Bankruptcy Law News

Puerto Rico Creditors Again Seek Discovery as Clock Ticks

Nov. 28, 2018, 10:05 PM

Unsecured creditors in Puerto Rico’s mammoth insolvency proceedings have asked the court to allow them to investigate possible legal claims that might lead to recovery benefiting the island’s creditors.

The motion is of some urgency because time is running out to file lawsuits to recover money or property.

The Official Committee of Unsecured Creditors’ Nov. 27 motion is its third request for permission to probe for possible lawsuits and comes after an independent investigator issued a “woefully deficient” report on such possible claims, in the committee’s words.

The extent of discovery is limited, the committee said. It seeks from the various Puerto Rico government entities in insolvency proceedings under the 2016 federal law known as PROMESA a list of all transactions of at least $3 million for the two-year period before the cases were filed in May 2017.

Certain provisions of the bankruptcy code that PROMESA incorporated allow a debtor (or an entity operating on behalf of a debtor, like a trustee or official committee) to undo and recover transfers of money or assets that either preferred a particular creditor or were “fraudulent.” A fraudulent transfer might refer to one made with intentional fraud, or it could be one for which reasonably equal value wasn’t given in exchange.

Urgent Motion

The committee’s motion is urgent because the statute of limitations for filing any such lawsuits to recover alleged preferential or fraudulent transfers will expire beginning in May 2019, two years after various Puerto Rico government agencies filed the restructuring cases.

The motion also seeks the appointment of a trustee to be in charge of pursuing any such claims, under section 926 of the Bankruptcy Code—an option reserved for municipal bankruptcies.

The committee has twice before sought an order allowing it to conduct discovery to investigate possible claims. The federal district court denied its first motion, filed in July 2017, because the Financial Management & Oversight Board—created by Congress to oversee the territory’s financial recovery efforts—had engaged a firm to investigate the claims.

When the investigator hadn’t filed its report by May 2018, the committee renewed its request. Again the court denied the motion, understanding that the report would be filed soon, the committee said.

The investigator’s report, finally filed in August 2018, was inadequate, the committee said. It didn’t “opine on the likelihood of success” of any potential litigation. In fact, the report didn’t even answer whether any avoidance actions could even by brought in the case, the committee said.

The motion is set for hearing before U.S. Magistrate Judge Judith Dein of the U.S. District Court for the District of Puerto Rico on Dec. 19.

Paul Hastings LLP represents the committee. The Commonwealth of Puerto Rico is represented by Proskauer Rose LLP.

The case is In re Fin. Oversight & Mgt. Board for Puerto Rico, D.P.R., 17-03283, Motion 11/27/18.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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