Federal District Judge Laura Taylor Swain on Wednesday approved a stipulation agreement that would end Cobra Acquisitions' claim against the Public Electric Power Authority (PREPA) for work that helped restore the electrical grid after damage caused by Hurricane Maria.
Swain's decision came during a public hearing on Title III cases in Puerto Rico in September, the same day the judge also left in place the closing of the bankruptcy filing of the Urgent Benefit Fund Corporation (COFINA) until a technical issue that remains outstanding is resolved.
Nearly seven years after replacing Whitefish Holdings in the emergency work to restore power in Puerto Rico, Cobra will receive nearly half of the roughly $400 million it sent to PREPA.
According to Swain, the agreement that Financial Supervision Board (JSF) signed with Cobra with management approval. Pedro PierluisiMore than reasonable under bankruptcy law and does not undermine any rights that municipalities may have against the company for payment of building taxes or any other type.
Swain issued his ruling in open court, after about 45 minutes of arguments between lawyers for the council, contractor Cobra, and the legal representative for the municipalities of Caguas, Cayey, Humacao, Guayama, Guaynabo, Las Piedras, Naguabo and Yabucoa, as well as Forman Electric Services, a company that is in dispute with Cobra on other matters and in other forums in Oklahoma and Florida.
Third Title Shield
When you make your decision, Swain denied the municipalities' objections, concluding that they violated the automatic stay of litigation that protects PREPA. Under Title III of the federal PROMESA Act. This, in an attempt to preserve a portion of the money that the public institution would pay COBRA to cover construction taxes and other municipal taxes that the contractor allegedly owes.
In turn, Swain ruled that Foreman Electrical Services, another contractor who dealt with Cobra, did not have the privilege or standing to intervene in the controversy, a finding that reaffirmed a similar ruling the judge had issued about two years earlier.
Swain's ruling came despite arguments from attorneys Arturo Negrón Vargas and Alex Fuentes, who reminded the judge that municipalities play an essential role in providing services to citizens.
From the municipalities' perspective, since COBRA did not pay them, they would be entitled to a lien for any cash amount PREPA paid to the contractor under the condition.
Paying COBRA could mean losing about $75 million in revenue, the municipalities claim, which have been fighting a COBRA lawsuit in a state forum for several years.
“Cobra had the opportunity to judicially challenge the collection notice and did not exercise that right,” Negrón Vargas said, noting that the municipalities acted in accordance with the Municipal Law adopted in 2018 and reaffirmed in 2022. That is when they informed the contractor that the payment was due for patents and construction taxes, and therefore, the lien would arise from any payment received by the contractor.
The fruit of mediation
“The Prepa funds are the property of Prepa and are protected by the automatic stay of litigation and subject to the exclusive jurisdiction of this court under Promesa Section 306(b),” said Paul V. Businger, board counsel and partner at the law firm of Proskauer Rose.
Bossinger, who confirmed that no other PREPA creditor had objected to the agreement reached with Cobra, stressed that the provision would put an end to what could have been another lengthy and expensive litigation for PREPA while emphasizing that the agreement does not relieve Cobra of any liability it may have with third parties.
Cobra's lawyer, Abid Qureshi, said the agreement, which would reduce the contractor's debt by 50%, would end a five-year-old controversy and apparent deadlock between the two parties.
According to Qureshi, the “tireless” work of former judge Shelley Chapman, as a mediator in the argument, was the decisive factor in reaching an understanding.
Although COBRA will only recover half, ending the dispute will allow the company to focus on its business, rather than continuing the dispute with PREPA.
Cobra came to Puerto Rico to fix the electrical grid, after multiple questions were raised against contractor Whitefish Holdings.
But once Cobra took over the project, it emerged that the company’s former president, Donald Ellison, and a former deputy regional administrator for the Federal Emergency Management Agency (FEMA), had conspired to get the company the $1 million contract. Both pleaded guilty to the crimes about two years ago.
The act of corruption led FEMA and PREPA to embark on a lengthy process of auditing and evaluating Cobra’s invoices, an analysis that in turn influenced the contractor’s request to Judge Swain to resolve the validity of its actions through a trial. As part of the agreement, Cobra will drop its lawsuit against PREPA.
