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Cooperatives Group Opposes GDB Deal

By on October 5, 2018

Editor’s note: The following originally appeared in the Oct. 4-10, 2018, issue of Caribbean Business.

Although the qualifying modification of the Government Development Bank (GDB) is seemingly a done deal, opponents continue to pop up.

One of the latest opponents is a group of cooperatives or credit unions, which are using an adversary proceeding to stop the GDB deal.

In March, the six Puerto Rico credit unions sued the island government, the Financial Oversight & Management Board (FOMB) and several other entities, including the GDB Recovery Authority, arguing “embezzlement and fraud” for selling them unsound Puerto Rico debt in a ploy to obtain their assets, and are now trying to stop the GDB restructuring. The coops—Cooperativas de Ahorro y Crédito Abraham Rosa, de Ciales, de Rincón, Vega Alta, Dr. Manuel Zeno Gandía and de Juana Díaz—say they have more than $1.45 billion in assets, nearly 140,000 members, about 35,000 non-member depositors, 384 full-time employees and branches in 15 island municipalities.

The GDB Debt Recovery Authority, which is expected to be the GDB’s successor, and its trustees, Matthew Karp, Jorge L. Padilla and David Pauker, were named as defendants in the lawsuit.

The Recovery Authority, however, says its inclusion in the lawsuit is an attempt to stop the GDB restructuring made through a qualifying modification filed in court in August. They also say the credit unions had enough time to oppose the GDB’s restructuring in court and failed to do so.

The Recovery Authority “may” become a successor to the GDB, and therefore may become “liable for the actions and omissions of the GDB,” recovery officials say.

The GDB is presently attempting to modify about $4.5 billion in debt pursuant to Title VI of Promesa. On Aug. 10, the GDB and Puerto Rico Fiscal Agency & Financial Advisory Authority filed an application seeking court approval of a qualifying modification that, among other things, would result in an exchange of all GDB securities—including all claims related to those securities—for new bonds issued by the Recovery Authority. The deal would also authorize the transfer of certain restructuring property from the GDB to the Recovery Authority.

“If the qualifying modification is approved, then plaintiffs will no longer hold claims against the GDB. In that circumstance, the Recovery Authority defendants could not possibly be liable to plaintiffs as successors to the GDB (which the Recovery Authority is not) because the court’s approval of the qualifying modification would discharge the GDB’s alleged obligations to plaintiffs. As such, there would be no basis to continue an action against the Recovery Authority defendants,” the Recovery Authority says.

On the other hand, if the qualifying modification is not approved, then the GDB will not have transferred the restructuring property to the Recovery Authority, and the Recovery Authority could never be considered a successor to the GDB, they say.

“Essentially, there would be no nexus at all between the Recovery Authority and the GDB. Either way, the complaint should be dismissed as for the Recovery Authority defendants because the Recovery Authority will never be a successor to the GDB, and even if the court approves the qualifying modification, the GDB’s alleged obligations to plaintiffs would be discharged,” they say.

The Recovery Authority said the credit unions failed to raise objections in the Title VI proceedings by the Aug. 20, 2018 deadline.

“They have therefore waived the right to object. They should not be allowed to end-run the Title VI procedures authorized by this court by attacking the qualifying modification through a Title III adversary proceeding. The complaint against the Recovery Authority defendants should be dismissed on this basis as well,” Recovery Authority officials said in court documents.


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