Thursday, December 14, 2017

Mediation judges slam Puerto Rico, creditors for breaching confidentiality

By on November 20, 2017

SAN JUAN — The team of judges acting as mediators in Puerto Rico’s bankruptcy cases slammed the parties on Monday for repeatedly breaching “the confidential nature of the mediation process” during a Nov. 15 hearing.

“The mediation process should not be permitted to be used as a shield or a sword in formal court proceedings,” reads the filing by Judge Barbara Houser, who leads the mediation group of five judges that was appointed in mid-June and tasked with facilitating confidential settlement negotiations between Puerto Rico and its creditors.

She urged judges Laura Taylor Swain and Judith Dein, who oversee court proceedings under Title III of Promesa, to adopt a “zero-tolerance policy” as to public disclosure of what is happening in the mediation process.

A few hours later, both judges entered an order to ensure the separation of the mediation and litigation proceedings. No party will discuss, “and the court will neither invite nor entertain” what takes place in the mediation, subject to sanctions that could include “striking of pleadings, denial of opportunity to present oral argument, denial of relief sought and/or preclusion of opposition to requests for relief,” the order says.

If a party validly needs to refer to mediation-related issues in the court proceedings, it would do so confidentially, by filing a motion under seal.

Court allows fiscal board to continue leading Puerto Rico debt probe

At the Nov. 15 hearing, the counsel of creditor groups, the financial control board and the commonwealth government made reference in various instances to off-the-record mediation sessions since late summer.

In discussing motions to authorize discovery of certain documents and materials, the creditor parties argued they hadn’t been able to obtain these through mediation. For instance, one of the lawyers representing Puerto Rico general obligation bondholders said the process hadn’t been “an effective vehicle” and suggested that while they could bring up the requests in mediation, they couldn’t force production of the documents vis-à-vis the discovery order they sought.

The board and the government were opposed, urging the court to deny the discovery motions and allow document production to continue to take place as part of the mediation. The latter requires parties to enter into nondisclosure agreements and abide by other confidentiality rules.

“I do recognize that the [mediation] process could be frustrating and difficult, but it’s something that has made a lot progress,” said Magistrate Judge Dein moments before denying the creditors’ discovery motions during the Nov. 15 hearing.

Moreover, Reorg Research reported on Friday that some creditors believe Martin Bienenstock of Proskauer Rose, the fiscal board’s lead counsel, violated mediation confidentiality rules in commenting about the commonwealth’s new fiscal plans at the Nov. 15 hearing.

“Bottom line, we know now that the money available for debt service for the next five years is almost nonexistent. And the resolutions that we all have to discuss and are discussing are contingent-type resolutions where, based on the actual availability of income, people will be paid. So it’s not that people cannot settle now. People are working on settlements,” Bienenstock said, as quoted by Reorg Research. The Proskauer lawyer later told the specialized news outlet he didn’t breach any confidentiality rule.

A ‘separate track’

In Monday’s filing, Judge Houser said parties should not “speculate as to what I (or any other mediator) think(s) about particular issues, as was done in open court last week.” She also called for allowing the mediation process to run “on an entirely separate track” from the commonwealth’s Title III cases and related litigation.

“The two processes (mediation vs. court) should not be conflated; nor should mediation parties be prevented from seeking to enforce their legal rights in court because they have chosen to participate in the mediation process. Otherwise, they could feel compelled to withdraw from the mediation process to protect their legal rights in court, which would be unfortunate for all concerned,” the filing adds.

At the beginning of the Nov. 15 hearing, Judge Houser spoke about the mediation sessions, which will resume early next year as the commonwealth government and the fiscal board work on revisions to the certified fiscal plans to incorporate the aftermath of Hurricane María.

The mediation team comprises Judge Houser of the U.S. Bankruptcy Court for the Northern District of Texas, Judge Thomas Ambro of the U.S. Court of Appeals for the Third Circuit, Senior Judge Nancy Atlas of the U.S. District Court for the Southern District of Texas, Judge Christopher Klein of the U.S. Bankruptcy Court for the Eastern District of California and Senior Judge Víctor Marrero of the U.S. District Court for the Southern District of New York.

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