Tuesday, July 16, 2019

Judge rejects tolling statute of limitations to file avoidance claims in Puerto Rico bankruptcy

By on April 24, 2019

(CB file)

Rejects Unsecured Creditors’ petition to act as trustee to file claims for commonwealth

SAN JUAN – U.S. District Judge Laura Taylor Swain rejected the Puerto Rico Financial Oversight and Management Board’s petition to toll the statute of limitations to file avoidance claims on behalf of the commonwealth.

In Wednesday’s omnibus hearing, Judge Swain dismissed the claim without prejudice to adversary proceedings or other actions before the court, saying she had no jurisdiction on the matter at this time.

May 2 is the deadline to file avoidance actions for the commonwealth.

Under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) and the Bankruptcy Code, the board had two years to bring such actions, which can only be rolled under extraordinary circumstances.

Edward Weisfelner, an attorney for the Special Claims Committee of the fiscal board, said the task of identifying claims was huge. He said the panel narrowed down the claims it will seek for money paid by the government to amounts totaling $1 million and higher but that the number of claims is about 360,000.

“In the absence of tolling, we would be forced to file claims against thousands of individuals,” he said.

The judge asked whether there was precedent to the extension but Weisfelner said the island’s case was unique.

“Puerto Rico is sui generis,” he said.

Bruce Bennett, a lawyer for Employee Retirement System creditors, said the board had two years to bring the claims and that claiming it was distracted with other litigation was not sufficient justification.

“The idea that it gave priority to many other things is not an excuse,” he said.

Peter Hein, a retail bondholder, called for stopping the board and unsecured creditors from going after thousands of retail bondholders.

Weisfelner said he was not asking for an indefinite extension. In response to a question from Judge Swain, he said those affected by a claim would not be able to raise as a defense that the statute of limitations has been reached.

Among other things, Judge Swain rejected a request by the Unsecured Creditors Committee (UCC) to be appointed trustee to file avoidance actions on behalf of the commonwealth, and a motion seeking derivative action to investigate possible causes of action.

However, she approved a stipulation that will allow the UCC and the board to pursue avoidance actions decided by the fiscal panel. She postponed a decision on whether to appoint a receiver for the Puerto Rico Electric Power Authority (Prepa) and rejected a request filed by Hein calling for the appointment of a committee that would defend the interest of individual and small retail bondholders.

Earlier in the day, the group Construyamos Otro Acuerdo, which advocates for alternatives to the current debt restructuring; the Citizens’ Front for An Audit of the Debt; and the Feminist Collective protested in front of several banks on the island. The groups, which were promoting the so-called embargo of the banks and the cancellation of the debt, also brought their demonstration to the U.S. District Court.

Judge Swain reserved her opinion on a request from the Ad Hoc Group of General Obligation Bondholders, who seek to establish procedures to regulate objections involving claims asserted against Puerto Rico in connection with leases of the Puerto Rico Buildings Authority (PBA) and bonds it issued in 2010. The group opposes attempts to disallow $6 billion in general obligation (GO) and PBA bonds.

Mark Stancil, a lawyer representing the Ad Hoc Group, accused the fiscal board of trying to target certain bonds to engineer a plan of adjustment. He rejected claims that the PBA is a sham or a mechanism of disguised financial transactions guaranteed by the commonwealth that have not been calculated toward the debt limit.

In a lawsuit filed Dec. 21, the board said the PBA leases provide for the payment of about $401.6 million in annual “rent,” with an excess of $600 million in unpaid “rent” having accrued since the debtors’ respective petition dates.

The board sought a court ruling that the leases are not “true leases,” but rather disguised financing transactions.

“As a result, the PBA has no right under Promesa or the Bankruptcy Code to receive post-petition rent payments from the debtors or administrative claims against the debtors,” the board said, adding that some of the leases do not give rise to administrative claims against the government because the lessees are nondebtor entities. The government is also trying to annul some $6 billion in GO bonds.

UCC lawyer Luc Despins, as well as Susheel Kirpalani, a lawyer for the Lawful Constitutional Debt Coalition, objected the request, contending it was not ripe because the Ad Hoc Group has not established it would suffer damages. Despins mentioned the Ad Hoc Group was trying to obtain discovery on matters that would be litigated in the future. Lawyers for Ambac Assurance and QTCN Noteholder Group also objected Ad Hoc’s request.

On the other hand, the judge dealt with a request from National Public Finance to seek a receiver for Prepa. Robert Barrison, a lawyer for National, urged Judge Swain to stop granting extensions on the decision on whether Prepa should have a receiver.

“All Prepa bondholders need questions answered,” he said, adding it was urgent to rid the public electric utility of “gross mismanagement.”

Fiscal board lawyers rejected the idea of a receiver, adding that a restructuring support agreement for Prepa could take no longer than a week to come into fruition. The extensions were granted because of the negotiations. Judge Swain gave a one-week extension.

Unsecured Creditors blocked

Judge Swain rejected requests from the Unsecured Creditors Committee to be appointed trustee to pursue avoidance claims on behalf of the commonwealth and a motion in which the UCC sought derivative actions to pursue possible causes of action to recover fraudulent or illegal payments but approve stipulations between the UCC, the Special Claims Committee or SCC and the board on the rules for pursuing avoidance actions and other claims.

The UCC wants to go after parties that negligently helped increase the debt. In motions, it has mentioned Banco Popular and officers and directors of the Puerto Rico Government Development Bank (GDB) involved in the commonwealth’s $3.5 billion bond issuance in 2014, including Proskauer Rose, the law firm that is currently advising the board in the bankruptcy-like proceedings.

The board replied that it intended to file claims against individuals involved in certain issuances for breach of fiduciary duties and other actions but not go after parties using “speculative reasons.”

Despins said his firm was going to hire the law firm Genovese, which worked on the Enron case and also on behalf of Doral Bank, which is one of the unsecured creditors, to pursue the claims, adding that the firm had agreed to work on a contingency basis.

He noted that he will be pursuing claims that the board refuses to pursue, which he said would be released May 2, when the statute of limitations is reached.

“The people we want to sue are third party,” he said, suggesting the board may be reluctant to go after third-party claims because two board members previously worked for the GDB and private banks.

Weisfelner said Section 305 of Promesa prevented the court from granting the UCC’s request because the board had not consented.

“I tell you, your Honor, that motion is a gross distortion of what SCC (Special Claims Committee) intends to do…. We are going to sue 27 underwriters, nine law firms and five accounting firms,” he said, adding that the lawsuits will charge them with breach of fiduciary duties and constructive fraudulent transfers.

He noted that the UCC wants to use deepening insolvency as a cause for action, which is not used in local jurisdiction.

The board also feels it will have a better chance of prevailing if it argues as basis for claims that the party engaged in constructive fraudulent transfers rather than actual fraudulent transfers because “undertaking a heavier burden for the same amount of damages does not make sense.”

Weisfelner also said UCC’s attempts to go after GDB officers is futile because they have immunity from lawsuits. He said any defense will have to be paid with commonwealth funds. He also said underwriters expressly disavowed fiduciary duties to the commonwealth in agreements made for issuances.

He added they were going to go after officials that authorized so-called scoop-and-toss strategies to move certain debts to the following year to recoup funds obtained.

Ambac Assurance Corp., Assured Guaranty and lawyers for Oppenheimer Funds all objected to the appointment of the UCC as trustee because the entity is not a creditor.

Assured Guaranty mentioned that members of the committee are not listed as claimants against the commonwealth. Despins said Doral Bank and Service Employees International Union are creditors.

A lawyer for National Public Finance said the UCC’s motion, as to the claims it intends to follow, is too broad and speculative.

A lawer for the Committee of Retirees did not have an objection to the UCC acting as trustee or having derivative standing but with parameters or limits.

On the other hand, Weisfelner said he would object to the UCC hiring Genovese on a contingent basis, adding it should be paid hourly, as are the other law firms.

Peter Friedman, a lawyer for the Puerto Rico Fiscal Agency & Financial Advisory Authority (Aafaf), said it was unfair to blame GDB officials for the debt and noted that there was no precedent for Despins request because it calls for the UCC to replace the government in engaging in lawsuits.

Judge Swain rejected the UCC’s request on its entirety. She said Section 305 of Promesa supports her conclusion.

“If court grants the UCC request…it will be second-guessing the Oversight Board…. It is clear the Oversight Board opposes the motion and the court has no power to grant it,” she said.

Earlier in the hearing, Martin Bienenstock, a lawyer representing the board, provided a status report on the budget and fiscal plans. He said negotiations with unions toward a debt adjustment plan for the government are proceeding smoothly and that they are mediation with the Puerto Rico Judges Association regarding the treatment of its retirement system. He also said there was a lot of progress toward the restructuring of Prepa.

On the other hand, Judge Swain approved payments to law firms requested by the fee examiner but postponed until June the approval of certain standards law firms will have to follow to obtain payment.

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