· ·protection and constitutional purposes, the only

16· ·taking that matters is a taking that threatens the

17· ·secured creditors's interest in the debtor's

18· ·interest in the collateral.

19· · · · · · · · THE COURT:· Yeah, so assume that's the

20· ·rule.

21· · · · · · · · MR. LUSKIN:· So if that's --

22· · · · · · · · THE COURT:· In any equity position

23· ·debtor is out of luck -- creditor is out of luck,

24· ·okay.

25· · · · · · · · MR. LUSKIN:· Right.

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·1· · · · · · · · THE COURT:· But I'm talking about a

·2· ·scenario where you go well below the equity --

·3· · · · · · · · MR. LUSKIN:· Right.· And I -- and I

·4· ·believe that in a situation where the facts show

·5· ·that a secured creditor at the outset of a case is

·6· ·clearly and unequivocally moving from over-secured

·7· ·to under-secured, in a way that damages and

·8· ·threatens its ability to be repaid, is a

·9· ·consideration.

10· · · · · · · · However -- and the Supreme Court in

11· ·Timbers points this out, that -- that duration of

12· ·the stay is important.· The Morales case, the

13· ·Timbers case really don't help the Appellants here.

14· ·That case involved a ten-year note after a plan of

15· ·reorganization that stripped away the basket of

16· ·rights that the secured creditor had --

17· · · · · · · · THE COURT:· The duration is important

18· ·only if there's not enough time to do the taking.

19· ·But if there's enough time to take it all then it's

20· ·gone.

21· · · · · · · · MR. LUSKIN:· I -- following through

22· ·that hypothetical, but I must echo what my brethren

23· ·have stated up here, which is that we are so far

24· ·away from that kind of situation.· The record

25· ·establishes over-security here.· There is cash and

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Exhibit F Page 62 of 94
·1· ·cash flow that is more than sufficient to pay the

·2· ·debt service, and certainly during the duration of

·3· ·the stay, from day one of the stay through the end

·4· ·of the day next month, or whenever it ultimately

·5· ·ends.

·6· · · · · · · · THE COURT:· So I think I hear you

·7· ·saying, which makes sense, that it's not just the

·8· ·duration, but it's the duration in relationship to

·9· ·the berm rate here, and if the berm rate

10· ·(indecipherable) the duration does not create enough

11· ·to impair the collateral so that it threatens the

12· ·payment of the debt then --

13· · · · · · · · MR. LUSKIN:· Correct.

14· · · · · · · · THE COURT:· -- (inaudible) would have

15· ·an issue.

16· · · · · · · · MR. LUSKIN:· Your Honor, yes, that is

17· ·correct and that is what distinguishes this case.

18· ·Where we have a perpetual income stream from

19· ·virtually all, if not all of the cash collateral

20· ·cases or adequate protection cases that the

21· ·Appellants cite, many of those cases were real

22· ·estate cases or equipment cases where the cash

23· ·collateral, the future rent that was being offered

24· ·as adequate protection was rent under a lease with a

25· ·term of years.· It was -- in one of the cases there

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Exhibit F Page 63 of 94
·1· ·was 13 months rent left and in another of the cases

·2· ·the key tenant was not renewing so the money was

·3· ·going away.

·4· · · · · · · · So in those cases, if you took away

·5· ·months 1 and 2 of rent, you weren't able to replace

·6· ·them with new loans 13, 14 and 15 as you are in

·7· ·these cases where total revenues are perpetual.· And

·8· ·that's -- and the employer contributions are

·9· ·perpetual.· And the excise tax and motor vehicle

10· ·fees that the HTS, the highway bondholders have

11· ·security interests in.· And those numbers and those

12· ·facts are in the record in the stipulations that

13· ·were put in to the District Court.

14· · · · · · · · I'm not sure -- I've lost track of the

15· ·time here.· I think I'm probably way over.· I have

16· ·one more point that I ask your indulgence.

17· · · · · · · · THE COURT:· Please make your point.

18· · · · · · · · MR. LUSKIN:· Okay.· I apologize.· I'm

19· ·going to -- I do think the perpetual revenue stream

20· ·distinguishes these cases from the typical cash

21· ·collateral situation and the hypothetical that Judge

22· ·Kayatta has put forward.

23· · · · · · · · And I -- I'll end by making the point

24· ·that the standard that the Oversight Board is

25· ·advocating is a balancing of a variety of factors

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Exhibit F Page 64 of 94
·1· ·without giving any one factor complete priority is

·2· ·not a new or unfamiliar standard.· I mean, courts

·3· ·constantly weigh factors to assess cause in many

·4· ·situations where the statute doesn't list them or

·5· ·give examples.· PROMESA uses cause in only two

·6· ·instances, one of them is the one we've been talking

·7· ·about, the other one does not list reasons.

·8· · · · · · · · The bankruptcy code and the bankruptcy

·9· ·rules authorize courts to pact for cause or for

10· ·cause shown in 71 separate spots, by my count, of

11· ·which reasons or examples are given in only 10.· The

12· ·Federal Rules of Appellate Procedure authorize this

13· ·Court to act for good cause in seven instances and

14· ·in none of them is an example given.

15· · · · · · · · Courts do not need examples to figure

16· ·out what the material relevant factors are, and

17· ·if -- in your hypothetical, if the facts presented

18· ·are like your hypothetical and constitutional issues

19· ·are implicated then, yes, that factor may come to

20· ·the fore.

21· · · · · · · · But here, that is not what we have.

22· ·There is no damage.· There is no need for adequate

23· ·protection.· If there were need for adequate

24· ·protection it's there in the equity cushion and the

25· ·equity cushion in this case is different because of

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Exhibit F Page 65 of 94
·1· ·the perpetual revenue.· There's -- I think that

·2· ·absent any further questions from the Court I should

·3· ·stop.· I've gone way over my allotment.

·4· · · · · · · · THE COURT:· I have one.

·5· · · · · · · · MR. LUSKIN:· I'm sorry, yes.

·6· · · · · · · · THE COURT:· In terms of the approach

·7· ·that you are advocating to take, I'm sure you read

·8· ·Judge Besosa's Brigade case?

·9· · · · · · · · MR. LUSKIN:· Yes.

10· · · · · · · · THE COURT:· Are you advocating

11· ·something more along those lines?

12· · · · · · · · MR. LUSKIN:· I think Judge Besosa was

13· ·not as express as I have been in -- in our brief of

14· ·listing the particular factors.· I think in fact,

15· ·what Judge Besosa did is decide that he has to

16· ·balance all of the factors and that among the

17· ·factors that he was required to include or to assess

18· ·was adequate protection and I think he did that. I

19· ·would, speaking for the Oversight Board, like to see

20· ·a decision from this Court is that is more express

21· ·and that could be -- and more expansive on the

22· ·balancing that makes it clear that the PROMESA

23· ·regime pre-petition is different from the bankruptcy

24· ·regime post-filing of the Title III case for

25· ·instance, so that in other cases we have guidance

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Exhibit F Page 66 of 94
·1· ·and Judge Besosa has more guidance, so yes.

·2· · · · · · · · THE COURT:· Thank you.

·3· · · · · · · · MR. LUSKIN:· Thank you very much.

·4· ·And, again, I apologize for going over.

·5· · · · · · · · THE COURT:· Not at all.

·6· · · · · · · · MR. BRUNSTAD:· Thank you, your Honor.

·7· ·Judge Thompson, there is no evidence in the record

·8· ·whatsoever of an equity cushion for Peaje and its

·9· ·bonds.· Zero.· Counsel paints a rosy picture that

10· ·there will be enough money, et cetera, there is zero

11· ·evidence in the record to substantiate those claims.

12· · · · · · · · We didn't have an evidentiary hearing.

13· ·We had an expert witness who was going to testify

14· ·about the projections and things, that was not

15· ·allowed.· These bonds are going to go out for

16· ·19 years.· Taking the cash today and spending it is

17· ·real harm.

18· · · · · · · · Judge Kayatta, the burn right now is a

19· ·hundred percent, they are burning a hundred percent

20· ·of the cash.· Section 405(k) of PROMESA says they're

21· ·not supposed to be impairing our collateral during

22· ·the so-called quiet period.· They are not

23· ·maintaining the status quo, they are impairing our

24· ·collateral yet they're violating the very statute

25· ·they seek shelter under and saying there's no cause

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Exhibit F Page 67 of 94
·1· ·for lifting the stay.· Even though they are not

·2· ·complying with the statutory regime they are

·3· ·supposed to be honoring they are impairing our

·4· ·collateral and they are doing it in a way that is

·5· ·causing us harm.

·6· · · · · · · · Why should they have the burden?· They

·7· ·have all of the information.· We do not.· They know

·8· ·what the protected revenues are.· We do not.

·9· ·They -- only they know when they will stop taking

10· ·our collateral.· We don't know, we can't gaze into

11· ·the crystal ball.· They have refused to take a

12· ·position on when they will stop taking our

13· ·collateral.· They have tipped their hand in this

14· ·proceeding before the Court.· They basically have

15· ·said "We will continue taking the collateral.· We

16· ·make no commitment to when we'll stop taking the

17· ·collateral."

18· · · · · · · · And they're adequately protected

19· ·because they have a lawsuit, an unsecured claim.

20· ·They can sue us later for taking their collateral.

21· ·But the third circuit said --

22· · · · · · · · THE COURT:· Counsel, so if there had

23· ·been a hearing and you had put your expert on --

24· · · · · · · · MR. BRUNSTAD:· Correct.

25· · · · · · · · THE COURT:· -- would your expert have

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Exhibit F Page 68 of 94
·1· ·simply said "We don't know"?

·2· · · · · · · · MR. BRUNSTAD:· Our expert would have

·3· ·said looking at the -- what information we were able

·4· ·to get from them, the projected revenues may well

·5· ·not be enough to cover all of the future obligations

·6· ·and make up for what they're taking now.

·7· · · · · · · · Remember, the way this works is cash

·8· ·is being collected, total revenues are being

·9· ·collected and as they come in were supposed to be

10· ·put into the accounts to make sure there's enough

11· ·there to make the next payment.· They stopped doing

12· ·that last May.· There was enough in there at that

13· ·time to cover us through this month.· But because

14· ·they're not putting any more of those total revenues

15· ·in, when we get to July there will be nothing there

16· ·to pay us.· We will be in default.· And their

17· ·argument is, "Well, we'll just continue to take the

18· ·property and you can sue us later.· You can have an

19· ·unsecured claim a lawsuit against us for taking your

20· ·property."

21· · · · · · · · But as the Third Circuit said in the

22· ·Rocco case we cite on pages 22 and 23 of our reply

23· ·brief, "A lawsuit is too speculative in nature to

24· ·offer adequate protection."· And the reason for that

25· ·is because substituting a lawsuit, a future right to

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Exhibit F Page 69 of 94
·1· ·sue is never the same as cash in the bank today.

·2· ·They are going around saying "We don't have enough

·3· ·money to pay anybody, but trust us, we can spend all

·4· ·of your collateral today and we'll pay you in the

·5· ·future."· Judge --

·6· · · · · · · · THE COURT:· Yeah, go ahead.

·7· · · · · · · · MR. BRUNSTAD:· You asked us for cites

·8· ·to where we argue that this is going to harm us and

·9· ·it's not going to be enough below.

10· · · · · · · · THE COURT:· I asked for a cite where

11· ·you told the judge below that your debt -- the debt

12· ·itself was not going to get repaid absent release

13· ·from the stay.

14· · · · · · · · MR. BRUNSTAD:· Now recall, Judge

15· ·Kayatta, we were not able to have our evidentiary

16· ·hearing to come and make our arguments before the

17· ·Court and --

18· · · · · · · · THE COURT:· I'm just looking at a very

19· ·long motion in which you specified the harm, and as

20· ·I read that harm, you were simply saying that the

21· ·collateral itself is being reduced.· I did not see

22· ·any claim, and maybe I missed something, which is

23· ·why I --

24· · · · · · · · MR. BRUNSTAD:· Let me do the best I

25· ·can.

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·1· · · · · · · · THE COURT:· Okay.

·2· · · · · · · · MR. BRUNSTAD:· I'll give you three

·3· ·cites.· The joint appendix page 32, paragraph 43.

·4· ·The joint appendix page 35, paragraph 50.· And the

·5· ·joint appendix page 171 at paragraph -- at paragraph

·6· ·4.

·7· · · · · · · · THE COURT:· And then to follow up on

·8· ·Judge Thompson's question, were -- did the judge

·9· ·deny you any discovery that you sought to do?

10· · · · · · · · MR. BRUNSTAD:· We sought -- we sought

11· ·to get the financial projections of the revenues,

12· ·what they were likely to be, so our expert witness

13· ·could try to prepare and come up and see whether

14· ·those projections were going to be adequate.

15· ·Judge -- Judge Besosa, over their objection, did

16· ·require them to give us those projections about the

17· ·future revenues.· And based upon that evidence, our

18· ·expert was going to testify that the future revenues

19· ·are likely to be insufficient to allow us not only

20· ·to be paid in full going forward, but to make up for

21· ·what they're spending currently.

22· · · · · · · · THE COURT:· I think let me ask my

23· ·question again.· Did Judge Besosa deny you any

24· ·discovery that you tried to do?

25· · · · · · · · MR. BRUNSTAD:· He did not.

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Exhibit F Page 71 of 94
·1· · · · · · · · THE COURT:· Okay.

·2· · · · · · · · MR. BRUNSTAD:· But remember your Honor

·3· ·the key point that I'd like to reiterate, it was our

·4· ·burden to show -- we have a security interest,

·5· ·that's undisputed.· It was our burden to show that

·6· ·basically they're taking our collateral, they're

·7· ·dissipating it.· That's undisputed.· Those are

·8· ·undisputed facts.

·9· · · · · · · · With that prima facie case made, it is

10· ·their burden to show that it's not causing us any

11· ·harm.· And all you have heard from them today is,

12· ·"Well, if there's any harm from this you can sue us

13· ·in the future with a speculative lawsuit", you know,

14· ·against us, even though they claim they don't have

15· ·any money.· Again, that's not adequate protection.

16· · · · · · · · And the reason why it must be their

17· ·burden to show adequate protection, again is because

18· ·they have the information -- in addition, one key

19· ·fact that's necessary to do the calculations is when

20· ·will they stop taking the collateral?· Because,

21· ·Judge Kayatta, this case is your hypothetical if

22· ·they just keep taking the collateral into the

23· ·future.· The burden is a hundred percent if

24· ·they -- if they keep going and going and going and

25· ·going as they plan --

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·1· · · · · · · · THE COURT:· But the regime changes in

·2· ·May at the latest, right?

·3· · · · · · · · MR. BRUNSTAD:· Well, but Judge

·4· ·Kayatta, what happens at that point is we then

·5· ·substitute nearly one stay for another.· When they

·6· ·file for bankruptcy they then get the automatic stay

·7· ·and then we have more hearings and more delay so we

·8· ·get one year, two years, perhaps, after the fact

·9· ·where they continue to take our collateral.· Each

10· ·day they continue to take our collateral the hole

11· ·gets bigger and bigger and bigger and bigger and the

12· ·problem becomes a problem akin to what happens with

13· ·poor debtors who get behind on their mortgage

14· ·payments.· They may be able to make the payment in

15· ·the future, but they never catch up on the arrears,

16· ·and in the end the collateral isn't going to be

17· ·sufficient to cover the hole.· And again, it's not

18· ·sufficient, the remedy they suggest is not

19· ·sufficient, that we can just sue them in the future

20· ·and get an unsecured claim against them for money

21· ·damages they basically say they don't have the funds

22· ·to pay.

23· · · · · · · · So taking collateral today without

24· ·adequate protection is real harm.· That's -- under

25· ·the borrowed canon -- the Borrowed Statute Canon we

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Exhibit F Page 73 of 94
·1· ·take the subtle meaning of the adequate protection

·2· ·concept, which was designed to protect secured

·3· ·parties just like Peaje in this case.

·4· · · · · · · · The balancing test that opposing

·5· ·Counsel advocates is a test under which relief would

·6· ·never be granted, because in their view really the

·7· ·only thing that matters is to have this quiet

·8· ·period.· Well, that would be all right --

·9· · · · · · · · THE COURT:· This is beginning to

10· ·become a run-on sentence.

11· · · · · · · · MR. BRUNSTAD:· Yes, your Honor.· Thank

12· ·you very much.

13· · · · · · · · MS. SOOKNANAN:· Your Honor, I just

14· ·have three brief points in rebuttal.· First with

15· ·respect to the burdens.· Whoever bears the burden it

16· ·is clear that in this case below we met our burden.

17· ·We showed cause, we showed that we were secured

18· ·creditors with a lien on property, that they are

19· ·diverting our property and that we are not

20· ·adequately protected.

21· · · · · · · · THE COURT:· Where's the evidence that

22· ·we should have looked at that would cast serious

23· ·doubt on the $19 million per month income stream

24· ·that is being paid by the non-stay --

25· ·non-Commonwealth?

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Exhibit F Page 74 of 94
·1· · · · · · · · MS. SOOKNANAN:· Your Honor, the

·2· ·evidence is in the stipulated facts itself, it's all

·3· ·the statements by these very entities saying that

·4· ·those contributions are uncertain.· They cannot on

·5· ·one hand point to that future revenue stream and

·6· ·point to these hypothetical payments and then say

·7· ·"By the way, those are uncertain, we don't know that

·8· ·they will be paid."· And remember, an evidentiary

·9· ·hearing was scheduled in this case.

10· · · · · · · · The Commonwealth suggests, goes as far

11· ·as to say it was incumbent upon us to notify the

12· ·Court that we had other evidence to submit.· That --

13· ·it's somewhat disingenuous to say that.

14· · · · · · · · To understand the timing, a hearing

15· ·was scheduled for November 3rd.· The day before the

16· ·parties submitted joint stipulations which we had

17· ·gotten together and agreed to in order to streamline

18· ·the hearing.· Everyone was fully aware that there

19· ·were other points that parties intended to meet, we

20· ·notified the Court that morning that there would be

21· ·expert testimony.

22· · · · · · · · So the suggestion that we should have

23· ·somehow told the Court that we had other evidence,

24· ·or that it was clear to the Court that these

25· ·stipulations were the entire record that the parties

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Exhibit F Page 75 of 94
·1· ·had agreed to is frankly absurd, these were filed on

·2· ·November 2nd and the hearing was cancelled on

·3· ·November 2nd.

·4· · · · · · · · THE COURT:· But as to the 19 million a

·5· ·month, Mr. Chesley told us that what wasn't

·6· ·uncertain were the non-government contributions.

·7· · · · · · · · MS. SOOKNANAN:· That is -- that is not

·8· ·what we have a said, your Honor.· The Commonwealth

·9· ·in October in its fiscal plan said that those

10· ·contributions of municipalities themselves was

11· ·uncertain.· That's what they wrote in their fiscal

12· ·plan and they are saying here today that they are

13· ·certain.· I mean, they are saying essentially that

14· ·all secured debt of Puerto Rico will be paid in

15· ·full.

16· · · · · · · · That's what they suggested today and

17· ·yet they repeatedly say otherwise in pages and pages

18· ·of their brief talking about how they do not have

19· ·money to pay their creditors.· They do not -- they

20· ·cannot meet their debts.· And neither the

21· ·Commonwealth nor the ERS addressed today their prior

22· ·statements that these contributions are uncertain.

23· · · · · · · · And with respect to the monthly

24· ·contributions, your Honor, it's currently

25· ·$13.9 million in payments.· Those are interest

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·1· ·payments only that go through 2020.· In 2020,

·2· ·principal payments kick in and that gets bumped up a

·3· ·significant amount.

·4· · · · · · · · I mean, at the end of the day, there

·5· ·was a hearing scheduled that we were entitled to,

·6· ·statutorily entitled to under PROMESA where we would

·7· ·have an expert testify, where the Commonwealth would

·8· ·put forth evidence on the adequate protection

·9· ·question.· And at a minimum we are entitled to that

10· ·hearing and the District Court (indecipherable).· We

11· ·cancelled the night before it was to be held and on

12· ·the same day that these stipulated facts were

13· ·submitted.

14· · · · · · · · One more brief point, the

15· ·Commonwealth -- I apologize if I'm over -- but the

16· ·Commonwealth has -- you know, in discussing what an

17· ·extraordinary case would be has said that this Court

18· ·may not be concerned because what we're dealing with

19· ·here is money and cash collateral and that can be

20· ·repaid.· And in bankruptcy cash collateral is

21· ·actually entitled to the most protection because

22· ·once it's been dissipated and spent there's nothing

23· ·left.· And all that will be left here at the end of

24· ·it, once they have dissipated and spent her money,

25· ·as they have admitted, is an unsecured claim.· That

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·1· ·is not enough.· The Constitution requires more.

·2· ·Thank you.

·3· · · · · · · · THE COURT:· After the clerk adjourns

·4· ·us I'd like Counsel to remain at the table, one or

·5· ·more of us is going to come to the well to say

·6· ·hello.· There's nothing else, I take it?· Well

·7· ·argued.· Thank you.· We'll do the best we can.

·8· · · · · · · · (Proceedings concluded.)

·9

10

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12

13

14

15

16

17

18

19

20

21

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25

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·1· ·STATE OF MICHIGAN· )

·2· · · · · · · · · · · ) SS

·3· · COUNTY OF GENESEE )

·4· · · · · · ·I, Quentina R. Snowden, do hereby state

·5· · that the foregoing document was reduced to

·6· · typewritten form by me from digital media, and

·7· · that it represents a complete, true and correct

·8· · rendition, to the best of my abilities, of the

·9· · proceedings held in this cause.

10· · · · · · ·I assume no responsibility for any

11· · inaudible portions, if any, by any speakers that

12· · are not discernible during the proceedings.

13· · · · · · ·I further certify that I am not

14· ·connected by blood, or marriage with any of the

15· ·parties; their attorneys or agents; and that I am

16· ·not interested, directly, indirectly, or

17· ·financially, in the matter of controversy.

18

19· ·Dated:· May 27, 2017

20

21· · · · · · ·________________________________

22· · · · · · ·Quentina R. Snowden, CSR-5519

23· · · · · · ·Notary Public, Genesee County, Michigan

24· · · · · · ·My commission expires: 1/4/2018

25

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