March 13, 2019
A recent Caribbean Business story by Eva Llorens Velez, “Legal Fees in Puerto Rico Bankruptcy Drop,” reports that the examiner of fees charged by lawyers and professionals in Puerto Rico’s bankruptcy said fees have dropped to $71 million for the June to September period compared with the previous four-month period. Fee examiner Brady C. Williamson resubmitted to the court a proposed order imposing additional standards to collect fees. He also proposed an order setting procedures for interim compensation, all of which he said could be tackled in the omnibus hearing set for April.
At the Dec. 19, 2018, omnibus hearing, the court denied without prejudice the fee examiner’s motion to impose additional presumptive standards. The new proposal incorporates comments from professionals. However, it maintained a 5 percent a year limit on rate increases for partners/shareholders and a 7 percent-a-year presumptive limit on “step,” or seniority, increases for associates.
Through the interim period that ended in September, firms subject to the Puerto Rico Oversight, Management and Economic Stability Act’s (Promesa) fee-review process have requested more than $306 million in total interim compensation, at least $5.9 million of the total attributable solely to rate increases, Williamson said. “That is the amount requested to date that, with or without specific client and Court approval, is the direct result of increases in the hourly rates charged at the outset of each professional’s engagement,” he explained.
Through the third interim period (February through May 2018), the collective and cumulative rate increases totaled almost $4 million. While the 2018 cost increases for the 50 largest firms exceeded 7 percent, according to a Citi report, Williamson said the goal is not to try to regulate professional revenue or profit, but to suggest boundaries for prospective hourly rate increases that comply with Promesa’s reasonableness standards and seek to manage both the immediate and long-term impact on the cost of the proceedings.
At the December hearing, the court noted the “unique situation” presented to professionals by these proceedings, asking the fee examiner to reconsider the initial rate increase recommendations and noting a 2 percent annual rate of inflation in New York, where most of the law firms are located.
The fee examiner said the Feb. 15 decision by the U.S. Court of Appeals involving the composition of the Promesa-established fiscal oversight board for the island “does not conclude that constitutional litigation, nor have all of its consequences yet been felt or appreciated,” and that he “already has engaged professionals on the continuing need to avoid duplicative efforts with further appeals or related activity involving the legislative and executive branches of the federal or Commonwealth governments.”
Williamson also said a particular difficulty inherent in Promesa’s Title III structure, given the board’s role as debtor representative, has been identifying the “client” of each financial adviser. For example, Deloitte Financial Advisory Services and Ernst & Young LLP are both financial advisers to the commonwealth, with Ernst & Young LLP reporting to the board and Deloitte FAS reporting to Puerto Rico’s Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym). Many financial professionals, whether working for a flat fee or an hourly fee, provide advice on one or more aspects of a debtor’s finances. However, for example, Ankura Consulting Group is the financial adviser to the Puerto Rico Electric Power Authority and no other debtor.