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Puerto Rico Unsecured Creditors, fiscal board committees allowed to pursue claims

By on May 16, 2019

New York’s Alexander Hamilton U.S. Custom House, where Thursday’s hearing was held (CB photo)

Judge Swain says that since Trump has yet to renominate board, its ‘future status’ is in question, and arguments over UCC conflicts were unpersuasive

SAN JUAN – U.S. District Court Judge Laura Taylor Swain granted Thursday the Unsecured Creditors Committee (UCC) and the Puerto Rico fiscal oversight board’s Special Claims Committee (SCC) derivative standing to pursue claims on behalf of the commonwealth Employees Retirement System (ERS) and the Highways and Transportation Authority (HTA).

The judge made her ruling at the end of a hearing in which she also approved a stipulation agreed upon by the UCC, the fiscal board and its SCC regarding the allocations of litigation responsibilities to assert causes of action on behalf of HTA and ERS, both of which filed for bankruptcy under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) in 2017.

May 20 is the statute of limitations for the two entities, which filed for bankruptcy on that day two years ago, to file avoidance claims, which are generally brought against corporations or individuals that received payment from the debtor sometime before the filing of the bankruptcy or to avoid so-called fraudulent transfers.

The stipulation approved by the judge was designed to address the so-called “Aurelius risk” by appointing the SCC and the UCC as co-plaintiffs to assert causes of actions the fiscal board would assert on its own. The Aurelius risk refers to the possibility that the board’s actions may be challenged after the U.S. First Circuit court decided, in Aurelius v. Puerto Rico, that the board was unconstitutional because its members were not appointed with the consent of the U.S. Senate. The court pushed the stay on the board’s mandate from late May to July 15 to allow President Trump and Congress to correct the situation.

At an April 24 omnibus hearing, Judge Swain had approved a stipulation to bring causes of action on behalf of the commonwealth that was similar to the one designed for the HTA and the ERS.

“In summary, the court previously determined that it has the authority to approve a consensual grant of derivative standing. The court further determined that the Oversight Board’s decision to share its responsibility to pursue causes of action in light of the so-called Aurelius risk constitutes the necessary ‘refusal’ for purposes of Section 926A of the Bankruptcy Code. The court adopts and incorporates by reference its early reasoning regarding consensual derivative standing in Section 926 of the Code,” the judge said.

“Necessity” and “debtor benefit,” Judge Swain added, support the grant of authority to the UCC and members of the board’s SCC to pursue causes of actions for HTA and ERS, which are expected to be commenced in the next few days. She noted that Service Employees International Union, which forms part of the UCC, meets the “requisite creditor status” because its members also have claims against the ERS.

Although Trump has indicated that he intends to renominate the board’s current members to continue serving their terms, “he has not acted on his intention to do so,” the judge said, and the First Circuit’s stay of its mandate is set to expire July 15.

“Therefore, despite the arguments made by the objectors, the future status of the Oversight Board remains in question and the movants are still in a situation where the Oversight Board authority to prosecute the actions may expire or be interrupted after the May 20th deadline. In the face of such uncertainty, it would be imprudent for the court to deny the requested relief,” Judge Swain said.

The UCC is the proper party to be appointed as co-plaintiff and co-trustee in the cases, the judge further said, because it is the only committee that has been appointed in both the HTA and ERS cases. She added that arguments raised regarding conflicts within the committee were unpersuasive.

The stipulation pursues claims against third parties and not inter-debtor claims because those are the subject of a tolling stipulation agreement approved by the court May 2.

The judge dismissed claims that the UCC’s stance in the commonwealth’s case may impede it from acting properly on behalf of HTA and ERS creditors, as it would advocate that any money collected go to commonwealth creditors.

“The fact that a pending motion exists that challenges the authority of the UCC in the ERS case does not change this analysis,” she said.

During the hearing, UCC’s lawyer, Luc Despins, said the status of the board was uncertain because Trump had yet to renominate its members.

“That process will not be completed by Monday,” he said, referring to the May 20 expiration of the statute of limitations.

In response to claims that the UCC is conflicted because it has defended the position of the commonwealth and would be unable to defend the positions of ERS and HTA creditors, Despins said the UCC has a fiduciary duty to defend the interests of all creditors. He also said the committee does not have the authority to make decisions regarding funds recovered by the debtors.

Regarding the types of avoidance actions that will be brought on behalf of ERS and HTA, Despins said there will be preference actions to recover money paid fraudulently by the entities. There will also be actions to claw back payments made in bonds, which will be stayed pending the court’s decision on whether certain issuances were legal.

He also said there will be lien avoidance actions but that those involve ERS bonds. In March, the UCC filed an objection to all claims that may be asserted against the ERS based on $3 billion in bonds issued by the pension system in 2008, arguing it did not have the authority to borrow through public bonds.

A lawyer from the firm McConnell Valdés opposed the stipulation, noting the aftermath of by the avoidance claims brought by the fiscal board against hundreds of government suppliers, making them liable for millions of dollars.

“You would expect a high level of diligence, especially in dealing with a deadline they knew was approaching,” the lawyer said in reference to the May 20 deadline.

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