The government of Guam’s bond handlers say there’s no need at this time to tell GovGuam’s creditors about a November 30, 2021 decision and order from Judge Elyze Iriarte that, read alone, raises significant issues for Guam Waterworks Authority and the people it has borrowed hundreds of millions of dollars from to finance its improvements.
In that decision and order, which answered several motions in the lawsuit commonly known as GovGuam & GWA v. Core Tech International, Judge Iriarte confirmed CTI has an ownership interest in the land (where the Northern District Wastewater Treatment Plant sits), questioned whether GWA has any right to use or occupy that land at all, and said the basis for GWA’s claim to the land – a survey map – was illegitimate.
“The impact is not yet known to the bond,” Guam Economic Development Authority administrator Melanie Mendiola told Kandit in a phone interview. GEDA handles GovGuam’s credit issues, including its sales and refunding of bonds. GEDA also handles bonds for GovGuam’s autonomous agencies, including GWA, which in 2020 refinanced $167 million worth of bonds. Attached to the indenture (contract) for that bond is an Official Statement, which includes the disclosure of pending lawsuits and claims against GWA. The only one, at the time, was CTI, which was sued by GWA then made a counterclaim to the ownership of Lot 10184-7 (Ukudu, Dededo), better known as the land, where the NDWWTP sits and is operated by GWA.
It is GWA’s most valuable asset, accounts for a major revenue stream upon which the repayment of the bonds were pledged, was the basis for $173 million in federal grants money that buttressed GWA’s assets to creditors, and is premised to bondholders as a clear source of future revenue growth due to the symbiotic relationship the NDWWTP has with the military buildup. And according to Judge Iriarte, it is questionable whether GWA has any legal right to step foot on the property to operate this major asset. “Core Tech holds an ownership interest in the property and has standing to bring its claim,” Judge Iriarte wrote on November 30 last year. Among its claims? That GWA owes CTI $130 million in inverse condemnation costs.
“If GWA has to pay, then at that point it’s disclosed (to creditors),” Ms. Mendiola told Kandit. Ms. Mendiola and her finance manager, Tina Garcia, pointed to the GWA Series 2020B bonds indenture Official Statement.
Attached to that statement and the indenture is a requirement of the federal Securities Exchange Act of 1934 called a Continuing Disclosure Agreement. In that CDA, which is specifically required by the Securities and Exchange Commission Rule 15c2-12, is the following language:
“Subject to any rights of the United States of America, [GWA] shall keep the System and all parts thereof free from judgments, from mechanics’ and materialmen’s liens and from all liens and claims of whatsoever nature or character, to the end that the security provided pursuant to this Indenture may at all times be maintained and preserved, and the [GWA] shall keep the System and the Revenues free from any liability which might hamper the Authority in conducting its business or operating the System.”
According to the indenture, “‘System’ means the water and sewer systems, now or hereafter existing, owned and/or operated by the Authority or its contractors, agents or subcontractors.” The NDWWTP, according to assurances GWA made to its creditors, plays a significant role in GWA’s revenues stream. According to GWA’s financial statements in 2019, more than 36 percent of its operating revenue came from its wastewater system. “The Authority owns and operates six wastewater treatment plants,” the official statement from GWA to its creditors states. “The Northern District WWTP is one of the Authority’s two largest wastewater treatment plans, and serves the northern area of Guam.”
The bonds GWA refinanced in 2020 are limited obligations of GWA “payable solely from and secured solely by a pledge of Revenues consisting primarily of all gross income and revenue received by the Authority from the ownership or operation of the Authority’s water and wastewater systems.”
Among the assertions GWA made to creditors were specific operating assurances, federal grants, and increases in revenue postured from the NDWWTP’s role in the military buildup on Guam.
“In 2010, the U.S. military planned to move approximately 8,600 military personnel and 9,000 dependents to Guam by 2013. The DOD subsequently altered its plans and complete a Supplementary Environmental Impact Statement (‘SEIS’) and released a Record of Decision for the military realignment in August 2015. Pursuant to the SEIS, the DOD estimates that the military realignment will result in increased wastewater generation of approximately 1.2 mgd and increased potable water demand of approximately 1.7 mgd. Such increases would result in a significant indirect impact on the aquifer lens and in a significant indirect impact on the Northern District wastewater system, respectively. To address the increased demands on the System, the DOD and the Authority have initiated several projects. Three projects have been deemed critical to the military realignment: (i) upgrading the Northern District WWTP to secondary treatment and installing the related outfall diffuser; (ii) refurbishing the interceptor sewer that runs from the Andersen Air Force Base to the Northern District WWTP; and (iii) expanding and rehabilitating the Northern Guam Lens Aquifer in the northwest field area of the Andersen Air Force Base (together, the ‘Water and Wastewater Infrastructure Improvements Program’). The Authority has received approximately $173.2 million in grants from the DOD, through the OEA, for the Water and Wastewater Infrastructure Improvements Program, and expects to contribute an additional $7.6 million to the program from proceeds of the 2020A Bonds and SDCs.” – excerpt from Official Statement (p. 52)
To be sure, GWA in the August 2020 Official Statement, did disclose the lawsuit; but, some of the information it presented to creditors was wrong:
“In 2018, the Government and the Director of Land Management filed a claim against Core Tech International Corporation (‘CTI’) in the Superior Court of Guam to rescind several certificates of title, including certificates of title for property upon which the Northern District WWTP is located, which were erroneously issued by the Deputy Civil Registrar to CTI’s predecessor-in-interest in 2014. The Authority intervened and asserted a quiet title action on Lots 10193 and 10194, which have been continuously used and occupied by the Government, the Authority and the PUAG, the Authority’s predecessor agency, since 1997, and for which a 2017 map recorded by the Department of Land Management shows title and ownership in the Authority.”
According to Judge Iriarte’s November 30 decision and order, GWA’s claim to ownership – the 2017 map – is no basis for a claim at all. The 2017 map is a reference to what is commonly called the “Castro Map,” named after the surveyor upon whose survey map of Lot 10184-7 is handwritten the words “not including sewage plant.” An October 6, 2006 quitclaim deed from the Guam Ancestral Lands Commission to the Estate of Jose M. Torres (the original landowner) has the notation, “subject to survey,” referring to the Castro Map. (The Torres estate sold the land to Younex, and CTI then acquired the land via auction following foreclosure). GWA has contended the handwritten language on the Castro Map proves the government never quitclaimed the land underneath the NDWWTP.
GovGuam and GWA, Judge Iriarte wrote, “also argue Core Tech does not own Lot 10184-7–the land that the Northern District Wastewater Treatment Plant sits on. Specifically, they contend that the October 2006 Quitclaim Deed from the GALC to the Torres Estate (Inst. No. 744340) conveyed land subject to survey establishing its size, boundaries and property lines. Counterclaim Defendants argue that the Castro Map, which indicates that Lot 10184-7 was not returned the landowner, serves as that survey. It follows, according to Counterclaim Defendants, that the October 2006 Quitclaim Deed never transferred title to Lot 10184-7 to Core Tech’s predecessors.
“Two factors mitigate against Counterclaim Defendants’ interpretation of the language “subject survey”. First, the language that the Counterclaim Defendants point to does not create an interest the property transferred. The provision in the October 2006 Quitclaim Deed that Counterclaim Defendants contend incorporates the Castro Map reads follows: ‘WHEREAS, Grantor hereby does not warrant ingress or egress from or to said property with the exception of known dedicated public right of ways and public easements they so exist prior to the execution this Deed. Grantor further does not warrant or establish the size, boundaries and property lines and Grantee(s) take said property in regards to size and boundaries subject to survey.’
“At best, the language indemnifies the grantor against a future claim involving the size and boundaries the property conveyed. By its plain language, however, this provision fails to reserve any rights in the property in favor the grantor. Moreover, even the provision created a condition precedent to transfer, after GLAC transferred the rights to the Torres Estate, it lost the authority to enforce the condition. The Court therefore does not find that the provision requires, or even permits, that the Castro Map be incorporated into and have effect on the October 6, 2006 Quitclaim Deed.”
Ms. Mendiola, however, does not assert at this time that the Iriarte decision and order – despite its plain rulings of law significant to the ownership of one of GWA’s largest revenue-generating facilities – does not need to be disclosed to bondholders.
“Bond counsel is aware of the court decision on GWA’s motion for summary judgment, that there has been no final judgment on the case and affirms that there is no bond default with the decision made at this point,” Ms. Mendiola said.
Is the November 30 decision and order material to the GWA bonds? According to a write up by the California State Treasurer regarding SEC Rule 15c2-12:
“SEC Rule 15c2-12 requires that underwriters of municipal securities, before bidding, purchasing, or selling a municipal security in the primary market, must obtain and review the issuer’s preliminary and final official statements and reasonably determine that the issuer has committed to provide continuing disclosures to investors.”Generally, this undertaking takes the form of a continuing disclosure certificate or continuing disclosure agreement (CDA) executed by the issuer with respect to the securities, or other obligor, at bond closing. In most cases, the information to be provided subject to a CDA, includes annual financial and operating information of the kind and substance contained in the offering documents, audited financial statements, notice of the occurrence of certain events, and notice of any failure to meet these reporting requirements.
“As part of the continuing disclosures to investors, issuers must provide notice of the occurrence of certain material events relating to the outstanding securities that are likely to be of a material interest to bondholders or potential investors within 10 business days of the occurrence of the event.”
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