Puerto Rico’s unsecured creditors filed a further challenge to the proposed Government Development Bank debt deal, saying that it treats the island’s government authorities in Title III bankruptcy unfairly.
A negotiated GDB restructuring deal, announced on Aug. 10, proposes that most of GDB’s assets be transferred to a “GDB Recovery Authority.” GDB bondholders, municipal depositors, and private entity depositors would have access to these assets under specific terms.
The same restructuring deal says that Puerto Rico authority’s claims against the GDB would go to a Public Entity Trust. Entities in Title III bankruptcy like the Puerto Rico Electric Power Authority, Puerto Rico Highways and Transportation Authority, and Employees Retirement System that deposited money with the GDB and/or lent it money would seek to have the Public Entity Trust restore their money.
However, a claim against the Public Entity Trust “may be worthless because neither the commonwealth nor the GDB’s fiscal plan makes provision for payment of such yet-to-be-allowed claim,” the Official Committee of the Unsecured Creditors said in their adversary complaint filed Thursday.
The committee filed the complaint in the U.S. District Court for Puerto Rico, with Judge Laura Taylor Swain. The unsecured creditors are entities to whom Puerto Rico’s government and its semi-autonomous entities owe non-bond debt. As of February 2017 the GDB had about $4.2 billion in outstanding debt.
The proposed deal would end any outstanding claims against the GDB and those who led it. The unsecured creditors say that former prominent GDB leaders are now leaders of the Puerto Rico Oversight Board, Puerto Rico Fiscal Agency and Financial Advisory Authority, FAFAA’s financial advisor, and the Backyard Bondholders group that supports the deal. “Those individuals would prefer that this court ‘bury’ GDB before the [unsecured creditors] committee and other interested parties have the opportunity to perform the autopsy.”
In July the Puerto Rico Oversight Board certified the proposed GDB deal for court consideration and creditor voting.
The GDB, unlike several other Puerto Rico debtors, has been seeking to resolve its debt crisis through a negotiated debt restructuring process found in Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act. The committee’s adversary proceeding follows a motion it filed on Aug. 24 in the Title VI process.
“The Unsecured Creditors Committee is directly challenging the GDB restructuring AND the [Oversight] Board,” Puerto Rico attorney John Mudd said in an email. “The motion it filed to represent the Title III debtors in the GDB restructuring is as important as the adversary proceeding.”
According to the committee’s adversary proceeding filing, “As a legal and practical matter, the purported [GDB restructuring proposal] and the [government-adopted] GDB Restructuring Act cannot be separated because the transactions relating to the purported qualifying modification (e.g. the creation of the Recovery Authority, the irrevocable transfer to that entity of the GDB’s cash, performing loans, and real estate, and the creation of statutory liens on those assets) are also being effectuated solely pursuant to the GDB Restructuring Act.”
In its adversary complaint the committee offers eight causes of action for the judge to declare the government-adopted GDB Restructuring Act to be illegal.
Among these arguments is that PROMESA only allows the restructuring of bond debt, while the GDB deal would restructure deposits and other forms of debt. The unsecured creditors also argue that the Bankruptcy Clause of the U.S. Constitution bars territories from enacting bankruptcy laws and that the GDB Restructuring Act effectively acts as such a law.
The unsecured creditors are being represented by Paul Hastings LLP and Casillas, Santiago & Torres LLC. Luc Despins is Paul Hastings lead attorney in this case.
