San Juan sues fiscal board over Gov’t Development Bank deal
SAN JUAN — On Thursday, the municipal government of San Juan sued the island’s financial control board in federal court to stop the Government Development Bank’s (GDB) restructuring support agreement (RSA), arguing it will “unlawfully” take the city’s revenues to pay the bank’s debt.
It is the second lawsuit filed by a municipality against the GDB’s restructuring deal. The municipality of Caguas recently sued the oversight board over the bank’s RSA, alleging it violates Promesa and confiscates funds belonging to the island’s towns.
The action filed by San Juan, whose lawyers are former Rep. Charlie Hernández and the law firm Mariani Franco, seeks to have the court declare that the GDB’s RSA is invalid for violating Promesa because it fails to provide a separate voting pool for municipal depositors with setoff rights. It further alleges that the deal purports to provide for a “settlement” of funds held in trust that are San Juan’s property and are not subject to restructuring under Title VI of Promesa. 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 GDB, the Financial Advisory & Fiscal Agency Authority (Fafaa) and the fiscal board from doing any restructuring agreement that confiscates San Juan’s “trust funds” and that fails to provide for a separate voting pool of municipal depositors.
According to the document, on July 14 the board certified the GDB’s RSA, which would take San Juan’s interests in two types of property. First there is property tax revenues, which would be used to pay GDB’s creditors, including public bondholders.
“This blatant raiding of a trust would mean that municipalities for whom the funds are held in trust would receive only a fraction of their value,” the suit says.
In addition, with respect to a second category of funds, the RSA strips San Juan and other municipalities that maintain deposits at the GDB of their right to setoff the amount of their deposits against their debts to the GDB, according to the complaint.
“The City of San Juan is responsible for providing essential public services to its people as well as visitors, including but not limited to medical care, policing and schooling. The RSA would have the effect of unlawfully taking San Juan’s interest in its deposits and trust fund at the GDB—monies that could be used to further fund essential services for the people of San Juan—for the benefit of the GDB’s bondholders,” the suit says.
The city also charges that it was excluded from negotiations and denied requests for information.
The lawsuit also argues that pursuant to Promesa, holders of claims against the GDB with different levels of priority interests are entitled to separate voting pools corresponding to their priority. Instead, the city says the bank and Fafaa have grouped San Juan and other municipal depositors together with all of the GDB’s other creditors, in one single voting pool.
“More egregiously, the oversight board, GDB and [Fafaa] are violating Promesa by improperly classifying San Juan and thereby depriving San Juan and other municipal depositors of their statutory right to vote as a group on the RSA in accordance with the nature and priority of their claims against the GDB,” the complaint reads.
The municipality added that the structure of the RSA is illegal and that Promesa provides that a court may approve the RSA 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.