Hearing Date: June 28, 2017 at 9:30 a.m. (Prevailing Eastern Time)

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

In re:

The Financial Oversight and Management Board for 

Puerto Rico, 

as representative of

The Commonwealth of Puerto Rico and

Puerto Rico Sales Tax Financing Corporation 

(“COFINA”),

Debtors.

PROMESA

Title III

No. 17 BK 3283-LTS

No. 17 BK 3284-LTS

(Jointly Administered)1

OBJECTION OF MUTUAL FUND GROUP AND

THE PUERTO RICO FUNDS TO DEBTORS’

MOTION FOR ORDER APPROVING PROCEDURE

TO RESOLVE COMMONWEALTH-COFINA DISPUTE

 

1 Pursuant to Paragraph 5 of the Joint Administration Order entered in lead Case No. 17 BK 3283-LTS [ECF No. 242], 

this pleading will be filed in both the lead Case No. 17 BK 3283-LTS and in Case No. 17 BK 3284-LTS.

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TABLE OF CONTENTS

Page

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

BACKGROUND...................................................................................................................................2

ARGUMENT.......................................................................................................................................6

I. PROMESA Does Not Authorize an “Agent” To Take Control of Collateral in 

Which the Bondholders Have the Overwhelming Economic Interest.................................6

II. The Proposed Order Orchestrates a Collusive Litigation and Settlement Process 

That Violates Article III and the Due Process Clauses of the United States 

Constitution and Deprives Objectors of Adequate Protection of Their Collateral ..............8

A. Collusive Litigation Violates Article III. .................................................................8

B. The Proposed Order’s Settlement Procedures Violate Rule 9019 and Deny 

Due Process..............................................................................................................9

C. The Proposed Order Strips Collateral and Denies Adequate Protection ...............10

D. The Proposed Order Violates the Federal Rules of Civil Procedure .....................11

E. The Litigation Schedule Prejudices COFINA .......................................................12

III. The Proposed Order Improperly Requires this Court to Determine a Controlling 

Issue of Law Under the Puerto Rico Constitution .............................................................13

CONCLUSION...................................................................................................................................15

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TABLE OF AUTHORITIES

Page(s)

Cases

In re Adelphia Commc’ns Corp.,

336 B.R. 610 (Bankr. S.D.N.Y. 2006).......................................................................................7

Armstrong v. United States,

364 U.S. 40 (1960)...................................................................................................................14

Craig v. McCarty Ranch Trust (In re Cassidy Land & Cattle Co.),

836 F.2d 1130 (8th Cir. 1988) ...................................................................................................7

Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp.,

1991 Del. Ch. LEXIS 215 (Del Ch. 1991)...............................................................................10

In re Emerging Communications,

2007 Bankr. LEXIS 4763 (Bankr. D. V.I. Feb. 13, 2007).........................................................7

Lex Claims, LLC v. Financial Oversight and Management Board,

853 F.3d 548 (1st Cir. 2017)......................................................................................................4

Lex Claims, LLC v. Garcia-Padilla,

2017 WL 657432 (D. P.R. Feb. 17, 2017)...............................................................................12

Louisville Bank v. Radford,

295 U.S. 555 (1935).................................................................................................................14

Murray v. United States,

817 F.2d 1580 (Fed. Cir. 1987)................................................................................................14

Protective Committee for Independent Shareholders of TMT Trailer Ferry, Inc. v. 

Anderson,

390 U.S 414 (1968)..................................................................................................................10

Romero v. Colegio de Abogados de Puerto Rico,

204 F.3d 291 (1st Cir. 2000)....................................................................................................15

Rudin v. Tax Comm’n (In re Olympia & York Maiden Lane Co., LLC),

233 B.R. 662 (Bankr. S.D.N.Y. 1999).......................................................................................7

Santana v. Calderon,

342 F.3d 18 (1st Cir. 2003)......................................................................................................15

United States v. Johnson,

319 U.S. 302 (1943)...................................................................................................................9

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United States v. Sec. Indus. Bank,

459 U.S. 70 (1982)...................................................................................................................14

Statutes

11 U.S.C. § 105............................................................................................................................6, 7

11 U.S.C. § 552(a) .........................................................................................................................14

11 U.S.C. § 928(b).........................................................................................................................14

48 U.S.C. § 2124(b).........................................................................................................................8

Act of July 5, 2007, No.56-2007......................................................................................................3

Act of May 13, 2006, No. 91-2006..................................................................................................3

Other Authorities

H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 316 (1977)................................................................7

S. Rep. No. 95-989, 95th Cong., 2d. Sess. 29 (1978)......................................................................7

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The Mutual Fund Group2

and the Puerto Rico Funds3(“Objectors”), who collectively hold 

over $4 billion in COFINA senior and subordinate bonds, object to the Debtors’ Motion for Order 

Approving Procedure to Resolve Commonwealth-COFINA Dispute (the “Protocol Motion”) 

[Dkt. No. 303], filed by the Financial Oversight and Management Board for Puerto Rico (the 

“Oversight Board”), and in support of their objection respectfully state as follows: 

PRELIMINARY STATEMENT

The Court should deny the Protocol Motion. The Oversight Board seeks – without any 

legal authority – to wrest control over the Commonwealth-COFINA Dispute4through entry of an 

order (the “Proposed Order”) that would exceed the bounds of PROMESA and violate the United 

States Constitution. 

The Proposed Order would appoint an agent to enforce COFINA’s right to pledged 

revenues in which COFINA itself has only minimal equity – the agent would act as a receiver. 

There is no authority for such appointment. 

The Proposed Order provides for a collusive litigation between the Oversight Board’s own 

agents, on the Oversight Board’s own schedule, with the Oversight Board retaining the power to 

settle, in violation of Article III of the United States Constitution. 

 

2 The Mutual Fund Group consists of mutual funds managed by Oppenheimer Funds, Inc., Franklin Advisers, Inc., 

and the First Puerto Rico Family of Funds.

3 The Puerto Rico Funds are the following Puerto Rico-based funds: Puerto Rico AAA Portfolio Bond Fund II, Inc.; 

Puerto Rico AAA Portfolio Bond Fund, Inc.; Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; Puerto Rico 

Fixed Income Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico Fixed Income Fund III, Inc.; Puerto 

Rico Fixed Income Fund IV, Inc.; Puerto Rico Fixed Income Fund V, Inc.; Puerto Rico Fixed Income Fund VI, Inc.; 

Puerto Rico GNMA & U.S. Government Target Maturity Fund, Inc.; Puerto Rico Investors Bond Fund I; Puerto Rico 

Investors Tax-Free Fund, Inc.; Puerto Rico Investors Tax-Free Fund, Inc. II; Puerto Rico Investors Tax-Free Fund III, 

Inc.; Puerto Rico Investors Tax-Free Fund IV, Inc.; Puerto Rico Investors Tax-Free Fund V, Inc.; Puerto Rico 

Investors Tax-Free Fund VI, Inc.; Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Inc.; Tax-Free 

Puerto Rico Fund, Inc.; Tax-Free Puerto Rico Fund II, Inc.; Tax-Free Puerto Rico Target Maturity Fund, Inc.; and 

UBS IRA Select Growth & Income Puerto Rico Fund.

4 Capitalized terms used but not defined herein have the meanings ascribed to them in the Protocol Motion.

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The Proposed Order imposes an untenable litigation schedule, prejudicing COFINA in the 

enforcement of its rights and denying bondholders adequate protection of their collateral. 

The Proposed Order authorizes compromise of bondholder collateral without even a 

hearing – denying bondholders both adequate protection and due process. 

Finally, the Proposed Order contemplates determination by this federal Court of an 

unprecedented issue of law under Puerto Rico’s Constitution – contrary to the practice of the U.S. 

Court of Appeals for the First Circuit and unjustifiable given the pendency of motions to certify 

the issue to the Puerto Rico Supreme Court in the Lex Claims litigation. 

Puerto Rico law is the lynchpin. Under the United States Constitution, federal law cannot 

deprive COFINA and its bondholders of property interests that are valid under Puerto Rico law. 

If, under Puerto Rico law, COFINA owns the revenues it pledged to its bonds, PROMESA is 

powerless to take the revenues away. The only issue in this dispute is whether Puerto Rico statutes 

transferring revenues to COFINA and securing its bonds are valid under Puerto Rico’s Constitution 

– an unprecedented issue that can only be decided definitively by the Puerto Rico Supreme Court, 

and can be so decided prior to November 1.

BACKGROUND

The Objectors are mutual funds and long-time holders of COFINA senior and subordinate 

bonds (the “Senior Bonds” and “Subordinate Bonds” and together the “COFINA Bonds” and 

the holders of such bonds, the “COFINA Bondholders”) that manage investments on behalf of 

hundreds of thousands of individual shareholders residing in Puerto Rico and in virtually every 

state. Objectors comprise the largest known group of COFINA creditors.

The Commonwealth established COFINA a decade ago, enacting legislation that 

transferred a portion of its sales and use tax revenues (“SUT”) to COFINA and pledged the SUT 

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to secure COFINA Bonds. See generally Act of May 13, 2006, No. 91-2006 (codified as amended 

at P.R. Laws Ann. tit. 13, §§ 11a et seq.); Act of July 5, 2007, No. 56-2007. COFINA issued over 

$17 billion of senior and subordinate bonds secured by a pledge of the SUT.

The vast majority of the SUT received by COFINA in any year is used to pay debt service 

on COFINA Bonds – in the coming fiscal year, COFINA’s expected SUT totals $753,074,280.35, 

covering debt service of $708,429,290.80 (after $3,905,920.95 of net subsidies).5 Thus the 

COFINA Bonds have, through the pledge of the SUT, the overwhelming economic interest in the 

SUT.

COFINA Bonds were rated higher and sold at lower interest rates than other 

Commonwealth debt. They were widely purchased by major institutional holders such as the 

Mutual Fund Group (who have held COFINA Bonds for years) and many thousands of residents 

of Puerto Rico.6 The COFINA Bonds are governed by an Amended and Restated Sales Tax Bond 

Resolution, as amended on June 10, 2009 (as amended, the “Resolution”). 

The Lex Claims Litigation

In 2016, holders of general obligation bonds (“GOs”) led by Lex Claims LLC sued for a 

declaratory judgment that SUT transferred by statute to COFINA and pledged to COFINA 

bondholders a decade ago are, nevertheless, “available resources” for the Commonwealth’s current 

and future budgets. Therefore (they argued) COFINA’s SUT was actually dedicated to the prior 

payment of GOs under Article VI, Section 8 of Puerto Rico’s Constitution. See generally Lex 

 

5 Financial information is available on COFINA’s website at http://www.bgfpr.com/investors_resources/cofina.html.

6 Bondcom, the firm hired by the Government Development Bank to compile a database of holders of Puerto Rico 

bonds, estimates that 50% of all Puerto Rico bonds are held by individuals: “The miracle of Puerto Rico is the 

enormous quantity of people that have invested and are Puerto Ricans.” Joel Cintrón Arbasetti & Carla Minet, The 

GDB Already Knows Who the Bondholders Are but Holds on to The Information, (Oct. 28, 2015), available at

http://periodismoinvestigativo.com/2015/10/the-gdb-already-knows-who-the-bondholders-are-but-holds-on-to-theinformation.

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Claims, LLC v. Alejandro Garcia Padilla, et al., No. 16-023744 (FAB) (D. P.R. 2016) (the “Lex 

Claims Litigation”). 

Lex Claims’ novel theory flies in the face of opinions by senior legal officers of both New 

Progressive Party of Puerto Rico and Popular Democratic Party administrations, as well as by two 

outside legal counsel that likewise opined that the COFINA transfers were valid and noted that 

COFINA-like structures were in wide use in other jurisdictions, including New York, which has a 

constitutional provision similar to that of Puerto Rico.7 See N.Y. Const. art. VIII, § 2.

Nevertheless, issue was joined before Judge Besosa in the U.S. District Court for the 

District of Puerto Rico. The Lex Claims plaintiffs named COFINA and COFINA’s trustee, Bank 

of New York Mellon, as defendants. Numerous COFINA bondholders, including Objectors, 

sought and were granted leave to intervene on the grounds that none of the putative defendants –

not the Trustee and not COFINA – were adequate representatives of the senior and junior COFINA 

bonds. Certain intervenors filed motions to dismiss. The Mutual Fund Group filed an answer and 

motion for judgment on the pleadings. [Lex Claims Dkt. Nos. 224, 225.] The Puerto Rico Funds 

filed a motion to certify the controlling issues of Puerto Rico law to the Puerto Rico Supreme 

Court, as did Ambac and the COFINA Senior Coalition (the “Certification Motions”) [Lex Claim 

Dkt. Nos. 221, 223, 232]. 

The U.S. Court of Appeals for the First Circuit stayed the Lex Claims Litigation under 

PROMESA § 405, Lex Claims, LLC v. Financial Oversight and Management Board, 853 F.3d 548 

(1st Cir. 2017), and it remains stayed under Title III’s automatic stay. The Objectors have moved 

 

7

In 2013, 425 state and local governments issued bonds secured by sales tax or similar revenues. See Moody’s 

Investors Service, “Rating Methodology: US Public Finance Special Tax Methodology,” at 4 (Jan. 31, 2014).

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for relief from the stay to prosecute the Certification Motions. [Case No. 17-BK-03283, Dkt. No. 

270; Case No. 17-BK-03284, Dkt. No. 139.]

The Commonwealth’s Alleged Cash

Needs and the November 1 Deadline

On April 29, 2017, Puerto Rico enacted the Fiscal Plan Compliance Law; chapters 4 and 6 

were perceived as authorizing the Commonwealth’s expropriation of funds from COFINA’s 

account. Governor Rossello later clarified that chapter 4 did not apply to COFINA and the 

Commonwealth has taken no action under chapter 6. See Explanatory Statement by the Governor 

of Puerto Rico when Signing House Bill 938, Gov. Ricardo Roselló Nevares (Apr. 29, 2017).

However, the Fiscal Plan certified by the Oversight Board contemplates the 

Commonwealth’s expropriation of all COFINA SUT because the Oversight Board announced in 

January 2017 – before it had an executive director, staff or an office and after a mere two months’ 

work by its professionals – that the Commonwealth had only $780 million in cash flow available 

for debt service. Notwithstanding the Oversight Board’s protestations to the contrary, it is not 

clear that the Commonwealth will need COFINA’s SUT to fund its necessary expenses either in 

the coming fiscal year or in the future.8

On May 17, counsel to the Oversight Board and to AAFAF represented to the Court that 

the Commonwealth would not seek to expropriate COFINA’s funds except on 30 days’ prior 

notice. See May 17, 2017 Hearing Transcript at 70:15-21, 73:23-74:3, 78:22-79:2. The Protocol 

Motion represents that the Commonwealth will need COFINA’s SUT by November 1, although 

 

8 The $780 million estimate appears to be a manufactured number, because it is based on deduction of a budgetary 

“reserve” of approximately $600 million a year and the pre-funding of future pension benefits and capital expenditures 

that are, by law, junior to debt service.

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that may be a deadline manufactured by voluntary pre-payments9and belied by an $800 million 

increase in cash on hand as of June 30, 201710– an increase exceeding the total amount of 

COFINA’s SUT in the coming fiscal year. Nevertheless, the Oversight Board justifies its Proposed 

Order by arguing that it will deliver a final judgment or settlement by November 1.

ARGUMENT

I. PROMESA Does Not Authorize an “Agent” To Take Control of Collateral in Which 

the Bondholders Have the Overwhelming Economic Interest

COFINA’s SUT is pledged to secure over $17 billion of bonds – thus it is the COFINA 

bondholders, not COFINA, that hold the overwhelming economic interest in the CommonwealthCOFINA Dispute, and it is the COFINA bondholders, not COFINA, that should dictate litigation 

strategy. The bondholders have already intervened to protect their economic interest in the Lex 

Claims litigation. The Proposed Order takes the prosecution of the Commonwealth-COFINA 

Dispute away from bondholders who are the real parties in interest and gives it to an “agent” for a 

debtor with only a marginal stake. Doing so prejudices the bonds and constitutes a denial of 

adequate protection.

The Oversight Board argues that section 105(a) of title 11 of the United States Code (the 

“Bankruptcy Code”) and PROMESA section 104(b) authorize the appointment of an agent to 

prosecute COFINA’s rights against the Commonwealth that are pledged to bondholders. Neither 

provision contains such authority, which would contradict section 105(b)’s flat prohibition on the 

appointment of a receiver:

 

9 The Commonwealth’s June 12, 2017 Treasury Single Account (“TSA”) Cash Flow Report shows $373 million in 

outstanding accounts payable, down from $1.6 billion as of June 2016 (reported in the Commonwealth’s Financial 

Report) and $2 billion in June 2015. The Fiscal Plan provides for the General Fund to spend $537 million as “extra 

pension contribution” – i.e., pension payments not required to pay current benefits. The 2018 budget projects capital 

expenditures increasing from $895.2 million in FYE 2017 to $1.2 billion in FYE 2018.

10 The Commonwealth’s Fiscal Plan projected $295 million of cash on hand as of June 30, 2017; the TSA report 

released on June 12, 2017 shows projected cash on hand at $1.15 billion.

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(b) Notwithstanding subsection (a) of this section, a court may not appoint 

a receiver in a case under this title.

11 U.S.C. § 105(b); see also H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 316 (1977); S. Rep. No. 

95-989, 95th Cong., 2d. Sess. 29 (1978) (“[T]he bankruptcy judge is prohibited from appointing a 

receiver in a case under title 11 under any circumstances.”).

The COFINA agent would be a receiver appointed solely by authority of PROMESA, 

which incorporates Bankruptcy Code section 105(b) and thus specifically precludes the 

appointment of a receiver.

11

The relief sought by the Oversight Board could also be likened to parties seeking the 

appointment of a “non-statutory fiduciary” in chapter 11 cases – which has been rejected. See In 

re Emerging Communications, 2007 Bankr. LEXIS 4763 at *17-19 (Bankr. D. V.I. Feb. 13, 2007); 

In re Adelphia Commc’ns Corp., 336 B.R. 610, 664 (Bankr. S.D.N.Y. 2006) aff’d, 342 B.R. 122 

(S.D.N.Y. 2006). As the court noted in Adelphia:

The Second Circuit has repeatedly held that the lower courts cannot use 

section 105(a) to circumvent the Code. Using section 105(a) to appoint a 

fiduciary to act as a trustee shorn of the name, but with few other substantive 

differences, would be the exact kind of wrongful judicial action that the 

Second Circuit has forbidden. 

336 B.R. at 664 (footnote omitted).

The Oversight Board also relies on PROMESA section 104(b) for authority to appoint a 

COFINA agent, but the statute instead shows why the Protocol Motion should be denied:

Any member or agent of the Oversight Board may, if authorized by the 

Oversight Board, take any action that the Oversight Board is authorized to 

take by this section. 

 

11 Some cases have allowed bankruptcy courts to appoint (or maintain) receivers under non-bankruptcy law. E.g., 

Craig v. McCarty Ranch Trust (In re Cassidy Land & Cattle Co.), 836 F.2d 1130, 1133 (8th Cir. 1988); Rudin v. Tax 

Comm’n (In re Olympia & York Maiden Lane Co., LLC), 233 B.R. 662, 666-67 (Bankr. S.D.N.Y. 1999). Those 

opinions have no relevance here, except in so far as they hold that a bankruptcy court has no power to appoint a 

receiver in lieu of a trustee – exactly what the Oversight Board is seeking to do here. 

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48 U.S.C. § 2124(b).

Section 104(b) authorizes the Oversight Board to act through its duly authorized agents, 

nothing more. Under the civil law of Puerto Rico, “[a]n agent is a person who has contracted ‘to 

render some service or to do something for the account or at the request of another.’” Colon v. 

Blades, 914 F. Supp. 2d 181, 189 (D.P.R. 2011) (quoting 31 L.P.R.A. § 4421). PROMESA 

authorizes appointment of someone to act on behalf of the Oversight Board: it does not authorize 

the Oversight Board to appoint an agent to represent COFINA independent of the Oversight Board 

itself. 

Indeed, an agent appointed under Section 104(b) would explicitly act not as an unconflicted 

representative of COFINA but as an agent of the Oversight Board. The Proposed Order itself 

shows as much: section 2k provides that the Oversight Board can always take the CommonwealthCOFINA Dispute away from COFINA’s agent by proposing a plan. The Oversight Board’s ability 

to take back the litigation is particularly problematic since the Board speaks for the 

Commonwealth as well, and its principal goal may be to assist the Commonwealth by taking 

property pledged to COFINA’s secured bondholders.

II. The Proposed Order Orchestrates a Collusive Litigation and Settlement Process 

That Violates Article III and the Due Process Clauses of the United States 

Constitution and Deprives Objectors of Adequate Protection of Their Collateral

A. Collusive Litigation Violates Article III

Proposed Order section 2g provides:

The Agents shall cooperate to commence the litigation to resolve the 

Commonwealth-COFINA Dispute by no later than ten (10) days after the 

Agents are appointed. In advance of the commencement of such litigation, 

the Agents, the Oversight Board and AAFAF shall agree to a schedule 

constructed to enable the Court to rule on a final basis, on the 

Commonwealth-COFINA Dispute, on or before November 1, 2017, in the 

absence of a prior settlement.

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The Oversight Board thus picks the litigants (and by implication, the litigation strategy of 

both sides), sets the schedule for the litigation, determines in advance when the litigation must end, 

and – perhaps most egregious of all – can settle the litigation without the consent of COFINA’s 

agent through a plan. Even without a plan, the Oversight Board would be the final arbiter of the 

Commonwealth-COFINA Dispute with authority to approve a settlement without the Court’s 

approval.

Article III of the United States Constitution limits the jurisdiction of the federal courts to 

“cases and controversies.” The litigation machined by the Proposed Order is collusive. It does 

not qualify as a “case and controversy” over which this Court may take jurisdiction. See United 

States v. Johnson, 319 U.S. 302 (1943) (where landlord arranged for tenant to sue to enforce rent 

control laws, the suit was “collusive” and therefore did not qualify as a case or controversy subject 

to the jurisdiction of the federal courts).

B. The Proposed Order’s Settlement Procedures Violate Rule 9019 and Deny Due 

Process

Proposed Order section 2j provides: 

Any settlement negotiated by the Agents shall only be effective upon 

(i) consent of the Oversight Board, (ii) an order of the Court granting an 

Oversight Board motion requesting approval of such settlement, or

(iii) confirmation of a title III plan of adjustment incorporating such 

settlement.

If the COFINA agent compromises the collateral securing Objectors’ bonds, the Oversight 

Board’s “consent” to that compromise eliminates any requirement of court approval in violation 

of Bankruptcy Rule 9019. Objectors’ rights – which they are seeking to vindicate in their own 

names in the Lex Claims litigation – are destroyed without any judicial process at all.

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C. The Proposed Order Strips Collateral and Denies Adequate Protection

Proposed Order section 2h denies adequate protection by directing the agent to litigate from 

the perspective of what is best for the Debtors even if that strips collateral from the bondholders:

Each Agent shall endeavor to the best of the Agent’s ability under the 

circumstances to litigate and negotiate from the perspective of what result 

is best for the Debtor the Agent represents based on the Agent’s estimation 

of the probabilities of the potential outcomes, as opposed to what result is 

best for any particular type of creditor of the Debtor the Agent represents, 

consistent with the approach explained by Chancellor Allen of the Delaware 

Chancery Court in Credit Lyonnais Bank Nederland, N.V. v. Pathe 

Communications Corp., 1991 Del. Ch. LEXIS 215* 108 n.55 (Del. Ch 

1991) and espoused in Protective Committee for Independent Shareholders 

of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S 414, 424-25 (1968). 

The Credit Lyonnais and TMT standards may be appropriate to guide litigation and 

settlement of an unpledged lawsuit, since the unsecured creditors and shareholders of Pathe 

Communications or TMT Trailer Ferry did not hold liens that were entitled to adequate protection. 

Those standards are not, however, appropriate to guide litigation and settlement of the 

COFINA SUT that secures the Objectors’ bonds. Indeed, giving settlement authority to a 

representative of COFINA, rather than a representative of its secured bondholders, flies in the face 

of Credit Lyonnais’s recognition that parties with only a marginal stake are likely to make 

decisions contrary to parties with the main stake.

Today, COFINA bondholders have an interest in COFINA SUT that, if vindicated, pays 

them in full. The COFINA agent’s “business judgment” that COFINA should give up a percentage 

of its SUT may be justifiable with respect to COFINA, but it should not deprive bondholders, such 

as Objectors, of collateral they are already litigating to protect. 

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D. The Proposed Order Violates the Federal Rules of Civil Procedure

The Proposed Order, in limiting participation in litigation of the Commonwealth-COFINA 

Dispute to the Oversight Board’s two hand-picked adversaries, violates the Federal Rules of Civil 

Procedure.

Rule 19, dealing with required joinder of parties, provides:

A person who is subject to service of process and whose joinder will not 

deprive the court of subject-matter jurisdiction must be joined as a party

if . . .

(B) that person claims an interest relating to the subject of the action and is 

so situated that disposing of the action in the person’s absence may:

(i) as a practical matter impair or impede the person’s ability to protect 

the interest . . . .

Fed. R. Civ. P. 19(a)(1)(B)(i) (emphasis added). The Objectors claim an interest relating to the 

Commonwealth-COFINA Dispute, and will be impaired in their ability to vindicate that interest if 

they are not joined as parties.

In addition, Rule 24, dealing with intervention, provides that the court “must” permit 

anyone to intervene who:

claims an interest relating to the property or transaction that is the subject 

of the action, and is so situated that disposing of the action may as a practical 

matter impair or impede the movant’s ability to protect its interest, unless 

existing parties adequately represent that interest.

Fed. R. Civ. P. 24(a)(2) (emphasis added). For the same reasons joinder is required under Rule 

19, the Objectors also have the right to intervene under Rule 24. No party to the dispute will 

adequately represent the Objectors’ interests, because the Proposed Order expressly states that the 

Board's agents owe no duty to “any particular type of creditor.” Proposed Order ¶ 2h.12

 

12 Rules 19 and 24 are applicable to adversary proceedings, see Fed. R. Bankr. P. 7019, 7024, and the CommonwealthCOFINA Dispute, which seeks, among other things, to “determine the validity, priority, or extent of a lien or other 

interest in property,” Fed. R. Bankr. P. 7001, would have to be filed as an adversary proceeding.

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The Proposed Order is, in reality, a request for this Court to reverse the intervention 

decisions of Judge Besosa in the Lex Claims litigation – who, in granting intervention, has already 

determined that the original defendants in that litigation (including COFINA) would not 

adequately represent the interests of COFINA Bondholders. Lex Claims, LLC v. Garcia-Padilla, 

2017 WL 657432, at *14 (D. P.R. Feb. 17, 2017).

E. The Litigation Schedule Prejudices COFINA

The Proposed Order dictates a litigation schedule that prejudices COFINA and denies 

adequate protection to its bondholders. 

First, COFINA and Commonwealth creditors have to come up with nominees for the 

agents. 

Then each nominee will have to make the disclosures necessary to clear conflict of interest 

restrictions under both federal law13 (which delayed the appointment of the Oversight Board itself 

for months14) and Puerto Rican law.15 

Then the Oversight Board will select the agents and finally the agents must find 

unconflicted Puerto Rico counsel (which may not be possible). 

After all that:

• the proposed Order gives “ten (10) days” for new counsel to become sufficiently 

expert in Puerto Rico’s constitution, constitutional debates, relevant statutes, 

legislative history and the aforementioned legal opinions to commence a litigation, 

and

• the agents must agree on a schedule that completes such litigation in the narrow 

time still remaining before November 1.

 

13 PROMESA § 109(a).

14 http://caribbeanbusiness.com/conflicts-of-interest-rule-weakens-promesa-junta/

15 https://www.elnuevodia.com/english/english/nota/thefiscaloversightboardwantstotackleconflictsofinterest2328706/

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No responsible advocate for COFINA would agree to such limitations on its litigation –

the set-up and schedule are imposed not in COFINA’s interests but in the interests of the 

Commonwealth. 

This collusive litigation on untenable conditions will prejudice real parties in interest 

(bondholders) who won the right to defend their revenue pledge in the Lex Claims Litigation. That 

litigation is already in progress, with COFINA’s interests defended by well-prepared counsel for 

COFINA Bondholders, including the Objectors. 

The Proposed Order does not serve the interests of justice, and denies bondholders 

adequate protection, by substituting a collusive litigation for a real one.

III. The Proposed Order Improperly Requires this Court to Determine a Controlling 

Issue of Law Under the Puerto Rico Constitution

The Commonwealth-COFINA Dispute is entirely a matter of Puerto Rican law – because 

Puerto Rican law determines whether SUT transferred to COFINA in 2006 and pledged to 

COFINA bondholders in 2007 is nevertheless, as the Lex Claims plaintiffs assert, “available 

resources” under Article VI Section 8 of the Puerto Rican Constitution and thereby dedicated to 

the prior payment of GOs.

If the Lex Claims plaintiffs are wrong, COFINA owns its SUT – actual title to the SUT. 

No federal law can take that away:

[H]owever great the Nation’s need, private property shall not be thus taken 

even for a wholly public use without just compensation.

United States v. Sec. Indus. Bank, 459 U.S. 70, 77 (1982) (upholding lien against invalidation 

under Bankruptcy Code). 

Thus, the Protocol Motion misconstrues the Commonwealth-COFINA Dispute when it 

states that it “covers the broader question whether federal law impacts the answer to whether the 

Pledged Sales Taxes are property of the Commonwealth title III debtor or the COFINA title III 

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debtor and what that impact is.” Neither section 552(a) nor 928(b) of the Bankruptcy Code, nor 

any other provision therein, can operate to take the Bondholders’ property.16

COFINA obtained its interest in the SUT, and the COFINA Bondholders obtained their 

pledge of the SUT, at a time when bankruptcy relief was not available to COFINA or any other 

Puerto Rico governmental entity. Federal law cannot retroactively destroy pre-existing liens. 

Armstrong v. United States, 364 U.S. 40, 44-45 (1960); Louisville Bank v. Radford, 295 U.S. 555 

(1935); Murray v. United States, 817 F.2d 1580, 1583-84 (Fed. Cir. 1987) (IRS foreclosure of first 

lien without allowing second lienholders to redeem property was a taking). 

Thus the controlling issue of law, indeed the only issue of law, is an issue of Puerto Rican 

constitutional law – for which there is no precedent.

The Proposed Order will require this Court to determine this issue of Puerto Rican 

constitutional law. Litigation to a final judgment will require this Court (before November 1) to 

rule on whether Puerto Rico’s constitution mandates reversion of COFINA’s SUT to the 

Commonwealth notwithstanding COFINA’s statutory rights. A settlement will require this Court 

(before November 1) to rule on whether the settlement is “reasonable” in light of the probability 

(determined by this Court) that the Puerto Rico Supreme Court would rule in COFINA’s favor. 

Objectors respectfully submit that neither this Court, nor any federal court, should 

determine, in a final judgment or in approving a settlement, how the Puerto Rico Supreme Court 

would rule on this crucial question. See Santana v. Calderon, 342 F.3d 18, 30-31 (1st Cir. 2003) 

(Where government employee asserted right to retain her job, “[o]nly the Supreme Court of Puerto 

Rico can definitively resolve this property right issue. Therefore we urge the district court . . . to 

 

16 Indeed, to construe a Code section in such a way would raise serious constitutional questions, which the Court 

should endeavor to avoid. See, e.g., Peaje Investments, LLC v. Garcia-Padilla, 845 F.3d 505, 511 (1st Cir. 2017) 

(applying “cardinal principle” of constitutional avoidance to construction of PROMESA stay).

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15

consult with the parties about the appropriateness of certifying to the Puerto Rico Supreme Court 

the Commonwealth constitutional issue.”); Romero v. Colegio de Abogados de Puerto Rico, 204 

F.3d 291, 305-306 (1st Cir. 2000) (ordering district court, on remand, to certify issues of Puerto 

Rican law to the Puerto Rico Supreme Court).

The stakes are higher even than the $750 million of contested annual SUT. 

If this Court enters judgment invalidating the statutory transfer of revenues to COFINA 

and statutory pledge of revenues to COFINA, or if this Court imposes a settlement impairing such 

transfer and pledge, its actions will put in question any pledge, any security interest, and any lien 

on Commonwealth revenues, existing or future. All pledges, security interests and liens would 

forever be subject to attack as an impermissible diversion of “available resources” under Puerto 

Rico’s Constitution. Puerto Rico would be locked out of the capital markets – if the 

Commonwealth cannot in the future grant a lien, it may not be able borrow at all. 

Only the Supreme Court of Puerto Rico should decide whether the Puerto Rico Constitution 

voids all secured financing and hence bars Puerto Rico from the capital markets. This Court should 

not enter the Proposed Order which requires it to make that decision. 

CONCLUSION

The Proposed Order’s collusive litigation and settlement procedure is not only improper 

and unwise – it is not necessary. The Lex Claims litigation is already set up to deliver a quick and 

definitive resolution of the COFINA-Commonwealth Dispute, and the parties hold sufficient 

COFINA Bonds – a majority in each class – to negotiate a settlement if there is to be a settlement.

For the foregoing reasons, Objectors respectfully request that the Court deny the 

Protocol Motion and the relief requested therein.

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I hereby certify that, on this same date, I electronically filed the foregoing with the 

clerk of the Court using the CM/ECF system, which will notify the attorneys of record.

RESPECTFULLY SUBMITTED, 

In San Juan, Puerto Rico, today June 16, 2017. 

TORO, COLÓN, MULLET, RIVERA

& SIFRE, P.S.C.

s/ Manuel Fernández-Bared_

MANUEL FERNÁNDEZ-BARED

USDC-PR No. 204,204

E-mail: mfb@tcmrslaw.com 

s/ Linette Figueroa-Torres_

LINETTE FIGUEROA-TORRES

USDC-PR No. 227,104

E-mail: lft@tcmrslaw.com

P.O. Box 195383

San Juan, PR 00919-5383

Tel.: (787) 751-8999

Fax: (787) 763-7760

Counsel to the Mutual Fund Group

KRAMER LEVIN NAFTALIS & 

FRANKEL LLP

s/ Thomas Moers Mayer_ 

AMY CATON

THOMAS MOERS MAYER

PHILIP BENTLEY

GREGORY A. HOROWITZ

DAVID E. BLABEY JR.

1177 Avenue of the Americas

New York, New York 10036

Tel.: (212) 715-9100

Fax: (212) 715-8000

Email: acaton@kramerlevin.com

tmayer@kramerlevin.com 

pbentley@kramerlevin.com

ghorowitz@kramerlevin.com

dblabey@kramerlevin.com

Counsel to the Mutual Fund Group

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/s/ José C. Sánchez-Castro 

José C. Sánchez-Castro

USDC-PR 213312

janchez@lsplawpr.com

Alicia I. Lavergne-Ramírez

USDC-PR 215112

alavergne@lsplawpr.com

Maraliz Vázquez-Marrero

USDC-PR 225504

mvazquez@lsplawpr.com

LÓPEZ SÁNCHEZ & PIRILLO LLC

270 Muñoz Rivera Avenue, Suite 1110

San Juan, PR 00918

Tel. (787) 522-6776

Fax: (787) 522-6777

Counsel for Puerto Rico AAA Portfolio Bond Fund II,

Inc., Puerto Rico AAA Portfolio Bond Fund, Inc., Puerto

Rico AAA Portfolio Target Maturity Fund, Inc., Puerto

Rico Fixed Income Fund, Inc., Puerto Rico Fixed Income

Fund II, Inc., Puerto Rico Fixed Income Fund III, Inc.,

Puerto Rico Fixed Income Fund IV, Inc., Puerto Rico

Fixed Income Fund V, Inc., Puerto Rico Fixed Income

Fund VI, Inc., Puerto Rico GNMA & U.S. Government

Target Maturity Fund, Inc., Puerto Rico Investors Bond

Fund I, Puerto Rico Investors Tax-Free Fund, Inc.,

Puerto Rico Investors Tax-Free Fund, Inc. II, Puerto Rico

Investors Tax-Free Fund III, Inc., Puerto Rico Investors

Tax-Free Fund IV, Inc., Puerto Rico Investors Tax-Free

Fund V, Inc., Puerto Rico Investors Tax-Free Fund VI,

Inc., Puerto Rico Mortgage-Backed & U.S. Government

Securities Fund, Inc., Tax-Free Puerto Rico Fund, Inc.,

Tax-Free Puerto Rico Fund II, Inc., Tax-Free Puerto

Rico Target Maturity Fund, Inc. and UBS IRA Select

Growth & Income Puerto Rico Fund

/s/ John K. Cunningham 

Glenn M. Kurtz 

John K. Cunningham 

WHITE & CASE LLP

1155 Avenue of the Americas

New York, NY 10036

Tel. (212) 819-8200

Fax (212) 354-8113

gkurtz@whitecase.com

jcunningham@whitecase.com

Jason N. Zakia

WHITE & CASE LLP

200 S. Biscayne Blvd., Suite 4900

Miami, FL 33131

Tel. (305) 371-2700

Fax (305) 358-5744

jzakia@whitecase.com

Counsel for Puerto Rico AAA Portfolio Bond Fund

II, Inc., Puerto Rico AAA Portfolio Bond Fund,

Inc., Puerto Rico AAA Portfolio Target Maturity

Fund, Inc., Puerto Rico Fixed Income Fund, Inc.,

Puerto Rico Fixed Income Fund II, Inc., Puerto

Rico Fixed Income Fund III, Inc., Puerto Rico

Fixed Income Fund IV, Inc., Puerto Rico Fixed

Income Fund V, Inc., Puerto Rico Fixed Income

Fund VI, Inc., Puerto Rico GNMA & U.S.

Government Target Maturity Fund, Inc., Puerto

Rico Investors Bond Fund I, Puerto Rico Investors

Tax-Free Fund, Inc., Puerto Rico Investors TaxFree Fund, Inc. II, Puerto Rico Investors Tax-Free

Fund III, Inc., Puerto Rico Investors Tax-Free

Fund IV, Inc., Puerto Rico Investors Tax-Free

Fund V, Inc., Puerto Rico Investors Tax-Free

Fund VI, Inc., Puerto Rico Mortgage-Backed &

U.S. Government Securities Fund, Inc., Tax-Free

Puerto Rico Fund, Inc., Tax-Free Puerto Rico

Fund II, Inc., Tax-Free Puerto Rico Target

Maturity Fund, Inc. and UBS IRA Select Growth &

Income Puerto Rico Fund

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