PR’s GDB Deal Faces Court Test
Puerto Rico’s unsecured creditors are seeking to derail the Government Development Bank debt deal by maintaining the automatic stay and by taking over representation of Puerto Rico’s authorities in the case.
Since Aug. 22 the Official Committee of the Unsecured Creditors, which represents non-bondholding creditors of Puerto Rico’s government and authorities, have been seeking to maintain the automatic stay in the GDB Title VI bankruptcy case. Since then the GDB, the government of Gov. Ricardo Rosselló, and the Oversight Board have filed objections to the committee’s filing and the committee has responded with its arguments.
On Wednesday Puerto Rico bankruptcy Judge Laura Taylor Swain will hear arguments on whether the automatic stay should be lifted, which could open the door to her approving the GDB debt deal. Swain will hear the arguments as part of a general omnibus hearing in Puerto Rico’s debt
The GDB had $4.2 billion of debt outstanding as of February 2017.
GDB bondholders are voting on the proposed deal through Sept. 12 and the outcome of that vote will also play a role in whether the debt deal is approved.
The committee is saying 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, which support the deal. On Sept. 10 the committee told Swain,
“If the purported [GDB] Qualifying Modification is approved, the very people who orchestrated the GDB Restructuring will have succeeded in releasing themselves, GDB, and others of any liability to the Title III Debtors relating to GDB’s role in Puerto Rico’s financial crisis, including any liability based on ‘unknown’ facts.”
The Puerto Rico Oversight, Management, and Economic Stability Act allows for a stay on the recovery of debts, called an “automatic stay,” under certain conditions.
In its Aug. 22 filing, the committee called for the continuation of the automatic stay for the GDB debt. This would effectively postpone or prevent the consummation of the proposed GDB debt deal, also known as the Qualifying Modification.
Among the committee’s arguments is that the transfer in the GDB deal of the Puerto Rico authorities’ deposits to the GDB is a violation of the automatic stay. The committee says the deal would affect Title III debtors’ (i.e. Puerto Rico authorities’) money in various ways and thus is contrary to the automatics stay. The committee said that whatever the board’s wishes with regards to ending the stay, the court has discretion on this issue.
For their part, the GDB and FAFAA argued that sections 303 and 305 of PROMESA gave them the right to operate freely of the committee’s claims. They say that section 303 gives them (and not the board or the court) the right to make most government decisions and these decisions include whether the stay should be extended or ended.
They say that section 304(i) of PROMESA said that Title III debtors can consent to Title VI modifications even if the automatic stay would otherwise apply when it said that “nothing in this section shall prevent the holder of a claim from voting on or consenting to a proposed modification of such claim under subchapter VI of this chapter.”
In the Oversight Board’s Aug. 31 filing it made some of the same arguments but added that the committee lacked authority to object to the GDB restructuring and standing to object to breaches to the automatic stay.
The board said that the stay protects the debtors and its assets rather than the creditors. The board said the committee represents some of the creditors and thus the committee lacks standing. The board said that the government authorities don’t have positive net claims against the GDB. And because of this the board said it makes no sense for the board to gain representation of the authorities’ interests (because they have none) in the GDB bankruptcy.
In a Sept. 6 filing the committee responded to the GDB, FAFAA, and the board by saying, “the GDB restructuring does not involve the exercise of the ‘governmental and political powers’ reserved to the commonwealth under section 303 [of PROMESA] or protected from court interference under section 305.”
The committee continued, “the Oversight Board’s assertion that the Title III debtors lack net claims against GDB is irrelevant, unsupported, and shows only that the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the Title III debtors.”
Whether the Title III (Puerto Rico authority) debtors have net claims against the GDB is irrelevant, the committee argued and, furthermore, hasn’t yet been properly determined.
Finally, the committee said that, “Abundant authority establishes that the automatic stay protects creditors as well as debtors, and here the committee clearly has standing as a party in interest under section 1109(b) of the bankruptcy code.”
In a further filing also on Sept. 6, the committee asked Swain to allow it to replace the board as the representative of the Puerto Rico authorities in Title III bankruptcy in the GDB bankruptcy.