Oversight board justifies spending $858 million on legal fees

By The Star Staff

The Financial Oversight and Management Board for Puerto Rico has justified the $858 million it has charged so far in legal fees in Puerto Rico’s bankruptcy processes, saying it is unavoidable because of the U.S. commonwealth’s large debt.

“The expenses incurred in Puerto Rico’s process to emerge from bankruptcy are substantial but unavoidable to reduce its debt burden,” the oversight board said in a written statement. “Puerto Rico’s debt is large, unsustainable, and extraordinarily complex. The restructuring is occurring under an orderly, judicious, and equitable bankruptcy process that has already yielded, and will continue to yield, significant savings for the people of Puerto Rico.”

“Puerto Rico’s about $130 billion bankruptcy is the largest in municipal bond history, exacerbated by economic decline, recession, significant outmigration, and natural disasters,” the board added. “The debt was issued by more than a dozen public entities. More than 165,000 creditors have filed proofs of claim.”

The legal expenses incurred are a fraction of the savings that have been achieved and will be achieved in the future through a substantial reduction of debt service payments, the oversight board said. The expenses incurred so far are less than 1% of the savings the oversight board has generated for the people of Puerto Rico through completed debt restructurings, the statement said.

The restructuring of the debt of the Puerto Rico Sales Tax Financing Corp. alone saved Puerto Rico $17.5 billion in debt service payments, and reduced the total nominal debt outstanding by $6 billion, from $18 billion to $12 billion. The debt of the Government Development Bank was reduced by $2 billion, from $5 billion to $3 billion. The reprofiling of the Puerto Rico Aqueduct and Sewer Authority’s debt reduced total debt payments by $380 million over 10 years, and the reprofiling of the Puerto Rico Infrastructure Financing Authority’s debt saved Puerto Rico $82.5 million.

“Further, a significant share of the Oversight Board’s legal fees is the result of litigation initiated by creditors and the Government of Puerto Rico, who, notwithstanding the costs, continue to assert claims against which the Oversight Board must defend, including an appeal filed last night by the government in the U.S. Court of Appeals for the First Circuit related to five laws the U.S. District Court for the District of Puerto Rico previously ordered the Government not to implement due to its failure to comply with PROMESA [the Puerto Rico Oversight, Management and Economic Stability Act],” the oversight board said.

To date, professionals subject to Title III review of their fees have filed and submitted to the fee examiner applications for $831.9 million in fees and $26.4 million in expenses. The number of firms working on the case went from 34 in 2018 to 43 in 2020.

Andrew Hennigan, an attorney, said there is no meaningful relationship between the debt total to be restructured in a bankruptcy case and the required number of hours to be worked, hourly rates charged, and total fees billed by professionals.

Fee Examiner Brady Williamson in a filing last week complained to the court about the duplication of work that is impacting fees.

“The single broadest and most costly category of unreasonable and unnecessary services involves inefficient staffing, including within firms and across firms representing the same client or clients allied in interest,” Williamson said in the filing. “Within any single firm, the problem presents itself as daily time recorded and billed by individual professionals -- whether partners/shareholders, associates or of counsel, and administrative staff -- duplicating efforts, apparently providing the same service or completing the same task, or providing a service that might have been better delegated.”

“The examples are legion -- most obvious in the context of hearings and depositions,” the fee examiner added. “The shift to virtual platforms actually may be exacerbating the phenomenon -- travel to San Juan or New York is no longer required to participate in most case events, inviting broader participation but also potentially greater cost. The mediation process is a present example. While the Fee Examiner is not a participant, by definition the number of mediation parties and counsel not subject to Title III fee review (primarily bondholders or guarantor groups) surely exceeds those that are subject to review. Nevertheless, the prospect of so many individual professionals engaged in or observing mediation sessions presents very concrete billing judgment and fee review challenges. The sheer number of participants -- reflected on filed or ultimately filed applications -- does not enhance public perception of value provided.”

Williamson noted a pleading filed in the Employees Retirement System litigation that was five pages long but was signed by more than 25 individual attorneys.

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