Thursday, May 23, 2019

Puerto Rico fiscal board requests avoidance claims delay

By on April 4, 2019

The fiscal board’s executive director, Natalie Jaresko; Chairman José Carrión; and members Ana Matosantos and David Skeel (CB file)

Says it has ‘been unable to complete this massive undertaking’

SAN JUAN – Puerto Rico’s Financial Oversight and Management Board has asked the U.S. District Court to delay the time prescribed by the Bankruptcy Code to bring avoidance and recovery actions related to the payments made on certain bonds issued by the Commonwealth of Puerto Rico, the Employees Retirement System (ERS) and the Public Buildings Authority (PBA).

The fiscal oversight board said it could otherwise have to litigate the avoidance claims held by the commonwealth and ERS no later than May 2 and May 20, respectively.

Avoidance claims are those in which a debtor or trustee attempts to recover money from debt the debtor paid before filing for bankruptcy because it may have been done so fraudulently or illegally.

The board said it has been working with the island’s Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) and the Unsecured Creditors Committee–which sued to compel the board to submit its avoidance claims– to identify and pursue valuable claims before they expire. The board and the UCC are also collaborating on a suit that seeks to annul $6 billion in bond issuances after 2012 as well as $600 million in PBA bonds.

The commonwealth made billions of dollars in payments of principal and interest to holders of the so-called “challenged bonds” during the four-year “lookback period” before the initiation in 2017 of the bankruptcy cases under Title III of the Puerto Rico Oversight, Management,and Economic Stability Act (Promesa) that seek to restructure some $70 billion in debt.

“To pursue avoidance and recovery of these payments, the Oversight Board must identify the holders of Challenged Bonds who received payments of purported principal and interest, which payments may be avoidable under PROMESA and the Bankruptcy Code, depending on the outcome of the Joint Claim Objection, the ERS Bond Objection, and the Ad Hoc Objection, respectively,” the document, filed April 2, reads.

Because Puerto Rico did not designate an indenture trustee to administer the $6 billion in bonds, the board said it must identify each holder and the payments made for each.

“At this time, the Oversight Board, together with the UCC, has been unable to complete this massive undertaking. The Oversight Board has acted promptly to appoint a special committee and retain professionals to discharge its duty under PROMESA to, among other things, investigate and pursue potential viable claims and causes of action,” the board said.

The oversight panel provided a list of tasks the claims counsel is performing, including reviewing a 600-page report outlining, “but not recommending or describing in detail, certain litigation claims, not including avoidance claims under the Bankruptcy Code”; as well as 80,000 documents provided “that support the facts and legal analysis contained in the Final Report, representing only 40% of the 200,000 documents believed to exist”; “records of tens of thousands of transfers by the Title III debtors to third parties during the four-year avoidance period prior to the Petition Dates; securities Position Reports similar to, but not adequately substituting for, the approximately 596 reports and hundreds of notices of participation filed by the holders of bonds that are objecting the invalidation” of their debt, as was described by the panel.

“At the time of this filing, requested documents continue to trickle in,” the board said, adding that it is also “assembling appropriate pleadings to preserve valuable” claims.

“As a result of these efforts, the Oversight Board is prepared to file hundreds of complaints to preserve potential avoidance Actions and to seek consensual tolling of, or otherwise pursue, potential third party claims relating to Puerto Rico’s financial crisis. However, it simply has been unable to confirm the identity of all appropriate Challenged Bond Avoidance Defendants, given an apparent lack of any central record-keeping to track exactly which bondholders received payments on which dates, and in what amounts,” the board explained.

The board is seeking to have the matter heard at an April 24 omnibus hearing.

Meanwhile, U.S. hedge fund Aurelius Capital Management filed a motion Wednesday seeking to preserve its rights to challenge all actions taken by the board and its members since its establishment, including the recent debt adjustment plan for the $16 billion Sales Tax Financing Corp., or Cofina, debt.

The First Circuit Court of Appeals recently declared the board unconstitutionally constituted because its members were not selected as stipulated by the Constitution’s Appointments Clause. The matter is in appeal even though, reportedly, President Trump may reappoint the current board members.

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