San Juan’s government has filed a legal challenge to the Oversight Board-approved Government Development Bank for Puerto Rico debt restructuring deal.
San Juan filed a complaint for declaratory judgement and injunctive relief Wednesday against the Puerto Rico Oversight Board, the GDB, and the Puerto Rico Fiscal Agency and Financial Advisory Authority in the United States District Court for Puerto Rico. The judge overseeing all of the Puerto Rico Oversight, Management, and Economic Stability Act cases, Laura Taylor Swain, is handling San Juan’s challenge.
On July 14 the Oversight Board approved the restructuring deal for the GDB’s $4.8 billion in debt. The board claimed to be following PROMESA’s Title VI, which governs approval of deals reached out of court between Puerto Rico’s creditors and debtors.
In its complaint San Juan – Puerto Rico’s largest city with 350,000 residents – focuses on three central arguments.
First, the GDB holds more than $152 million in San Juan deposits, the city claims. These deposits are San Juan property and ineligible for Title VI restructuring which explicitly addresses only bonds, loans and other similar securities, the city states.
Second, the GDB deposits are “secured” unlike the money that the GDB owes to bondholders, the city argues. Yet the board-approved Restructuring Support Agreement calls for the municipalities to vote in the same class as all the other GDB creditors. Since PROMESA calls for creditors of different types to vote in different groups, this voting practice would be contrary to PROMESA.
Third, in Puerto Rico law municipal depositors are allowed to set-off their deposits against their GDB loan balances, the city said. However, the RSA is grossly inaccurate in accounting for these deposits against the loans and thus the agreement is breaching the law.
San Juan’s legal action claims, “The ultimate effect of the RSA would be to provide a windfall to the GDB’s bondholders by using the resources of San Juan and other municipalities for the payment of bondholder claims while imposing enormous losses on those same municipal depositors through the confiscation of their excess [special tax deposit] and their statutorily guaranteed right to setoff deposits at the GDB against their loans from the GDB.”
San Juan charges that the board held illegal executive private sessions concerning the creation of the RSA that included representatives of the GDB and FAFAA. PROMESA only allows executive sessions with board members and its staff present, the city claims.
In Title VI after the board approval of a deal, creditors must vote on it and a judge must approve it. Neither of these steps has yet occurred with the GDB deal.
In its complaint San Juan calls for the judge to rule that the board’s approval of the agreement is invalid. It calls for Swain to declare that PROMESA and Article VI, Clause 2 of the U.S. Constitution preempt Puerto Rican laws and executive order that have stopped the municipalities from withdrawing their funds from the GDB for over a year. Finally, it calls for the judge to prohibit the GDB and FAFAA from certifying any agreement that would use municipal special tax (“CAE”) deposit trust funds for the benefit of non-municipal creditors or that doesn’t provide a separate voting pool for municipal depositors.
Neither the FAFAA nor the GDB immediately responded with a comment for this story.