Unsecured creditors sue to stop Puerto Rico GDB restructuring deal
SAN JUAN – The Committee of Unsecured Creditors has sued in federal court to stop the plan of adjustment of the Puerto Rico Government Development Bank’s (GDB) debt under the consensual resolutions Title VI of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).
In an adversary proceeding submitted late Thursday, the Committee said that under the GDB deal, former bank officials and advisers would be exempt from liability over the island’s public debt. The GDB was the government’s financial adviser.
“Long before the commencement of these Title III [debt adjustment] cases, the Government Development Bank for Puerto Rico…as financial advisor to the Title III Debtors, was the architect with various financial institutions of many of the financial maneuvers that led to the Title III Debtors’ current fiscal crisis,” the committee said.
As a result of the fiscal crisis, GDB was operationally wound down and ceased operations more than a year ago, but former GDB employees remain involved in Puerto Rico’s restructuring efforts.
“Indeed, current and former GDB insiders are now (i) members of the Oversight and Management Board for Puerto Rico (the ‘Oversight Board’), (ii) officers of the Puerto Rico Fiscal Agency and Financial Advisory Authority (‘AAFAF’), (iii) managing directors of AAFAF’s financial advisor, or (iv) the executive director of a GDB bondholder group supporting the transaction (the so-called ‘Bonistas Del Patio’ whose executive director is former GDB head Jorge Irizarry). These individuals would prefer that this Court ‘bury’ GDB before the Committee and other interested parties have the opportunity to perform the autopsy,” the committee said.
The committee stressed that the government is attempting to restructure all of GDB’s debts and liquidate its assets outside of Title III proceedings.
The GDB’s debt adjustment contemplates the restructuring of its unsecured bondholders’ and certain depositors’ claims through a “qualifying modification” binding on all bondholders under Title VI, the group said, for which GDB has already sought approval.
“The claims of the Title III Debtors and certain other government depositors are not being restructured as part of the purported Qualifying Modification. Rather, their claims are being restructured solely through transactions to be effectuated pursuant to the GDB Restructuring Act, which purports to release any rights or claims of the Title III Debtors against GDB or its current or former officers, directors, employees, agents, or representatives (collectively, the ‘GDB Releasees’) and to deprive the Title III Debtors and any other government entities of standing to challenge the GDB Restructuring,” the committee wrote.
However, even if no potential liability claims against the GDB officials were allowed, other claims by debtors against the bank are also not allowed, the group said.
The committee said the deal would offset the public funds deposited with GDB by the Title III debtors against GDB’s “alleged outstanding loans” to those debtors, transfer all of the valuable assets at GDB, much of which consists of deposits of public funds to the Recovery Authority, and release the entity and GDB releasees from claims that could be brought against them by the debtors.
The group wants to invalidate the deal, contending it goes against Promesa because only bondholders can invalidate claims, and that the law cannot be preempted.
“The Commonwealth cannot enact its own liquidation statute because any such statute would be preempted by Promesa pursuant to the Bankruptcy Clause. The GDB Restructuring Act amounts to a de facto bankruptcy law that discharges or otherwise extinguishes most claims against GDB, transfers all of GDB’s assets to other entities, and exists in the same area covered by Title III of Promesa,” the committee said.
The group also took issue with the report commissioned by the Financial Oversight and Management Board on the causes of the island’s debt.