In less than two years, lawyers and consultants participating in Puerto Rico´s debt restructuring process have requested more than $360 million in fees that were recommended by the fee examiner officer and approved by the court, according to an analysis by El Nuevo Día.
When adding the Oversight Board and the Fiscal Agency and Financial Advisory Authority (FAFAA) operating costs, payments for the Sales Tax Financing Corporation (Cofina) debt restructuring process and contracts granted by the administration of Alejandro García Padilla for debt renegotiation before Congress passed PROMESA, the collapse of public finances has cost Puerto Ricans nearly $1 billion.
COFINA´s restructuring process represented $332 million for funds and lawyers participating in the negotiation. Between 2014 and 2016, the government allocated more than $250 million in contracts to firms advising on restructuring issues and lobbying in Washington in favor of PROMESA. Proskauer Rose, Alix Partners, Millstein & Co., and Cleary Gottlieb are among those firms.
Meanwhile, without including professional services expenses, over the past three years, the Board and FAFAA´s budgets totaled nearly $50 million.
In August 2017, Brady C. Williamson and the Godfrey & Kahn firm were authorized by Judge Laura Taylor Swain to monitor and examine the bills filed by lawyers, financial advisors, economists, actuaries, administrative agents, and even public relations firms hired to handle Puerto Rico's bankruptcy.
Two years after Title III cases began, and according to Williamson's reports to Judge Swain, attorneys and consultants who bill the government continue to claim excessive refundable expenses and, although it´s been reduced, duplication of work persists.
Billing in Puerto Rico's bankruptcy
According to reports examined by El Nuevo Día, between May 2017 (when Puerto Rico filed for bankruptcy under PROMESA Title III) and last January, 47 firms have participated in Title III cases.
Specifically, the government pays for the fees consultants and attorneys working for the Oversight Board, FAFAA, the Unsecured Creditors Committee (UCC), the Official Committee of Retirees (COR, Spanish acronym), and advisors to the Mediation Team established by Swain and led byChief Judge Barbara Houser of the U.S. bankruptcy court for Texas' northern district.
The fees of attorneys hired by bondholders groups or municipal insurers have not been calculated on the costs identified by this newspaper.
In general terms, fees are generally billed approximately every three months.
Of the total firms participating in Title III cases, only 11 have headquarters in Puerto Rico. These include the law firms O'Neill & Borges; Cancio, Nadal, Rivera & Díaz, and Bennazar, García & Millán. The firms advising the Board and FAFAA in public administration, financial management, and economic policy matters are U.S.-based firms. McKinsey & Company; economists Andrew Wolf and Rafael Romeu, founder of Dev Tech Systems; FTI Consulting; Filsinger Energy Partners; Ernst & Young, and Deloitte & Touche, and others are among those firms.
When it comes to Title III bills already approved in court, only two cents on the dollar go to Puerto Rican professionals or to firms based on the island.
According to the president of the College of Certified Public Accountants (CPA), David González, one of the Board´s biggest mistakes was hiring so many external resources that had to spend a great deal of time learning about the situation in Puerto Rico.
That decision, González said, delayed the fiscal reorganization and debt restructuring processes, and therefore, made those processes more expensive.
According to González inefficiency in the process was largely the result of PROMESA since it did not establish a clear power structure for the Board, as was the case in Detroit and Washington, DC.
"There is no clear mandate, and the slower the process, with these people billing and more expensive firms, it doesn´t seem to be the best-case scenario," González said.
On the other hand, according to public accountants leader, without PROMESA, Puerto Rico would be on a cliff's edge, particularly since the local government has not paid its obligations in three years.
"With PROMESA, those actions were stopped, which should have helped to make some adjustments, but what we see is that after three years of meetings, we still have ghost contracts and with friends," González said.
During the first five billing cycles under Title III and recommended for approval, consultants and attorneys involved in this process claimed some $354 million in fees and another $10.5 million in reimbursable expenses such as travel expenses and meal charges.
The business of bankruptcy
"These firms have billed $360 million in two years, that was what a few years ago by the U.S. Comptroller's Office estimated this process would cost in five years," said attorney Rolando Emmanuelli.
The last certified fiscal plan estimates the debt restructuring process cost at $1.5 billion by 2023.
For Emmanuelli, who is in Washington for the Supreme Court's oral hearing to review the constitutionality of the Board, Title III cases billing process shows another deficiency of PROMESA.
Emmanuelli, who represents the Electrical Industry and Irrigation Workers Union (Utier), said that when PROMESA was approved, they did not include in the statute that the U.S. Trustee had to examine the fees, as it happens in bankruptcy cases.
"This Chapter 9 (of the Bankruptcy Code) is an industry," Emmanuelli said. "They are specialized law firms, whose fees are exorbitant."
Emmanuelli said the first time he attended a Puerto Rico bankruptcy mediation session, the familiarity between the attorneys representing all the parties surprised him.
"They see Puerto Rico as a huge market because of the size of the debt and because reportedly there might be another law like PROMESA since there are like five states in serious financial problems," Emmanuelli said.
According to Emmanuelli, although Swain tried to remedy PROMESA's deficiency by appointing a fee examiner since the judge's oversight resources are limited, there were only a few results.
In Emmanuelli's opinion, since the Board and FAFAA are the "clients" of these firms, they should be responsible for the bills Puerto Rico pays. This is because, in addition to the duplication of work that Williamson noted, both the fiscal entity and the government agreed to pay fees that are not related to the Puerto Rican market.
For example, U.S. law clerks charge about $300 an hour. That's usually what a renowned lawyer charges in Puerto Rico, Emmanuelli said.
In open court, Swain urged both agencies to be prudent when in hiring lawyers and consultants.
"That's why our argument before the Supreme Court that if this board is unconstitutional, then something will have to be done with all this that happened," Emmanuelli said.