Puerto Rico Title III Cases – Lead Case No. 17-03283-LTS

As you may be aware, the Oversight Board has announced it will commence litigation to “avoid” and recover billions of dollars in payments to hundreds of contractors who did business with Puerto Rico between 2013 and 2017.  This FAQ page is intended to answer some of the most frequently asked questions (FAQs) about this litigation.

If you have additional questions after reviewing the information on this page, you can contact the Oversight Board via its attorneys by sending an email to pradvpro@brownrudnick.com or calling 617-856-8396.

  1. What is an “avoidance” action and why is it necessary?

The Bankruptcy Code, incorporated into PROMESA, gives the Oversight Board authority to “avoid” transfers of property by Title III Debtors (the Commonwealth, ERS, HTA, and PREPA) made within a certain period prior to the filing of their Title III petitions.  This means the court can render the transfers contrary to law and the Oversight Board can bring the money back to Puerto Rico.

Avoidance actions are very common in large bankruptcy proceedings, including those involving government entities.  They allow debtors to ensure that money transferred to third parties in the period before bankruptcy was appropriately and fairly spent, and if not, recover that money for the benefit of creditors and taxpayers.  Importantly, avoidance actions of this type do not intend to convey that a vendor committed any wrongdoing.  Rather, avoidance actions ensure no one creditor is favored by payments made prior to the bankruptcy filing and that a fair distribution of a debtor’s assets is made in accordance with applicable law.

  1. What is the Oversight Board’s basis for filing this litigation?

There are essentially two different legal theories for these avoidance actions: preference and fraudulent transfer.

A preference is a payment in the 90 days prior to the bankruptcy to a “preferred” creditor, i.e., someone who got paid more than usual when others in similar situations were not being paid due to Puerto Rico’s insolvency.  (For parties with family relationships to elected officials, and others with “insider” relationships to the government, the relevant period is one year, not 90 days.)  To test for this type of liability, the Oversight Board took a close look at any party that received an unusually large volume of payments in the 90 days before a Title III petition was filed.

A fraudulent transfer may not mean actual fraud.  Fraudulent transfer claims can be complicated, but most importantly a fraudulent transfer is a payment made for which Puerto Rico did not receive “reasonably equivalent value” in exchange.  If not, even if the transfer was not intentionally wrongful or fraudulent, Puerto Rico can recover the funds because the money rightfully should benefit all creditors and citizens.

In these cases, the Oversight Board paid special attention to whether recipients of payments had properly registered contracts with the Office of the Controller that corresponded to the payments received.  Under Puerto Rico law, failure to register contracts, failure to make a contract in writing, and payments in excess of amounts allowed by contract, are all grounds to find the contract was void, and recover amounts paid on the contract.  The Bankruptcy Code meshes with Puerto Rico law and permits the Oversight Board to recover amounts paid in violation of Puerto Rico law.

  1. Who is the Oversight Board going to sue?

Importantly, the Oversight Board has given all parties the opportunity to sign a “tolling agreement” to permit the Oversight Board and counterparty time to attempt to consensually resolve the issues, including as to further review the relevant payments and any contracts produced by the counterparty.  If payments are properly documented and contracts properly registered, the Oversight Board will not sue.

More generally, the Oversight Board is looking only at vendors who received more than $2.5 million over the course of 2013-2017.  After conducting a cost-benefit analysis, the Oversight Board determined that pursuing actions against entities receiving less than $2.5 million was not cost-effective.

The Oversight Board is not going to sue any non-profits, religious entities, or government entities.

  1. How much money is at stake?

The Oversight Board is only commencing lawsuits (and sending tolling agreements) after reviewing hundreds of thousands of payments and contracts.  All of the vendors identified as potential preference and fraudulent transfer defendants exhibited “indicia of liability,” such as that the Office of the Controller has no record of any contract with the vendor.  Because failure to register with the Controller is unlawful and results in a null contract and recovery of all payments allegedly made on such contract, the non-existence of a contract is a strong indication of avoidance liability.

Approximately $4.2 billion in payments to about 330 different vendors fit the Oversight Board’s criteria for liability.  The Oversight Board has negotiated tolling agreements with several dozens of these vendors, and either did not get a response from or couldn’t negotiate an agreement with the others.  It is not yet clear what portion of these payments will ultimately be subject to litigation, or will be actually recovered.

  1. What if the Oversight Board makes a mistake?

Mistakes do happen, and reasonable explanations are common.  If a vendor demonstrates a proper basis for the payments at issue, the Oversight Board will not sue (or will dismiss suits after filing).

  1. My company has received a tolling agreement proposal, and/or been sued. What should we do?

The Oversight Board and its attorneys cannot advise you how to respond.  However, you may wish to consult with an attorney to make you understand you rights.

For general information and to clarify materials received from the Oversight Board and receive translated versions of some documents, send an email to pradvpro@brownrudnick.com or call 617-856-8396.  Please note that not all documents are available in Spanish.

The basis for the communications received or lawsuit commenced is the payments you or your company received from Puerto Rico during 2013-2017.  Copies of contracts, invoices, receipts, and other documents relating to your work for or with Puerto Rico during that period are likely to be relevant and should not be destroyed.