Judge gives green light to Puerto Rico GDB restructuring

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Puerto Rico bankruptcy Judge Laura Taylor Swain ruled that the Government Development Bank can move forward with its bid to restructure $4.2 billion in bonds.

Though Swain didn’t approve the deal in her ruling on Thursday, she removed one of its biggest hurdles. The Unsecured Creditors Committee had asked her to continue a stay in the case, which would have delayed or stopped the deal. Among other terms, the GDB's proposed restructuring would require the exchange of existing bonds for new bonds with par values 45% lower.

In her ruling Swain said that since the GDB restructuring “is a vehicle to effectuate a transaction by, not against, the debtors[, it] is not subject to the strictures of the automatic stay.” She said the fact that the Puerto Rico Oversight Board, as the GDB’s representative, supported it made the restructuring a “transaction by” the debtor.

Swain said that in U.S. bankruptcy code, section 363 would normally put restrictions on a debtor from taking actions to affect or dispose of its property. She noted that section 363 wasn’t incorporated into the Puerto Rico Oversight, Management, and Economic Stability Act, which controls Puerto Rico’s bankruptcy.

Swain said that the UCC, led by attorney Luc Despins, clearly met the “basic requirements of constitutional standing.” However, it wasn’t clear that it had a standing based on its own legal rights, she wrote. Ultimately, there are “serious questions as to whether the committee has standing to request enforcement of the provisions of section 362(a) of the Bankruptcy Code [that address stays.]”

Swain decided to skip this issue and instead address the “merits of the motion.” On this she ruled against the committee.

She wrote that, “The committee’s argument that the debtor-representation responsibilities that Congress placed on the Oversight Board create conflicts of interest, and that historical ties of the Oversight Board members, and other personnel involved with the restructuring, with certain institutions exacerbate such conflicts, is immaterial to the issue of the statutory reach of the automatic stay and thus will not be further addressed here.”

The committee’s motion for a continued stay in the GDB restructuring was filed in the central Title III Puerto Rico bankruptcy case. Swain’s ruling came in this Title III case and said the Oversight Board was free to seek certification of the GDB restructuring.

Meanwhile, the committee is trying to challenge the restructuring in two other approaches. It has filed an adversary proceeding against it in the Title III case. And it is challenging it in a Title VI bankruptcy case filed in Puerto Rico District court.

On Sept. 13 the GDB announced that bondholders had voted in sufficient numbers in favor of the proposed restructuring for it to go forward. At some point the Oversight Board may file a motion with Swain to approve the GDB restructuring.

In the meantime, the committee may appeal Swain’s ruling to the first Circuit Court of Appeals.

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PROMESA Government Development Bank for Puerto Rico Commonwealth of Puerto Rico Puerto Rico