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San Juan told it has no standing to stop gov’t bank restructuring agreement

By on September 1, 2017

SAN JUAN – The Government Development Bank (GDB) and the Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) have told the city of San Juan it does not have standing to stop the bank’s restructuring support agreement (RSA).

The entities also rejected the municipality’s contention that it will suffer irreparable harm with the deal. San Juan sued two months ago to stop the RSA, arguing the deal will “unlawfully” take the city revenues to pay the bank’s debt.

It was the second lawsuit filed by a municipality against the GDB’s restructuring deal. Caguas had also sued Puerto Rico’s fiscal control board over the bank’s RSA, alleging it violates the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) and confiscates funds belonging to the island’s towns.

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According to the document filed Friday, the GDB’s creditors, who are collectively owed more than $7 billion, consist primarily of bondholders and depositors. For the past five months, the GDB and FAFAA have worked with local credit unions, investors and other creditors to negotiate a voluntary modification of the GDB’s debt under Title VI of Promesa. Those negotiations culminated in the GDB and a substantial portion of its creditors reaching an RSA that was certified as a modifying qualification under Title VI.

Government Development Bank for Puerto Rico (CB file photo)

“If a creditor vote on the Qualifying Modification proceeds as planned, and it receives the requisite support, GDB expects to submit it for the Court’s approval later this year. GDB will be ready to commence the voting process shortly. At this critical stage, Plaintiff seeks the extraordinary remedy of a preliminary injunction to stop GDB from moving forward with soliciting and counting votes. Its motive is obvious: it does not like the deal being offered (whether for political or financial reasons),” the document reads.

The entities contend San Juan’s request for an injunction fails at every level. Besides not been able to establish the likelihood of success, FAFAA and the GDB argue that San Juan has no right to sue because the Legislature has divested San Juan and every other agency and municipality of the authority to challenge the qualifying modification, including the solicitation and voting processes that go along with it.

“And even if Plaintiff had authority to sue, its substantive objection to the proposed voting pools is legally defective. Plaintiff’s objection hinges on it being a secured creditor based on its purported right to set off its deposits with GDB against its debts owed to GDB. Plaintiff argues that pooling it with unsecured creditors for voting purposes would violate Title VI. But the truth of the matter is that Plaintiff has no setoff rights and is not a secured creditor,” the entities said.

Secondly, they argued that San Juan has not established that it would suffer irreparable harm if the vote on the RSA proceeds as planned because Title VI provides that any vote on a qualifying modification will remain non-binding until the fiscal board certifies the vote has complied with Promesa’s requirements, as well as the U.S. District Court ruling that the qualifying modification complies with Promesa including its voting and pooling requirements.

“Thus, a vote will not cause Plaintiff any harm at all, much less irreparable harm. If the vote succeeds, every argument Plaintiff now advances will be preserved: the Court can address the precise pooling issue presented here and require a revote if Plaintiff is right. Additionally, the harm Plaintiff claims from a revote—that other municipalities might be improperly coaxed into voting in favor of the Qualifying Modification—is speculative, amorphous, and, ultimately, not Plaintiff’s issue to raise.

“How other municipalities choose to vote is their own concern,” the document says.

The entities noted that the GDB would suffer real harm if the vote does not take place.

“Specifically, GDB would be unable to meet the voting and approval milestones in the RSA, thus giving creditors the right to walk away from the deal. That would transform what is currently a binding bilateral agreement into an option contract for creditors, and could stop the Title VI process in its tracks,” they said.

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