The Commonwealth-COFINA Dispute

In August 2017, the Title III court entered the Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute, which sets forth procedures to litigate and potentially settle the Commonwealth-COFINA Dispute (which concerns the question whether, after considering all procedural and substantive defenses and counterclaims, including constitutional issues, the sales and use taxes purportedly pledged by COFINA to secure debt (the “Pledged Sales Taxes”) are property of the Commonwealth or COFINA under applicable law).

Subsequently, the Committee, as Commonwealth Agent, filed a complaint asserting, among other things, that the Commonwealth retained ownership of the future sales and use tax revenues, and, beginning on February 21, 2018, the Agents (as well as several intervening parties) filed their respective motions, cross-motions, objections, and replies for summary judgment. The Court heard oral argument on the summary judgment motions on April 10, 2018, and, at the conclusion of the hearing, the Court reserved judgment on the motions. No ruling has been issued by the Court on these motions. Click here to view the docket in the Commonwealth-COFINA Dispute litigation.

The Agreement in Principle

On June 5, 2018, the Commonwealth Agent and the COFINA Agent executed an agreement in principle (the “Agreement in Principle”) to resolve the Commonwealth-COFINA Dispute and those related issues that may be mediated pursuant to the order expanding the scope of the Agents’ mediation authority. The Agreement in Principle contemplated, among other things, that (1) 100% of already-collected pre-FY 2019 Pledged Sales Taxes would be allocated to COFINA and (2) for FY 2019 through FY 2058, 53.65% of Pledged Sales Taxes Based Amount would be allocated to COFINA and 46.35% of Pledged Sales Taxes Based Amount would be allocated to the Commonwealth. The Agreement in Principle was subject to various conditions precedent and subsequent. In light of the Agreement in Principle, the court held its decision on the summary judgment motions in abeyance so as to give the parties an opportunity to reach a final settlement.

The Commonwealth-COFINA Settlement

In August 2018, the Oversight Board, COFINA, AAFAF, certain senior and junior COFINA bondholders, and monoline insurers entered into a plan support agreement regarding the terms to settle the Commonwealth-COFINA Dispute, which settlement the Oversight Board submitted for court approval through a plan of adjustment in COFINA’s Title III case and a motion under Bankruptcy Rule 9019 in the Commonwealth’s Title III case. The Oversight Board has asserted that its settlement is predicated on the allocation of Pledged Sales Taxes set forth in the Agreement in Principle. The Oversight Board’s settlement motion can be viewed here, the disclosure statement of COFINA can be viewed here, and the plan of adjustment for COFINA can be viewed here.

The Commonwealth Agent’s Position on the Commonwealth-COFINA Settlement

Subsequent to the execution of the Agreement in Principle, the Oversight Board certified a revised Commonwealth fiscal plan on June 29, 2018 that contained revised projections with respect to revenues, expenses, and debt capacity. The Commonwealth Agent expressed the concern (including in multiple filings before the court) that these revised projections affected the feasibility of the Agreement in Principle and the settlement proposed by the Oversight Board. The Commonwealth Agent also requested and obtained approval of a briefing schedule in connection with the potential filing by the Commonwealth Agent of a motion challenging the authority of the Oversight Board to seek approval of the settlement.

On October 23, 2018, the Oversight Board certified a further revised Commonwealth fiscal plan which reflects, among other things, (1) updated data regarding the Commonwealth’s actual performance in fiscal year 2018 and the receipt of federal disaster funds and (2) an increase to the 40-year cash flow projections contained in the June Fiscal Plan. Subsequently, the Commonwealth Agent and Oversight Board entered into a stipulation pursuant to which the Commonwealth Agent agreed not to oppose the Oversight Board’s settlement motion or the COFINA plan of adjustment but preserved its rights to file such an objection in the event that, prior to approval of the settlement motion and confirmation of the COFINA plan of adjustment, (i) the Oversight Board certifies another Commonwealth fiscal plan which materially reduces the 40-year cash flow projections from those set forth in the October 23 Commonwealth fiscal plan or (2) the settlement agreement or the COFINA plan of adjustment are amended, modified or supplemented such that there is a material negative economic impact to the rights and interests of the Commonwealth.

The hearing on approval of the Oversight Board’s settlement motion and confirmation of the COFINA plan of adjustment was held on January 16 and 17, 2019. On February 4, 2019, the court entered orders approving the Commonwealth-COFINA Settlement and confirming the COFINA plan of adjustment. Click here to read the court’s decision approving the COFINA plan.