Monday, September 23, 2019

Creditor group presses Puerto Rico fiscal board to reveal avoidance claims

By on March 29, 2019

Editor’s note: The following originally appeared in the March 28 – April 3, 2019, issue of Caribbean Business.

Court orders board to show cards by April 1

One group in Puerto Rico’s bankruptcy case that has been most vocal and has perhaps conducted a thorough oversight of the commonwealth’s expenditures is the Unsecured Creditors Committee (UCC). While the committee, represented by lawyer Luc Despins, is merely trying to increase the amount of money it can recover from the government, it has brought to light issues that may otherwise go unnoticed by court observers.

Federal Court Judge Laura Taylor Swain recently granted a request from the UCC that sought to set expedited deadlines for procedures for Puerto Rico to bring avoidance actions in its bankruptcy cases because of a looming May deadline.

Avoidance actions are any and all avoidance, recovery, subordination or other claims, actions or remedies that may be brought by or on behalf of the debtors or other authorized parties in the bankruptcy proceedings. They typically go against individuals or corporations that obtain payments from the debtor 90 days before the bankruptcy filing but can go further into the past. The debtor in these cases attempts to recoup money it has already paid.

The UCC said that despite repeated requests, the island’s fiscal oversight board has yet to submit a list of avoidance actions it intends to pursue.

As a matter of fact, since last year, the UCC has been trying to deal with avoidance claims. On Nov. 27, 2018, the committee filed a motion, which was granted Dec. 14, 2018, seeking discovery of Title III debtors, except for the Sales Tax Financing Corp. (Cofina by its Spanish acronym), to investigate whether they may have viable claims for avoidance actions against third parties. “The [UCC] believes it is critical to now move this investigation forward given the potential expiration of certain claims in May 2019. Specifically, the committee is seeking disclosure with respect to pre-petition transfers of property valued at $3 million or more in the two years immediately preceding the dates on which the debtors commenced the Title III cases,” they said.

Following the judge’s order earlier this week, the Oversight Board must provide a list by April 1 of the avoidance actions it will pursue. The UCC wants to be allowed to submit a motion seeking the appointment of a trustee to assert avoidance actions.

There are other matters the UCC has brought to light that in many ways have steered the commonwealth’s Title III case.

The committee litigated, on behalf of the commonwealth, the question of whether billions of dollars in sales & use taxes are the property of the commonwealth or Cofina, litigation resulted in a settlement that will allow the commonwealth to retain $28 billion in such taxes over the next 40 years. The UCC had serious concerns with respect to the restructuring of the Government Development Bank (GDB) because it purported to transfer the lion’s share of the GDB’s valuable assets away from the Title III debtors and to a newly formed entity for the benefit of certain consenting creditors. Moreover, the committee was concerned the GDB restructuring would result in Title III debtors losing valuable claims they may hold against this bank and current and former officers and directors of the GDB, before there has been an adequate investigation with respect to such claims. The committee filed a notice of its intent to object to the GDB’s Title VI qualifying modification and other pleadings, forcing the government to make changes to its restructuring terms.

They raised objections regarding the Kobre & Kim report on the debt. The informative motion points out, among other things, that the final report does not address the merits of any claims, including avoidance actions, whether Puerto Rico’s constitutional debt limit was exceeded or claims against private financial institutions.

The general approach of the final report is to exonerate potentially culpable parties, including by volunteering conclusions and presumptions that give the impression that there was no wrongdoing. Despite the final report’s efforts to exonerate, it still identifies highly troubling conduct by the GDB leadership, including swap transactions, GDB’s role as the government’s fiscal agent, the $3.5 billion general-obligation (GO) bond offering in March 2014 (though the report does not address potential claims of the debtors that could have arisen from the circumstances of the GO bond offering). Ultimately, they say the final report is of limited utility because it is impossible for any interested party to follow up on the investigator’s efforts.

The UCC was also behind efforts to stop the government from paying legal expenses to Bonistas del Patio, arguing that they were not part of any Title III case. The committee is also questioning the legality of the $6 billion in GO debt incurred after 2012, and the legality of Public Buildings Authority bonds.

The UCC joined the Oversight Board in seeking information from monoline bond insurers about their losses in their attempt to establish a receiver for the Puerto Rico Electric Power Authority.

In related news, the U.S. First Circuit Court upheld two lower court rulings, stating that certain GO bondholders do not have a lien on revenues and, in the second, that government is not obligated to pay pledged Highways & Transportation Authority revenue to bondholders.

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