Puerto Rico's unsecured creditors seek to reduce amount for the GDB

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Puerto Rico's Unsecured Creditors Committee this week filed an objection in court in an effort to block successors of the Government Development Bank from making $578 million in claims against the island's central government.

The Unsecured Creditors group in the territory's historic bankruptcy are battling with bondholders to recover debt owed by the government. Puerto Rico’s Title III bankruptcy Judge Laura Taylor Swain certified a restructuring of the GDB’s $4.1 billion of debt in November. The relevant court stipulation said that the committee retained a right to object to the GDB’s claim against the central government.

The committee represents the central government’s non-bond holding creditors. It has worked to reduce what the central government owes and pays out to others besides its members; its members do not include the GDB or its successors.

The committee, through its lead attorney Luc Despins of Paul Hastings, filed its objection to the claims of the GDB successor entities on July 15.

On Aug. 27 the servicer of the GDB Debt Recovery Authority, AmeriNational Community Services, and the collateral monitor for the DRA bonds, Cantor-Katz Collateral Monitor, filed a motion for the committee’s objection to be added to the central government debt mediation.

On Wednesday, the committee responded by objecting to the matter being put into mediation.

The issue is what should be done about loans that the GDB asserted the central government owes it. While the GDB originally asserted the central government owed it $4.5 billion, in an October 2018 stipulation the GDB agreed that it would make no claims against the central government beyond $578 million.

The committee is seeking the “complete disallowance” of the GDB claim for several reasons. First, the GDB has already received $1.6 billion in “fraudulent transfers” and more than $110 million in “preferential transfers” from the central government, the committee said in its July filing.

Second, under the bankruptcy code the claim is unenforceable, the committee claimed. This is because the GDB and its successors have failed to provide sufficient documentation of its claims against the central government. It is also because any claims are subject to Puerto Rico’s setoff rights, which would require a reduction of these claims.

In late July Swain put a stay on several disputes in the bankruptcy concerning general obligation, Employees Retirement System, Public Building Authority, and Highways and Transportation Authority. She told the court’s mediator and her team should oversee mediation through at least late November.

AmeriNational and Cantor-Katz argued in their court filing on Aug. 27 that committee’s objection “falls squarely with the scope and matters envisioned by the mediation order: (i) it raises arguments and seeks relief mirrored by other adversary complaints already subject to the stay and mandatory mediation process; (ii) it addresses issues that are integral to confirmation of a plan of adjustment, mainly the claims allowance process; and (iii) it deals with significant issues related to parties already slated to play meaningful roles in the mediation process.”

On Wednesday the committee said this wasn’t the case. It said that the GDB successor bondholder representatives are just trying to defend another claim against the central government. There are “thousands of unliquidated claims asserted against the commonwealth,” it said. These representatives just want their claims to be moved to the “front of the line” for resolution.

It’s best to include as much as possible in the mediation, said James Spiotto, managing director with Chapman Strategic Advisors. One wants to have a “holistic” treatment of the debt.

This isn’t the only case of an apparently completed bond debt deal that is continuing on after it is court approved and the new restructured bonds are issued and debt service is paid.

Swain has approved a deal for the Puerto Rico Sales Tax Financing Corp. (COFINA). However, a group of holders of the subordinate COFINA bonds have appealed it to the U.S. Court of Appeals for the First Circuit. The Puerto Rico Oversight Board motioned for the court to summarily reject the case.

In early August the First Circuit rejected this. The court has said that plaintiffs should submit arguments by early October.

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PROMESA Government Development Bank for Puerto Rico Commonwealth of Puerto Rico Puerto Rico Sales Tax Financing Corp (COFINA) Puerto Rico