Friday, September 30, 2022

[Editorial] Ol’ McDonald Had a Farm…

By on November 1, 2018

Editor’s note: The following originally appeared in the Nov. 1-7, 2018, issue of Caribbean Business.

The Spanish saying “El cabro velando las lechugas,” translated literally to English as: “The goat watching over the lettuce,” has the connotation of surveillance gone awry because a goat cannot be trusted to watch over lettuce without devouring it. If you have watched Animal Channel or visited Puerto Rico’s rural countryside—el campo— you take this for granted.

Much like the animal behavior of those cabritos across the countryside, advisers and lawyers representing the Commonwealth in bankruptcy proceedings under Title III of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) cannot be trusted to watch over their fees. Thus, the naming of Fee Examiner Brady C. Williamson—something like Ol’ McDonald—to watch that the goats only nibble at some of the lettuce rather than gorging on what little produce is grown. The question on the bankrupt Promesa farm begs: “Who watches over Ol’ McDonald?”

The question first arose for this newspaper at the inception of the Fee Examiner post, created on Oct. 6, 2017, through “an order pursuant to Promesa Sections 316 and 317 and Bankruptcy Code Section 105(A) Appointing a Fee Examiner and Related Relief (the Fee Examiner Order), expressly limited to “the Title III cases.”

That order enabled the delivery of an initial report, filed in March 2018, in which the Fee Examiner presented a summary of uncontested fee applications for the first interim compensation period. The report informs the fees requested for the “First Interim Fee Period” from May 3, 2017 through Sept. 30, 2017, totaling $75 million; expenses requested totaled $2 million.

In its first Omnibus Hearings over compensation for professional fees, Federal Judge Laura Taylor Swain saw “40 separate and properly noticed applications for professional compensation from a total of 30 financial firms and law firms, including eight based in the Commonwealth.” It would be up to “Titi” Laura to put her good Housekeeping Seal of Approval on the fee review process—“similar, with some variations, to the process in other large Chapter 11 cases”—and the agreed-upon compensation levels.

The question this newspaper asked back then was: “Why wait for a fee examiner?” when Judge Taylor Swain had the power to impose a ceiling for legal and advisory fees as is done by judges in other bankruptcy cases. But, then again, this is Title III in Promesa, chock-full of gray areas and lukewarm interpretations tracing to timidity inspired by the colonial truths in the law.

The Fee Examiner put the legal morass into context with this understatement: “Promesa is a new and unique statute. The issues it raises are profound, constitutional and statutory, involving federal and Commonwealth law, and the U.S. and Puerto Rico Constitutions. The financial and legal professionals working on these cases have confronted massive challenges of time and distance, analysis and advocacy, with little directly applicable precedent. While there have been municipal bankruptcies under Chapter 9, of course, the Commonwealth’s history and status as debtors are unprecedented.”

Indeed. There is a section in the first filing that explains: “Although McKinsey [& Co.] affiliates [advisers to the Financial Oversight & Management Board] have extensive experience in Chapter 11 proceedings—and in preparing applications for professional fees—the McKinsey governmental team for this assignment stated that it does not track, by individual professional, the time expended—by the hour, by the day or by the week, nor does it record expenses, all of which are subsumed within its monthly flat fees.”

Thus, the legal eagles from large corporate nests perched atop Park Avenue soared along with fees as high $1,000 per hour, bringing legal costs to heights, if unattended, projected to be well in the vicinity of $1 billion over the next decade. The report goes on to explain that “the court could remove McKinsey from the Fee Examiner’s process, and instead entrust the reasonableness assessment to the Oversight Board itself—establishing and applying unique standards for McKinsey to meet the Court’s own mandate for fee review.” [Thus], the Fee Examiner concludes, “The compensation sought by McKinsey today is significant and it may well increase.” My, that lettuce is looking tasty.

At this writing, the Fee Examiner had rendered a third report, pertaining to services performed and expenses incurred during the “Third Interim Fee Period,” which ran from Feb. 1, 2018 through May 31, 2018.” Reports filed are rife with double standards in the compensation levels. Take, for instance, a list of Professionals by Matter, included in the July 2018 report, which has the Fee Examiner making $102,167.42 for 229 hours of work.

As the bankruptcy process under Promesa continues to unfold, it behooves the justices overseeing this unprecedented process to ask: “Who examines the fee examiner?”—With a Fee Fee here; And a Fee Fee there; Here a Fee, there a Fee; Everywhere a Fee Fee; Ol’ MacDonald had a Farm—E-I-E-I-O.

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