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Unsecured Puerto Rico creditors seek discovery on avoidance actions

By on November 28, 2018

SAN JUAN – Expressing its frustration to the U.S. District Court, the Official Committee of Unsecured Creditors–in all Title III cases, except the Sales Tax Financing Corp.’s, under the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa)–renewed a request Wednesday to investigate possible avoidance actions that could be asserted by the government to recover assets that could be used to pay creditors.

The committee, which is represented by lawyer Luc Despins, says no such investigation has been conducted by the island’s Financial Oversight and Management Board. Time is quickly running out because the statute of limitations on avoidance actions for three debtors, including the Commonwealth, expires in May.

What are avoidance actions? Under the Bankruptcy Code, a trustee or, in this case, a creditor, has the power to bring assets into the bankruptcy estate through the avoidance of certain transfers that occurred before the bankruptcy filing. These transfers include fraudulent ones or those made while the debtor was insolvent, among others.

“To ensure that these potentially valuable assets of the Debtors are not lost, and to protect the right of creditors under section 926 of the Bankruptcy Code to seek appointment of a trustee to prosecute Avoidance Actions where the Debtor refuses to pursue such causes of action, the Committee must be allowed to obtain, at the very least, some basic information from the Debtors concerning such potential claims,” the committee said in court documents.

The creditor group’s request, however, is limited. It says it wants debtors, other than those of the Sales Tax Financing Corp. (Cofina by its Spanish acronmy), be required to produce a list of all transfers of $3 million or more during the two years preceding the petition date in each of the bankruptcy-like Title III cases.

It is not the first time the committee has made the request to identify avoidance actions. In July 2017, the committee sought information relating to potential causes of action and “potential improprieties and misconduct relating to the structuring, issuance, underwriting and selling of the Commonwealth’s debt which may have impacted the value of the Commonwealth’s Estate.”

The response the committee received at that time was that the investigation would instead be handled by a firm, Kobre & Kim LLP, appointed by the fiscal oversight board to investigate the causes of the debt. However, the final report, issued in August, did not provide information on any possible commonwealth claims or avoidance actions.

The fiscal board recently proposed employing another counsel to conduct a further investigation, but the counsel has not yet been identified. The board also created a sub-committee, whose work in identifying claims remains under wraps.

“The Committee, which has a fiduciary obligation to review the Debtors’ prepetition conduct, cannot afford to keep waiting, hoping that the Oversight Board will eventually investigate Avoidance Actions. The Committee, at the Court’s direction, has already adopted a ‘wait and-see’ approach for more than 18 months and now only five months remain until the statute of limitation expires with respect to most of the Debtors’ Avoidance Actions,” the committee said in a document filed by the law firm Paul Hastings and local law firm Casillas, Santiago & Torres.

“Given the significance of the task at hand and the fact that Avoidance Actions sometimes provide material recoveries in bankruptcy cases, time is of the essence,” the creditor committee said.

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