Tuesday, April 24, 2018

[Editorial] Fear and Loathing… In ‘Titi’ Laura’s Court

By on March 19, 2018

Editor’s note: The following editorial originally appeared in the March 15-21 print edition of Caribbean Business.

Trust U.S. Congress to enact laws that enable proceedings opposite to the original intent underpinning their drafting. That truth is self-evident in the legal motions and strategic maneuvers employed by the many moving parts in the Puerto Rico Oversight, Management & Economic Stability Act (Promesa). When Promesa passed in Congress, Republican leadership on Capitol Hill had hoped to deliver a mechanism for territories without access to Chapter 9 bankruptcy proceedings to restructure debt, chart a path to austerity and return to capital markets. To quote a chorus by a philosopher of Pop culture named Elton John: “I think it’s going to be long, long time….”

Sadly, the solons on the Hill are discovering that Promesa is rife with holes and flimsy legal provisions—18 creditor constituencies, the Commonwealth and Financial Oversight & Management Board (FOMB) at loggerheads—something akin to a signal that dinner is served for the vultures circling the skies above. Invite vultures to a roast of carcasses and expect them to feast.

Yes, in debt restructuring, there is plenty of pain to go around, except for legal and financial advisers, whose gorging on Puerto Rico’s debt crisis has only just begun. That much was made tacitly clear in a report by the fee examiner Brady Williamson, appointed by the federal court, who informed that five firms account for two-thirds of the fee reimbursements submitted. Among these are Proskauer Rose, which filed for $15.9 million for work that it has done for the FOMB; O’Melveny & Myers, which filed for more than $16 million; Paul Hastings for $9.3 million; Willkie Farr & Gallagher for $4.7 million; and Greenberg Traurig for $3.4 million. The cherry on top is the consulting firm McKinsey & Co., which advises the FOMB to the tune of some $5.1 million monthly, an amount the firm agreed to adjust down to $2 million a month.

The fee examiner reports “the average rates varied from about $245 an hour for firms based in Puerto Rico to $775 an hour to firms in New York. The highest hourly rate was $1,425.” There is some adjusting to do. For instance, the fee examiner’s report pointed to the excesses of compensating “12 attorneys from one firm to attend omnibus hearings at which only one or two were expected to speak.”

Altogether, the high-powered lawyers in attendance submitted $75 million in charges (thus far), scrutinized by the fee examiner whose final report helped inform Swain’s approval of slightly less than $50 million in fees. Swain, to her credit, stressed that the people of Puerto Rico could not afford to spend “billions of dollars” on legal and professional fees.

Try as Swain might to rein costs in, there are forces inherent in Promesa that make for a legal jamboree. A Rosselló administration and Control Board vying to restructure the debt of 18 different creditor constituencies in an untested legal framework—Puerto Rico is not Detroit—add layers to this process that promise to blow legal fees sky high.

In recent press reports, FOMB Executive Director Natalie Jaresko alluded to “a very complex process with dozens of lawsuits [and] multiple sets of interests”—with the caveat that the costs “seem comparable to other large, complex debt restructurings and bankruptcies.”

The most recent letter by the FOMB to members of the U.S. Congress complaining there is duplicative work by lawyers “because the Commonwealth often has divergent interests from those of the FOMB,” is in direct response to concerns held by leaders on the Hill who see lawyers and fees run amok in a process.

Observers of this process, who have experience with other bankruptcies, see Puerto Rico’s Promesa sweepstakes driving legal fees into the hundreds of millions by the time proceedings come to a close.

That much was forewarned one year ago by this newspaper during a special report on a Puerto Rico Debt Conference hosted by the Associated General Contractors Puerto Rico Chapter in Washington, D.C. During a keynote address on the first day of that debt conclave, former Detroit Emergency Manager Kevyn Orr called Promesa the “lawyer relief act” because, said he, the legal firms would be the only ones making millions upon millions in a drawn-out process. Now that the self-fulfilling prophecy has come to pass, it behooves the FOMB to cut to the chase, certify the plans or submit their own, which is what U.S. congressional leadership is begging them to do. Adding $500 million in legal fees on this road to “recovery” is far too much to suffer for an island in desperate need of economic development.

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