Hearing Date: October 3, 2018 at 2:00 p.m. (AST)

UNITED STATES DISTRICT COURT 

DISTRICT OF PUERTO RICO

---------------------------------------------------------------x

In re:

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO,

as representative of 

THE COMMONWEALTH OF PUERTO RICO, et al.,

Debtors.1

---------------------------------------------------------------x

PROMESA

Title III

No. 17 BK 3283-LTS

(Jointly Administered)

OFFICIAL COMMITTEE OF UNSECURED 

CREDITORS OF PUERTO RICO

 Movant, 

v.

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO

 as representative of

THE COMMONWEALTH OF PUERTO RICO, et al.,

 Respondents. 

---------------------------------------------------------------x

PROMESA

Title III

Re: ECF No. 3881

OBJECTION OF 

FINANCIAL OVERSIGHT AND MANAGEMENT 

BOARD TO OFFICIAL COMMITTEE OF UNSECURED 

CREDITORS’ MOTION FOR ORDER GRANTING DERIVATIVE 

STANDING TO ACT ON BEHALF OF TITLE III DEBTORS FOR CERTAIN 

LIMITED PURPOSES AND OTHER RELATED RELIEF WITH RESPECT TO 

RESTRUCTURING OF GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO

 

 1 The Debtors in these title III cases, along with each Debtor’s respective title III case number (listed as a bankruptcy 

case number due to software limitations) and the last four (4) digits of each Debtor’s federal tax identification number, 

as applicable, are the (i) Commonwealth of Puerto Rico (Bankruptcy Case No. 17-BK-3283 (LTS)) (Last Four Digits 

of Federal Tax ID: 3481), (ii) Employees Retirement System of the Government of the Commonwealth of Puerto Rico 

(“ERS”) (Bankruptcy Case No. 17-BK-3566 (LTS)) (Last Four Digits of Federal Tax ID: 9686), (iii) Puerto Rico 

Highways and Transportation Authority (“HTA”) (Bankruptcy Case No. 17-BK- 3567 (LTS)) (Last Four Digits of 

Federal Tax ID: 3808), and (iv) Puerto Rico Sales Tax Financing Corporation (“COFINA”) (Bankruptcy Case No. 

17-BK-3284 (LTS)) (Last Four Digits of Federal Tax ID: 8474); and (v) Puerto Rico Electric Power Authority 

(“PREPA”) (Bankruptcy Case No. 17 BK 4780 (LTS)) (Last Four Digits of Federal Tax ID: 3747).

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TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT .................................................................................................... 2

BACKGROUND ............................................................................................................................ 7

I. The GDB Restructuring ...................................................................................................... 8

II. The UCC Attacks on All Fronts the GDB Restructuring in the Title III and Title VI 

Cases................................................................................................................................... 9

ARGUMENT................................................................................................................................ 11

III. PROMESA Does Not Allow for Derivative Standing...................................................... 11

IV. PROMESA Permits Only Limited Derivative Standing Under Bankruptcy Code 

Section 926 and the UCC Cannot Rely On It ................................................................... 17

V. Derivative Standing is Not Warranted Even if Permitted................................................. 19

VI. The Oversight Board is the Only Appropriate Representative of the Title III 

Debtors.............................................................................................................................. 23

A. Congress Contemplated a Holistic Approach to Puerto Rico’s Restructuring ..... 24

B. The UCC Cannot Bypass PROMESA’s Carefully Constructed Framework ....... 25

C. The UCC’s Allegations of Conflict Ring Hollow................................................. 26

VII. The Entire Fairness Doctrine is Being Misused ............................................................... 27

CONCLUSION............................................................................................................................. 30

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TABLE OF AUTHORITIES

Page(s)

CASES

Ass’n. of Retired Employees. v. City of Stockton (In re City of Stockton),

478 B.R. 8 (Bankr. E.D. Cal. 2012).........................................................................................13

Campana v. Pilavis (In re Pilavis),

233 B.R. 1 (Bankr. D. Mass. 1999) ...............................................................................6, 20, 23

Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.),

722 F.2d 1063 (2d Cir. 1983)...................................................................................................21

Commodore Int’l, Ltd. v. Gould (In re Commodore Int’l, Ltd.),

262 F.3d 96 (2d Cir. 2001).......................................................................................................17

Fin. Oversight & Mgmt. Bd. v. Ad Hoc Grp. of PREPA Bondholders (In re Fin. 

Oversight & Mgmt. Bd.),

899 F.3d 13 (1st Cir. 2018)..................................................................................................2, 15

G-I Holdings, Inc. v. Those Parties Listed On Exhibit A (In re G-I Holdings, Inc.),

313 B.R. 612 (Bankr. D. N.J. 2004) ........................................................................................23

Holstein v. Sanitary & Improv. Dist. No. 7 (In re Sanitary & Improv. Dist. No. 7),

96 B.R. 967 (Bankr. D. Neb. 1989) ...................................................................................13, 23

Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc.,

419 B.R. 749 (M.D. Tenn. 2009).............................................................................................21

In re After Six, Inc.

154 B.R. 876 (Bankr. E.D. Pa. 1993) ......................................................................................21

In re Calvary Temple Evangelistic Ass’n.,

47 B.R. 520 (Bankr. D. Minn. 1984) .......................................................................................21

In re City of Stockton,

486 B.R. 194 (Bankr. E.D. Cal. 2013).........................................................................13, 14, 23

In re Dow Corning Corp.,

199 B.R. 896 (Bankr. E.D. Mich. 1996)..................................................................................21

In re Dziurgot-Farnsworth,

2014 Bankr. LEXIS 5046 (Bankr. D.R.I. Dec. 12, 2014)........................................................24

In re Hardeman Cnty. Hosp. Dist.,

540 B.R. 229 (Bankr. N.D. Tex. 2015)....................................................................................12

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In re New York City Off-Track Betting Corp.,

2011 WL 309594 (Bankr. S.D.N.Y. Jan. 25, 2011)...........................................................12, 19

In re New York City Off-Track Betting Corp.,

434 B.R. 131 (Bankr. S.D.N.Y. 2010).........................................................................12, 13, 19

In re Richmond Unified School Dist.,

133 B.R. 221 (Bankr. N.D. Cal. 1991) ....................................................................................13

In re Sunset Hollow Properties, LLC,

359 B.R. 366 (Bankr. D. Mass. 2007) .....................................................................................17

In re Trados Inc.,

73 A.3d 17 (Del. Ch. 2013)......................................................................................................29

In re Waters,

2008 Bankr. LEXIS 374 (Bankr. D. Conn. Feb. 8, 2008) .......................................................21

In re Yasin,

179 B.R. 43 (Bankr. S.D.N.Y. 1995).......................................................................................19

Infinity Investors Ltd. v. Kingsborough (In re Yes! Entm’t Corp.),

316 B.R. 141 (D. Del. 2004)....................................................................................................23

Larson v. Foster (In re Foster),

516 B.R. 537 (B.A.P. 8th Cir. 2014)........................................................................................23

Morley v. Ontos, Inc. (In re Ontos, Inc.),

478 F.3d 427 (1st Cir. 2007)....................................................................................................20

Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC,

467 F.3d 73 (2d Cir. 2006).......................................................................................................21

Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery,

330 F.3d 548 (3d Cir. 2003).....................................................................................................17

Prime Healthcare Mgmt., Inc. v. Valley Health Sys. (In re Valley Health Sys.),

429 B.R. 692 (Bankr. C.D. Cal. 2010).....................................................................................13

Reed v. Cooper (In re Cooper),

405 B.R. 801 (Bankr. N.D. Tex. 2009)..............................................................................23, 24

S.I. Acquisition, Inc. v. Eastway Delivery Serv. (In re S.I. Acquisition), Inc.,

817 F.2d 1142 (5th Cir.1987) ..................................................................................................15

Schertz-Cibolo-Universal City Indep. Sch. Dist. v. Wright (In re Educators Grp. 

Health Tr.),

25 F.3d 1281 (5th Cir. 1994) ...................................................................................................15

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Smart World Techs., LLC v. Juno Online Servs. (In re Smart World Techs., LLC),

423 F.3d 166 (2d Cir. 2000).....................................................................................................21

United States v. Johnson,

529 U.S. 53 (2000)...................................................................................................................18

STATUTES

7 L.P.R.A. § 562 ............................................................................................................................22

11 U.S.C. § 101(10).......................................................................................................................19

11 U.S.C. § 105........................................................................................................................13, 16

11 U.S.C. §§ 105(a), 503(b), 1103(c), 1109(b)................................................................................4

11 U.S.C. § 363..............................................................................................................6, 13, 14, 20

11 U.S.C. § 405(m)(4) .............................................................................................................24, 25

11 U.S.C. § 541..............................................................................................................................15

11 U.S.C. §§ 544, 545, 547, 548, 549(a) .............................................................................5, 18, 20

11 U.S.C. § 903..............................................................................................................................12

11 U.S.C. § 904........................................................................................................................12, 13

11 U.S.C. § 926...................................................................................................................... passim

11 U.S.C. § 926(a) .......................................................................................................................2, 5

11 U.S.C. § 930..............................................................................................................................13

11 U.S.C. § 1104......................................................................................................................12, 18

Act 109-2017 ...................................................................................................................................8

PROMESA § 101(a) ...............................................................................................................22, 24

PROMESA § 101(b)........................................................................................................................7

PROMESA § 101(e) ......................................................................................................................25

PROMESA § 104(b)......................................................................................................................16

PROMESA § 104(i)(1) ................................................................................................................8, 9

PROMESA §§ 104(j).......................................................................................................................8

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PROMESA § 106(e) ......................................................................................................................28

PROMESA § 108(a)(2)..................................................................................................................26

PROMESA § 109...........................................................................................................................25

PROMESA § 301(a) ..................................................................................................................5, 17

PROMESA § 301(c)(5)..................................................................................................................15

PROMESA § 301(c)(7).......................................................................................................... passim

PROMESA § 303........................................................................................................12, 14, 15, 16

PROMESA § 304................................................................................................................8, 12, 14

PROMESA § 305................................................................................................................... passim

PROMESA § 315(b).............................................................................................................. passim

PROMESA § 405(m).......................................................................................................................9

PROMESA § 407..........................................................................................................................16

PROMESA § 601......................................................................................................................7, 29

PROMESA § 601(g)(2)(A)..............................................................................................................8

PROMESA § 601(m)(1)(D).......................................................................................................9, 29

OTHER AUTHORITIES

6 COLLIER ON BANKRUPTCY ¶ 904.01............................................................................................12

6 COLLIER ON BANKRUPTCY ¶ 904.01[2].................................................................................13, 14

Fed. R. Bankr. P. 9004.....................................................................................................................4

Fed. R. Civ. P 10(a) .........................................................................................................................4

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To the Honorable United States District Court Judge Laura Taylor Swain:

The Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), 

as representative of the Commonwealth of Puerto Rico (the “Commonwealth”), the Puerto Rico 

Sales Tax Financing Corporation (“COFINA”), the Puerto Rico Highways and Transportation 

Authority (“HTA”), the Employees Retirement System of the Government of the Commonwealth 

of Puerto Rico (“ERS”), and the Puerto Rico Electric Power Authority (“PREPA,” and together 

with the Commonwealth, COFINA, and HTA, the “Debtors”), pursuant to section 315(b) of the 

Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”),2 respectfully 

submits this objection to the Official Committee of Unsecured Creditors’ Motion for Order 

Granting Derivative Standing to Act on Behalf of Title III Debtors for Certain Limited Purposes 

and Other Related Relief With Respect to Restructuring of Government Development Bank for 

Puerto Rico [ECF. No. 3881] (the “Derivative Standing Motion”) in which the Official Committee 

of Unsecured Creditors (the “UCC”) seeks to obtain derivative standing to act on behalf of the 

Title III debtors (except COFINA) (hereinafter referred to as the “Title III Debtors”) for the 

purpose of objecting to the restructuring of the Government Development Bank for Puerto Rico 

(“GDB”).

PRELIMINARY STATEMENT

1. Even though Congress made it crystal clear the Oversight Board is the sole 

representative of each Title III debtor, and no trustee may be appointed except to prosecute an 

avoidance action under Bankruptcy Code section 926(a), the UCC assumes without the support of 

a single chapter 9 decision that the Court has power to grant the UCC the powers a trustee would 

have to determine whether and how to respond to GDB’s Title VI application. The UCC’s 

 2 PROMESA has been codified in 48 U.S.C. §§ 2101–2241.

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assumption is erroneous, as evidenced by the lack of authority for it and multiple statutory 

provisions rebutting it.

2. Moreover, the UCC’s factual premises for its Derivative Standing Motion are 

actually horrible imaginings of non-existent facts. Paragraph 1 of the UCC’s motion alleges 

“current and former officers, directors, employees, agents, and representatives...which will 

undoubtedly be argued to include the investment banks, law firms, and others that facilitated and 

profited from Puerto Rico’s ruinous debt offerings – will be released from any potential liability 

to the Title III Debtors...” In fact, the releases apply neither to former officers, directors, and 

employees, nor to investment banks, law firms, and other non-individuals, nor to present officers 

and directors for periods prior to the instant restructuring. See Case No. 18-1561-LTS, ECF No. 

151 (“GDB Restructuring Informative Motion”) at ¶¶ 7-9. Regrettably, the UCC did not withdraw 

its instant motion after the filing of the foregoing informative motion.

3. Put differently, the UCC Derivative Standing Motion is based neither on valid law, 

nor on valid facts.

4. Because the UCC lacks constitutional and prudential standing to challenge the 

GDB’s Title VI Qualifying Modification directly, it now asks the Court to take the unprecedented 

step of sweeping the Oversight Board aside so the UCC can exercise the Oversight Board’s rights 

as sole representative of the Title III Debtors to deal with GDB’s restructuring. Congress, 

however, made the Oversight Board the sole representative (PROMESA section 315(b)) of each 

Title III Debtor, provided it many trustee powers (PROMESA section 301(c)(7)), and foreclosed 

the ability of parties in interest to obtain court orders interfering with the Title III Debtors’ political 

powers and property rights absent Oversight Board consent (PROMESA section 305). (The UCC 

nowhere explains how it could exercise the Oversight Board’s powers in respect of the GDB 

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restructuring while the Oversight Board retains key consent rights under section 305). As a result, 

the Court cannot grant the UCC “double derivative standing” to play the role of both Oversight 

Board and Government to decide for the Title III Debtors the best use of their property—i.e. by 

tampering with the carefully structured GDB restructuring. Notably, the UCC fails to comply with 

Bankruptcy Rule 9004 and Fed. R. Civ. P. 10(a) as it does not identify any respondent to its motion.

5. To carry out Congress’s mandate, PROMESA ensures the Oversight Board remains 

at the helm of the restructuring process for Title III debtors. Unlike chapter 9, where the municipal 

debtor is given the powers of a bankruptcy trustee, PROMESA entrusts most trustee powers to an 

independent, federally-appointed Oversight Board, with the Government retaining powers not 

granted to the Oversight Board. Moreover, PROMESA section 305 prohibits the Court from 

entering an order interfering with the Title III Debtors’ property rights (here, the assertion of rights, 

defenses, and alleged causes of action against GDB) absent Oversight Board consent.

6. Unable to point to a specific provision in PROMESA permitting it to supplant the 

Oversight Board as representative and trustee, the UCC moves for derivative standing through a

hodgepodge of Bankruptcy Code sections: 105(a), 503(b), 1103(c), and 1109(b). While it provides 

a laundry list of 14 decisions from various circuits (not including binding First Circuit

jurisprudence) in which a form of nonconsensual derivative standing was granted, the UCC does 

not supply a single case where it was granted in a chapter 9 case. The reason for this omission is 

obvious: a court, absent consent or the applicability of Bankruptcy Code section 926(a), cannot 

permit a party to stand in the shoes of a chapter 9 or Title III debtor and substitute its judgments 

for that of the governmental debtor (or, as here, the Oversight Board). Significantly, Bankruptcy 

Code section 926(a) only allows derivative standing in the context of avoidance actions that, 

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outside bankruptcy, belong to creditors in the first place. Here, the UCC wants to control the Title 

III debtors’ rights that never belong to creditors.

7. Having foreclosed the rights of any third party to exercise discretion over a Title III 

Debtor`s property or restructuring (in addition to conspicuously omitting trustee appointment 

powers from PROMESA), Congress provided only a limited avenue for a creditor to prosecute 

certain causes of action belonging to a Title III Debtor. Bankruptcy Code section 926

(incorporated into PROMESA by section 301(a)), provides, in relevant part “[i]f the debtor refuses 

to pursue a cause of action under section 544, 545, 547, 548, 549(a), or 550 of this title, then on 

request of a creditor, the court may appoint a trustee to pursue such cause of action.” 11 U.S.C. 

section 926 (emphasis added). Because the UCC is not a creditor, and because the actions it seeks 

to take (i.e. objecting to the Title VI Qualifying Modification and the GDB Restructuring Act) are 

not claims that fall within the exclusive list of claims permitted under section 926, the UCC cannot 

obtain derivative standing under this section.3

 Indeed, Supreme Court jurisprudence is clear that 

when Congress creates a limited exception to a rule, a court cannot create additional exceptions. 

Section 926 is the exception the UCC, with no authority whatsoever, is trying to expand to include

derivative standing as if the Title III case were a chapter 11 case.

8. Even if the derivative standing sought by the UCC were not prohibited by 

PROMESA, the UCC is unable to show it is warranted. Obtaining derivative standing in chapter 

11 cases requires a showing the trustee is aware of colorable claims but unjustifiably fails or refuses

to pursue them.4

 The UCC has not pointed to any colorable claims it seeks to pursue. Rather, it 

seeks derivative standing for the purpose of “maintaining the status quo” and “preserving” 

 3 Not being a creditor because it does not own any claim, the UCC could not avail itself of section 926 even if it 

applied here, which it does not. 

4 See Campana v. Pilavis (In re Pilavis), 233 B.R. 1, 3–4 (Bankr. D. Mass. 1999).

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unidentified and potentially non-existent “rights and claims.”5 There is no test for derivative 

standing in chapter 9 and Title III cases for good reason. There can be no unjustifiable failure or 

refusal to use property of the debtor where Bankruptcy Code section 363 does not apply. The 

Oversight Board is given complete authority to settle any cause of action or enter into any 

agreement without court approval because section 363 of the Bankruptcy Code is absent from 

PROMESA. 

9. Faced with no standing to challenge the GDB Title VI restructuring directly nor the 

ability to pursue derivative standing under Bankruptcy Code section 926, the UCC pounds the 

table with the accusation the Oversight Board is inherently conflicted simply because (by express 

operation of PROMESA) it represents all Title III Debtors. This claim rings hollow. Congress 

chose to establish a single independent Oversight Board as the representative of each and every 

Title III Debtor, thus avoiding the chaos that would ensue if each debtor were pulling in separate 

directions rather than moving in unison for the benefit of Puerto Rico and its stakeholders. The 

UCC loses sight of the fact that all the Title III and non-Title III debtors are integral parts of the 

same government. In line with Congressional thinking that there should be one Oversight Board 

for all the covered entities, the United States Trustee created one general statutory creditors’ 

committee for all the Title III debtors. The only reason the UCC does not also represent creditors 

of GDB in Title VI is that Title VI, unlike Title III, does not provide for statutory creditors’ 

committees. 

 5 See Commonwealth of Puerto Rico, Financial Information and Operating Data Report (Dec. 18, 2016), at 189, 

available at http://bgfpr.com/documents/CommonwealthofPuertoRicoFinancialInfoFY201612-18-16.pdf (“GDB 

loans were also used to cover operational deficits of the Commonwealth and its instrumentalities.”); P.R. Act No. 

31-2013, Statement of Motives, at 1-2 (“[HTA] operates with a deficiency of approximately $355 million annually, 

which has been corrected in the past by means of loans granted by the Government Development Bank for Puerto 

Rico (BGF) to continue operating and meeting its obligations to its creditors. This practice began in 2008, when 

[HTA] resorted to financing to cover its operations.”).

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10. Finally, the UCC’s argument that a fairness standard be applied to the GDB 

restructuring is not only entirely out of place in a derivative standing motion, it is no more than 

erroneous rhetoric. Congress has prescribed the standards for approving a Title VI restructuring 

in PROMESA section 601. Those standards cannot be altered by the UCC’s notion of “fairness.” 

GDB’s bond claims have overwhelmingly voted to support the GDB restructuring. The Oversight 

Board, as Administrative Supervisor of GDB and representative of the Title III Debtors, ensured 

that the transaction complied with PROMESA. And despite outrageous claims that two members 

of the Oversight Board are conflicted as a result of their past ties to GDB, all seven members of 

the Oversight Board voted unanimously to approve the transaction—thus providing a majority of 

independent board members even if two votes were set aside.

11. Accordingly, the UCC’s inappropriate attempt to usurp the Oversight Board’s 

congressionally mandated role and substitute its judgment for that of both Congress and the 

democratically elected Government of Puerto Rico should be denied. 

BACKGROUND

12. On June 30, 2016, the Oversight Board was established under PROMESA section

101(b). Pursuant to PROMESA section 315(b), “[t]he Oversight Board in a case under this title is 

the representative of the debtor” and “may take any action necessary on behalf of the debtor to 

prosecute the case of the debtor, including filing a petition under section 304 of [PROMESA] . . . 

or otherwise generally submitting filings in relation to the case with the court.”

13. On May 3, 2017, the Oversight Board issued a restructuring certification pursuant 

to PROMESA sections 104(j) and 206 and filed a voluntary petition for relief for the 

Commonwealth pursuant to PROMESA section 304(a), commencing a case under title III thereof.

14. Thereafter, Title III cases were commenced for (i) ERS (Case No. 17-BK-3566 

(LTS)), (ii) HTA (Case No. 17-BK-3567 (LTS)) and (iii) PREPA (Case No. 17-BK-4780 (LTS)).

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15. On June 15, 2017, the Office of the United States Trustee for the District of Puerto 

Rico (the “U.S. Trustee”) filed a Notice of Appointment of Official Committee of Unsecured 

Creditors in the Commonwealth of Puerto Rico [Case No. 17-3283, ECF No. 338]. The U.S. 

Trustee subsequently appointed the UCC in the Title III cases of the ERS, HTA, and PREPA. See 

Case No. 17-3283, ECF No. 1171.

I. THE GDB RESTRUCTURING 

16. Concurrently with the commencement of the Title III Cases, on May 15, 2017, the 

GDB, the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”), and certain 

supporting creditors entered into a Restructuring Support Agreement (the “RSA”) concerning 

GDB’s financial obligations to its creditors.

17. On July 12, 2017, the Oversight Board certified the RSA as a “Voluntary 

Agreement” under PROMESA section 104(i)(1) and as a Qualifying Modification pursuant to 

PROMESA section 601(g)(2)(A).

18. On August 24, 2017, the Governor of Puerto Rico signed Act 109-2017 (the “GDB 

Restructuring Act”) into law.

19. On May 8, 2018, the Oversight Board recertified the RSA as amended on October 

20, 2017, December 20, 2017, March 20, 2018, and April 6, 2018, pursuant to PROMESA section

104(i)(1).

20. On August 10, 2018, GDB and AAFAF commenced a case under PROMESA Title 

VI by filing an application with the United States District Court for the District of Puerto Rico (the 

“Title VI Court”) for approval of the Qualifying Modification pursuant to PROMESA section

601(m)(1)(D) [Case No. 18-1561, ECF No. 1] (the “Title VI Case”).

21. The Qualifying Modification the Title VI Court is being asked to approve is critical 

to Puerto Rico’s recovery. The GDB case involves a significant number of local, Puerto Rican 

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bondholders and Puerto Rican lending institutions invested in GDB debt. See Press Release, 

AAFAF, AAFAF, GDB and a Significant Portion of the RSA Parties Have Reached a Deal to 

Amend the GDB Restructuring Support Agreement (Mar. 27, 2018). Its restructuring is key to 

invigorating Puerto Rico’s economy and ensuring that essential public services continue on the 

island. See GDB Restructuring Act, Statement of Motives; PROMESA section 405(m).

22. On September 20, 2018, the Declaration of Jane Sullivan on Behalf of Epiq 

Corporate Restructuring Certifying the Tabulation of Votes Cast on the Qualifying Modification 

for GDB Under Title VI of PROMESA [Case No. 18-1561, ECF No. 156] was filed, revealing that 

“Eligible Voters of over 74.8% of the aggregate principal amount of the Participating Bond Claims 

in the GDB Bond Claims Pool voted, and that, of those that voted in such pool, over 97.4% of the 

Participating Bond Claims voted to approve the Qualifying Modification, reflecting over 72.9% of 

the aggregate principal amount.” Id. at 3. In addition, “100% of the aggregate principal amount of 

the Participating Bond Claims in the Guaranteed Bond Claims Pool voted to approve the 

Qualifying Modification.” Id.

II. THE UCC ATTACKS ON ALL FRONTS THE GDB RESTRUCTURING IN THE 

TITLE III AND TITLE VI CASES

23. Despite the overwhelming approval of the Qualifying Modification and the 

beneficial effects of the GDB restructuring to Puerto Rico’s recovery, the UCC has initiated a 

multitude of repetitive litigation within the Title VI and Title III cases to attack the GDB 

restructuring on all fronts. 

24. On August 22, 2018, the UCC filed the Official Committee of Unsecured Creditors’ 

Notice of Intention to Object Regarding Purported Qualifying Modification for Government 

Development Bank [Case No. 18-1561, ECF No. 59] (“UCC Notice”) in the Title VI Case, 

signaling its desire to object to the Qualifying Modification directly in the Title VI Case.

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25. On the same day the UCC filed the UCC Notice, it filed the Urgent Motion of 

Official Committee of Unsecured Creditors, Pursuant to Bankruptcy Code Sections 105(a) and 

362, for Entry of Order Enforcing Automatic Stay and Court’s June 29, 2017 Order Confirming 

Application of Automatic Stay With Respect to GDB Restructuring in the Commonwealth’s Title 

III Case. [Case No. 17-3283, ECF No. 3797] (the “UCC Stay Motion”).

26. On September 1, 2018, the Oversight Board filed the Objection of Financial 

Oversight and Management Board for Puerto Rico as the Administrative Supervisor of the 

Government Development Board for Puerto Rico to the Official Committee of Unsecured 

Creditors’ Notice of Intention to Object to Qualifying Modification for Government Development 

Bank [Case No. 18-1561, ECF No. 111] (the “Standing Objection”). 

27. On September 6, 2018 the UCC filed the Derivative Standing Motion in the 

Commonwealth’s Title III case. On the same day, the UCC filed the Complaint of Official 

Committee of Unsecured Creditors of All Title III Debtors (Other Than COFINA) for Declaratory 

Judgment with Respect to GDB Restructuring [Case No. 18-AP-101-LTS, ECF No. 1] (the “UCC 

Adversary Complaint”), commencing an adversary proceeding seeking declarations that the GDB 

Restructuring Act is invalid and unenforceable on a variety of grounds.

28. On September 13, 2018, the UCC filed the Omnibus Response of Official 

Committee of Unsecured Creditors to GDB/AAFAF’s and Oversight Board’s Standing Objections

[Case No. 18-cv-1561, ECF No. 131] (the “UCC Standing Response”).

29. The next day, on September 14, 2018, the UCC filed the Preliminary Objection of 

Official Committee of Unsecured Creditors of All Puerto Rico Title III Debtors (Other Than 

COFINA) to Proposed PROMESA Title VI Modification of Government Development Bank for 

Puerto Rico [Case No. 18-1561, ECF No. 136] (the “UCC Title VI Preliminary Objection”).

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30. On September 18, 2018, the Court entered the Memorandum Order Denying 

Motion of Official Committee of Unsecured Creditors for Entry of an Order Enforcing the 

Automatic Stay, [Case No. 17-3283, ECF No. 3941] (the “Stay Enforcement Order”) denying the 

UCC Stay Motion. The Court ruled the automatic stay did not preclude the debtors or the 

Oversight Board from carrying out the GDB restructuring as “Congress intended to preserve 

governmental debtors’ ability to initiate transactions affecting their assets.” Id. at 6.

ARGUMENT

I. PROMESA DOES NOT ALLOW FOR DERIVATIVE STANDING

31. In its attempt to transplant the derivative standing doctrine of chapter 11 into 

PROMESA Title III, the UCC cites a hodgepodge of case law from across various circuits. See 

Derivative Standing Motion at ¶¶ 42-44. Notably absent from its string cites are any binding 

decisions regarding derivative standing from the First Circuit, and even more telling is the absence 

of any cases demonstrating the derivative standing doctrine is applicable in chapter 9. The absence 

of support for derivative standing in chapter 9 illuminates the obvious: Congress made clear a party 

in interest cannot supplant a municipal debtor (and in this case, the Commonwealth or its 

instrumentalities) in the exercise of its powers over property (with the limited exception of

Bankruptcy Code section 926, discussed below). 

32. The Oversight Board is the Only Representative of the Debtors. PROMESA

made clear that the Oversight Board is the sole representative (PROMESA section 315(b)) with 

many trustee powers (PROMESA section 301(c)(7)), of each Title III Debtor. Congress foreclosed 

the ability of any party to obtain derivative standing or advocate for the rights of any of the Title 

III Debtors. Not only is there no such derivative right, but PROMESA specifically excludes 

Bankruptcy Code section 1104, which permits a party in interest to move for appointment of a

trustee to supersede a debtor`s governance (here, the Oversight Board).

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33. PROMESA Prohibits Nonconsensual Derivative Standing. PROMESA 

sections 303 and 305 (which have as their chapter 9 analogs Bankruptcy Code sections 903 and 

904) insulate the Title III Debtor’s decisions—regarding both political and property matters—from 

court interference.6 This is because, as the chapter 9 court explained in In re New York City OffTrack Betting Corp., “[u]nlike the Bankruptcy Code generally, chapter 9 is not concerned with 

balancing the rights of creditors and debtors. Rather, the principal purpose of chapter 9 is to allow 

municipal debtors the opportunity to continue operations while adjusting or refinancing their 

creditor’s obligations.” 2011 WL 309594 at *5 (Bankr. S.D.N.Y. Jan. 25, 2011). 

34. PROMESA section 305 embodies these considerations. It provides in relevant part 

that “notwithstanding any power of the court, unless the Oversight Board consents . . . the court 

may not, by any stay, order, or decree . . . interfere with . . . (2) any of the property or revenues of 

the debtor; or (3) the use or enjoyment by the debtor of any income producing property.” 

PROMESA § 305. The inclusion of this section, combined with the absence of Bankruptcy Code 

section 363, demonstrates a Title III debtor retains control over its property and decision-making—

subject to the Oversight Board’s powers under PROMESA Titles I, II, and III—and the Court lacks 

jurisdiction to order otherwise. In re City of Stockton, 486 B.R. 194, 198 (Bankr. E.D. Cal. 2013)

(holding the Court cannot “prevent a chapter 9 debtor from spending its money for any reason, 

even foolishly or in a manner that disadvantages other creditors” without consent.); Holstein v. 

Sanitary & Improv. Dist. No. 7 (In re Sanitary & Improv. Dist. No. 7), 96 B.R. 967, 972 (Bankr. 

D. Neb. 1989) (holding in chapter 9 “[t]he debtor is free to use its property and the bankruptcy 

 6 See, e.g., 6 COLLIER ON BANKRUPTCY ¶ 904.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. rev.) (“Section 

904 compliments section 903 in providing a constitutional shield for chapter 9 by limiting federal intrusion upon 

States’ rights.”); In re Hardeman Cnty. Hosp. Dist., 540 B.R. 229, 233 (Bankr. N.D. Tex. 2015) (noting the Tenth 

Amendment requires “that a municipal debtor be left in complete control of its political and governmental affairs”).

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court cannot approve or disapprove such use.”); Prime Healthcare Mgmt., Inc. v. Valley Health 

Sys. (In re Valley Health Sys.), 429 B.R. 692, 714 (Bankr. C.D. Cal. 2010) (“By virtue of § 904, a 

debtor in chapter 9 retains title to, possession of, and complete control over its property and its 

operations, and is not restricted in its ability to sell, use, or lease its property.”).7

35. Specifically, PROMESA section 305 (combined with the exclusion of Bankruptcy 

Code section 363) preserves a Title III debtor’s authority to settle causes of actions—precisely 

what the Title III Debtors are seeking to accomplish through the GDB restructuring—without 

Court approval. In re City of Stockton, 486 B.R. at 199 (holding debtor could freely enter into 

settlements without court approval, as “[t]he power to approve a compromise implies the power to 

disapprove a compromise. And the power to disapprove is the power to interfere. And the power 

to interfere without consent with property or revenues is precisely what Congress has withheld in 

chapter 9 cases.”).8

 Indeed, in its Stay Enforcement Order, this Court recognized that “Congress 

intended to preserve governmental debtors’ ability to initiate transactions affecting their assets 

given, for example, the inclusion of Section 303, 304(i) and 305 of PROMESA.” Stay 

Enforcement Order at 6. The Court further observed that the sovereign considerations animating 

the exclusion of Bankruptcy Code section 363 operated to permit a Title III Debtor to enter into 

 7 See also, e.g., In re Richmond Unified School Dist., 133 B.R. 221, 225 (Bankr. N.D. Cal. 1991) (“the debtor is free to 

use, sell or lease property without regard to the restrictions in section 363 . . . Should a debtor do so irresponsibly, the 

sole remedy provided is dismissal for cause pursuant to section 930.”); Ass’n of Retired Employees. v. City of Stockton 

(In re City of Stockton), 478 B.R. 8, 20 (Bankr. E.D. Cal. 2012) (“a federal court can use no tool in its toolkit — no 

inherent authority power, no implied equitable power, no Bankruptcy Code § 105 power, no writ, no stay, no order —

to interfere with a municipality regarding political or governmental powers, property or revenues, or use or enjoyment 

of income-producing property . . . In short, the § 904 limitation on the court’s authority is absolute, with only the two 

exceptions stated in § 904: consent; and provision in a plan of adjustment”); In re New York City Off-Track Betting 

Corp., 434 B.R. 131, 140 (Bankr. S.D.N.Y. 2010) (holding that the command of sections 903 and 904 “is clear:” a 

court “may not interfere with a chapter 9 debtor’s political or governmental powers, or the use of the debtor’s property, 

without the debtor’s consent.”); see also 6 COLLIER ON BANKRUPTCY ¶ 904.01[2] (“a municipal debtor is not restricted 

in its ability to use, sell or lease its property, and the court is not to involve itself with the day to day operations of the 

municipality.”).

8 See also 6 COLLIER ON BANKRUPTCY ¶ 904.01[2] (“The chapter 9 debtor is free to enter into (or not enter into) a 

settlement as it sees fit, without the necessity of court approval”).

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negotiated resolutions of disputes over property rights or otherwise taking actions to dispose of its 

property, including the GDB restructuring. Id. 

36. The logic of this structure is confirmed by the fact that a contrary conclusion would 

prevent the Debtors from continuing normal operations. For example, the Commonwealth, with 

the approval of the Oversight Board, can appropriate funds to its instrumentalities (as budgets for 

the Commonwealth have been doing for years) without seeking Court approval. If the 

Commonwealth retains appropriation power it (along with the other Debtors) surely retains the 

ability to settle claims to implement the GDB restructuring.

37. In this case, the Debtors and the Oversight Board, as representative of the Debtors, 

have made determinations, in the exercise of their sole judgment, regarding an appropriate 

disposition of the Title III Debtors’ property (i.e. any potential claims they may have against 

GDB).9

 The UCC now asks the Court to interfere with this carefully considered decision to 

promote the best interests of the island and its stakeholders and instead bestow the UCC standing 

to control the Title III Debtors’ property in its misguided belief that such action would benefit the 

unsecured claimholders. But the Oversight Board has not consented to such interference, and, 

therefore, PROMESA section 305 prohibits the Court from granting the relief sought by the UCC.

38. This conclusion is consistent with the First Circuit Court of Appeals’ recent 

decision in Fin. Oversight & Mgmt. Bd. v. Ad Hoc Grp. of PREPA Bondholders (In re Fin. 

Oversight & Mgmt. Bd.), 899 F.3d 13 (1st Cir. 2018). There, the First Circuit recognized 

 9 It is well settled that causes of action are property of a debtor’s estate and the trustee has exclusive standing to assert 

such claims. See Schertz-Cibolo-Universal City Indep. Sch. Dist. v. Wright (In re Educators Grp. Health Tr.), 25 F.3d 

1281, 1284 (5th Cir. 1994) (citing S.I. Acquisition, Inc. v. Eastway Delivery Serv. (In re S.I. Acquisition), Inc., 817 

F.2d 1142, 1153-54 (5th Cir.1987)). In chapter 11, an estate is created under 541 which holds the claims and causes 

of action of the debtor. PROMESA does not incorporate section 541, and PROMESA section 301(c)(5) defines 

“property of the estate” as “property of the debtor.” Because there is no estate, all claims and causes of action that can 

be asserted by the Title III Debtors constitute “property of the debtor,” which is protected by PROMESA section 305 

from Court interference.

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PROMESA section 305 did not prohibit the Court from “stand[ing] aside” to “allow another court 

to decide whether to interfere with the powers or properties of the debtors,” but did prohibit the 

Court from issuing “any [] stay, order, or decree that itself interferes with the debtor’s powers or 

assets,” id. at 19, because “[w]hen a bankruptcy or Title III court acts directly, it impinges on th[e] 

autonomy” protected by PROMESA section 305. Id. at 21. Here, if the Court were to grant the 

UCC’s request to stand in the Title III Debtors’ shoes to control the use of their property, the Court 

would be entering an order that directly interferes with the Title III Debtors’ autonomy. Such 

direct interference, the First Circuit made clear, is proscribed by section 305.

39. Derivative Standing Would Deprive the Government, Acting With the 

Approval of the Oversight Board, of Control Over the Commonwealth and its

Instrumentalities. Similarly, PROMESA section 303 prohibits the relief sought by the UCC. 

PROMESA section 303 provides, in relevant part, that PROMESA Title III “does not limit or 

impair the power of a covered territory to control, by legislation or otherwise, the territory or any 

territorial instrumentality thereof in the exercise of the political or governmental powers of the 

territory.” PROMESA § 303. Here, the Commonwealth has enacted the GDB Restructuring Act. 

In doing so, it has acted to control itself and its instrumentalities “by legislation,” a clear “exercise 

of the political or governmental powers of the territory.”10

40. The UCC’s Reliance on the Commonwealth-COFINA Stipulation is 

Misplaced. Moreover, the UCC’s reference to the Stipulation and Order Approving Procedure to 

 10 The Court’s inability to order derivative standing in PROMESA Title III is further illustrated by the fact that Congress 

clearly knew how to grant ‘derivative standing’ style remedies to creditors when it wanted to, but chose not to provide 

for any similar right during a Title III case. This can be seen, for example, in PROMESA section 407, which gives 

secured creditors certain rights to bring suit over inter-debtor transfers of assets by Puerto Rican instrumentalities. 

Notably, Congress did not include section 407 remedies in Title III. See PROMESA section 407(b) (“A creditor may 

enforce rights under this section . . . unless a stay under title III is in effect.”). This further demonstrates Congress 

wanted to consolidate in the hands of the Oversight Board alone the power to choose to bring—or not—causes of 

action on behalf of the various debtors during a Title III case.

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Resolve Commonwealth-COFINA Dispute [ECF No. 996] (the “CW-COFINA Stipulation”) does 

not support its argument that the Court can grant the derivative standing it seeks here. In the CWCOFINA Stipulation, the Oversight Board appointed the UCC to act as its agent in resolving the 

CW-COFINA Dispute, pursuant to PROMESA subsections 104(b) (the authority of the Oversight 

Board’s agents) and 104(g) (authority of the Oversight Board to enter into contracts) and subject 

to limitations drawn up by the Oversight Board itself. CW-COFINA Stipulation at ¶ 2. An agent 

acts for its principal and does not replace it or step into its shoes.

11 The UCC did not supplant the 

Oversight Board as representative and trustee of the Commonwealth, as it seeks to do here. First, 

the Oversight Board exercised its own power to appoint agents. Second, the Oversight Board at 

all times “remain[ed] the only party authorized by PROMESA to propose a title III plan of 

adjustment” that could effectuate any settlement reached by the Commonwealth and COFINA 

agents, and retained the right to “negotiate and mediate with creditors to achieve [its own] 

settlement of the Commonwealth-COFINA Dispute.” Id. at ¶ 4.n. The CW-COFINA Stipulation 

was designed and advocated by the Oversight Board, which expressly consented under PROMESA 

section 305 to the appointment of the Commonwealth Agent in its limited capacity. See id. at ¶ 2; 

see also ¶ 11 (“Except as provided in paragraph 2, the Oversight Board does not consent or 

otherwise release any rights of the Oversight Board under PROMESA or otherwise, including 

section 305 of PROMESA.”). Here, the Oversight Board has not consensually ceded its authority 

over the Title III Debtors with respect to the GDB restructuring, and nothing in the CW-COFINA 

 11 Based on the fact that the agents were retained by the Oversight Board, the Court clarified that the agents are exempt 

from liability pursuant to PROMESA §105, which only applies to the “Oversight Board, its members and its 

employees.” Case No. 17-3283, ECF No. 1612 at ¶ 2 (applying immunity protections of PROMESA section 105 to 

agents); ¶ 6 (providing that nothing in the Order “limits the powers and authority of the Oversight Board . . . with 

respect to any of its agents and employees”). Notably, the UCC filed a response to the COFINA Agent’s motion 

seeking the PROMESA section 105 protections (see Case No. 17-3283, ECF No. 1121) quoting PROMESA section 

105 and stating that “the Commonwealth Agent [i.e. the UCC] is the approved agent appointed by the Oversight Board 

. . . and, therefore, should enjoy the benefit of this protection.” Case No. 17-3283, ECF No. 1279 at ¶ 2. 

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Stipulation supports the notion that the UCC can wrest away the Oversight Board’s authority or

otherwise exercise the Title III Debtors’ rights to impede the GDB restructuring.12 

II. PROMESA PERMITS ONLY LIMITED DERIVATIVE STANDING UNDER 

BANKRUPTCY CODE SECTION 926 AND THE UCC CANNOT RELY ON IT

41. Congress provided only a limited form of derivative standing in chapter 9 and

PROMESA. Bankruptcy Code section 926, made applicable to Title III pursuant to PROMESA 

section 301(a), provides, in relevant part, “If the debtor refuses to pursue a cause of action under 

section 544, 545, 547, 548, 549(a), or 550 of this title, then on request of a creditor, the court may

appoint a trustee to pursue such cause of action.” Bankruptcy Code section 926 (emphasis added). 

The plain language of section 926 illustrates that only a creditor (and not any party in interest) may 

seek standing from the court to pursue a limited universe of claims, i.e. avoidance actions, and 

only if the debtor refuses. Notably, the causes of action embodied in section 926 start out as actions 

owned by creditors outside bankruptcy, or do not exist outside bankruptcy. Thus, section 926 acts 

to return to creditors actions they owned. Here, the UCC is asking to control actions the UCC and 

the creditors it represents never owned. 

42. Congress’s incorporation of section 926 into PROMESA, and its exclusion of other 

Bankruptcy Code sections such as section 1104 (permitting a party in interest to seek appointment 

and removal of a trustee), demonstrates Congress’ intentional foreclosure of other forms of 

derivative standing. United States v. Johnson, 529 U.S. 53, 58 (2000) (“When Congress provides 

 12 The cases on derivative standing cited in the CW-COFINA Stipulation (at ¶ 2) all relate to the consensual grant of 

derivative standing to a creditors’ committee for a limited purpose, and draw a clear distinction between that situation 

and one where the UCC seeks to seize the debtor-in-possession’s authority to pursue claims without the debtor-inpossession`s consent, applying a completely different test to such situations. See Commodore Int’l, Ltd. v. Gould (In 

re Commodore Int’l, Ltd.), 262 F.3d 96, 99-100 (2d Cir. 2001) (detailing the test for the consensual grant of standing 

to a creditors’ committee and distinguishing cases where the “debtor in possession unjustifiably failed to bring suit”); 

Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 566 (3d Cir. 2003) (citing 

Commodore Int’l’s test on consensual derivative standing approvingly); In re Sunset Hollow Properties, LLC, 359 

B.R. 366, 383 (Bankr. D. Mass. 2007) (citing Commodore Int’l approvingly). 

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exceptions in a statute, it does not follow that courts have authority to create others. The proper 

inference, and the one we adopt here, is that Congress considered the issue of exceptions and, in 

the end, limited the statute to the ones set forth.”); Santana v. Holder, 731 F.3d 50, 56 (1st Cir. 

2013) (refusing to imply additional exception to statute as “[t]he absence of such a limitation, 

despite the explicit enumeration of others, serves as a strong indication that Congress imposed the 

restrictions that it deemed important and declined to impose others.”). That PROMESA section 

301(c)(7) provides that the Oversight Board is the “trustee” for all Bankruptcy Code provisions 

incorporated into PROMESA except section 926 further underscores that this is the only limited 

circumstance in which derivative standing is authorized.

43. The UCC’s Requested Relief Does Not Comply with Section 926. Because

section 926 is the only provision in PROMESA that specifically provides for derivative standing, 

a creditor may only petition the Court to appoint a trustee in conformance with this section. The 

UCC does not own a claim and, pursuant to Bankruptcy Code section 101(10), is therefore not a 

“creditor” for purposes of PROMESA. Moreover, the UCC is not seeking to pursue the causes of 

action listed in section 926. The UCC makes no attempt to move under section 926, and could not 

if it wanted to. 

44. First, only a creditor, and not just any party in interest, can move for derivative 

standing under section 926. This limitation was intentional and is animated by sovereignty 

concerns. For example, in In re New York City Off-Track Betting Corp., the bankruptcy court 

denied a motion by former employees of a chapter 9 debtor to appoint a trustee, noting “[c]ourts 

should be loath to appoint a trustee given that the court's limited powers in a chapter 9 case are 

best understood as operating within the context of constitutional and federalism concerns.” No. 

09-17121 MG, 2011 WL 309594, at *4 (Bankr. S.D.N.Y. Jan. 25, 2011). The court went on to 

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explain that “the narrow application of section 926 is evidenced by the fact that only a creditor, 

and not any party in interest (or the court sua sponte), can seek the appointment of a trustee.” Id.

(emphasis added). Here, the UCC is not a creditor, it has no assets or liabilities, and it does not 

own (nor can it assert) any of its constituents’ claims, which are not even against GDB but the 

Title III Debtors. The UCC is therefore precluded from moving under section 926.

45. Second, even if it could move under section 926, the UCC seeks far more than the 

circumscribed relief permitted by section 926. The UCC does not identify specific claims it seeks 

to pursue; rather, it seeks to wield the Title III Debtors’ rights in order to dismantle the GDB

restructuring and object to (indeed, override) the Commonwealth’s own legislative prerogatives. 

But standing under section 926 is a limited right which provides for a closed list of actions, none 

of which the UCC has implicated in its intended objections. See In re Yasin, 179 B.R. 43, 48 n.6 

(Bankr. S.D.N.Y. 1995) (“In chapter 9, the court can appoint a trustee solely for the purpose of 

bringing certain avoiding actions. The chapter 9 trustee can neither assume nor reject unexpired 

leases or executory contracts or be compelled to do so; only the debtor can.”). The UCC could 

only pursue section 926 standing for claims pursuant to sections 544, 545, 547, 548, 549(a), or 550 

of the Bankruptcy Code. None of the UCC’s far reaching objections constitute claims that can 

properly fall within these sections.

III. DERIVATIVE STANDING IS NOT WARRANTED EVEN IF PERMITTED.

46. Even if the Court could grant derivative standing under PROMESA Title III (it 

cannot), the UCC does not begin to show it would be justified on the facts. Bankruptcy courts 

within the First Circuit have permitted derivative standing only where the moving party has 

demonstrated there is (1) a colorable claim for relief, (2) the trustee had knowledge of the case and 

unjustifiably failed or refused to pursue the claim, and (3) the litigation presented no burden to the 

estate. Campana v. Pilavis (In re Pilavis), 233 B.R. 1, 3–4 (Bankr. D. Mass. 1999); see also 

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Morley v. Ontos, Inc. (In re Ontos, Inc.), 478 F.3d 427, 431-32 (1st Cir. 2007) (“creditors only 

have standing to pursue [] claims during bankruptcy proceedings when a trustee or debtor in 

possession unjustifiably fails to pursue the claim.”). The UCC has not made, and cannot make, 

the required showings. As a threshold matter, however, as explained above, in the absence of 

Bankruptcy Code section 363, there can be no judicial determination that the Title III debtors have 

unjustifiably failed or refused to prosecute a claim or defense. 

47. First, the UCC fails to show the existence of any “colorable claims.” Indeed, the 

UCC does not allege any claims actually exist, and does not seek authority to pursue them if they 

did. Rather, the UCC simply seeks to obtain derivative standing solely for the purpose of 

“maintaining the status quo” and “preserving” unidentified and potentially non-existent “rights 

and claims.” Derivative Standing Motion at 1, ¶ 39. This is not a valid basis for the grant of 

derivative standing because “the entire purpose of seeking derivative standing is to pursue claims 

that a trustee cannot or will not pursue.” Hyundai Translead, Inc. v. Jackson Truck & Trailer 

Repair, Inc., 419 B.R. 749, 757 (M.D. Tenn. 2009) (emphasis added). Moreover, statutory 

creditors’ committees are not entitled to assert derivative standing simply to interfere with the 

debtor’s use of its property or its decision making. See In re Calvary Temple Evangelistic Ass’n., 

47 B.R. 520, 523 (Bankr. D. Minn. 1984) (holding that derivative standing was never to be granted 

to allow creditors’ committees to move to sell estate assets, the court holding derivative standing 

powers should not “be extended to motions or proceedings involving the ongoing operations and 

business judgments of the debtor. It simply creates too many obstacles.”); In re Dow Corning 

Corp., 199 B.R. 896, 900 (Bankr. E.D. Mich. 1996) (“although it might be in the best interests of 

the estate to sell an asset, an official committee cannot usurp the power of management (trustee or 

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debtor-in-possession) to make that choice.”).13 We have not found any court that has ever granted 

derivative standing for the sole purpose of sabotaging an affiliated, non-Title 11 debtor entity’s 

restructuring efforts (which, in this case, will benefit the overall restructuring of the 

Commonwealth)—the only thing the UCC wishes to do here.

48. Second, the UCC cannot demonstrate that the Title III Debtors “unjustifiably 

refused” to pursue such (unidentified) claims. Indeed, besides alleging the existence of shadowy 

and ill-defined conflicts of interest, the UCC makes no attempt to argue this element. This 

omission is by design: there is no unjustifiable refusal because the Title III Debtors the UCC is 

supposedly trying to “protect” are net debtors vis-à-vis GDB14—which means if the UCC succeeds 

in dismantling the GDB restructuring, the Title III Debtors would experience more harm than 

good.

 13 See also In re Waters, 2008 Bankr. LEXIS 374 *32-33 (Bankr. D. Conn. Feb. 8, 2008) (holding “only a trustee (or 

debtor in possession) can sell property”); Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 

F.3d 73, 80 (2d Cir. 2006) (“a creditors’ committee may not settle an adversary proceeding over the objections of 

the debtor-in-possession.”) (citing Smart World Techs., LLC v. Juno Online Servs. (In re Smart World Techs., LLC), 

423 F.3d 166, 184 (2d Cir. 2000)); In re After Six, Inc. 154 B.R. 876, 882 (Bankr. E.D. Pa. 1993) (holding that in 

relation to sale of debtor’s property in chapter 11 case the Creditors’ Committee’s view “must be subjected to the 

deference to the Debtor’s wishes.”); Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 

1063, 1071 (2d Cir. 1983) (bankruptcy court is admonished not to “blindly follow the hue and cry of the most vocal 

special interest groups;” in that case the official Creditors’ Committee). 

14 Specifically, (i) HTA owes GDB over $1.933 billion, while having a demand deposit claim of, if anything, under $33 

million, (ii) the Commonwealth Treasury Department (Hacienda) owes GDB over $884 million, while its demand 

deposit claim was $568 million, (iii) PREPA owes GDB over $324 million because notwithstanding section 562 of 

the GDB Enabling Act, a minimum of approximately $324 million was withdrawn by PREPA while GDB was 

insolvent and, in addition, PREPA owes over $43 million for money borrowed, while its demand deposit claim is only 

$152 million, and (iv) ERS has a $33 million demand deposit claim against GDB for funds on deposit at GDB, which 

funds Act 106 of August 2017 and Joint Resolution 188 mandate to be transferred to the Commonwealth to help pay 

pension claims. Demand deposit amounts and liabilities for loans from GDB are taken from the GDB fiscal plan 

certified April 20, 2018 at pp. 37-38. We understand the Commonwealth actually owes GDB substantially more than 

reflected above. See Proof of Claim No. 29485, filed in Case No. 17-03283 (D.P.R. filed May 25, 2018) (asserting 

claim of not less than $2,231,033,108 by GDB against the Commonwealth); Proof of Claim No. 29533, filed in Case 

No. 17-03567 (D.P.R. filed May 25, 2018) (asserting claim of $2,355,974,556.98 by GDB against HTA); Proof of 

Claim No. 29617, filed in Case No. 17-04780 (D.P.R. filed May 25, 2018) (asserting claim of $41,357,139.80 by GDB 

against PREPA); Proof of Claim No. 151149, filed in Case No. 17-03567 (D.P.R. filed Jun. 29, 2018) (asserting claim 

of $2,355,974,556.98 by GDB against HTA).

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49. Moreover, the Oversight Board’s decision to support the GDB restructuring was 

made as part of its territory-wide mandate to restore the entirety of Puerto Rico to fiscal 

responsibility and access to capital markets, see PROMESA section 101(a), taking into account 

the interconnectedness of the island’s affairs. The UCC’s desire to interpose itself to undo the 

Oversight Board’s determination of what is best holistically (and to instead focus only on the 

competing interests of unsecured claimholders across the Title III Debtors) would eviscerate the 

Oversight Board’s ability to prosecute global restructurings for the entire island—its 

Congressionally ordained role. The Oversight Board’s decision to fulfill its mandate instead of 

bending to the UCC’s comparatively narrow asserted interests is eminently justifiable. That the 

UCC (wrongly) believes the GDB transaction is not beneficial to the Title III Debtors is irrelevant. 

The UCC cannot insert its judgment in place of that of the Debtors and certainly not that of the 

Oversight Board. In re City of Stockton, 486 B.R. 194, 198 (Bankr. E.D. Cal. 2013); In re Sanitary 

& Improv. Dist. No. 7, 96 B.R. 967, 972 (Bankr. D. Neb. 1989) (making clear the Court cannot 

“prevent a chapter 9 debtor from spending its money for any reason, even foolishly or in a manner 

that disadvantages other creditors” without consent).15 As mentioned above, the Oversight Board 

retains complete authority to enter into settlements of causes of action without Court approval, 

which is for all intents and purposes what the GDB restructuring is vis-à-vis the Title III Debtors. 

Thus there is no basis to challenge the Oversight Board’s approval of the GDB restructuring.

 15 Notably, the UCC has the burden of establishing all three prongs required for derivative standing. See Larson v. 

Foster (In re Foster), 516 B.R. 537, 542 (B.A.P. 8th Cir. 2014) (holding “[t]he party seeking such derivative 

standing bears the burden of proof” on showing the necessary requisites are proved); Infinity Investors Ltd. v. 

Kingsborough (In re Yes! Entm't Corp.), 316 B.R. 141, 145 (D. Del. 2004) (“It is the creditor’s burden in the first 

instance to demonstrate that it has satisfied these prerequisites for derivative standing.”); G-I Holdings, Inc. v. Those 

Parties Listed On Exhibit A (In re G-I Holdings, Inc.), 313 B.R. 612, 629 (Bankr. D. N.J. 2004) (“it is the 

committee’s burden in the first instance to demonstrate that it has satisfied the test for derivative standing”). The 

UCC fails to even allege that they satisfy the third standard, that the litigation presents no burden to the estate. 

Campana v. Pilavis (In re Pilavis), 233 B.R. 1, 3–4 (Bankr. D. Mass. 1999). Nor could they as the GDB 

restructuring is an important element of the overall Commonwealth revitalization. Accordingly, any litigation 

challenging the GDB restructuring would impose a great burden on the Debtors’ Title III cases.

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50. Finally, no equitable reason to grant derivative standing exists here. This is 

because, under PROMESA Title III, Congress put the Oversight Board in charge of prosecuting 

causes of action and defenses of the Title III Debtors. See PROMESA sections 301(c)(7), 315(b). 

This arrangement is unlike chapter 11, where the debtor’s prepetition management generally 

remain in place, and is more like a chapter 7 case with an appointed trustee from the outset of the 

case. Notably, certain courts have held that derivative standing is unnecessary in chapter 7 because 

“there is always a trustee in place. There is not the potential for a conflicted board of directors 

pulling its punches. There is not the risk of the proverbial fox guarding the henhouse.” Reed v. 

Cooper (In re Cooper), 405 B.R. 801, 812 (Bankr. N.D. Tex. 2009). Therefore, just as in chapter 

7, “there would seem to be no equitable rationale” to grant derivative standing. Id; see also In re 

Dziurgot-Farnsworth, 2014 Bankr. LEXIS 5046 *4 (Bankr. D.R.I. Dec. 12, 2014) (citing Reed v. 

Cooper approvingly). 

IV. THE OVERSIGHT BOARD IS THE ONLY APPROPRIATE REPRESENTATIVE 

OF THE TITLE III DEBTORS

51. The Oversight Board is the only entity that was specifically established and 

designed by Congress to serve as representative of the Debtors, and was given many trustee powers

to carry out this responsibility. It is thus the only appropriate body that can serve in this role. The 

UCC is simply unfit to replace it. The UCC’s judgment as to the disposition of the Title III 

Debtors’ property would not be from the vantage point of the island’s recovery as a whole (as the 

Oversight Board is charged with doing), but solely as it purportedly pertains to the recoveries of 

unsecured claimholders across various Title III Debtors. This extreme outcome is without 

precedent, and would fly in the face of Congressional intent and the structure and purposes of 

PROMESA. More fundamentally, the creditors of the Title III debtors cannot realistically expect 

to be better off by focusing solely on the disposition of transactions between themselves and GDB. 

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Those dispositions pale in comparison to the importance of the resurgence of the Commonwealth 

as a whole. 

A. Congress Contemplated a Holistic Approach to Puerto Rico’s Restructuring

52. In enacting PROMESA, Congress specifically found that “[a] comprehensive 

approach to fiscal, management, and structural problems and adjustments that exempts no part of 

the Government of Puerto Rico is necessary, involving independent oversight and a Federal 

statutory authority for the Government of Puerto Rico to restructure debts in a fair and orderly 

process.” PROMESA § 405(m)(4). Congress established the Oversight Board with the purpose 

“to provide a method for a covered territory to achieve fiscal responsibility and access to the capital 

markets.” PROMESA § 101(a). To achieve its mandate, Congress imbued the Oversight Board 

with myriad powers to oversee and manage the recovery and revitalization of the island. Such 

powers are not limited to Title III, but include the certification of fiscal plans and budgets, 

revitalization projects under Title V, and consensual creditor collective action arrangements under 

Title VI. 

53. Through Title III, PROMESA establishes a novel framework for dealing with the 

adjustment of a territory’s debts based on chapter 9 of the Bankruptcy Code. Whereas in chapter 

9 the municipal debtor serves as trustee, in Title III the Oversight Board holds many trustee powers

(PROMESA section 301(c)(7)) and is the sole representative (PROMESA section 315(b)) of each 

Title III Debtor from the inception of a case. The Oversight Board is given critical responsibilities 

in prosecuting the debtor’s case, including settling claims and negotiating and filing plans of 

adjustment. Congress took this extraordinary step of installing the Oversight Board because it 

specifically recognized that a comprehensive and holistic approach to solving Puerto Rico’s fiscal 

and structural problems required independent oversight. See PROMESA section 405(m)(4). It 

established an Oversight Board composed of hand-selected, highly qualified members of diverse 

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backgrounds and experience. Such members underwent a rigorous selection process, were 

appointed by the President (see PROMESA section 101(e)), are uncompensated, and, to ensure 

their independence, are subject to federal conflict of interest and disclosure of financial interests 

laws (see PROMESA section 109). Each Title III Debtor had to consent to the filing of a Title III 

petition, aware that doing so would make the Oversight Board its sole representative within Title 

III and would give the Oversight Board the power to consent to Court interference with the debtors’ 

property under PROMESA section 305.

B. The UCC Cannot Bypass PROMESA’s Carefully Constructed Framework

54. Not only is the UCC asking for derivative standing to step into the shoes of the 

debtors, but it is going one step further and is trying to step into the shoes of the Oversight Board. 

Even if the Court could grant the UCC derivative standing under PROMESA Title III to step into 

the shoes of the Debtors, the Court cannot grant the UCC “double derivative standing” to play the 

role of both Oversight Board and Government. Not surprisingly, the UCC fails to identify the 

respondents to its motion. The UCC has deployed an inadequate caption failing to name any 

respondent and to comply with Bankruptcy Rule 9004, thus leaving the responding parties 

unknown.

16 

55. The UCC cannot bypass PROMESA’s carefully constructed framework by asking 

the court to install it as the ‘new’ representative of the Title III Debtors. It cannot effectively 

change the composition of the members of the Oversight Board by replacing it with its own 

members – that is left to the President (as the UCC itself recognized and supported in the 

 16 Bankruptcy Rule 9004 requires every caption to include the title of the case, and Fed. R. Civ. P 10(a) explains the 

title of a complaint must “name all the parties,” after which other pleadings may refer generally to the parties. 

Because contested matters such as this are commenced by motion, the original motion needs to specify each party, 

as the Oversight Board’s pleadings always do. The UCC’s instant motion neither has a caption naming only one 

Title III debtor and no respondents.

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Appointments Clause litigation).17 Nor can it obtain the power to block the enforcement of a 

Commonwealth statute, as it seeks to do here, when only one entity was given that power: the 

Oversight Board. See PROMESA section 108(a)(2).

56. Significantly, the UCC is unfit to replace the Oversight Board as trustee even in a 

limited capacity. Rather than being established by Congress and comprised of members appointed 

by the President, it is a creature of Title III, it is appointed by the U.S. Trustee, and its members 

are unsecured claimholders of each Title III Debtor. Unlike the Oversight Board, it has no mandate 

nor duty to consider the impact of adjustment of debts on the long-term financial sustainability of 

the Commonwealth and on its access to capital markets. Unlike the Government of Puerto Rico, 

it has no obligation to ensure the provision of governmental services, to be responsive to the 

concerns of the island’s inhabitants, nor to promote the revitalization of Puerto Rico’s economy. 

Its only objective is to maximize recoveries of unsecured claimholders of Title III debtors. It 

would contravene Congressional intent and the sovereignty of Puerto Rico to permit the UCC to 

helm the ship as representative of the debtor, even in a limited capacity.

C. The UCC’s Allegations of Conflict Ring Hollow

57. The UCC’s allegations that the Oversight Board is inherently conflicted because it 

represents all Title III Debtors ring hollow. Congress specifically chose to make this Oversight 

Board the representative of each and every debtor and the Administrative Supervisor of a Title VI 

modification. No disqualifying conflict can thus exist based on this statutorily mandated structure, 

contrary to the UCC’s argument. Indeed, having separate representation for each Title III debtor 

 17 See Case No. 17-3283, ECF No. 1631 at 5-11 (arguing in favor of constitutionality of PROMESA appointment 

provisions and Congress’s nigh unlimited power in that regard).

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would create chaos and could lead to an antagonistic result with each part of the ship sailing full 

steam ahead in opposite directions.

58. Indeed, the UCC represents creditors of four separate Title III debtors, each with 

their own competing interests. For example, the Qualifying Modification might be more favorable 

from the perspective of one debtor’s (e.g. HTA’s) unsecured claimholders but less favorable to 

another debtor’s (e.g. PREPA’s) unsecured claimholders. That the UCC believes it could fulfill 

the role of trustee without conflict but the Oversight Board cannot underscores the insincerity of 

its argument that the Oversight Board is conflicted.

59. The UCC also alleges that the members of the Oversight Board that have

connections to GDB are not disinterested.18 If the UCC is correct, then former Treasury Secretary

Henry Paulson would not have been allowed implement the “bailout” deal because of his prior 

affiliations with Goldman Sachs—an absurd result. The wheels of government would grind to a 

halt, as any individual who had been through the “revolving door” of government would suddenly 

be unable to pursue any initiative related to their past employment or employer. 

V. THE ENTIRE FAIRNESS DOCTRINE IS BEING MISUSED

60. While having no bearing on the merits of its derivative standing request, the UCC 

uses its Derivative Standing Motion in the Title III Case to suggest that the Title VI Court (where 

the UCC has no standing) should assess the transaction according to the fairness standard it utilized 

in the PREPA post-petition financing context. Derivative Standing Motion at ¶ 4. The UCC asks 

the question “Who was representing the interests of the Title III Debtors with respect to their claims 

against GDB and the GDB Releasees?” Id. The answer they claim is “no one.” This is wrong. 

 18 As described below, the only Oversight Board connections to GDB are that two of its members are former officers 

of GDB. Notably, no former officer of GDB is being released under the GDB Restructuring Act. GDB 

Restructuring Informative Motion at ¶ 7.

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The Oversight Board reviewed the transaction from the perspective of all debtors and the goals of 

PROMESA and could have vetoed the transaction in its capacity as Administrative Supervisor. 

Having satisfied itself that the transaction was compliant with PROMESA and consistent with the 

Oversight Board’s mandate, the Oversight Board certified the Qualifying Modification—a 

determination that cannot be second-guessed by other parties nor reviewed by the Court. 

PROMESA § 106(e).

61. Moreover, the UCC’s outrageous claims that certain Oversight Board members 

acted out of personal interest are unfounded. The Oversight Board’s members are not being 

released, as the release is limited to current officers in their capacity as such, not former officers 

now serving on the Oversight Board. See GDB Restructuring Informative Motion at ¶ 7. 

Obviously, then, to state the Oversight Board acted in self-interest and was conflicted when none 

of its members are even slightly benefitting by the restructuring makes no sense.

62. Furthermore, while there is not a shred of merit to the UCC’s allegations, even if 

taken at face value they would not rise to the level of an interested transaction that is scrutinized 

for entire fairness to determine whether the officers and directors carried out their fiduciary duty 

of care in accordance with the business judgment rule. Indeed, there is no law applying business 

judgment tests to the governmental judgments the Oversight Board and AAFAF are called on to 

make. 

63. Even if the entire fairness and business judgment tests were somehow reconfigured 

and imposed on a governmental and political regime, the Oversight Board’s vote as Administrative 

Supervisor to certify the Qualifying Modification was unanimous. Only two of the seven 

Oversight Board members have ties to the GDB. The case law demonstrates that, to assess whether 

there was “a disinterested and independent board majority, the court conducts a director-byCase:17-03283-LTS Doc#:3959 Filed:09/21/18 Entered:09/21/18 17:05:53 Desc: Main

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director analysis.” In re Trados Inc., 73 A.3d 17, 44-45 (Del. Ch. 2013). A court cannot apply 

an entire fairness standard of review unless the majority of the voting members are interested. Id.

at 20 (“To obtain review under the entire fairness test, the stockholder plaintiff must prove that 

there were not enough independent and disinterested individuals among the directors making the 

challenged decision to comprise a board majority.”). Therefore, even if the Court had jurisdiction 

to review the Oversight Board’s certification determination, such determination should be assessed 

based on the board members’ ‘business judgment’ rather than entire fairness.

64. Finally, entire fairness is also inapplicable because Title VI has its own 

confirmation procedures that prescribe a narrow scope of Court review. Specifically, the Title VI 

Court shall not approve the Qualifying Modification if and only if the Court determines that such 

Qualifying Modification does not meet certain, specified requirements of section 601. PROMESA 

section 601(m)(1)(D). The Court is not asked to make wide-ranging value judgments as to the 

reasonableness of the Qualifying Modification.

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CONCLUSION

For the foregoing reasons, the Debtors respectfully request that the Court deny the 

Derivative Standing Motion. 

Dated: September 21, 2018

San Juan, Puerto Rico

Respectfully submitted,

/s/ Martin J. Bienenstock

Martin J. Bienenstock 

Paul V. Possinger 

Ehud Barak

Timothy W. Mungovan

Margaret A. Dale

Maja Zerjal 

(Admitted Pro Hac Vice)

PROSKAUER ROSE LLP

Eleven Times Square

New York, NY 10036

Tel: (212) 969-3000

Fax: (212) 969-2900

Attorneys for the Financial Oversight and 

Management Board as representative for the 

Debtors

/s/ Hermann D. Bauer 

Hermann D. Bauer

USDC No. 215205

O’NEILL & BORGES LLC

250 Muñoz Rivera Ave., Suite 800

San Juan, PR 00918-1813

Tel: (787) 764-8181

Fax: (787) 753-8944

Co-Attorneys for the Financial Oversight and 

Management Board as representative for the 

Debtors

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