Other Puerto Rico towns ask to join San Juan’s suit against fiscal board
SAN JUAN – The Puerto Rico municipalities of Juana Díaz, Cabo Rojo, Hormigueros and San Germán have asked to intervene in the lawsuit filed by the Municipality of San Juan in U.S. District Court against the Financial Oversight and Management Board to stop the Government Development Bank’s (GDB) restructuring support agreement, alleging that the bank uses the city’s revenues to pay its own debt.
The municipalities, which filed their requests for intervention in two separate documents earlier this week, argued the claims made by the capital city are similar to theirs.
“It does not require more than a cursory reading of the pleadings…to conclude that the injuries for which the Municipality of San Juan seeks redress are not exclusive to the Capital City but rather are common to all municipal governments,” one of the petitions reads.
Early this week, however, Judge Laura Taylor Swain rejected the Municipality of Mayagüez’s petition to join San Juan as a co-plaintiff in the claim against the fiscal board.
The municipal government of San Juan sued in late July, days after Caguas sued the GDB and Fiscal Agency and Financial Advisory Authority (FAFAA) to stop the transaction.
The action filed by San Juan, whose lawyers are former Rep. Charlie Hernández and the law firm Mariani Franco, seeks for the court to declare that the GDB’s RSA is invalid because it is in violation of the Promesa law because it fails to provide a separate voting pool for municipal depositors with setoff rights. It further alleges that the deal is a debt “settlement” using funds held in trust that are property of San Juan and not subject to restructuring under Title VI of Promesa. The deal, among other monies, uses excess Additional Special Contribution to guarantee payment to creditors.
It also mentions that it violates the federal law’s transparency requirements.
The suit, moreover, seeks a ruling stating that Promesa preempts local laws and executive orders that authorize the government to stop withdrawals of municipal deposits from the GDB. Furthermore, the action calls for a permanent injunction to stop the bank, FAFAA and the fiscal board from reaching any restructuring agreement that confiscates San Juan’s “trust funds” and that fails to provide for a separate voting pool of municipal depositors.
The municipality added that the structure of the RSA is illegal and that Promesa provides that a court may approve it provided only that it is not “manifestly inconsistent” with Title VI of the federal law. The latter provides a consensual restructuring mechanism, through which the board certifies a deal between a government entity and its creditors that is later validated by the court.
The transaction—first announced in May and approved by the board on July 14—contemplates that municipalities, credit unions and holders of the bank’s debt agree to exchange their claims for three types of new bonds. These would be issued by a new public entity and would be paid mostly through the GDB’s municipal loan portfolio. The deal provides for haircuts that range from 25 percent to 45 percent, depending on the tranche that each creditor selects.