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Judge assures unsecured Puerto Rico creditors will have data on debt

By on June 6, 2018

SAN JUAN – U.S. Magistrate Judge Judith Dein said Wednesday in court that the Committee of Unsecured Creditors (UCC) in Puerto Rico’s bankruptcy-like process will eventually have access to the documents needed to conduct its own investigation into the causes of the island’s debt.

Dein, who headed part of an omnibus hearing Wednesday on the island’s case under the Puerto Rico Oversight, Management & Economic Stability Act’s (Promesa) Title III, said she wanted to have a status report on the release of certain documents in a week, but will hold a hearing with officials from the Government Development Bank (GDB), the island’s fiscal agent, which has handled many bond issuances, to ascertain “their reluctance” to provide documentation. She also said she would take addressing the release of other documents under advisement.

The interest in investigating the debt began after groups said they wanted to probe its legality. The island’s fiscal oversight board argued that because it had been granted some authority to investigate bond-selling practices under Promesa, the entire discovery process into the debt should be led by its newly hired investigator, John Couriel, and the law firm where he is a partner, Kobre & Kim.

An Oct. 30 “Interim Report” reflects that Couriel’s work began immediately after being hired by the fiscal board on Sept. 1, and that the review could be completed within 200 days of his retention—meaning the investigation would conclude by March 20. The final report was not issued.

Instead, the investigator issued a “Second Interim Report” report on April 5, simply stating that “rolling productions” continued to be received, and that a “realistic timeframe for the preparation and delivery of a final investigation report is during the summer of 2018.” The investigator did not provide initial findings or recommendations for the parties in the Title III bankruptcy cases, and instead offered only a number of potential areas of inquiry.

A final report on the debt is due by August. UCC Lawyer Luc Despins criticized the pace in taking any steps to investigate or audit the debt. He criticized the lack of transparency in providing documents and questioned whether the committee would be able to obtain any meaningful documents from the investigator.

A non-disclosure agreement (NDA) provides that, apart from materials received from Banco Santander and Banco Popular, the investigator can withhold information voluntarily provided by other third parties.

Despite months of requests, the investigator has been unable to receive consent from Puerto Rico’s Fiscal Agency and Financial Advisory Authority on an NDA that would allow the UCC to review documents produced by government entities such as the Government Development Bank–which he said was identified as one of the most critical drivers behind the “unsustainable piling of debt”– such as a Government Accountability Office report.

Puerto Rico creditors prevail in document-disclosure dispute

The GDB is slated to go through a Title VI, or consensual, transaction of its debt next month. The UCC fears it may not be able to identify possible areas of claims.

Likewise, with regard to interviews, the discretionary structure of the NDA means that detailed summaries or downloads may never be provided to the committee, Despins said.

Timothy Montgomery, a lawyer for the fiscal board, said the UCC can have access to the same documents the investigator has, except for those obtained from the GDB because those are for “only attorneys’ eyes,” and cannot be shared.

“In order for the investigator to be able to accomplish its investigation, it has to live within the restrictions that are being placed upon it by the parties from whom he is seeking to obtain documents,” he said.

In an effort to expedite the probe, the investigator has sought documents from “third parties with whom they are interacting” on a voluntary basis rather than serving a subpoena to avoid a restriction from the investigator to share the documentation. Many of the parties that have shared documents with the investigator have not given consent for documents to be shared with others.

He said, nonetheless, that there was a path forward to the dispute in that the investigator is going to file a final report along with an exit plan informing the creation of a document depository that will allow a party access after obtaining court permission.

“That to the oversight board is a more expedient way,” Montgomery said. Magistrate Dein, however, expressed doubts about the expediency of the process. She also said she wanted to be able to examine an NDA with the GDB to ensure it was not too restrictive.

The investigator is slated to complete his report by Aug. 15. The report contains a review of retail selling practices and matters for regulatory attention as well as possible areas of claims.

Judge Swain rejects separate Prepa committee

Also Wednesday, Judge Laura Taylor Swain, who also presided over the omnibus hearing, denied without prejudice a request by the Official Committee of Retired Employees to appoint a committee that would represent Puerto Rico Electric Power Authority’s (Prepa) retirees.

Judge Swain did not say who would represent Prepa’s Retirees and opted to take a “wait and see” attitude because U.S. Trustee Monsita Lecaroz said she took no position on the matter. The retiree committee sought that it be on the record that the group does not represent Prepa’s retirees.

The committee’s members were appointed by the U.S. Trustee on June 15, 2017. The group represents about 167,000 members. After its appointment, Prepa filed for Title III bankruptcy. The public power company’s retirees received benefits and pensions through its own retirement system, which is underfunded by $3.6 billion. Pension benefits will be switched to a defined contribution plan and accrued benefits are slated to be reduced by 10%.

In light of that, lawyers for the retiree committee said Prepa retirees should have their own committee.

The U.S. Trustee has not appointed a Prepa Retiree Committee nor amended a notice of appointment of the Retiree Committee to include Prepa retirees.

Rolando Emmanuelli, the lawyer representing Prepa’s Retirement System, objected the retiree committee’s request. He said the expansion of the jurisdiction of the committee to cover Prepa’s retirees was “duplicative and unnecessary and would enhance costs.”

He said Prepa’s Board of Trustees has retained professionals to assist in representing the retirees, and that the two legal entities might have disagreements in the Title III proceedings.

Unlike other entities, Prepa is in the middle of a privatization process, in which the government is planning to sell its generation assets, or powerplants, but put the power-transmission and -distribution systems under private concession.

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