[Senate Report 117-48]
[From the U.S. Government Publishing Office]
Calendar No. 182
117th Congress } { Report
SENATE
1st Session } { 117-48
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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.
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\19\Public Law 114-187, 130 Stat. 549, codified at 40 U.S.C. 2101
et seq.
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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.
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\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'').
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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.
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\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]