H.R. 5278 —better known as the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)— was a bipartisan bill in the United States Congress[1] that was signed into law by President Obama on June 30, 2016.[2] With this protection the governor of Puerto Rico, Alejandro Garcia Padilla, suspended payments due on July 1.[2]

PROMESA aims to establish an oversight board, a process for restructuring debt, and expedited procedures for approving critical infrastructure projects in order to combat the Puerto Rican government-debt crisis.[3] It is supposed to enable the island’s government to enter a bankruptcy-like restructuring process and halt litigation in case of default. The task of the oversight board is to facilitate negotiations, or, if these fail, bring about a court-supervised process akin to a bankruptcy. The board is also responsible for overseeing and monitoring sustainable budgets.[2] The President must appoint all seven members of the board, six of whom must be chosen among individuals recommended by Congressional leaders (though if not recommended by a September deadline, the President may make the appointments directly). The Governor of Puerto Rico (or a designee) would serve ex officio as an eighth member without voting rights.[3]

Critics indicate that the law continues to treat the island as an anomaly, neither as a state nor a municipality, fails to provide a way to statehood or independence, and does not deal with underlying economic problems such as high unemployment, lack of opportunities, welfare issues, and brain drain.[4] The oversight board will have broad sovereign powers to effectively overrule decisions by Puerto Rico’s legislature, governor, and other public authorities, under the federal government’s constitutional power to “make all needful rules and regulations” regarding U.S. territories.


U.S. Bank Trust National Association v. Commonwealth of Puerto Rico, Alejandro García-Padilla, in his official capacity as Governor of Puerto Rico, University of Puerto Rico and Dr. Celeste Freytes-González, in her official capacity as President of the University of Puerto Rico,
Civil No. 16-2150 (FAB)

On August 19, 2016, Indiano & Williams, jointly with Kramer, Levin, Naftalis & Frankel, LLP, a New York law firm, filed a complaint, motion for relief from the automatic PROMESA stay (Puerto Rico Oversight, Management, and Economic Stability Act of June 30, 2016), motion for preliminary injunction, and memorandum of law in support of the two aforementioned motions on behalf of U.S. Bank Trust National Association (“USBank”). USBank is the trustee of the monies deposited in trust by the University of Puerto Rico (“UPR”) pursuant to a 1971 Trust Agreement, to secure the payment by the UPR of all obligations related to the UPR bonds issued in 2006 which outstanding principal amount is $431.8 million. USBank first requests that the automatic PROMESA stay be lifted and, thus, its complaint allowed to proceed in the US District Court for the District of Puerto Rico, such that the court may consider its request to declare Puerto Rico’s Moratorium Act or 2016 and Executive Order 31, issued pursuant to the Moratorium Act, invalid under the Takings Clause and the Contracts Clause of the United States Constitution, among other claims for relief. If USBank’s case is excepted from the PROMESA stay and is, ultimately successful, the Commonwealth and the UPR will be made to comply with the obligation under the Trust Agreement governing the 2006 bonds, to transfer pledged revenues, in the form of tuition and fees, to the trust from which the payment of interest and principal is satisfied. USBank argues, among others, that lifting the automatic stay in this case will keep the Trustee from suffering irreparable harm, is favored by the balance of equities, and serves the public interest.


Last week the Oversight Board, (O.B.) acting as a trustee of the PR government 1 and co-plaintiff, the Official Committee of Unsecured Creditors, filed over 300 lawsuits trying to collect monies from a very wide gamut of entities that the PR government had paid monies to in the last four (4) years since May 3, 2017, date of the filing of the Bankruptcy Petition.

The named defendants are very diverse: they include entities such as Walmart, Microsoft, Merck, banks, savings and loans, brokerage houses, bond holders etc.

The bulk of the allegations are for the unlawful transfers/payment during 90 days prior to filing of the bankruptcy petition (referred to as the “Petition Date”. The complaints allege the avoidance of Preference Period Transfer Pursuant to 11 U.S.C. § 547). Other periods for unlawful transfers consist of two (2) years [“Code Fraudulent Transfer Period”) in violation of 11 U.S.C. § 548(a)(1)(B) and four (4) years [the “Paulian Fraudulent Transfer Period”].

The Oversight Board refers to its authority to recover the transfers pursuant to: Recovery of Avoided Transfer Pursuant to 11 U.S.C. § 550.

Other allegations by the Oversight Board include: the unlawful disbursements pursuant to 2 L.P.R.A. § 97, 3 L.P.R.A. § 283h); the contract was not executed in writing in violation of 2 L.P.R.A. § 297; insufficient documentation under 2 L.P.R.A. § 97; 3 L.P.R.A. § 283h(a); 3 L.P.R.A. §§ 2301-05, 8613; the contract was not registered with the Controller’s Office and unlawful pursuant to: Ocasio v. Alcalde Mun. de Maunabo, R-84-356, 1988 WL 580831 (P.R. Apr. 19, 1988); Mun. de Quebradillas v. Corp. de Salud de Lares, 180 D.P.R. 1003, 1015-16 (2011); the transfers were disbursements of public funds not authorized by law. 2 L.P.R.A. § 97; 3 L.P.R.A. § 283h(a); see also, e.g., 3 L.P.R.A. §§ 2301-05, 8613 [requiring documentation of contracts with Commonwealth]; the transfers exceeded the terms of the contract with the PR government; transfers that did not correspond to the contract with the PR Government or public corporations such as PREPA or PRASA.

The O.B. is obviously trying to bring back monies paid out by the PR government or its public corporations, in the previous four (4) years from the date that the Petition was filed. It is using the bankruptcy provisions, PR law and jurisprudence, to place the burden on the service/product providers.

Adding insult to injury, if the defendant had any claims against the PR government for goods and services already provided and not paid for, the O.B., pursuant to 11 U.S.C. § 502(d), is requesting that those Claims of the Defendant against the Commonwealth be disallowed until such time as the Defendant pays to the Oversight Board an amount equal to the aggregate amount of the Transfers. Finally, the Oversight Board request for pre-judgment and post judgment interest at the maximum legal rate.

A defendant may have provided bonafide these goods and services. Nonetheless, the bankruptcy and local laws allow for this legal process. Further justifying the O.B.’s suits is its claim that documentation available to the O.B. or the requirements/process in which it was carried out, does not fully support the payments were bonafide.

Looking at the big picture, the Oversight Board needs to stop or toll the statute of limitations until all is sorted out. The O.B. needs to ensure that the payments were lawful and according to all the technical requirements when contracting with the PR government, as discussed in the local jurisprudence.

In the next 90 days, the Board’s lawyers, through process servers, will be serving all defendants. For the defendant that has not been served, but knows it has been named in the suit, the first step is to seek advice of legal counsel to help steer you towards the most effective defense and/or seek the resolution of the lawsuit. It is not prudent to wait until receive process to search for experienced legal counsel. In PR, the firms that have attorneys experienced in federal litigation are few. There are firms already representing parties in PROMESA, which may prevent them from representing an entity due to a conflict of interest. Although there is a community of bankruptcy lawyers, many of these are solo practitioners, generally specializing in debtor or creditor representation through the bankruptcy process. A defendant needs to assess whether it wants a firm or a solo practitioner to defend the lawsuit. It is a good idea to interview with the firm or lawyer to ensure the client is comfortable with the lawyers involved. It is a process that may take more than one interview, so start immediately will be helpful. Legal counsel will need time to examine the supporting documentation as applicable to the complaint as well as analyze the potential defenses or motions to dismiss that it will raise within the limited time afforded to answer the complaint.

In the meantime, each named defendant needs to compile all the documentation to support its defense. Among these documents re: contract with the PR government of public corporation, any addendums, modifications, whether formal or informal such as emails or correspondence; cancelled checks received for the services provided; evidence or proof that the goods or services were provided/delivered to the government.

1 trustee under title 11 of the United States Code as incorporated into PROMESA (the “Bankruptcy Code”). PROMESA §§ 301, 315,


The Oversight Board (OB) pursuant to PROMESA has filed close to three hundred (300) lawsuits against entities where the PR government has paid at least $2.5 Million dollars over four years prior to the filing of the bankruptcy petition on May 3, 2017. Since April 30, 2019 and through May 2, 2019 late into the day the OB has filed hundreds of lawsuits against PR government providers of goods and services.

Pursuant to Federal Rule of Bankruptcy Procedure 7001(1) made applicable to these Title III cases by section 310 of the Puerto Rico Oversight, Management, and Economic Stability Act (48 U.S.C. § 2170) (“PROMESA”),

The defendants range from retaliers, to fast food companies, insurance brokers, tech service providers, advertising agencies, financial services providers, temporary employment agencies, health providers, hospitals, educational service providers and bond holders as well as many entities that filed proof of claims for monies owned them by the PR government. Some of the defendants sued are as follows:
Wal-Mart Puerto Rico Inc., Intervoice Communication of Puerto Rico Inc., America Aponte & Assoc. Corp., Arcos Dorados Puerto Rico LLC., J. Jaramillo Insurance, Inc., Bianca Conventon Center, Inc., Campofresco, Corp., Arieta & Son Assurance Corporation. Jose Santiago, Inc., Armada Productions Corp. , Asociacion Azucarera Cooperativa Lafayette, Caribbean Data System, Inc., Avanti Technologies Inc., Avanzatec LLC., Management, Consultants & Computer Services, Incorporated. Comprehensive Health Service, Inc., Badillo Saatchi & Saatchi, Inc., Empresas Arr Inc., Barreras, Inc., Empresas Loyola, Inc., Beanstalk Innovation Puerto Rico LLC., Manpower, BI Incorporated, Estrada Bus Line, Inc., Bio-Nuclear of Puerto Rico, Inc., Facsimile Paper Connection Corp., First Hospital Panamericano, Inc., Cabrera & Ramos Transporte, Inc., MMM Healthcare, Inc., Forcelink Corp., Caribbean City Builders, Inc., Caribbean Educational Services, Inc., Fridma Corporation, Caribbean Restaurant Inc., N. Harris Computer Corporation, Educational Development Group, Inc., Girard Manufacturing, Inc., Caribbean Temporary Services, Inc., Caribe Tecno, Inc., Johnjavi Corporation, Abbvie Corp., Carnegie Learning, Inc., Kelly Services Puerto Rico, Carvajal Educacion, Inc., Educree: Consultores Educativos Inc., Oracle Caribbean, Inc., Kelly Services, Inc., Total Petroleum Puerto Rico Corp., Case Solutions, LLC., CCHPR Hospitality, Inc., Pearson Pem P.R., Inc., Centro Avanzado Patologia & Terapia del Habla, Inc., Printech, Inc., Kid’s Therapy Services, Inc., Centro de Patologia del Habla Y Audicion LLC., L.L.A.C., Inc., Learning Alliance, LLC., Luz M. Carrasquillo Flores, Nelson D. Rosario Garcia, Elias E Hijos, Inc., Puerto Rico Telephone Company, Inc., Next Level Learning, Inc., Ricoh Puerto Rico, Inc., Badillo, Sattchi & Sattchi, Inc., Grainger Caribe, Inc., Bank of NY Mellon, Eje Puerto Rico, Inc., Mangual’s Office Cleaning Service Inc., Eastern America Insurance Agency, Inc.,


Although the OB is suing to recover monies on behalf of the PR Government, the PR government politicians have been disassociating themselves from these lawsuits. They have indicated that the lawsuits will hurt the PR businesses with expensive litigation and thus the PR economy. They complain that it will be detriment to the credibility of the PR Government since no entity will want to provide goods or services to the PR Government or Public Corporations such as PRASA or PREPA.

According to reports in the local newspapers, there are approximately Sixty (60) defendants that have voluntarily waived the statute of limitations in an effort to be able to bide time to analyze the allegations and explore resolution before being thrown into full fledged and costly litigation. 


PROMESA grants extensive authority to the Oversight Board, including the powers of a trustee under title 11 of the United States Code as incorporated into PROMESA (the “Bankruptcy Code”). PROMESA §§301, 315.

One of the primary counts upon which the Oversight Board has sued multiple government providers, are for payments made by the PR government or its corporate agencies to defendants within 90 days from the filing of the bankruptcy petition on May 3, 2017.  

In bankruptcy, a preferential payment is a payment made for the benefit of certain creditors shortly before filing for bankruptcy. The idea behind this provision is that the  debtor was heading towards insolvency for some time and shortly before filing the petition paid some creditors and not many others. This provision brings back the last monies paid out into the bankruptcy estate for a more equitable distribution as prescribed by the distribution priorities among all creditors.

The OB, acting as bankruptcy trustee, has exerted its power to mover the court to revert or undo preferential payments and recover that money or property to distribute among all of your creditors.

The preference period prior to filing of the petition is usually 90 days, unless the payee was an insider, which increases the period to a year before filing of the petition.  An insider is a relative, friend or business associate. In other words, if a payment was by the PR Government or its Public Corporations after March 3, 2017 to a non insider, it would be subject to being voidable and recovered by the OB.

The OB is alleging that during the 90 days before the Petition Date (the “Preference Period”), the Commonwealth made certain transfers of interests in the Commonwealth’s property, in the form of cash, to or for the benefit of the Defendant (“90-Day Transfers”) in the aggregate amount of a certain sum.  The OB is pursuing the avoidance of Preference Period Transfer Pursuant to 11 U.S.C. § 547. The OB alleges that the 90-Day Transfers are avoidable pursuant to 11 U.S.C. § 547 and recoverable pursuant to 11 U.S.C. § 550.

There are defenses to these claims such as payments made in the ordinary course of business or for new value.  These defenses will be discussed in another article.


The Oversight Board pursuant to Federal Rule of Bankruptcy Procedure 7001 and sections 105(a), 502, 544, 547, 548 and 550 of the Bankruptcy Code and Puerto Rico law to recover money for the Commonwealth of Puerto Rico, including its public corporations and instrumentalities such as PREPA and GDB.

As such it has filed adversary proceedings pursuant to section 306(a) of PROMESA. 48 U.S.C. § 2166(a) against many entities, now defendants, claiming payments were made preferentially and need to be returned to the Puerto Rico government or public corporation.

If you are a defendant being sued for having received payment by the debtor/bankrupt within the ninety (90) days prior to the filing of the bankruptcy petition has defenses under the bankruptcy code. Once such defense or exception is that it was paid or transferred in the Ordinary Course of Business pursuant to 11 U.S.C. §547(c)(2).

The defendant being sued for receiving a preferential payment or transfer must prove by a preponderance of the evidence that: 1) the debt was incurred in the ordinary course of business or financial affairs of the debtor and the creditor; 2) payment was made in ordinary course of business between the parties; OR 3) payment was done in ordinary business terms between the debtor and creditor (transferee).

Under the second item to be proved, the courts have found it is a subjective inquiry as to the business practices of these particular parties, not determined by industry practices. The factors considered are: a) length of time of the dealings of the parties; b) same or different manner of payment; c) same or different amount of payment; d) usual or unusual conduct of creditor or debtor to either collect or pay on the debt; e) advantage gained by creditor by debtors insolvency (such as gain additional security).

The idea is to demonstrate that there was nothing unusual about the payments that are currently being attempted to be set aside. The courts have looked at pre-preference period as a base line of dealings between the parties and used it to determine whether payments were ordinary or not.

*    Whether payments were made/received in the ordinary course of business or financial affairs of the debtor and transferee; or
*    Whether payments were made/received according to ordinary business terms.

11 U.S.C. § 547(c) (2)(A) & (B).
When a transfer is made under the “ordinary business terms”, the legal inquiry is a more objective test and will look to the industry wide behavior (as opposed to the subjective test of the parties particular dealings). It will look at the common practices of those same businesses in making payments, including when in distress.

If you are a defendant in this situation, the questions to ask are as follows:

When did the payments begin? For what amounts? Reason for payments? Were they timely or late? Was contract terminated? Were payments usual (amount, time, manner, place)?

As pertains to the industry: were these type of payments common? Was the late timing also common.

In conclusion, this defense is accepted by the courts, as well as, sometimes even by the trustee. It does, however, require much documentation to establish it.

Fraudulent transfers and obligations in Bankruptcy 11 U.S. Code § 548

Under PROMESA, the Oversight Board has sued hundreds of entities that have received monies from the Puerto Rico government (Commonwealth) or its instrumentalities with the intention to avoid and recover all transfers made by the Commonwealth of an interest in the Commonwealth’s property and to or for the benefit of the Defendant or any other transferee.

It is alleging in the complaints that the Commonwealth received less than a reasonably equivalent value in exchange for the 2-Year Transfers because the Commonwealth’s books and records maintained by its Office of the Controller do not contain any contract evidencing that the Commonwealth received value in exchange for the 2-Year Transfers. The Commonwealth was insolvent on the date that such 2-Year Transfers were made. As such the Transfers were fraudulent transfers that the Oversight Board may avoid pursuant to 11 U.S.C. § 548(a)(1)(B). During the four years prior to the Petition Date (the “Paulian Fraudulent Transfer Period”), the Commonwealth made payments to Defendant (“4-Year Transfer(s)”). Certain of these payments (if any, the “2-Year Transfer(s)” and, together with the 4-Year Transfer(s), the “Transfers”) may have occurred during the two years prior to the Petition Date (the “Code Fraudulent Transfer Period”).

A fraudulent transfer is when debtor knowingly transfers property ownership in an attempt to reduce the amount a creditor may get in a bankruptcy case or sells the property for less than it is worth. When this happens the bankruptcy trustee (in this case the Oversight Board (O.B.) can void or undo the transfer and bring back into the bankruptcy estate for redistribution to creditors. The intent to keep away from creditors is a requisite for this section to apply. In determining intent to defraud, the courts have looked at circumstances surrounding the sales of the property: for less than fair market value, to whom the transfer/sale is made is it to an insider (such as relative, friend, or business associate, unusual manner of transfer, becoming insolvent after the transfer, failing to disclose transaction.

The transfer will be considered fraudulent and may be voided or undone by trustee when: 1) sale/transfer of property was done for less than the property’s reasonable equivalent value even when there is NO INTENT to defraud the creditors; 2) the debtor was insolvent or the property transfer caused his insolvency.

The courts will look at the following factors when determining reasonable equivalent value: fair market value of the property; whether in ordinary course of business; value of other offers for property; whether in exchange for promise of future business.

The two dimensions to fraudulent transfers sometimes are referred to as actual fraud or constructive fraud. The actual fraud, the property owner transferred the property in order to keep the property out of reach of his creditors. The constructive fraud, although there was no intent to defraud the creditors, the sale was for below a reasonably equivalent value and there was signs of financial distress. In other words, even in the situation where there was no fraud but the price of sale was too low, it can be voided or undone by the trustee as a fraudulent transfer.

The period of review for the bankruptcy trustee, referred to commonly as the Look Back Period, is generally two (2) years and can be extended back up to four (4) years, based on state law.


Over the weekend, the Puerto Rico Oversight Board (O.B.) along with Unsecured Creditors’ Committee and Special Claims Committee joint plaintiffs, filed suit against multiple entities that received monies from the Employees Retirement System of Puerto Rico (the “ERS”) and Highways and Transportation Authority (HTA) during the past four (4) years. The O.B. acts pursuant to Federal Rule of Bankruptcy Procedure 7001(1) made applicable to these Title III cases by section 310 of the Puerto Rico Oversight, Management, and Economic Stability Act (48 U.S.C. § 2170) (“PROMESA”).

The O.B. filed many adversary complaints in bankruptcy to avoid and recover constructive fraudulent transfers and preferences and to disallow claims pursuant to 11 U.S.C. §§ 502, 544, 547, 548, and 550 and Puerto Rico law.

Once again the O.B. is suing on monies paid by HTA in the 90 days as well as two (2) to four (4) years before the filing of the petition. The “Petition Date”) that the Oversight Board initiated a Title III debt adjustment proceeding on behalf of HTA was May 21, 2017. In its complaint, the O.B. alleges that during the 90 days before the Petition Date (the “Preference Period”), HTA made certain transfers of interests in HTA’s property, in the form of cash or other funds, to or for the defendant’s benefit. The O.B. alleges that the HTA was insolvent at the time of the transfers or preferences were paid out.

Based on Puerto Rico law and jurisprudence, the O.B. alleges that at the time of the payments, HTA did not have a contract with the defendant, it was not registered with the Controller’s office, transfers did not correspond to the amounts in the contract, monies paid were in excess of the value provided. See 2 L.P.R.A. § 297. See Ocasio v. Alcalde Mun. de Maunabo, R-84-356,1988 WL 580831 (P.R. Apr. 19, 1988). 28. The Transfers were disbursements of public funds not authorized by law. 2 L.P.R.A. § 97; 3 L.P.R.A. § 283h(a); see also, e.g., 3 L.P.R.A. §§ 2301-05, 8613 (requiring documentation of contracts with HTA). The Transfers, being public monies disbursed unlawfully, may be recovered. See Mun. de Quebradillas v. Corp. de Salud de Lares, 180 D.P.R. 1003, 1015-16 (2011) (citing similar restrictions on municipal disbursements and noting that holding otherwise “would be leaving public funds in private hands that do not correspond to them” and citing “public policy. The O.B. requests the return of unlawful disbursements pursuant to 2 L.P.R.A. § 97, 3 L.P.R.A. § 283h), 31 L.P.R.A. §§ 3491-3500.

Adding insult to injury, the O.B. requests that any claims filed against the ERS or HTA for monies owed the defendant be disallowed pursuant to 11 U.S.C. § 502(d) and (j)) until the time all preference and transfers are paid back into the HTA bankruptcy estate.

There are defenses to these claims, which have been discussed in other related articles. Contact Indiano & Williams, P.S.C.


Over the past two weeks, the Puerto Rico Oversight Board (O.B.) has been making public announcements and overtures to the hundreds of defendants that it has sued. It is encouraging defendants to meet with their lawyers and disclose their documents and information justifying the monies received by the PR government. As reported by El Nuevo Dia on May 24, 2019, the O.B. will set up an out of court process so that defendants can come to it and justify the legality of the payments beginning on May 30, 2019.

Since the end of April until very recently, the O.B. along with Unsecured Creditors’ Committee and Special Claims Committee joint plaintiffs, filed over three (300) hundred lawsuits against multiple entities that received monies from the Puerto Rico government, government corporations or entities, the most recent being for Employees Retirement System of Puerto Rico (the “ERS”) and Highways and Transportation Authority (HTA) during the past four (4) years. The O.B. acts pursuant to Federal Rule of Bankruptcy Procedure 7001(1) made applicable to these Title III cases by section 310 of the Puerto Rico Oversight, Management, and Economic Stability Act (48 U.S.C. § 2170) (“PROMESA”).

The O.B., under the guise of saving defendants legal fees, has invited all defendants to show and explain their evidence to the O.B.’s Special Claims Committee. The O.B. has specifically indicated it is interested in examining the defendants’ contracts with the P.R. government and instrumentalities, invoices, purchase orders, etc. It prominently adds that the defendants will not need to be represented by a lawyer for this process, only if defendants want to have their lawyer involved. The O.B.’s financial consultants will examine the documents and information and determine if the payments were justified or not. If it determines the payment was justified, it will dismiss the case. If it does not determine that the payments were justified, it will work out an arrangement or continue the regular course of litigation.

If you are a defendant in one of the lawsuits filed by the O.B., you may think twice about meeting with the O.B.’s Special Claims Committee without legal representation. There is a slight chance that it may save some money if you do not hire a lawyer, but at what cost? The lawsuits are claiming in excess of $2.5 million dollars, and the O.B, acting as bankruptcy trustee, is trying to get as much of it back with the help of the bankruptcy statutes. You need to know where you legally stand well before you enter the wolf’s den.

Would you go into the office of a prosecutor and try to talk your way out of the charges against you? You may be able to in some instances, but in most, you will have provided the prosecutor with valuable information that will limit your defenses. The O.B. has filed suit against you and you are ignorant of the law. You need to know what information may hurt you in this particular lawsuit. It is advisable to consult with a lawyer first. The lawyer will be able to examine your evidence and apply it to the law. He will be able to assess the strengths and weaknesses of your position. Once you are equipped with this valuable information, you may want to try the out of court process, but always aided and accompanied by your lawyer. Remember, that even if you were acting in total good faith, you may be liable to return the monies under the bankruptcy statutes. Finally, even if you are liable, you will know your defenses, and the likelihood of prevailing. Regardless of your situation, you will have more leverage to negotiate a better resolution when fully appraised by a lawyer. A lawyer well versed in federal litigation, will be able to use his knowledge and experience in presenting your best defense or to reach a satisfactory settlement.

There are defenses to these claims, which have been discussed in other related articles. Contact Indiano & Williams, P.S.C.