FAQ About Bankruptcy Avoidance Actions – PREPA


As you may be aware, the Oversight Board has announced it will commence litigation to
“avoid” and recover millions of dollars in payments to contractors who did business with PREPA
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 (including 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 PREPA for the benefit of
ratepayers and creditors.

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.

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

There are essentially two different legal theories for these avoidance actions: preference
and constructive 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 PREPA’s insolvency. (For PREPA’s officers and directors, and others with “insider”
relationships to PREPA, 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.

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

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
recover amounts paid on the contract. The Bankruptcy Code permits the Oversight Board to
recover amounts paid in violation of Puerto Rico law.

3. What diligence process did the Oversight Board undertake?

The Oversight Board reviewed voluminous records concerning billions of dollars of
transfers from PREPA to its many contract counterparties, including suppliers of fuel, equipment
and maintenance and repair services, over the course of 2013-2017. After reviewing those
records, the Oversight Board determined to conduct further review only of vendors who received
more than $2.5 million in the aggregate from PREPA in the relevant period. 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. Of the parties receiving more than $2.5
million, the Oversight Board removed all non-profits, religious, and government entities from

Over 100 entities remained following these initial layers of review. The Oversight Board
then met several times and exchanged information with representatives of both PREPA and the
Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) regarding the potential
impact of contemplated litigation against PREPA vendors, in an attempt to minimize interruption
to PREPA’s day-to-day operations and rebuilding efforts. The Oversight Board conducted
additional diligence prior to commencing negotiations or litigation with any party PREPA or
AAFAF identified as critical to ongoing operations, seeking information from PREPA to verify
critical status and to provide evidence of a current contractual relationship.

4. Who is the Oversight Board going to sue?

Importantly, the Oversight Board has given many parties the opportunity to sign a
“tolling agreement” to permit the Oversight Board and the 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.

The Oversight Board determined to pursue claims against vendors, if a tolling agreement
was not entered into or PREPA was unable to provide evidence of a current contractual
relationship with vendors identified as critical, or provide additional corroborating information
relating to other vendors.

5. 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.

The Oversight Board has either commenced or tolled dozens of avoidance actions
regarding transfers of several hundred million dollars in the aggregate. The Oversight Board has
negotiated tolling agreements with some of these vendors. It is not yet clear what portion of
these payments will ultimately be subject to litigation, or will be actually recovered.

6. 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).

7. 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 help you understand your 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 PREPA 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.

8. Will the PREPA avoidance actions be part of the “Informal Resolution” process
established in the other Title III cases?

Yes. Defendants to the PREPA avoidance actions can refer to the following website:
https://cases.primeclerk.com/puertoricoavoidanceactions/Home-Index for more information
about the informal resolution process. Through this process, the Oversight Boards hopes to
resolve many of the avoidance actions without litigation. For more information and to
commence this process, please call 617-856-8396.