UNITED STATES DISTRICT COURT 

DISTRICT OF PUERTO RICO 

IN RE: 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO 

RICO, 

as representative of 

THE COMMONWEALTH OF PUERTO 

RICO et al., 

 Debtors.1

 

PROMESA 

Title III 

No. 17 BK 3283-LTS 

(Jointly Administered) 

THE OFFICIAL COMMITTEE OF 

UNSECURED CREDITORS OF THE 

COMMONWEALTH OF PUERTO RICO, 

as agent of 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO 

RICO, 

as representative of 

THE COMMONWEALTH OF PUERTO 

RICO, 

Plaintiff, 

 

Adv. Proc. No. 17-00257-LTS 

OBJECTION OF THE BANK OF NEW 

YORK MELLON, AS TRUSTEE, TO 

COMMONWEALTH AGENT’S URGENT 

MOTION, PURSUANT TO 

BANKRUPTCY CODE SECTION 105(A) 

AND BANKRUPTCY RULE 9019, FOR 

ORDER ESTABLISHING PROCEDURES 

GOVERNING 5.5% SUT REVENUES 

COLLECTED ON OR AFTER JULY 1, 

2018 

 

 

1

 The Debtors in these Title III Cases, along with each Debtor’s respective Title III case number listed as 

a bankruptcy case number due to software limitations and the last four (4) digits of each Debtor’s 

federal tax identification number, as applicable, are the (i) Commonwealth of Puerto Rico (Bankruptcy 

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

Financing Corporation (Bankruptcy Case No. 17 BK 3284-LTS) (Last Four Digits of Federal Tax ID: 

8474); (iii) Puerto Rico Highways and Transportation Authority (Bankruptcy Case No. 17 BK 3567-

LTS) (Last Four Digits of Federal Tax ID: 3808); (iv) Employees Retirement System of the 

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

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

17 BK 4780-LTS) (Last Four Digits of Federal Tax ID: 3747) (Title III case numbers are listed as 

Bankruptcy Case numbers due to software limitations). 

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v. 

BETTINA WHYTE, 

as agent of 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO 

RICO, 

as representative of 

THE PUERTO RICO SALES TAX 

FINANCING CORPORATION, 

Defendant. 

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TABLE OF CONTENTS 

PRELIMINARY STATEMENT .................................................................................................... 1

BACKGROUND ............................................................................................................................ 4

ARGUMENT .................................................................................................................................. 8

I. AT A MINIMUM, DUE PROCESS REQUIRES THAT ALL BENEFICIAL 

HOLDERS ARE PROVIDED ADEQUATE NOTICE AND AN 

OPPORTUNITY TO BE HEARD WITH RESPECT TO THE PROCEDURES 

MOTION............................................................................................................................. 8

II. BNYM’S RIGHTS, CLAIMS, LIENS, AND SECURITY INTERESTS UNDER 

THE RESOLUTION AND THE INTERPLEADER ORDER SHOULD NOT BE 

ALTERED. ....................................................................................................................... 11

III. THE COURT SHOULD NOT IMPOSE ANY NEW DUTIES ON BNYM 

WITHOUT ITS CONSENT. ............................................................................................ 14

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TABLE OF AUTHORITIES 

 Page(s) 

Cases 

Gonzalez-Gonzalez v. U.S., 

257 F. 3d 31 (1st Cir. 2001) .......................................................................................................8 

Noonan v. Sec’y of Health & Human Servs. (In re Ludlow Hosp. Society, Inc.), 

124 F.3d 22 (1st Cir. 1997) ......................................................................................................12 

Official Unsecured Creditors’ Comm. v. Stern (In re SPM Mfg. Corp.), 

984 F.2d 1305 (1st Cir. 1993) ..................................................................................................12 

W. Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 

43 F. 3d 714 (1st Cir. 1994) .................................................................................................8, 10 

Statutes 

11 U.S.C. § 105(a) .........................................................................................................................12 

13 P.R. Laws Ann. § 11a(b) .............................................................................................................4 

13 P.R. Laws Ann. § 12 ...................................................................................................................4 

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

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

adopted on July 13, 2007, by the Puerto Rico Sales Tax Financing Corporation (“COFINA”), 

through its undersigned counsel, hereby objects (this “Objection”) to the urgent motion [Doc. 

No. 495] (the “Procedures Motion”), filed by The Official Committee of Unsecured Creditors of 

the Commonwealth of Puerto Rico (the “Commonwealth Agent”), as agent for The Financial 

Oversight and Management Board for Puerto Rico (the “Oversight Board”), as representative of 

the Commonwealth of Puerto Rico (the “Commonwealth”), to establish procedures governing 

proceeds of the Pledged Sales Tax (as defined herein) collected on or after July 1, 2018, and in 

support hereof, respectfully states as follows:1 

PRELIMINARY STATEMENT 

1. Through this Objection, BNYM seeks: (i) to ensure that all holders of 

beneficial interests in the Bonds (the “Beneficial Holders”) whose rights may be affected by the 

proposed procedures receive adequate notice of the relief requested by the Commonwealth Agent 

and an opportunity to be heard; (ii) to protect the validity, priority, and extent of any of BNYM’s 

rights, claims, liens, and security interests under the Resolution and the Court’s interpleader 

order; and (iii) to avoid the imposition of new duties on BNYM outside of the Resolution and the 

Court’s interpleader order absent clearly defined parameters. 

2. To be clear, BNYM takes no position on the full agreement-in-principle at 

this time and in no way seeks to upset the settlement process. Further, of the three procedures 

 

1

 Capitalized terms used but not defined in this opposition have the meanings given in the Resolution or 

the Procedures Motion, as the context requires. References to Bondowners generally as a matter of 

convenience do not change the defined terms set forth in the Resolution, as addressed more fully in the 

Motion of The Bank of New York Mellon, as Trustee, for Partial Summary Judgment Pursuant to Fed. 

R. Civ. 56, No. 17-0133-LTS (D.P.R. Nov. 6, 2017), Doc. No. 435, and BNYM reserves all rights and 

claims addressed therein. 

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proposed by the Commonwealth Agent in the Procedures Motion, BNYM does not object to: 

(i) accounting separately for the Pledged Sales Tax deposited after July 1, 2018, provided that 

(a) parties-in-interest develop, and the Court’s orders clearly define, specific procedures as to 

how any investment gains should be calculated and apportioned between Pre- and Post-July 1, 

2018 Funds, and (b) BNYM is protected from liability for acting in compliance with such Court 

order; and (ii) allocating the Pledged Sales Tax deposited after July 1, 2018, to the 

Commonwealth and COFINA pursuant to a settlement agreement that is approved by the Court 

as part of a confirmed plan of adjustment. 

3. The focus of this Objection is the Commonwealth Agent’s proposed 

procedure governing the disposition of the Pledged Sales Tax deposited after July 1, 2018, in the 

event that the settlement is not finalized and approved by the Court and the Court later 

determines that the Commonwealth owns all of the Pledged Sales Tax not yet collected and 

deposited with BNYM. See Procedures Motion ¶¶ 4(c), 5. The Commonwealth Agent would 

like the Court to approve an agreement between the Agents now that, in such circumstances, the 

Court’s hypothetical future ruling would be retroactive to July 1, 2018. In effect, the deposit of 

Pledged Sales Tax with BNYM after July 1, 2018, could cease to be governed by the Resolution 

and applicable law. See id. This last procedure is referred to herein as the “Disposition 

Procedure.” 

4. The Procedures Motion suffers from two fundamental flaws as it relates to 

the Disposition Procedure. First, the Disposition Procedure may deprive BNYM and the 

Beneficial Holders of substantive property and contractual rights without giving adequate notice 

and an opportunity to be heard to all Beneficial Holders, in contravention of Beneficial Holders’ 

due process rights. Second, the Commonwealth Agent’s protestations notwithstanding, the 

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Disposition Procedure is not necessary to preserve the status quo. Funds have been interpleaded 

and are subject to disbursement only by Court order. Nothing more should be required by the 

Commonwealth Agent. 

5. These flaws easily may be remedied. As to the application of due process, 

the Court may enter an order conditionally approving the Procedures Motion subject to the 

following notice procedures: 

a. Within five (5) days of the entry of the order conditionally approving the 

Procedures Motion, BNYM shall provide written notice of the Procedures Motion 

to all Bondowners, advising them of the Court’s conditional approval of the 

Procedures Motion, the objection deadline established solely for Beneficial 

Holders that are not party to this Adversary Proceeding, and any other 

information that BNYM deems appropriate. 

b. Holders of beneficial interests in the Bonds that are not party to this Adversary 

Proceeding shall have thirty-five (35) days after entry of an order conditionally 

approving the Procedures Motion to file an objection or other responsive pleading 

in the Adversary Proceeding. Such holders are permitted to intervene in the 

Adversary Proceeding for that limited purpose without the need to file a motion 

seeking leave to intervene. 

c. If no objections are timely filed, the order conditionally approving the Procedures 

Motion will become effective as of the first day following the objection deadline 

without any further action required by the Court or the parties. If one or more 

objections are filed within the time allotted, the Court will consider them prior to 

entering a final order granting or denying the Procedures Motion. 

Further, if the Court determines that the Disposition Procedure is necessary to preserve the status 

quo and to protect the Commonwealth Agent’s existing rights, the Court should confirm that the 

status quo is, indeed, being preserved by incorporating the following language in the order: 

“Notwithstanding anything to the contrary contained in the order, nothing in the order shall alter 

or impair the validity, priority, or extent of any of BNYM’s rights, claims, liens, or security 

interests under the Resolution or the Interpleader Order.” 

6. Separately, as a condition to ordering BNYM to perform accounting 

functions beyond the scope of BNYM’s duties under the Resolution and the Interpleader Order, 

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the Court should (i) mandate clearly defined and specific procedures, to be developed by the 

parties-in-interest, governing the calculation and apportionment of investment gains as between 

Pre- and Post-July 1, 2018 Funds, and (ii) protect BNYM from liability for acting in compliance 

with such Court order. 

7. In the absence of these changes to the proposed order, the Procedures 

Motion should be denied. 

BACKGROUND 

8. The Commonwealth created COFINA as an independent governmental 

instrumentality for the purpose of financing the payment, retirement, or defeasance of 

Commonwealth debt obligations through the issuance of bonds secured by an assignment of a 

portion of the revenues generated by a tax on the sale or use of a broad range of goods and 

services. See 13 L.P.R.A. §§ 11a(b), 12. A portion of the tax (the “Pledged Sales Tax”) in each 

fiscal year is required to be deposited in a special fund owned by COFINA and maintained 

separate and apart from the Commonwealth’s general fund. See 13 L.P.R.A. § 12. COFINA’s 

enabling statute states that the Pledged Sales Tax was “transferred to, and shall be the property of 

COFINA.” Id.

9. COFINA issued multiple series of senior and subordinate sales tax 

revenue bonds (the “Bonds”) under the Resolution. See generally Resolution. Payments of 

principal and interest and other amounts due under the Resolution are secured by, among other 

things, an assignment of the Pledged Sales Tax. See id. § 501. Upon receipt, COFINA is 

required to deposit the Pledged Sales Tax with BNYM. Id. § 505.1. Amounts held by the 

Trustee under the Resolution, including the Pledged Sales Tax, are “held in trust” and “applied 

only in accordance with the provisions of the Resolution . . . .” Id. § 502.3. 

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10. On May 16, 2017, BNYM commenced an adversary proceeding (the 

“Interpleader Proceeding”) seeking interpleader and declaratory relief because certain holders of 

beneficial interests in the Bonds, insurers of the Bonds, and COFINA asserted competing claims 

to the Pledged Sales Tax held by BNYM in trust under the Resolution. See Complaint, Adv. Pro. 

No. 17-0133-LTS (D.P.R. May 16, 2017), Doc. No. 1. BNYM filed the Interpleader Proceeding 

to preserve the fund while the Court resolved the parties’ disputes. In Stage One of the 

Interpleader Proceeding, the Court recognized the parties’ competing claims, granted BNYM’s 

request to interplead the funds, and ordered BNYM to hold the funds (net of the BNYM’s fees 

and expenses) “on behalf of the party or parties ultimately determined by the Court to be 

entitled” to them. See Order Granting Interpleader, Staying Pending and Future Litigation 

Against The Bank of New York Mellon, as Trustee, Pursuant to 28 U.S.C. § 2361, and Granting 

Related Relief (the “Interpleader Order”), Adv. Pro. No. 17-0133-LTS (D.P.R. May 30, 2017), 

Doc. No. 110. 

11. On August 10, 2017, the Court entered the Stipulation and Order 

Approving Procedure to Resolve Commonwealth-COFINA Dispute (the “CommonwealthCOFINA Stipulation”), establishing procedures whereby the Agents could litigate and/or settle 

the narrow legal question of “[w]hether after considering all procedural and substantive defenses 

and counterclaims, including constitutional issues, the sales and use taxes purportedly pledged by 

COFINA to secure debt are property of the Commonwealth or COFINA under applicable law” 

(the “Commonwealth-COFINA Dispute”). See No. 17 BK 3283-LTS (D.P.R. Aug. 10, 2017), 

Doc. No. 996. 

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12. On September 8, 2017, the Commonwealth Agent commenced this 

Adversary Proceeding to litigate the Commonwealth-COFINA Dispute. See Complaint, Adv. 

Pro. No. 17-0257-LTS (D.P.R. Sept. 8, 2017), Doc. No. 1. 

13. On June 7, 2018, the Agents announced an agreement-in-principle that 

may resolve the Commonwealth-COFINA Dispute if all conditions precedent are satisfied, the 

Agents reach a final settlement agreement, and that agreement is approved by the Court as part 

of a confirmed plan of adjustment submitted by COFINA. See Joint Informative Motion of 

Commonwealth Agent and COFINA Agent Disclosing Agreement in Principle, Adv. Pro. No. 17-

0257-LTS (D.P.R. June 7, 2018), Doc. No. 486. 

14. At the Agents’ request, the Court entered an order holding any rulings on 

the pending summary judgment motions in this Adversary Proceeding in abeyance for a period 

of sixty days to allow the Agents to finalize a settlement agreement. See Order Holding 

Decisions on Motions for Summary Judgment in Abeyance for 60-Day Period, Adv. Pro. No. 17-

0257-LTS (D.P.R. June 11, 2018), Doc. No. 492. 

15. The Commonwealth Agent filed the Procedures Motion to “establish[] 

procedures” governing the Pledged Sales Tax collected on or after July 1, 2018, “pending 

implementation of the Commonwealth-COFINA settlement.” See Procedures Motion ¶ 1. If 

granted, the Procedures Motion would subject the deposit of any Pledged Sales Tax collected on 

or after July 1, 2018, with BNYM to the following conditions: 

(a) BONY would separately account for (i) all 5.5% SUT 

revenues currently in BONY accounts or received on or 

before June 30, 2018 (the “Pre-July 1 2018 Funds”) and 

(ii) all 5.5% SUT revenues received by BONY on or after 

July 1, 2018 (the “Post-July 1, 2018 Funds”), so as to 

ensure that the two pools of funds (and proceeds from 

investment of such funds) are clearly identifiable; 

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(b) Upon the effective date of the settlement, the Post-July 1, 

2018 Funds shall be allocated to the Commonwealth and 

COFINA in accordance with the PSTBA shares set forth in 

the settlement agreement (i.e., 53.65% for COFINA, which 

would be the first dollars of the 5.5% SUT, and 46.35% for 

the Commonwealth); and 

(c) In the event that either (x) the Agents do not execute a 

settlement agreement by August 4, 2018 or (y) the effective 

date of COFINA’s Title III plan of adjustment approving 

and incorporating the settlement does not occur within 200 

days after execution of the settlement agreement (as such 

deadlines may be extended pursuant to the terms of the 

Agreement in Principle), then the court’s eventual ruling on 

the ownership of the 5.5% SUT not yet collected by the 

Commonwealth (as of June 30, 2018) shall govern the 

disposition of the Post-July 1, 2018 Funds (it being 

understood that neither Agent is waiving any appellate 

rights with respect to such determination). 

Procedures Motion ¶ 4. 

16. As noted above, BNYM does not object to the first procedure, providing a 

separate accounting for the Post-July 1, 2018 Funds, as long as the parties are not asking the 

Court to impose any new duties, such as an undertaking to perform a complicated calculation and 

accounting for investment gains attributable to Pre- and Post-July 1, 2018 Funds, without clearly 

defined instructions. The current proposal should be revised to address allocation of investment 

gains between the two pools of funds. BNYM also does not object to the second procedure, 

allocating the Post-July 1, 2018 Funds pursuant to a settlement agreement if approved by the 

Court as part of a confirmed plan of adjustment. BNYM’s objection focuses solely on the third 

proposed procedure—the Disposition Procedure. 

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ARGUMENT 

I. AT A MINIMUM, DUE PROCESS REQUIRES THAT ALL BENEFICIAL 

HOLDERS ARE PROVIDED ADEQUATE NOTICE AND AN OPPORTUNITY 

TO BE HEARD WITH RESPECT TO THE PROCEDURES MOTION. 

17. The Commonwealth Agent wants the Court to enter an order now that, if

the agreement-in-principle is not finalized and approved, and the Court later determines that the 

Commonwealth owns all of the Pledged Sales Tax not yet collected and deposited with BNYM, 

such hypothetical future ruling would be retroactive to July 1, 2018, notwithstanding that BNYM 

already would be holding Post-July 1, 2018 Funds in trust pursuant to the terms of the 

Resolution. See Procedures Motion ¶ 4(c). The Commonwealth Agent’s proposed order, if 

entered, would function as an implicit pre-determination of one discrete issue within the larger 

Commonwealth-COFINA Dispute, alter the status quo, and may directly affect BNYM’s and the 

Beneficial Holders’ interests in those funds.2 At a minimum, such relief should not be granted 

without due process—adequate notice and an opportunity to be heard—being given to all 

Beneficial Holders whose rights and interests may be affected. 

18. Due process requires that adequate notice and an opportunity to be heard 

be given to any entity whose pecuniary interests might be directly and adversary impacted by a 

proposed action. See Gonzalez-Gonzalez v. U.S., 257 F. 3d 31 (1st Cir. 2001); see also W. Auto 

Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F. 3d 714, 720 (1st Cir. 1994) 

(recognizing that parties-in-interest “encompasses not only entities holding ‘claims’ against the 

debtor, but any entity whose pecuniary interests might be directly and adversely affected by the 

proposed action.”). 

 

2

 In that sense, the requested relief is akin to an advisory opinion—relief requested that amounts to an 

abstract declaration of the parties’ respective relationships to the Post-July 1, 2018 Funds without 

application of the relief to resolve any current concrete dispute. See Opinion and Order Granting 

Motion to Dismiss, Adv. Pro. No. 17-0189-LTS (D.P.R. Jan. 30, 2018), Doc. No. 124. 

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19. Possession of the Pledged Sales Tax has legal significance under the 

Resolution. As examples: (i) funds on deposit with BNYM shall be applied only in accordance 

with the Resolution and applicable law, see Resolution § 502.3; (ii) the amounts held by BNYM 

for payment due on any date with respect to particular Bonds “shall, on and after such date and 

pending such payment, be set aside on its books and held in trust by it for the Owners of such 

Bonds,” id. § 1203; (iii) BNYM has payment priority rights with respect to its fees, expenses, 

and indemnification claims, see id. § 1103.1; and (iv) BNYM has a lien prior to that of the 

Bondowners on any and all funds at any time held by it under the Resolution, see id. § 804. If 

the Disposition Procedure is imposed, but the settlement ultimately is not consummated, BNYM 

and the Beneficial Holders may be deprived of these and all other legal rights that attend 

possession of the Post-July 1, 2018 Funds. In these circumstances, due process rights must be 

afforded to all Beneficial Holders whose interests might be affected by the relief requested. 

20. The need for due process is highlighted by the procedures governing the 

effectiveness of settlements in the Commonwealth-COFINA Stipulation. If the Agents reach an 

agreement, the Commonwealth-COFINA Stipulation provides that “[s]uch settlement shall only 

be effective upon . . . , with respect to COFINA, confirmation of a title III plan of adjustment in 

the COFINA title III case incorporating such settlement pursuant to a Final Order, and which 

plan has become effective . . . .” Commonwealth-COFINA Stipulation ¶ 4.i. The 

Commonwealth-COFINA Stipulation conditions the effectiveness of agreements between the 

Agents on confirmation of a plan of adjustment, inter alia, to prevent the Agents from modifying 

creditors’ legal and contractual rights and interests in property unilaterally without proper notice 

and an opportunity to be heard. 

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21. Despite this recognition of Beneficial Holders’ due process rights, the 

Commonwealth Agent seeks to implement “one critical and time-sensitive component of the 

agreement in principle” outside the Court-approved protocol through a motion filed in this 

Adversary Proceeding. See Procedures Motion ¶ 1. Although the Commonwealth Agent 

characterizes this component of the agreement as merely procedural in nature, the requested 

relief may fundamentally alter the characterization of Post-July 1, 2018 Funds to the detriment of 

BNYM and the Beneficial Holders. The Commonwealth Agent wants the Court to treat the PostJuly 1, 2018 Funds as if they were not deposited with BNYM, which arguably has the same 

effect as cutting off the flow of Pledged Sales Tax entirely. 

22. A large percentage of Beneficial Holders is not a party to this Adversary 

Proceeding and/or not represented at all in connection with this title III proceeding. Non-party 

Beneficial Holders have not received adequate notice of the proposed settlement among the 

Agents. Before the Agents negotiate away others’ interests in property, the CommonwealthCOFINA Stipulation and due process demand that such Beneficial Holders have adequate notice 

and an opportunity to be heard. See W. Auto Supply Co. v. Savage Arms, Inc. (In re Savage 

Indus., Inc.), 43 F.3d at 720 (explaining that “the debtor in possession or trustee must ensure 

‘parties in interest’ adequate notice and opportunity to be heard before their interests may be 

adversely affected” because “[n]otice is the cornerstone underpinning Bankruptcy Code 

procedure.”). The Court should not create an exception to its settlement protocol or permit the 

Commonwealth Agent to ignore the Beneficial Holders’ due process rights as a matter of 

convenience. 

23. To remedy the due process defects of the Procedures Motion, BNYM 

requests that the Court deny the Procedures Motion unless the following (or substantially 

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similar) notice procedures are incorporated as part of an order conditionally approving the 

Procedures Motion. 

a. Within five (5) days of the entry of the order conditionally approving the 

Procedures Motion, BNYM shall provide written notice of the Procedures Motion 

to all Bondowners, advising them of the Court’s conditional approval of the 

Procedures Motion, the objection deadline established solely for Beneficial 

Holders that are not party to this Adversary Proceeding, and any other 

information that BNYM deems appropriate. 

b. Holders of beneficial interests in the Bonds that are not party to this Adversary 

Proceeding shall have thirty-five (35) days after entry of an order conditionally 

approving the Procedures Motion to file an objection or other responsive pleading 

in the Adversary Proceeding. Such holders are permitted to intervene in the 

Adversary Proceeding for that limited purpose without the need to file a motion 

seeking leave to intervene. 

c. If no objections are timely filed, the order conditionally approving the Procedures 

Motion will become effective as of the first day following the objection deadline 

without any further action required by the Court or the parties. If one or more 

objections are filed within the time allotted, the Court will consider them prior to 

entering a final order granting or denying the Procedures Motion. 

II. BNYM’S RIGHTS, CLAIMS, LIENS, AND SECURITY INTERESTS UNDER 

THE RESOLUTION AND THE INTERPLEADER ORDER SHOULD NOT BE 

ALTERED. 

24. The Commonwealth Agent ostensibly filed the Procedures Motion in 

order to “preserv[e] the status quo of the Commonwealth’s and COFINA’s respective rights to” 

the Pledged Sales Tax. See Procedures Motion ¶ 1. The Ad Hoc Group of General Obligation 

Bondholders observed that “the relief requested in the Motion is unnecessary because the goal of 

preserving the status quo already has been achieved through the Court’s prior holdings with 

respect to the interpleaded funds held by [BNYM].” See Doc. No. 500. BNYM agrees. 

25. BNYM commenced the Interpleader Proceeding to resolve conflicting 

claims to the Pledged Sales Tax in its possession by certain holders of beneficial interests in the 

Bonds, insurers of the Bonds, and COFINA. Recognizing the existence of such competing 

claims, the Court ordered BNYM to interplead deposits of the Pledged Sales Tax “until entry of 

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a final order of this Court directing the timing and manner of the disbursement of such funds.” 

Interpleader Order ¶ 3. Pursuant to the Interpleader Order, BNYM must “hold the entirety of the 

[interpleaded funds] in the existing accounts into which they have been deposited, on behalf of 

the party or parties ultimately determined by the Court to be entitled” to such funds. Id.

26. The Disposition Procedure is not necessary to protect whatever interest the 

Commonwealth Agent may have in the Post-July 1, 2018 Funds because those funds have been 

interpleaded and are subject to disbursement only by Court order. No additional procedures are 

necessary. If the Court determines that the Procedures Motion should be granted, it should 

confirm that the status quo is, indeed, being preserved by providing expressly that nothing in the 

order alters the validity, priority, or extent of any of BNYM’s rights, claims, liens, or security 

interests under the Resolution or the Interpleader Order. 

27. In support of the Procedures Motion, the Commonwealth Agent cites 

section 105(a) of the Bankruptcy Code, providing that “[t]he court may issue any order . . . that is 

necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). On the 

facts of this case, however, the Disposition Procedure is not “necessary” (or appropriate) to carry 

out the provisions of title III or to avoid any potential unfair advantage for COFINA if the 

settlement fails. See Official Unsecured Creditors’ Comm. v. Stern (In re SPM Mfg. Corp.), 984 

F.2d 1305, 1311 (1st Cir. 1993) (“Nor does section 105(a) authorize courts to create substantive 

rights that are otherwise unavailable under the Code, or to expand the contractual obligations of 

parties”); see also Noonan v. Sec’y of Health & Human Servs. (In re Ludlow Hosp. Society, Inc.), 

124 F.3d 22, 28 (1st Cir. 1997) (“But since section 105 itself is not a source of new substantive 

rights, the bankruptcy court may invoke section 105(a) only if the equitable remedy utilized is 

demonstrably necessary to preserve a right elsewhere provided in the Code.”). 

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28. Far from being necessary to preserve the status quo, the Disposition 

Procedure appears to fundamentally alter the status quo. If the Agents’ proposal were accepted, 

it would be the Commonwealth Agent’s legal position that could be enhanced and to whom the 

unfair advantage would run. If the agreement-in-principle is not finalized and approved by the 

Court, funds that otherwise would be deposited with BNYM after July 1, 2018, and held by 

BNYM in trust for the benefit of Bondowners (and Beneficial Holders) under the terms of the 

Resolution would be recharacterized automatically as “future” Pledged Sales Tax as if those 

funds were not held by BNYM and possession of the funds in trust had no legal significance. By 

contrast, maintaining the status quo under the Interpleader Order would not “improve” 

COFINA’s position or result in an “unfair advantage” for COFINA; it would preserve (not 

enhance or diminish) BNYM’s and the Bondowners’ existing legal and contractual rights. 

29. The Disposition Procedure is not necessary to preserve whatever interest 

the Commonwealth currently may have in the Post-July 1, 2018 Funds. The Commonwealth 

Agent has taken the position that the Commonwealth owns the Pledged Sales Tax, regardless of 

whether the proceeds of such tax have been deposited with BNYM under the Resolution. See

Commonwealth Agent’s Motion for Summary Judgment and Incorporated Memorandum of Law, 

Adv. Pro. No. 17-0257-LTS (D.P.R. Feb. 21, 2018) Doc. No. 322 (arguing that the Pledged Sales 

Tax, “including all SUT revenues currently on deposit at BONY and any future SUT revenues,” 

are the Commonwealth’s property). 

30. If the Commonwealth Agent is correct, the Interpleader Order is sufficient 

to protect the Commonwealth in the event that the agreement-in-principle is not finalized and 

approved because it prevents BNYM from distributing the Pledged Sales Tax in the absence of a 

Court order. See Interpleader Order ¶ 2. If the Commonwealth Agent is incorrect, the 

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Exhibit B Page 17 of 20
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Commonwealth Agent would not be harmed or prejudiced by maintaining the equilibrium 

established by the Interpleader Order. In these circumstances, the Commonwealth currently has 

no interest in funds once they are deposited with BNYM and would continue to have no interest 

in funds deposited with BNYM. The Commonwealth Agent should not be able to expand its 

rights and diminish non-parties’ rights in property solely because it has reached a preliminary 

agreement-in-principle with the COFINA Agent—an agreement that is subject to numerous 

conditions precedent and may never be finalized or approved. 

31. Because the procedures are not “necessary or appropriate” within the 

context of section 105(a) of the Bankruptcy Code, BNYM requests that the Court deny the 

Procedures Motion unless the following (or substantially similar) language is incorporated into 

the order, thereby confirming that the status quo actually is being preserved and that nothing in 

the order affects BNYM’s rights: “Notwithstanding anything to the contrary contained in the 

order, nothing in the order shall alter or impair the validity, priority, or extent of any of BNYM’s 

rights, claims, liens, or security interests under the Resolution or the Interpleader Order.”3

III. THE COURT SHOULD NOT IMPOSE ANY NEW DUTIES ON BNYM 

WITHOUT ITS CONSENT. 

32. Under the Interpleader Order, BNYM has a duty to hold the Pledged Sales 

Tax deposited with BNYM “in the existing accounts into which they have been deposited” and 

to invest such funds and “apply the investment gains in accordance with the terms of the 

Resolution.” Interpleader Order ¶ 3. As part of this process, BNYM has issued monthly notices 

to Bondowners since the commencement of the Interpleader Proceeding regarding the updated 

market value of each debt service account into which the Pledged Sales Tax is deposited as of 

the first day of each month. BNYM also internally tracks the amount of Pledged Sales Tax 

 

3

 AAFAF is seeking a similar reservation of rights in the proposed order. See Doc. No. 501. 

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Exhibit B Page 18 of 20
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deposited with BNYM on a daily basis in the ordinary course of business. Accordingly, it is not 

burdensome or objectionable for BNYM to provide a separate accounting of the Pledged Sales 

Tax deposited with BNYM after July 1, 2018. 

33. Separately accounting for investment gains on Post-July 1, 2018 Funds, 

however, is burdensome and complicated and could subject BNYM to second-guessing and 

unnecessary liability in the event that any party disagrees with BNYM’s calculations. As a 

condition to ordering BNYM to perform accounting functions beyond the scope of BNYM’s 

duties under the Resolution and the Interpleader Order, the Court should (i) mandate clearly 

defined and specific procedures, to be developed by the parties-in-interest, governing the 

calculation and apportionment of investment gains as between Pre- and Post-July 1, 2018 Funds, 

and (ii) protect BNYM from liability for acting in compliance with such Court order. 

WHEREFORE, BNYM respectfully requests that the Court enter an order 

sustaining this Objection, denying the Procedures Motion, and granting such other and further 

relief in favor of BNYM as may be just and proper. 

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

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Exhibit B Page 19 of 20
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Dated: June 20, 2018 Respectfully submitted, 

 San Juan, Puerto Rico 

SEPULVADO, MALDONADO & COURET 

By: /s/ Albéniz Couret-Fuentes 

Elaine Maldonado-Matías 

USDC-PR Bar No. 217309 

Albéniz Couret-Fuentes 

USDC-PR Bar No. 222207 

José Javier Santos Mimoso 

USDC-PR Bar No. 208207 

304 Ponce de León Ave. – Suite 990 

San Juan, PR 00918 

Telephone: (787) 765-5656 

Facsimile: (787) 294-0073 

Email: emaldonado@smclawpr.com 

Email: acouret@smclawpr.com 

Email: jsantos@smclawpr.com 

REED SMITH LLP 

/s/ Eric A. Schaffer 

Eric A. Schaffer 

Luke A. Sizemore 

225 Fifth Avenue, Suite 1200 

Pittsburgh, PA 15222 

Telephone: (412) 288-3131 

Facsimile: (412) 288-3063 

Email: eschaffer@reedsmith.com 

Email: lsizemore@reedsmith.com 

Kurt F. Gwynne 

1201 N. Market Street, Suite 1500 

Wilmington, DE 19801 

Telephone: (302) 778-7550 

Facsimile: (302) 778-7575 

Email: kgwynne@reedsmith.com 

Counsel to The Bank of New York Mellon, 

as indenture trustee

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Exhibit B Page 20 of 20