PREPA creditors, board clash on potential impaired class discovery

Puerto Rico Electric Power Authority creditors and the Puerto Rico Oversight Board filed opposing requests to the bankruptcy court concerning discovery into a deal the board said could be key to approving its plan of adjustment.

Fuel line lenders to the authority filed a motion on Nov. 4 to examine a deal the board had reached with Vitol, which had provided fuel to PREPA in the early 2000s. On Thursday night the board filed an objection to the fuel line lenders’ motion but released the board’s agreement with Vitol, partly meeting the lenders’ demands. Also on Thursday night, the PREPA bond trustee and a group of PREPA bondholders and bond insurers filed a joinder supporting the fuel line lenders’ motion.

One impaired class must vote for a PREPA plan of adjustment under the Puerto Rico Oversight, Management, and Economic Stability Act for U.S. District Court for the Southern District of New York Judge Laura Taylor Swain to approve it. On Nov. 2 the board told Swain in a hearing that Vitol could serve as an impaired class that would vote for the board’s proposed plan of adjustment.

In the fuel line lenders’ motion, they requested “information about the actual terms of the agreement between the board and Vitol, including the circumstances under which Vitol’s commitment to vote in favor of the plan arose.”

Vitol in 2007 pleaded guilty to larceny in a New York court with regard to a “corrupt scheme to obtain oil from Iraq by paying millions of dollars in illegal kickbacks to Iraqi officials,” the lenders quoted the board saying in a May court brief. In 2009 and 2012, PREPA invoked a Puerto Rico law that bans the awarding of contracts to entities convicted of corruption-related crimes when it attempted to end the contracts and recover payments made to Vitol. Vitol sued for unpaid fuel bills.

After a decade of litigation, a court took a middle stance between the parties and ordered PREPA to pay $28.5 million plus interest, which now means there is a total owed of $41.5 million. 

In May, the board filed an appeal. But in July it and Vitol filed a motion to hold the appeal in abeyance, saying they had reached an agreement to settle. In August, they asked for the case to be dismissed and in September the court did so. 

PROMESA’s requirement of an impaired consenting class “is a core substantive creditor protection meant to ensure the fairness of the resulting plan of adjustment,” the fuel line lenders said in their motion.

“The use of undisclosed side arrangements to create the acceptances needed to confirm debt restructurings in PROMESA’s predecessor statutes has long been a concern, including to the United States Supreme Court,” the fuel line lenders said. “It thus should come as no surprise that counsel’s announcement generated concerns about a myriad of potential problems with the board’s proposed plan, including improper classification, gerrymandering of an impaired accepting class, the good faith of the forthcoming plan, and whether a ‘class’ of one small creditor that the Oversight Board (until recently) was arguing is owed nothing is a legitimate impaired accepting class under these circumstances.”

The fuel line lenders said the classification of Vitol as an accepting impaired creditor should be looked at now to be sure the board is making progress to a viable proposed plan of adjustment being submitted by Dec. 1, which Swain has directed.

The bondholders filed a joinder agreeing with the fuel line lenders’ request and said they should also be allowed to request documents concerning the Vitol deal.

In response to the fuel line lenders, the board said since PREPA would be granting a release to Vitol, something it was not doing for other creditors, Vitol should be given a separate voting class among PREPA creditors.

In its court filing Thursday, the board released the agreement it made with Vitol but said further discovery about the circumstances of its creation was not appropriate at this time. The fuel line lenders’ motion “is premature because it seeks discovery regarding the confirmability of a non-existent hypothetical proposed plan.” The board said it was also premature because after the board proposed a plan of adjustment, the court would likely issue an order governing efficient discovery.

The board said giving the lenders discovery over settlement communications between the board and third parties “would generally chill settlement negotiations and could ultimately obstruct settlements.”

The board urged the court to deny the lenders’ motion.

Swain has assigned United States Magistrate Judge Judith Dein the task of considering the fuel line lenders’ motion.