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Judge Besosa to Hear Creditor Lawsuit Against Gov’t Development Bank

By on April 5, 2016

SAN JUAN – Federal Judge Francisco Besosa will hear the lawsuit filed Monday by a group of Government Development Bank (GDB) creditor, who are seeking the bank stop transferring assets out, except for those that cover essential services, reads a copy of the lawsuit obtained by Caribbean Business. The GDB owes about $4 billion to its creditors.

Judge Francisco Besosa (Image of painting via www.prd.uscourts.gov)

Judge Francisco Besosa (Image of painting via www.prd.uscourts.gov)

Last February, Besosa struck down as unconstitutional the Puerto Rico Public Corporation Debt Enforcement & Recovery Act — a locally enacted law establishing a bankruptcy mechanism for the island’s public entities. The commonwealth government challenged the ruling, and the case is expecting a decision soon by the U.S. Supreme Court, after the U.S. top court decided to hear the administration’s petition.

Plaintiffs against the GDB, which include Brigade Capital, Tasman Funds, Claren Road and Solus, are asking the federal district court on the island for relief over “preferential payments and transfers to [bank’s] creditors” taking place at the bank, as “assets continue to be unlawfully and progressively dissipated to support selected GDB creditors in order to help the failing commonwealth meet its liquidity needs.”

On Tuesday, the creditors filed a petition for a temporary restraining order (TRO), “barring GDB from making any transfers to or for the benefit of creditors other than as necessary to maintain essential public services or as required to pay ordinary course operating expenses of GDB,” according to the motion.

Later during the day, Besosa denied the plaintiffs’ petition for a TRO, and ordered the bank to answer the lawsuit no later than April 15.

GDB Chairwoman & President Melba Acosta stated Monday afternoon that “although the allegations set forth in the lawsuit are wrong, it is clear that our creditors agree with us that the situation of Puerto Rico is critical, the debt of the island is unpayable, and that the need for a federal restructuring regime to help the commonwealth achieve its recovery is crucial.”

“As economic conditions continue to deteriorate in Puerto Rico with no relief in sight, the GDB — like all commonwealth agencies — confronts extremely difficult choices, and it is our responsibility to evaluate all options that can make it possible to pay creditors while ensuring that the GDB continue operations,” Acosta further stated, while once again urging Congress for immediate action.

Melba Acosta Febo (GDB) Government Development Bank President & Chief Financial Officer of the Government_ANA_5531

GDB President & Chairwoman Melba Acosta

Chief of Staff Grace Santana told reporters earlier Monday that the administration is evaluating the lawsuit, which seeks “to restrict deposit outflows, except for those that respond to essential government services.”

What’s more, the group of creditors allege they can’t assess the full scope of these transfers “because the GDB withheld such information from the market.” The GDB stated that this is completely false and not based on facts, adding it has fully performed its role as depository, fiscal agent and financial adviser of the government, as required by law.

For the GDB, the creditors’ lawsuit is further evidence of the price being paid by all parties involved as a result of Congress’ inaction. Moreover, the bank states it remains committed to working with its creditors, including the group that has sued the institution, to seek a comprehensive response to the bank’s fiscal situation, while ensuring it continues to play its important roles within the commonwealth government.

Meanwhile, the Alejandro García Padilla administration presented legislation Monday night that would deal with the financially battered GDB and the more than $2 billion in debt payments hitting this summer. It would amend the GDB’s receivership provisions under its charter law amid concerns over the ability of the financially battered bank to continue its operations.

The GDB had only $561 million in liquidity as of April 1, and faces a $422 million debt payment on May 2. The latter would be subject to the governor’s authority to unilaterally declare a moratorium on its payment, if the bombshell legislation becomes law.

The bank could try to achieve a forbearance agreement with its creditors that would keep the sides out of court while debt-restructuring talks take place, similar to the Puerto Rico Electric Power Authority’s during the past two years.

For his part, Senate President Eduardo Bhatia told reporters on Monday, “That is why we need a [debt-] restructuring law, to impose order on all the disorder lawsuits create,” while warning it could be the first of many more to come.

According to the lawsuit, “until GDB’s debts are restructured and its ability to continue as a going concern is confirmed, GDB should be required to cease such payments, except to the extent the funds must be immediately used to maintain services essential to the public safety of citizens of Puerto Rico, or to pay the ordinary course operating expenses of GDB such as utilities, rent, and employee wages.”

For the group of creditors, there is a “hopeless conflict” between the commonwealth’s interest and that of the GDB’s stakeholders and creditors.

“One thing is clear: if GDB continues making preferential payments as selected governmental depositors race for the exits, it will be impossible for GDB to restructure its debts and remain a going concern, further destroying the value of GDB’s debts and imperiling the financial stability of the commonwealth as a whole,” the lawsuit warns.

Plaintiffs argue that if the bank depletes its liquidity by the time moratorium legislation is passed, “it will be too late and GDB will not have the liquidity to survive its own debt restructuring.”

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