FAQ About Fuel Supplier Litigation – PREPA


As you may be aware, the Oversight Board has announced it will commence litigation to
“avoid” and recover many millions of dollars in payments to fuel suppliers and fuel testing
laboratories that did business with PREPA. 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. Why are the fuel suppliers and laboratories being sued?

PREPA, Puerto Rico’s public utility company, generates much of Puerto Rico’s
electricity using oil-fired generators. Fuel oil purchases are the single largest expense in its
operating budget, comprising billions of dollars in expenditures every year. PREPA is required
by contract and environmental regulations to purchase only high-grade fuel oil, which is more
expensive and cleaner than low-grade oil.

In recent years, PREPA employees, ratepayers, and other whistleblowers have alleged
that certain PREPA fuel suppliers conspired with PREPA insiders for many years to sell PREPA
low-grade oil at high-grade prices. The fuel suppliers allegedly paid kickbacks to fuel testing
laboratories to falsify test results to show that the low-grade oil purchased was in fact high-grade.
The suppliers and insiders then pocketed enormous profits based on the significant market price
difference between the low-grade oil actually sold to PREPA and the high-grade oil they
purported to sell.

If true, this conduct harmed PREPA, PREPA’s creditors, and the ratepayers to whom
PREPA may have passed on the increased cost of fuel oil, and potentially caused damage to
Puerto Rico’s electricity infrastructure and environment.

2. Aren’t the Fuel Suppliers Already Being Sued?

Yes. A class of plaintiffs comprised of PREPA ratepayers has already filed a lawsuit
against the fuel suppliers and laboratories, as well as PREPA insiders and PREPA itself. The
class action plaintiffs allege claims primarily under the Racketeer Influenced and Corrupt
Organizations Act (“RICO”). The class action litigation is subject to the PROMESA automatic
stay. In other words, while PREPA adjusts its debts in its Title III case, the litigation is not
moving forward.

3. So why is the Oversight Board involved in this dispute?

The Oversight Board is involved because it has the authority and duty to prosecute
avoidance claims and recover funds for the benefit of PREPA and its creditors and ratepayers.
PROMESA gives this authority to the Oversight Board alone. Based on the facts known to the
Oversight Board, the claims appear valuable and merited.

Avoidance actions are very common in large bankruptcy proceedings, including those
involving government entities. The Bankruptcy Code, incorporated into PROMESA, gives the
Oversight Board authority to investigate and pursue claims on behalf of all Title III Debtors
(including PREPA). Moreover, the Oversight Board is uniquely empowered to “avoid” transfers
of property by Title III Debtors 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 legitimate creditors.

In sum, avoidance claims allow the Oversight Board to ensure that money transferred by
PREPA 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 ratepayers.

Importantly, the Oversight Board may avoid and recover transfers made by PREPA to
third parties regardless of whether the third parties, or PREPA itself, 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.

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

The Oversight Board states a number of claims, primarily in the nature of fraudulent
transfer. A fraudulent transfer may or may not mean actual fraud. A fraudulent transfer is, in
relevant part, 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 ratepayers.

In sum, the Oversight Board alleges that PREPA paid for high-grade fuel oil, but received
only low-grade oil, which was not reasonably equivalent in value. Thus, it is arguably entitled to
the difference in value between the market price of high-grade and low-grade oil at the time of
each transfer. Likewise, PREPA did not receive reasonably equivalent value for laboratory fuel
testing services, because the laboratory test results were purportedly inaccurate.

5. What diligence process did the Oversight Board undertake?

The Oversight Board has reviewed the filings in the class action lawsuit, the results of
various investigations into the scheme by public and private agencies, and other publicly
available documents.

6. Why doesn’t the Oversight Board simply join the class action?

The Oversight Board considered a number of procedural options to bring its claims
relating to the fuel oil purchases. One option was to “intervene” in the class action lawsuit and
bring cross-claims on behalf of PREPA against the other defendants. It is possible that the
Oversight Board could intervene in the future, or similarly could seek to consolidate avoidance
litigation into the class action.

However, as noted above, the avoidance claims the Oversight Board may bring against
the defendants are different from those brought in the class action, and are unique to the
Oversight Board and its authority under PROMESA. Moreover, the Oversight Board determined
not to involve itself in the litigation commenced by the ratepayers as to purported damages the
ratepayers sustained directly. Rather, the Oversight Board is seeking to preserve and pursue
avoidance claims in a separate litigation for the benefit of PREPA’s unsecured creditors and

7. How much money is at stake?

It is not currently possible to reduce PREPA’s damages to a dollar amount. The
Oversight Board will need to conduct discovery and litigation to better understand the damages
suffered by PREPA and its ratepayers. However, the Oversight Board expects that, as expressed
simply as the market price differential between low-grade and high-grade oil at relevant times in
relevant volumes, the harm could easily be in the billions of dollars.