[Senate Report 117-48]
[From the U.S. Government Publishing Office]


                                                      Calendar No. 182
117th Congress     }                                    {       Report
                                 SENATE
 1st Session       }                                    {       117-48

======================================================================



 
   PUERTO RICO RECOVERY ACCURACY IN DISCLOSURES ACT OF 2021 (PRRADA)

                                _______
                                

               December 13, 2021.--Ordered to be printed

                                _______
                                

         Mr. Manchin, from the Committee on Energy and Natural 
                   Resources, submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 1192]

    The Committee on Energy and Natural Resources, to which was 
referred the bill (H.R. 1192) to impose requirements on the 
payment of compensation to professional persons employed in 
voluntary cases commenced under title III of the Puerto Rico 
Oversight Management and Economic Stability Act (commonly known 
as ``PROMESA''), having considered the same, reports favorably 
thereon with an amendment (in the nature of a substitute) and 
recommends that the bill, as amended, do pass.

                               AMENDMENT

    The amendment is as follows:
    Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Puerto Rico Recovery Accuracy in 
Disclosures Act of 2021'' or ``PRRADA''.

SEC. 2. DISCLOSURE BY PROFESSIONAL PERSONS SEEKING APPROVAL OF 
                    COMPENSATION UNDER SECTION 316 OR 317 OF PROMESA.

    (a) Definitions.--In this section:
          (1) List of material interested parties.--The term ``List of 
        Material Interested Parties'' means the List of Material 
        Interested Parties established under subsection (c)(1).
          (2) Oversight board.--The term ``Oversight Board'' has the 
        meaning given the term in section 5 of PROMESA (48 U.S.C. 
        2104).
    (b) Required Disclosure.--
          (1) In general.--In a case commenced under section 304 of 
        PROMESA (48 U.S.C. 2164), no attorney, accountant, appraiser, 
        auctioneer, agent, or other professional person may be 
        compensated under section 316 or 317 of that Act (48 U.S.C. 
        2176, 2177) unless prior to making a request for compensation, 
        the professional person has filed with the court a verified 
        statement conforming to the disclosure requirements of rule 
        2014(a) of the Federal Rules of Bankruptcy Procedure setting 
        forth the connection of the professional person with any entity 
        or person on the List of Material Interested Parties.
          (2) Supplement.--A professional person that submits a 
        statement under paragraph (1) shall promptly supplement the 
        statement with any additional relevant information that becomes 
        known to the person.
          (3) Disclosure.--Subject to any other applicable law, rule, 
        or regulation, a professional person that fails to file or 
        update a statement required under paragraph (1) or files a 
        statement that the court determines does not represent a good 
        faith effort to comply with this section shall disclose such 
        failure in any filing required to conform to the disclosure 
        requirements under rule 2014(a) of the Federal Rules of 
        Bankruptcy Procedure, for at least five years thereafter.
    (c) List of Material Interested Parties.--
          (1) Preparation.--Not later than 30 days after the date of 
        enactment of this Act, the Oversight Board shall establish a 
        List of Material Interested Parties subject to--
                  (A) the approval of the court; and
                  (B) the right of the United States trustee or any 
                party in interest to be heard on the approval.
          (2) Inclusions.--Except as provided in paragraph (3), the 
        List of Material Interested Parties shall include--
                  (A) the debtor;
                  (B) any creditor;
                  (C) any other party in interest;
                  (D) any attorney or accountant of--
                          (i) the debtor;
                          (ii) any creditor; or
                          (iii) any other party in interest;
                  (E) the United States trustee and any person employed 
                in the office of the United States trustee; and
                  (F) the Oversight Board, including the members, the 
                Executive Director, and the employees of the Oversight 
                Board.
          (3) Exclusions.--The List of Material Interested Parties may 
        not include any person with a claim, the amount of which is 
        below a threshold dollar amount established by the court that 
        is consistent with the purpose of this Act.
    (d) Review.--
          (1) In general.--The United States trustee shall review each 
        verified statement submitted pursuant to subsection (b) and may 
        file with the court comments on such verified statements before 
        the professionals filing such statements seek compensation 
        under section 316 or 317 of PROMESA (48 U.S.C. 2176, 2177).
          (2) Objection.--The United States trustee may object to 
        applications filed under section 316 or 317 of PROMESA (48 
        U.S.C. 2176, 2177) that fail to satisfy the requirements of 
        subsection (b).
    (e) Limitation on Compensation.--In a case commenced under section 
304 of PROMESA (48 U.S.C. 2164), in connection with the review and 
approval of professional compensation under section 316 or 317 of 
PROMESA (48 U.S.C. 2176, 2177) filed after the date of enactment of 
this Act, the court may deny allowance of compensation or reimbursement 
of expenses if--
          (1) the professional person has failed to file the verified 
        disclosure statements required under subsection (b)(1) or has 
        filed inadequate disclosure statements under that subsection; 
        or
          (2) during the professional person's employment in connection 
        with the case, the professional person--
                  (A) is not a disinterested person (as defined in 
                section 101 of title 11, United States Code) relative 
                to any entity or person on the List of Material 
                Interested Parties; or
                  (B) represents or holds an adverse interest in 
                connection with the case.

                                PURPOSE

    The purpose of H.R. 1192 is to impose on any attorney, 
accountant, appraiser, auctioneer, agent, or other professional 
person compensated under section 316 or 317 of the Puerto Rico 
Oversight Management and Economic Stability Act (commonly known 
as ``PROMESA'') the same disclosure requirements imposed by 
rule 2014(a) of the Federal Rules of Bankruptcy Procedure on 
professional persons retained in bankruptcy cases pursuant to 
section 327 of title 11, United States Code.

                          BACKGROUND AND NEED

Disclosure under rule 2014(a)

    The Bankruptcy Code, title 11 of the United States Code, 
imposes strict conflict-of-interest restrictions on 
professionals hired to assist in bankruptcy cases.\1\ Section 
327 of the Bankruptcy Code requires bankruptcy trustees to 
obtain court approval before they can hire professionals to 
assist in a bankruptcy case. It permits the court to approve 
the employment of a professional only if the court first finds 
that the professional does not hold or represent an adverse 
interest and is ``disinterested.'' The purpose of these 
requirements is to ensure that professionals employed in 
bankruptcy cases have no conflicting interests.\2\ They ``serve 
the important policy of ensuring that all professionals 
appointed pursuant to section 327(a) tender undivided loyalty 
and provide untainted advice and assistance in furtherance of 
their fiduciary responsibilities.''\3\ They are necessary ``to 
preserve the integrity of the bankruptcy system.''\4\
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    \1\Rome v. Braunstein, 19 F.3d 54, 57 (1st Cir. 1994).
    \2\In re Tinley Plaza Associates, L.P., 142 B.R. 272, 277 (Bankr. 
N.D. Ill. 1992).
    \3\Rome v. Braunstein, 19 F.3d at 57.
    \4\In re Tinley Plaza Associates, L.P., 142 B.R. at 280.
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    Rule 2014 of the Federal Rules of Bankruptcy Procedure is 
the mechanism by which bankruptcy courts police the conflict-
of-interest standards of section 327. Rule 2014 requires 
professionals to file with the bankruptcy court, before they 
are hired, ``a verified statement . . . setting forth the 
[professional's] connections with the debtor, creditors, any 
other party in interest, their respective attorneys and 
accountants, the United States trustee, or any person employed 
in the office of the United States trustee.'' The purpose of 
rule 2014 is to provide the bankruptcy court with the 
information it needs to determine whether the professional is 
disinterested or holds or represents an adverse interest.\5\ 
The rule places the obligation to disclose on the professional, 
since the courts do not have the resources to seek out 
conflicts of interest that are not disclosed.\6\ ``Disclosure 
`goes to the heart of the integrity of the bankruptcy system.' 
. . . [T]he duty to disclose under Bankruptcy Rule 2014 is 
considered sacrosanct because the complete and candid 
disclosure by [a professional] seeking employment is 
indispensable to the court's discharge of its duty'' to ensure 
that the professional meets the requirements of section 327.\7\ 
``To the extent . . . conflicts are not disclosed, the court is 
prevented from exercising its statutory obligation to rule on 
the propriety of the [professional's] employment.''\8\
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    \5\In re Worldcom, Inc., 311 B.R. 151, 164 (Bankr. S.D. N.Y. 2004), 
citing In re Leslie Fay Cos., Inc. 175 B.R. 525, 533 (Bankr. S.D. N.Y. 
1994).
    \6\In re EWC, Inc., 138 B.R. 276, (Bankr. W.D. Okla 1992).
    \7\In re eToys, Inc., 331 B.R. 176, 189 (Bankr. D. Del. 2005).
    \8\In re Roberts, 75 B.R. 402, 411 (D. Utah 1987).
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    ``Both [section] 327 and Bankruptcy Rule 2014(a) require 
strict enforcement to preserve the integrity of the bankruptcy 
system.''\9\ The conflict of interest requirements of section 
327(a) are enforced through section 328(c) of the Bankruptcy 
Code which provides that a bankruptcy court may deny 
compensation to a professional if, at any time during the 
professional's employment under section 327, the professional 
is not disinterested or holds or represents an adverse 
interest. Similarly, ``failure to disclose relevant connections 
[under rule 2014] is an independent basis for the bankruptcy 
court to disallow fees or to disqualify the professional from 
the case.''\10\ Indeed, ``[v]iolation of the disclosure rules 
alone is enough to disqualify a professional and deny 
compensation, regardless of whether the undisclosed 
connections'' rose to the level of a conflict of interest.\11\
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    \9\In re Tinley Plaza Associates, L.P., 142 B.R. at 280.
    \10\Banner v. Cohen, Estis & Associates, LLP. (In re Balco Equities 
Ltd.), 345 B.R. 87, 112 (Bankr. S.D. N.Y. 2006), quoting Exco 
Resources, Inc. v. Milbank, Tweed, Hadley & McCloy LLP (In re Enron 
Corp.), 2003 U.S. Dist. LEXIS 1442 at 14 (S.D. N.Y. 2003).
    \11\In re EWC, Inc., 138 B.R. 276, 280 (Bankr. W.D. Okla. 1992).
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Municipal bankruptcies

    Important as the requirements of section 327(a) and rule 
2014(a) are in private bankruptcy cases, they do not apply in 
municipal bankruptcy cases.\12\ That is because a municipality 
is a political subdivision or public agency or instrumentality 
of a State, and section 904 of the Bankruptcy Code, 11 U.S.C. 
Sec. 904, forbids bankruptcy courts from interfering with the 
political or governmental powers of a municipal debtor, 
including the ability to hire professionals.\13\
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    \12\See In re East Shoshone Hospital District, 226 B.R. 430 (Bankr. 
D. Ida. 1998).
    \13\See In re Pauls Valley Hospital Authority, 2013 Bankr. LEXIS 
5510 at 6-12 (Bankr. W.D. Okla. 2013).
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    As a result, the bankruptcy court's ability to police 
conflicts of interest in a municipal bankruptcy case is more 
limited than in a corporate bankruptcy. The court's power to 
police conflicts rests mainly on its power to confirm the 
municipality's debt adjustment plan. Under section 1129(b)(1) 
of the Bankruptcy Code (which is made applicable to municipal 
bankruptcy cases by section 901 of the Code), the court must 
find that a municipality's plan is ``fair and equitable.'' 
Under section 943(b)(3) of the Code, the bankruptcy court must 
also determine that all amounts paid by a municipal debtor to 
its professionals ``have been fully disclosed and are 
reasonable.''
    Thus, even though the conflict of interest provisions of 
section 327 and 328(c) of the Bankruptcy Code do not apply in 
municipal bankruptcy cases, the Supreme Court has made it clear 
that bankruptcy courts have the power to remedy conflicts of 
interest. That power ``is not dependent on express statutory 
provisions. It inheres in the jurisdiction of a court of 
bankruptcy,'' and is based on the court's responsibility to 
ensure that a municipality's debt adjustment plan ``embodies a 
fair and equitable bargain openly arrived at and devoid of 
overreaching, however subtle,''\14\ and that all professional 
compensation is ``fully disclosed and reasonable.'' The term 
``reasonable compensation,'' the Court has said ``necessarily 
implies loyal and disinterested service,'' free from conflicts 
of interest.\15\ But without the disclosures required by rule 
2014 in private sector bankruptcy cases, the court's ability to 
police conflicts of interest is more limited in municipal 
bankruptcy cases.
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    \14\American United Mutual Life Insurance Co., v. City of Avon 
Park, 311 U.S. 138, 145-146 (1940). See also In re City of Detroit, 524 
B.R. 147, 210 (Bankr. E.D. Mich. 2014).
    \15\Woods v. City National Bank & Trust Co., 312 U.S. 262, 268 
(1941), citing Avon Park, 311 U.S. at 147.
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PROMESA

    The Bankruptcy Code only affords ``municipalities'' 
protection under chapter 9.\16\ Neither the Commonwealth of 
Puerto Rico nor its instrumentalities qualify as 
``municipalities'' for purposes of chapter 9 because Puerto 
Rico is not a ``State.''\17\ As a result, Puerto Rico could not 
obtain protection under the Bankruptcy Code when it was no 
longer able to service its debts.\18\
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    \16\11 U.S.C. 109(c).
    \17\11 U.S.C. 101(40) (defining ``municipality'' as an 
``instrumentality of a State'') and 101(52) (defining a ``State'' to 
exclude Puerto Rico ``for the purpose of defining who maybe a debtor 
under chapter 9'').
    \18\Puerto Rico v. Franklin California Tax-Free Trust, 597 U.S. 115 
(2016).
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    Congress responded to Puerto Rico's financial crisis in 
June 2016 by enacting the Puerto Rico Oversight, Management, 
and Economic Stability Act, commonly known as PROMESA.\19\ 
Title I of PROMESA establishes a federally appointed Financial 
Oversight and Management Board as an entity within Puerto 
Rico's territorial government. Title II gives the Oversight 
Board broad powers to help restore Puerto Rico to financial 
health. Title III establishes a unique form of bankruptcy 
protection for the Commonwealth and its instrumentalities and 
authorized the Oversight Board to file cases under title III 
before a federal judge selected by the Chief Justice of the 
United States.
---------------------------------------------------------------------------
    \19\Public Law 114-187, 130 Stat. 549, codified at 40 U.S.C. 2101 
et seq.
---------------------------------------------------------------------------
    Title III of PROMESA is largely modeled on the municipal 
bankruptcy provisions codified in chapter 9 of the Bankruptcy 
Code.\20\ Like section 904 of the Bankruptcy Code, section 305 
of PROMESA prohibits the bankruptcy court from interfering with 
the governmental powers of the Commonwealth or its 
instrumentalities. Like section 901 of the Bankruptcy Code, 
section 301 of PROMESA incorporates by references many of the 
provisions of the Bankruptcy Code governing private bankruptcy 
cases, but not section 327, governing the employment of 
professionals. Although section 310 of PROMESA applies the 
Federal Rules of Bankruptcy Procedure to cases under title III, 
the disclosure requirements of 2014 do not apply to 
professionals hired by the Commonwealth, its instrumentalities, 
or the Oversight Board because those requirements are tied to 
section 327, which does not apply.
---------------------------------------------------------------------------
    \20\Colon-Torres v. Negron-Fernandez, 997 F.3d 63, 69 (1st Cir. 
2021) (``PROMESA creates a . . . bankruptcy process for the 
Commonwealth and its instrumentalities modeled on the reorganization 
process for municipalities, codified in Chapter 9 of the Bankruptcy 
Code'').
---------------------------------------------------------------------------
    But while PROMESA does not give the court the power to 
screen professionals for conflicts of interest before they are 
hired,\21\ sections 316 and 317 of PROMESA do give the court 
responsibility for approving their compensation and the 
reimbursement of their expenses. Sections 316 and 317 of 
PROMESA are largely modeled on sections 330 and 331 of the 
Bankruptcy Code, which give bankruptcy court control over 
compensation of professionals in private sector bankruptcies. 
Section 316 (and by extension, section 317) requires that 
compensation must be ``reasonable,'' and it authorizes the 
court, ``on its own motion or on the motion of the United 
States Trustee or any other party in interest,'' to award less 
than the amount of compensation requested, if the amount 
requested is unreasonable.
---------------------------------------------------------------------------
    \21\Section 316 gives the Commonwealth, its instrumentalities, and 
the Oversight Board the ``sole discretion'' to employ professionals.
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The need for legislation

    The court's ability to police conflicts of interest among 
professionals under PROMESA is implicit, at best. It rests upon 
the court's authority to award ``reasonable compensation'' 
under section 316 and 317 of PROMESA, to confirm plans only if 
``fair and equitable'' under section 1129(b)(1) of the 
Bankruptcy Code, and on the court's equitable authority to 
issue necessary or appropriate orders under section 105 of the 
Bankruptcy Code (both of which Code sections are made 
applicable to PROMESA cases by section 301(a) of PROMESA). 
PROMESA leaves it to the diligence of the court, the United 
States Trustee, or a party in interest to ferret out any 
conflicts of interest. Nothing in PROMESA requires the 
professionals themselves to disclose their connections to 
interested parties that may give rise to a conflict of interest 
or create the appearance of a conflict of interest.
    Legislation is therefore needed to extend the disclosure 
requirements of rule 2014 to professionals employed in PROMESA 
cases.

                          LEGISLATIVE HISTORY

    H.R. 1192 was introduced in the House of Representatives by 
Representative Velazquez (D-N.Y.) on February 22, 2021. It 
passed the House on February 24, 2021, by a vote of 429 to 0.
    Similar legislation was introduced in the Senate by Senator 
Menendez on February 23, 2021. The Committee on Energy and 
Natural Resources held a hearing on both H.R. 1192 and S. 375 
on July 29, 2021.
    Similar legislation was also introduced in both the House 
and Senate during the 116th Congress. Rep. Velazquez introduced 
H.R. 683 on January 17, 2019, and Senator Menendez introduced 
S. 1675 on May 23, 2019. The Subcommittee on Antitrust, 
Commercial, and Administrative Law of the House Committee on 
the Judiciary heard testimony on H.R. 683 on June 25, 2019, and 
the House Committee on the Judiciary ordered the bill favorably 
reported on September 9, 2020. The House passed H.R. 683 by 
voice vote on December 8, 2020.
    Similar legislation was also included during the 116th 
Congress in H.R. 6975, which was introduced by Rep. Grijalva 
(D-AZ) on May 22, 2020. The House Committee on Natural 
Resources heard testimony on a draft of H.R. 6975 on October 22 
and 30, 2019, and received additional testimony on the bill at 
an oversight hearing on June 11, 2020.

                        COMMITTEE RECOMMENDATION

    The Senate Committee on Energy and Natural Resources, in 
open business session on November 18, 2021, by a majority voice 
vote of a quorum present, recommends that the Senate pass H.R. 
1192, if amended as described herein.

                          COMMITTEE AMENDMENT

    The Committee adopted an amendment in the nature of a 
substitute during its consideration of H.R. 1192. The amendment 
addresses concerns with the bill as passed by the House. 
Concerns were raised during hearings on the bill in both the 
House and the Senate that strict implementation of the bill 
would not be feasible because of the extraordinarily large 
number of creditors in the PROMESA cases.
    Natalie Jaresko, the Executive Director of the Oversight 
Board, testified before the House Committee on Natural 
Resources that the bill, as introduced, was ``overly 
expansive'' because it would require professionals to disclose 
their connections with over 165,000 creditors that had filed 
claims against the government of Puerto Rico. While ``very 
supportive'' of greater disclosure, Ms. Jaresko warned that 
disclosure on the scale required by the bill ``would be an 
impossible exercise,'' and said that the bill would need to be 
interpreted or amended to allow for ``its practical 
implementation.''\22\
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    \22\PROMESA Implementation During the Coronavirus Pandemic: 
Oversight Hearing Before the House Committee on Natural Resources, 
116th Cong., at 29 and 90 (June 11, 2020).
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    Similarly, Judge Arthur Gonzales, a former bankruptcy judge 
and a member of the Oversight Board, testified before the 
Committee on Energy and Natural Resources that requiring every 
professional in the PROMESA cases to disclose their connections 
with each of the more than 165,000 creditors ``would cause 
extraordinary delays and drive expenses up considerably,'' and 
that it ``would be virtually impossible to complete in any 
relevant timeframe and [would] be extraordinarily costly.'' 
Like Ms. Jaresko, Judge Gonzales testified in support of the 
bill, but urged that it ``be clarified or modified . . . to 
ensure its purpose [can] be accomplished.''\23\
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    \23\Hearing on S. 375 and H.R. 1192 Before the Senate Committee on 
Energy and Natural Resources, 117th Cong. (July 29, 2021), Written 
Testimony of Arthur Gonzales at 4 and Transcript at 19.
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    The Committee amendment addresses this concern by narrowing 
the disclosure requirement to a professional's connection with 
persons or entities on a ``List of Material Interested 
Parties,'' drawn up by the Oversight Board and approved by the 
bankruptcy court. Rather than requiring disclosure of a 
professional's connection with every retiree eligible to 
receive a government pension, for example, use of the material 
interested parties list will enable the court to focus its 
attention on connections that pose a more substantial risk of 
compromising a professional's impartiality, based upon a dollar 
threshold or other criteria established by the court.
    In addition, the Committee amendment omits several 
provisions of the House-passed bill. It omits section 2(b)(3) 
of the House-passed bill because parties in interest already 
have the right to be heard under section 1109 of the Bankruptcy 
Code (which is made applicable to PROMESA cases by section 
301(a) of PROMESA). It omits section 2(c) of the House-passed 
bill because section 306 of PROMESA already confers 
jurisdiction of all cases under title III of PROMESA in the 
district courts (and section 307 establishes venue in the 
District of Puerto Rico). It omits section 2(e)(2) of the 
House-passed bill so as not to limit the discretion afforded to 
bankruptcy courts to decide whether to deny payment of 
professional compensation. It omits section 2(e)(3) because 
attorneys and accountants of creditors' committees are already 
subject to the disclosure requirements of rule 2014 since 
section 301(a) incorporates section 1103 (unlike section 327) 
of the Bankruptcy Code into PROMESA.\24\
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    \24\Professionals employed by creditors' committees, unlike those 
employed by the Oversight Board or the Commonwealth and its 
instrumentalities, are subject to rule 2014 because they are appointed 
pursuant to section 1103 of the Bankruptcy Code, which is made 
applicable to PROMERSA cases by section 301(a) of PROMESA.
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    The Committee amendment also eliminates references to ``the 
estate,'' since there is no ``estate'' in cases under title III 
of PROMESA,\25\ and it otherwise conforms the terms used in the 
bill to the terminology of PROMESA and the Bankruptcy Code.
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    \25\Gracia-Gracia v. Financial Oversight & Management Board for 
Puerto Rico (In re Financial Oversight & Management Board for Puerto 
Rico), 939 F.3d 340, 349 (1st Cir. 2019).
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                      SECTION-BY-SECTION ANALYSIS

    Section 1 provides a short title for the Act, the ``Puerto 
Rico Accuracy in Disclosure Act of 2021'' or ``PRRADA.''
    Section 2 contains the Act's substantive provisions.
    Subsection (a) defines the terms ``List of Material 
Interested Parties'' and ``Oversight Board'' used in the Act.
    Subsection (b) establishes disclosure requirements for 
professionals employed in cases under title III of PROMESA that 
conform to the disclosure requirements of rule 2014 of the 
Federal Rules of Bankruptcy Procedure for professionals 
employed pursuant to section 327 of the Bankruptcy Code.
    Paragraph (1) applies to attorneys, accountants, 
appraisers, auctioneers, agents, and other professionals 
(mirroring the list of professionals in rule 2014(a)) that are 
employed in a case under section 304 of PROMESA. It provides 
that no such professional may be compensated under the 
compensation provisions of sections 316 and 317 of PROMESA 
unless the professional has filed with the court a ``verified 
statement'' (the term used in rule 2014(a)) that conforms to 
the disclosure requirements of rule 2014(a) and sets forth the 
connection of the professional person with any entity or person 
on the List of Material Interested Parties under section 2(c).
    Paragraph (2) requires professionals to file supplemental 
disclosure statements as additional connections become known. 
Although rule 2014(a) does not expressly require supplemental 
disclosure, the courts have interpreted the duty of disclosure 
under rule 2014 as an ongoing one.\26\ ``Continuing disclosure 
is necessary to preserve the integrity of the bankruptcy system 
by ensuring that . . . professionals remain conflict 
free.''\27\ Thus, consistent with the practice under rule 2014, 
paragraph (2) requires professionals employed in PROMESA cases 
to promptly disclose to the court any previously undisclosed 
connection with a party on the List of Material Interested 
Parties that may arise after the professional has filed the 
disclosure statement required under paragraph (1).
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    \26\In re Granite Partners, 219 B.R. 22, 35 (Bankr. S.D. N.Y. 1998) 
(``Rule 2014(a) does not expressly require supplemental or continuing 
disclosure . . . Nevertheless, section 327(a) implies a duty of 
continuing disclosure, and requires professionals to reveal connections 
that arise after their retention.''); Rome v. Braunstein, 19 F.3d 5457-
58 (1st Cir. 1994) (``the need for professional [disclosure] and 
avoidance of conflicts of interest does not end upon appointment'').
    \27\In re Granite Partners, 219 B.R. at 35.
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    Paragraph (3) requires professionals to disclose any 
previous failure to disclose connections in subsequent 
disclosure statements. It makes it clear that the burden is on 
the professional ``to come forward and make full, candid, and 
complete disclosure'' to the court if the professional has 
failed to file a disclosure statement required by paragraph 
(1), failed to file a supplemental statement required by 
paragraph (2), or filed a statement pursuant to paragraph (1) 
or (2) that failed to disclose connections that should have 
been disclosed. In other words, if a professional neglects to 
disclose a connection when first required, the professional has 
a duty to disclose the omission promptly once it is discovered. 
As is the case under rule 2014, negligence does not excuse the 
failure to disclose connections that should be disclosed.\28\
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    \28\In re B.E.S. Concrete Products, Inc., 93 B.R. 228, 237 (Bankr. 
E.D. Cal. 1988) (``The burden is on the . . . [professional] to come 
forward and make full, candid, and complete disclosure . . . Negligent 
omissions do not vitiate the failure to disclose.'').
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    Subsection (c) provides for the creation of the List of 
Material Interested Parties referred to in subsection (b)(1), 
which requires professionals to disclose their connection with 
any person or entity listed on the List of Material Interested 
Parties.
    Paragraph (1) directs the Oversight Board to prepare the 
list, subject to the approval of the court and the right of the 
United States trustee and any party in interest to be heard on 
the approval of the list.
    Except as provided in paragraph (3), paragraph (2) requires 
the List of Material Interested Parties to include the same 
types of persons or entities listed in rule 2014. Rule 2014 
lists ``the debtor,\29\ creditors, any other party in 
interest,\30\ their respective attorneys and accountants,\31\ 
[and] the United States trustee, or and any person employed in 
the office of the United States trustee.''\32\ Paragraph (2) 
adds the Oversight Board, including its members, Executive 
Director, and employees.
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    \29\Section 301(c)(2) of PROMESA defines the ``debtor'' to mean the 
Commonwealth of Puerto Rico or an instrumentality of the Commonwealth.
    \30\A ``party in interest'' is someone ``who has a `legally 
protected interest that could be affected by a bankruptcy 
proceeding.''' In re Tower Park Properties, LLC, 803 F.3d 450, 457 (9th 
Cir. 2015), quoting In re Thorpe Insulation Co., 677 F.3d 869, 884 (9th 
Cir. 2012), quoting In re James Wilson Associates, 965 F.2d 1034, 1042 
(3d Cir. 1985).
    \31\As passed by the House, H.R. 1192 only covers attorneys and 
accountants of ``any . . . party in interest'' other than the debtor or 
a creditor. Consistent with rule 2014, the Committee amendment covers 
attorneys and accountants of the debtor, any creditor, or any other 
party in interest.
    \32\Rule 2014 includes the United States trustee and persons 
employed by the office of the United States trustee in the list of 
connections that professionals must disclose. The House-passed bill 
excludes them. The Committee amendment restores them in view of the 
significant additional duties that H.R. 1192 imposes upon the United 
States trustee in PROMESA cases.
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    Paragraph (3) authorizes the bankruptcy court to establish 
a threshold dollar amount, consistent with the purpose of the 
Act, for Material Interested Parties. Persons with claims below 
the threshold amount need not be included on the List of 
Material Interested Parties.
    Subsection (d) directs the United States trustee to review 
disclosure statements filed with the court pursuant to 
subsection (b) and confirms the United States trustee's 
authority to contest the award of compensation to professionals 
under sections 316 and 317 of PROMESA.\33\
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    \33\The United States trustees and Assistant United States trustees 
are Justice Department employees who are appointed and supervised by 
the Attorney General. 28 U.S.C. 581, 582. They oversee the 
administration of bankruptcy cases by, among other things, monitoring 
applications to employ professionals, 28 U.S. 586 (a)(3)(I), and 
reviewing applications for professional compensation in private sector 
bankruptcy cases. 28 U.S.C. 586(a)(3)(A). PROMESA gives the United 
States trustee the opportunity to review and contest applications for 
compensation, though not for employment. 48 U.S.C. 2176.
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    Paragraph (1) directs the United States trustee to review 
each verified statement filed with the court pursuant to 
subsection (b), and authorizes the United States trustee to 
file comments on such statements with the court. This authority 
is consistent with the United States trustee's role in 
reviewing professional employment applications under section 
327.
    Paragraph (2) authorizes the United States trustee to 
object to applications for professional compensation filed 
under sections 316 and 317 of PROMESA that fail to satisfy the 
disclosure requirements of subsection (b) of H.R. 1192. This 
authority is consistent with the United States trustee's 
existing authority to contest professional compensation under 
sections 316 and 317.
    Subsection (e) authorizes the court to deny payment of 
compensation for services or reimbursement of expenses under 
section 316 or 317 of PROMESA if the professional fails to meet 
either the disclosure requirements in paragraph (1) or the 
conflict-of-interest requirements in paragraph (2).
    Paragraph (1) is a disclosure requirement. It provides that 
the court may deny compensation to a professional who fails to 
file a disclosure statement required under subsection (b)(1) or 
files an inadequate disclosure statement under that subsection. 
It reflects the large body of bankruptcy case law that holds 
that the duty of disclosure is so important ``that the failure 
to disclose relevant connections is an independent basis for 
the bankruptcy court to disallow fees or to disqualify the 
professional from the case,''\34\ even if the undisclosed 
connection does not pose an actual conflict of interest.\35\
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    \34\Banner v. Cohen, Estis & Associates, LLP (In re Balco Equities 
Ltd.), 345 B.R. 87, 112 (Bankr. S.D.N.Y. 2006), quoting Exco Resources, 
Inc. v. Milbank, Tweed, Hadley & McCloy LLP (In re Enron Corp.), 2003 
U.S. Dist. LEXIS 1442 at 14 (S.D.N.Y. 2003), citing In re Leslie Fay 
Cos., 175 B.R. 525, 533 (Bankr. S.D.N.Y. 1994). ``It is well settled 
that the Court may deny compensation to a professional when the 
professional fails to comply with the disclosure requirements of'' rule 
2014. In re Etheridge, 2019 Bankr. LEXIS 3786 (Bankr. M.D. N.C. 2019), 
citing In re Crivello, 134 F.3d 831, 836 (7th Cir. 1998) (``failure to 
disclose is sufficient grounds to revoke . . . employment . . . and 
deny compensation''). ``Authority to disqualify a professional is not 
explicitly set forth in the Bankruptcy Code. However, that authority 
arises out of the court's equity powers.'' In re Rusty Jones, Inc., 134 
B.R. 321, 341 (Bankr. N.D. Ill. 1991).
    \35\``The scope of disclosure [required under rule 2014] much 
broader than the question of disqualification [under section 327 of the 
Bankruptcy Code].'' In re Granite Partners, L.P., 219 B.R. 22, 35 (S.D. 
N.Y. 1998). A ``court may find a disclosure violation even if the 
undisclosed connection does not amount to a conflict.'' Id., citing In 
re Olsen Industries, Inc., 22 B.R. 49, 60 (Bankr. D. Del. 1997). The 
disclosure requirements of rule 2014 ``are more encompassing than those 
governing the disinterestedness inquiry under section 327. For while 
retention under section 327 is only limited by interests that are 
`materially adverse,' under Rule 2014, `all connections' that are not 
so remote as to be de minimus must be disclosed.'' In re Leslie Fay 
Cos., 175 B.R. 525, 536 (Bankr. S.D. N..Y. 1994).
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    Paragraph (2) is a conflict-of-interest requirement. It 
provides that the court may deny compensation to a professional 
who is not disinterested or who represents or holds an adverse 
interest. It contains the same ``disinterested'' and ``adverse 
interest'' standards as section 327 of the Bankruptcy Code and 
provides the same sanction--denial of compensation--as section 
328(c) of the Code, for violated those standards.\36\
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    \36\Section 328(c) provides that ``the court may deny allowance of 
compensation for services and reimbursement of expenses of a 
professional person . . ., if, at any time during such professional 
person's employment . . ., such professional person is not a 
disinterested person, or represents or holds an interest adverse . . . 
with respect to the matter on which such professional person is 
employed.''
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    The terms ``disinterested'' and ``interest adverse'' used 
in paragraph (2) have well-established meanings in bankruptcy 
law. The term ``disinterested person'' is defined in section 
101(14) of the Bankruptcy Code, and generally means someone 
``who does not have an interest materially adverse to the 
interest of the estate . . . for any . . . reason.'' An 
``adverse interest'' is not defined by the Bankruptcy Code, but 
generally means a conflicting economic interest or a bias 
against the estate.\37\ The ``disinterested'' and ``adverse 
interest'' tests ``overlap and form a single test to judge 
conflicts of interest.''\38\
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    \37\In re Granite Partners, L.P., 219 B.R. 22, 32-33 (Bankr. S.D. 
N.Y. 1998).
    \38\Id. at 33.
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    The courts have held that both the disclosure requirements 
of rule 2014 and the conflict of interest requirements of 
section 327 of the Bankruptcy Code ``require strict enforcement 
to preserve the integrity of the bankruptcy system.''\39\ But, 
as important as strict enforcement of the disclosure 
requirements is, ``the bankruptcy judge [is] not bound by a 
completely inflexible rule mandating denial of all fees in all 
cases.''\40\
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    \39\In re Tinley Plaza Associates, L.P., 142 B.R. 272, 280 (Bankr. 
N.D. Ill. 1992).
    \40\In re Watson Seafood & Poultry Co., Inc., 40 B.R. 436, 440 
(Bankr. E.D. N.C. 1984). ``There is considerable precedent establishing 
that nondisclosure of potential conflicts alone justifies the 
bankruptcy court's exercise of discretion to deny all fees,'' but 
``[t]he law . . . does not require such a result.'' In re Roberts, 75 
B.R. 402, 412 (D. Utah 1987). ``The general rule should be that all 
fees are denied when a conflict is present, but the court should have 
the ability to deviate from that rule in those cases where the need for 
. . . discipline is outweighed by the equities of the case. This 
flexibility is supported by [section] 328(c) [of the Bankruptcy Code], 
which says that the court `may' (rather than `shall') deny compensation 
when [a professional holds or] represents an interest adverse to the 
estate.'' In re Watson Seafood & Poultry Co., Inc., 40 B.R. at 440.
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    ``Section 328(c) declares that . . . the court `may' deny 
compensation. . . . [T]he plain language of the statute is 
permissive. . . . The permissive `may deny' language does not 
require the court to deny . . . fees or disgorge previous[ly] 
paid fees in all cases.''\41\ Subsection (e) uses the same 
``may deny'' language as section 328(c).
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    \41\Gray v. English, 30 F.3d 1319, 1323 (10th Cir. 1994).
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                   COST AND BUDGETARY CONSIDERATIONS

    The Congressional Budget Office has not estimated the costs 
of H.R. 1192 as passed by the House (or of H.R. 698 during the 
116th Congress). The Committee has requested, but has not yet 
received, the Congressional Budget Office's estimate of the 
cost of H.R. 1192 as ordered reported. When the Congressional 
Budget Office completes its cost estimate, it will be posted on 
the Internet at www.cbo.gov.

                      REGULATORY IMPACT EVALUATION

    In compliance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee makes the following 
evaluation of the regulatory impact which would be incurred in 
carrying out H.R. 1192.
    As passed by the House, section 2(a) of H.R. 1192 would 
require all professionals compensated under section 316 or 317 
of PROMESA to file a verified statement disclosing any 
connection they may have with over 165,000 creditors in cases 
filed under section 304 of PROMESA with the court prior to 
seeking compensation, supplemental statements disclosing 
additional information, and annual statements confirming the 
accuracy of prior statements. In addition, section 2(d) of the 
House-passed bill would require any professional compensated 
prior to the enactment of H.R. 1192 to file a disclosure 
statement. A witness testified that compliance with these 
requirements would be ``extraordinarily costly'' and may prove 
too burdensome for smaller professional firms.
    The Committee amendment to the bill attempts to reduce the 
cost and burden of the bill by narrowing the required 
disclosures to a List of Material Interested Parties. Creditors 
with claims under a threshold dollar amount established by the 
court would be excluded from the List. The Committee believes 
that the amendment will significantly reduce the cost and 
burden of compliance.
    In addition, the Committee eliminates the requirement for 
annual statements under section 2(a)(2)(B) and for statements 
from former professionals under section 2(d) of the House-
passed bill, further reducing the amount of paperwork required 
by the House-passed bill.
    Since H.R. 1192 mandates the filing of disclosure 
statements, the cost of preparing them is likely to be 
compensable as part of the ``actual, necessary services 
rendered by the professional person'' under section 316 of 
PROMESA.\42\ But section 316 limits compensation for 
professional services to ``reasonable'' amounts, as determined 
by the court, taking into account the considerations listed in 
section 316(c).
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    \42\See Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. 121, 132 (2015) 
(finding time spent preparing a fee application compensable under 
section 330 of the Bankruptcy Code).
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    No personal information would be collected under the bill. 
Therefore, there would be no impact on personal privacy.

                   CONGRESSIONALLY DIRECTED SPENDING

    H.R. 1192, as ordered reported, does not contain any 
congressionally directed spending items, limited tax benefits, 
or limited tariff benefits as defined in rule XLIV of the 
Standing Rules of the Senate.

                        EXECUTIVE COMMUNICATIONS

    The Committee did not request Executive Agency views on 
H.R. 1192.

                   ADDITIONAL VIEW OF SENATOR MANCHIN

    I strongly support enactment of H.R. 1192 as proposed to be 
amended by the Committee amendment. I append my additional 
views to explain why.
    Disclosure of potential conflicts in a bankruptcy case is 
needed not only to guard against conflicts of interest but to 
assure the parties to the bankruptcy case and the public that 
the end result is fair. As Judge Henry Friendly said, ``the 
conduct of bankruptcy proceedings not only should be right but 
must seem right.''\43\ This is as true in PROMESA cases as in 
any other bankruptcy case. Extending the disclosure 
requirements of rule 2014 to cases under PROMESA will not only 
protect the integrity of the cases, but will assure the people 
of Puerto Rico of their integrity.
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    \43\In re Ira Haupt Co., 361 F.2d 164, 168 (2d Cir. 1966).
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    Extending the disclosure requirements to pending cases, 
however, poses two challenges. The first challenge is that rule 
2014 was designed to apply prospectively, to the hiring of 
professionals and not, as here, retrospectively, as many as 
five years after they were hired. The second challenge stems 
from the sheer number of creditors in the pending cases, which 
threatens to make strict compliance with the disclosure 
requirements costly, burdensome, and even infeasible.
    Applied literally and inflexibly, the House-passed bill 
could unfairly result in the disqualification of, and denial of 
payment to, innocent professionals whose ``connections'' pose 
no serious threat to the integrity of the cases. Worse, it 
could disrupt or delay the progress being made to restore 
Puerto Rico to financial stability.\44\
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    \44\Robert J. Keach, a past President of the American Bankruptcy 
Institute, testified to this effect before the House Judiciary 
Committee in June 2019. ``[B]ecause the PROMESA proceedings have been 
in place for some time, and the disinterestedness and other standards 
of the Bankruptcy Code were not requirements for retention of 
professionals at the outset of any of the Title III cases,'' Mr. Keach 
testified, ``the remedy provisions of [H.R. 1192] will have to be 
carefully considered, and likely amended, to prevent the inadvertent 
disqualification or necessary resignation of professional firms, 
including many local firms, that fairly and properly met the standards 
of retention when the Title III cases commenced. Such an event could be 
highly disruptive of the current proceedings and the considerable 
progress made in those cases. Calibration of the application of the 
Bankruptcy Code standards going forward, when such standards did not 
previously govern, is essential to avoid interfering with that 
progress.''
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    I believe that the Committee amendment fairly addresses 
both of these challenges by preserving Judge Swain's equitable 
discretion to apply the disclosure requirements in a manner 
that is both just and practicable.
    Like all bankruptcy judges, Judge Swain, the District Court 
Judge who Chief Justice Roberts entrusted with the herculean 
task of presiding over the PROMESA cases, sits as a court 
equity, imbued with broad equitable powers to achieve a justice 
and fairness.\45\ Justice and fairness are essential in all 
bankruptcy cases, but they are especially important in the case 
of a government debtor, where the goal is not just a fair 
division of assets among creditors, but the maintenance of 
public services.\46\ The Committee amendment preserves Judge 
Swain's discretion to apply the disclosure requirements in a 
manner that is both fair and feasible, consistent with 
longstanding practice under rule 2014 and the equities of the 
PROMESA cases.
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    \45\Pepper v. Litton, 308 U.S. 295, 304 (1939); Miller v. Generale 
Bank Nederland, N.V. (In re Interpictures, Inc.), 2000 U.S. App. LEXIS 
1848 at 5 (2d Cir 2000), citing In re Momentum Manufacturing Corp., 25 
F.3d 1132, 1136 (2d Cir. 1994).
    \46\In re Financial Oversight & Management Board for Puerto Rico, 
432 F. Supp. 3d 25, 30 (1st Cir. 2020). See also Puerto Rico v. 
Franklin California Tax-Free Trust, 136 S. Ct. 1938, 1950 (J. 
Sotomayor, dissenting) (``governments cannot shut down power plants, 
water, hospitals, sewers, and trains and leave citizens to fend for 
themselves'').
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                                                  Joe Manchin, III.

                        CHANGES IN EXISTING LAW

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, the Committee notes that no 
changes in existing law are made by the bill as ordered 
reported.

                                  [all]