UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF PUERTO RICO 

---------------------------------------------------------------------- X 

 : 

In re: : 

 : 

THE FINANCIAL OVERSIGHT AND : PROMESA 

MANAGEMENT BOARD FOR PUERTO RICO, : Title III 

 : 

 as representative of : Case No. 17-BK-3283 (LTS) 

 : 

THE COMMONWEALTH OF PUERTO RICO et al., : (Jointly Administered) 

 : 

Debtors.1

 :

:

---------------------------------------------------------------------- X 

OMNIBUS REPLY OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS IN 

SUPPORT OF URGENT MOTION, 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

 

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-BK3283 (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), (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) (Last Four Digits 

of Federal Tax ID: 3747). 

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TABLE OF CONTENTS 

Page 

PRELIMINARY STATEMENT .................................................................................................... 1

REPLY ............................................................................................................................................ 5

I. Oversight Board Previously Consented to Enforcement of Automatic Stay ....................... 5

II. Sections 303 and 305 of PROMESA Do Not Apply to Automatic Stay Issues Raised by 

Stay Motion...................................................................................................................... 7

A. GDB Restructuring Is Not Exercise of Political or Governmental Powers ..................... 7

B. Application of Automatic Stay to GDB Restructuring Is Not Interference Prohibited by 

Section 305 ............................................................................................................. 10

III. The GDB Restructuring Violates Automatic Stay Notwithstanding Commonwealth’s 

Alleged Consent ............................................................................................................. 11

IV. Section 304(i) Does Not Insulate GDB Restructuring from Stay Violation ...................... 14

V. GDB Restructuring Is Not Excepted from Automatic Stay as Exercise of 

Commonwealth’s Police Power Under Section 362(b)(4) ............................................ 16

VI. Whether Title III Debtors Have Net Claims Against GDB Is Irrelevant and Not Yet 

Determined..................................................................................................................... 17

VII.The Committee Has Standing to File Stay Motion and Has Properly Done So ................ 19

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TABLE OF AUTHORITIES 

 Page(s) 

Cases 

Christianson v. Colt Indus. Operating Operating Corp., 

486 U.S. 800, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988) ..........................................................13 

In re City of Stockton, 

526 B.R. 35 (Bankr. E.D. Cal.) ..........................................................................................7, 8, 9 

In re Commerce Oil Co., 

847 F.2d 291 (6th Cir. 1988) ...................................................................................................17 

Commodity Futures Trading Comm’n v. Weintraub, 

471 U.S. 343 (1985) .................................................................................................................18 

F.D.I.C. v. Shearson-Am. Exp., Inc., 

996 F.2d 493 (1st Cir. 1993) ....................................................................................................20 

Faitoute Iron & Steel Co. v. City of Asbury Park, 

316 U.S. 502, 62 S. Ct. 1129, 86 L. Ed. 1629 (1942) ..............................................................17 

In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 

582 B.R. 579 (D.P.R. 2018) .....................................................................................................13 

In re Fin. Oversight & Mgmt. Bd. for Puerto Rico for Puerto Rico, 

872 F.3d 57 (1st Cir. 2017) ......................................................................................................20 

In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 

No. 17-2079, 2018 WL 3751014 (1st Cir. Aug. 8, 2018) ..................................................10, 11 

In re Hart, 

282 B.R. 70 (B.A.P. 1st Cir. 2002) ............................................................................................7 

Home Bldg. & Loan Ass’n v. Blaisdell, 

290 U.S. 398, 54 S. Ct. 231, 78 L. Ed. 413 (1934) ..................................................................17 

In re Indian Motocycle Co., Inc., 

266 B.R. 243 (Bankr. D. Mass. 2001) .....................................................................................20 

Jaap Corp.

v. Dep’t of State, 187 D.P.R. 730, 739 (2013) ...........................................................................3 

In re Jack Greenberg, Inc., 

189 B.R. 906 (Bankr. E.D. Pa. 1995) ......................................................................................18 

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TABLE OF AUTHORITIES 

(continued) 

 Page(s) 

In re Jefferson Cty., 

474 B.R. 228 (Bankr. N.D. Ala. 2012) ....................................................................................10 

In re Lake Country Invs. Ltd., 

No. 99-20287, 1999 WL 33490220 (Bankr. D. Idaho Sept. 22, 1999)....................................20 

In re Maloney, 

204 B.R. 671 (Bankr. E.D.N.Y. 1996) (Swain, J.) ..................................................................19 

In re McMullen, 

386 F.3d 320 (1st Cir. 2004) ....................................................................................................16 

In re Nortel Networks, Inc., 

669 F.3d 128 (3d Cir. 2011).....................................................................................................16 

Ostano Commerzanstalt v. Telewide Sys., Inc., 

790 F.2d 206 (2d Cir. 1986) affirmed in part and reversed in part on other 

grounds ....................................................................................................................................19 

In re Pecan Groves of Arizona, 

951 F.2d 242 (9th Cir.1991) ....................................................................................................20 

In re Soares, 

107 F.3d 969 (1st Cir. 1997) ..............................................................................................16, 19 

St. Paul Fire & Marine Ins. Co. v. Labuzan, 

579 F.3d 533 (5th Cir. 2009) ...................................................................................................20 

Tesorero de Puerto Rico v. Banco Comercial de Puerto Rico, 

46 D.P.R. 308 (1933) .................................................................................................................3 

United Structures of Am., Inc. v. G.R.G. Eng’g, S.E., 

9 F.3d 996 (1st Cir. 1993) ........................................................................................................14 

In re WHET, Inc., 

750 F.2d 149 (1st Cir. 1984) ....................................................................................................18 

Statutes 

7 L.P.R.A. § 1281 ............................................................................................................................3 

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TABLE OF AUTHORITIES 

(continued) 

 Page(s) 

11 U.S.C. 

§ 101(27) ....................................................................................................................................6 

§ 105(a) ..................................................................................................................................1, 1 

§ 323.........................................................................................................................................18 

§ 362................................................................................................................................. passim

§ 362(a) ......................................................................................................................................1 

§ 362(a)(1) ...............................................................................................................................11 

§ 362(a)(3) ...............................................................................................................................12 

§ 362(a)(4) ...............................................................................................................................12 

§ 362(a)(6) ...............................................................................................................................12 

§ 362(a)(7) ...............................................................................................................................12 

§ 362(b)(4) .........................................................................................................................16, 17 

§ 362(d) ....................................................................................................................................12 

§ 363.............................................................................................................................11, 13, 14 

§ 365...........................................................................................................................................1 

§ 553.........................................................................................................................................14 

§ 553(a) ....................................................................................................................................14 

§ 903.......................................................................................................................................8, 9 

§ 904.....................................................................................................................................9, 10 

§ 922...........................................................................................................................................1 

§ 922(d) ....................................................................................................................................13 

§ 926...........................................................................................................................................8 

§ 1109.........................................................................................................................................3 

§ 1109(b) ..................................................................................................................................20 

48 U.S.C § 2161 .............................................................................................................................12 

GDB Restructuring Act .......................................................................................................... passim

GDB Restructuring Act, art. 302 ...................................................................................................14 

GDB Restructuring Act, art. 402 ...................................................................................................15 

GDB Restructuring Act, art. 403(i) ................................................................................................15 

GDB Restructuring Act, art. 702 ...................................................................................................15 

GDB Restructuring Act, art. 703 ...................................................................................................15 

GDB Restructuring Act, art. 704 ...................................................................................................15 

U.K. Pensions Act 2004 .................................................................................................................16 

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TABLE OF AUTHORITIES 

(continued) 

 Page(s) 

Other Authorities 

7 Collier on Bankruptcy ¶ 1109.04 (16th ed. 2018) .....................................................................20 

Alan N. Resnick & Henry J. Sommer, 3 Collier on Bankruptcy ¶ 362.05[5][b] 

(16th ed. 2015) .........................................................................................................................17 

Fed R. Civ. P. 

12(B)(1)....................................................................................................................................18 

12(B)(6)....................................................................................................................................18 

PROMESA 

§ 301(a) ......................................................................................................................................1 

§ 303...............................................................................................................................1, 2, 8, 9 

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

Puerto Rico Constitution ..................................................................................................................3 

S. Rep. No. 95–989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787...............................................16 

Statement for 2014 GO Bonds (Mar. 11, 2014) (available at 

http://www.gdbpr.com/investors_resources/documents/CommonwealthPRGO

2014SeriesA-FinalOS.PDF).....................................................................................................19

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

 The Official Committee of Unsecured Creditors of all Title III Debtors (other than 

COFINA) (the “Committee”) respectfully submits this omnibus reply (the “Reply”) (i) in 

response to the objections (together, the “Objections”)2 filed by the Oversight Board and by 

GDB and AAFAF (together, the “Objectors”) and (ii) in support of the Committee’s motion for 

an order enforcing the automatic stay (or the Court’s Stay Order) with respect to the GDB 

Restructuring (the “Stay Motion”).3

 In support of its Reply, the Committee states as follows: 

PRELIMINARY STATEMENT 

1. The transactions contemplated by the GDB Restructuring Act cannot move 

forward for the simple reason that they violate the automatic stay and this Court’s June 29, 2017 

order confirming the application of the automatic stay (the “Stay Order”).4 Indeed, the 

Objections hardly dispute that the actions effectuated by the GDB Restructuring Act violate the 

stay;5 rather, they assert that the Court’s hands are tied by sections 303 and 305 of PROMESA or 

(in the case of the Oversight Board) that the Committee lacks authority or standing to request 

 

2

 The Objections are the Objection of the Government Development Bank for Puerto Rico and the Puerto Rico 

Fiscal Agency and Financial Advisory Authority to 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

[Docket No. 3826] (the “GDB Objection”) and the Objection of Financial Oversight and Management Board 

for Puerto Rico to 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 [Docket No. 3845] (the 

“Oversight Board Objection”). 

3

 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 [Docket No. 3797]. Capitalized terms used 

but not otherwise defined herein shall have the meanings set forth in the Stay Motion. 

4

 Order Pursuant to PROMESA Section 301(a) and Bankruptcy Code Sections 105(a), 362(a), 365, and 922 

Confirming (I) Application of the Automatic Stay to Government Officers, Agents, and Representatives, (II) Stay 

of Prepetition Lawsuits, and (III) Application of Contract Protections [Docket No. 543, June 29, 2017]. 

5

 The Objections do contain certain other arguments, for example, that the police power exception to the 

automatic stay applies to the GDB Restructuring or (in the case of the Oversight Board) that consent renders 

section 362 inapplicable. These arguments are tangential to the Objections’ most important argument regarding 

the exercise of alleged political or governmental powers and, furthermore, are meritless for the reasons 

discussed below. 

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that the Court enforce the automatic stay. These arguments are flawed for several reasons. 

2. First, to the extent that the Stay Motion is a request for the Court to “interfere” in 

the Title III Debtors’ affairs within the meaning of section 305 of PROMESA (as explained 

below, it is not), the Oversight Board previously consented to any such “interference” by 

seeking and obtaining entry of the Stay Order. Among other things, that order expressly 

stays, restrains, and enjoins “all foreign and domestic governmental units” from taking any 

action to obtain possession of property of or from the Title III Debtors or offsetting any 

prepetition debt owing to the Title III Debtors against any claim against the Title III Debtors. 

Moreover, under the Stay Order, the Court explicitly retained jurisdiction to hear and determine 

all matters arising from or related to the implementation, enforcement, or interpretation of this 

order. The Oversight Board cannot now change its mind and withdraw its consent based on the 

fact that the Committee is requesting the Court enforce its own Stay Order. 

3. Second, even if the Oversight Board had not consented to the Court’s 

“interference” (it has), neither section 303 nor section 305 of PROMESA precludes enforcement 

of the automatic stay with respect to the GDB Restructuring. As discussed below, the GDB 

Restructuring does not involve the exercise of the “governmental and political powers” reserved 

to the Commonwealth under section 303 or protected from Court interference under section 305. 

Moreover, it is impossible for an order enforcing the automatic stay to “interfere” within the 

meaning of section 305 of PROMESA because such an order merely recognizes the application 

of a stay that is already in force, having arisen either “automatically” by act of Congress or 

consensually by prior order of this Court (in the case of the Stay Order). 

4. The Oversight Board’s remaining arguments also fail. Contrary to the Oversight 

Board’s assertion that the Title III Debtors consented to the GDB Restructuring, the Title III 

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Debtors cannot consent to annul the automatic stay. Further, the Oversight Board’s assertion that 

the Title III Debtors lack net claims against GDB is irrelevant, unsupported, and shows only that 

the Oversight Board is hopelessly conflicted and uninterested in acting as a true fiduciary for the 

Title III Debtors. Lastly, contrary to the Oversight Board’s assertions, the Committee clearly has 

standing under section 1109 of the Bankruptcy Code and has properly acted in the Title III cases 

to raise the issue of enforcement of the automatic stay. 

5. Finally, the Objections make clear that the Objectors support the GDB 

Restructuring regardless of the mandates of PROMESA and the Bankruptcy Code or 

considerations of transparency, fairness or fiduciary duties. According to the Objectors, no 

one is allowed to challenge the decision by GDB and AAFAF (a deeply conflicted entity with 

respect to issues involved here) to violate the automatic stay by, among other things: (a) setting 

off the Title III Debtors’ deposits placed with GDB against claims asserted by GDB; (b) 

eliminating claims held by the Title III Debtors and others against GDB and related third parties, 

such as the current and former leadership of GDB and AAFAF, as well as members of the 

Oversight Board (including by handing out free releases to GDB’s current or former officers, 

directors, employees, agents, or representatives (the “GDB Releasees”));6

 and (c) creating liens 

on property of the Title III Debtors held in trust or other fiduciary capacity by GDB.7

 

6

 It is unclear whether the government will take the position that “agents” and “representatives” include current 

and former counsel and other advisors (e.g., underwriters) to GDB. 

7

 GDB and AAFAF deny that GDB holds any of the Title III Debtors’ funds in trust or other fiduciary capacity, 

despite the specific statutory authorization given to GDB to act as trustee of public funds at 7 L.P.R.A. § 1281. 

GDB Objection ¶23 n. 8. It is unclear why the Committee and other parties should be forced to rely on this 

denial, given that GDB has not provided the disclosure necessary to verify it. For example, GDB account 

agreements may have created trustee relationships with “special deposit” or “specific deposit” depositors, but 

GDB has not provided these for the Committee’s review. See, e.g., Tesorero de Puerto Rico v. Banco 

Comercial de Puerto Rico, 46 D.P.R. 308, 316 (1933), 1934 PR Sup. LEXIS 281 (official translation) (“In a 

special deposit, the title remains in the depositor.”). And it is incongruous for GDB to be specifically 

authorized by law to act as trustee of public funds but to now disclaim that role. Moreover, GDB and AAFAF’s 

attempt to distinguish Jaap Corp. v. Dep’t of State, 187 D.P.R. 730, 739 (2013) is unconvincing—Jaap’s 

conclusion that public funds must be managed with the “highest ethical and fiduciary standards” was not based 

on the existence of government procurement requirements, but on the text of the Puerto Rico Constitution. 

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6. To justify this, and to push forward a scheme designed to insulate the GDB 

Releasees from any legal liability in connection with a financial crisis that resulted in the largest 

public bankruptcy in history, GDB and AAFAF attempt to wrap themselves in the flag of 

territorial sovereignty and assert that the GDB Restructuring has a “governmental” or “political” 

purpose. And they do this cloaked in secrecy, having repeatedly refused to provide the discovery 

that would allow truly independent actors like the Committee to investigate the Title III Debtors’ 

claims against GDB.8

 Meanwhile, GDB and AAFAF suffer from massive conflicts of interest 

that arise because AAFAF (GDB’s successor entity, staffed and advised by ex-GDB personnel) 

and its counsel represent both the Commonwealth and GDB in a restructuring that shields the 

very same ex-GDB personnel from legal liability. 9 Indeed, AAFAF and the GDB appear to be 

so secure in their (incorrect) belief that their actions are immune from review that they admit that 

they negotiated amongst themselves the disallowance of the Title III Debtors’ claims (including 

by the free grant of releases to the GDB and the GDB Releasees) against the GDB and the de 

facto allowance of the GDB’s claims against the Title III Debtors. 10

7. At the same time, the Oversight Board, for its part, has seemingly abandoned its 

oversight role by joining GDB and AAFAF in pushing forward with a transaction that prejudices 

 GDB and AAFAF fail to address the fundamental point here—public funds are treated as funds held in a 

fiduciary capacity, and GDB cannot therefore do whatever it wants with those funds to benefit a set of favored 

creditors. 

8

 GDB and AAFAF state that they have had “numerous meetings” with the Committee and that they have 

provided it with “information and documents regarding GDB.” GDB Obj., at 5 n.7 . However, GDB meetings 

with the Committee all took place after the original GDB RSA was signed and, despite the Committee’s 

repeated requests, the fundamental features of the deal remain unchanged. Furthermore, while GDB and 

AAFAF have provided the Committee certain GDB loan agreements with the Commonwealth, they have not 

provided a variety of key documents, such as account agreements, evidence concerning the amounts actually 

lent and repaid in connection with GDB-Commonwealth loans, or the GDB D&O insurance policies. 

9

 The conflicts of interest, self-dealing, and secrecy that contaminate the GDB Restructuring will be explored in 

more detail in future pleadings to be filed by the Committee. 

10 Because the GDB has filed proofs of claim against Title III Debtors, allowance of that claim must be subject to 

the Committee’s right to object under section 502 of the Bankruptcy Code. See Proofs of Claim Nos. 29485, 

29617, 29533, 151149. Furthermore, by filing their proofs of claim, GDB has waived sovereign immunity with 

respect to any claims against GDB arising out of the same transactions. See 11 U.S.C. § 106(b). 

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the Title III Debtors—i.e., the same entities for which the Oversight Board is obligated to serve 

as trustee and representative in these Title III cases. The Oversight Board’s “representation” of 

the Title III Debtors apparently includes opposing the Stay Motion based on, among other things, 

its insistence that the Title III Debtors do not have any net claims against GDB. This raises 

troubling questions of conflicts of interest, as (among other things) the Oversight Board’s 

members include former GDB officials (who could be released from claims under the GDB 

Restructuring Act) and, as far back as 2014, its counsel served as counsel to GDB. 

REPLY 

I. Oversight Board Previously Consented to Enforcement of Automatic Stay 

8. Section 305 of PROMESA prohibits the Court from interfering with the Title III 

Debtors’ political or governmental powers, property or revenues, or income producing property, 

unless the Oversight Board consents to such interference. Here, the Oversight Board did just that 

when it requested and obtained entry of the Stay Order, which expressly makes the automatic 

stay applicable to the very type of transactions contemplated under the GDB Restructuring. 

9. In particular, the Stay Order (which was entered as proposed by the Oversight 

Board) provides that “all foreign and domestic governmental units . . . are hereby stayed, 

restrained, and enjoined from,” among other things: 

commencing or continuing any judicial, administrative, or other action or 

proceeding against the Debtors, including the issuance or employment of 

process, that was or could have been commenced before the Title III 

Cases were commenced; 

taking any action to obtain possession of property of or from the Debtors 

or exercise control over property of the Debtors; 

taking any action to collect, assess, or recover a claim against the Debtors 

that arose before the commencement of the Title III Cases; 

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offsetting any debt owing to the Debtors that arose before the 

commencement of the Title III Cases against any claim against the 

Debtors.11

The Stay Order also expressly enjoins all foreign and domestic governmental units and all those 

acting on their behalf from “in any way seizing, attaching, foreclosing upon, levying against, or 

taking any action to obtain possession or control over any and all property of the Debtors.”12 In 

addition, the Stay Order provides that “[t]he Court retains jurisdiction to hear and determine all 

matters arising from or related to the implementation, enforcement, or interpretation of this 

order.”13 The Stay Order contains no language that would suggest that the Oversight Board’s 

consent to entry of the Stay Order and enforcement thereof is limited any way. 

10. In short, the Oversight Board requested that the Court enter an order confirming 

the application of, and the Court’s authority to enforce, the automatic stay in these Title III cases 

and, in doing so, consented to any “interference” by the Court (as it may be necessary) for 

purposes of section 305 of PROMESA. The Oversight Board cannot now change its mind and 

withdraw this consent simply because it doesn’t like the effect that its prior consent to entry of 

the Stay Order now has on the proposed GDB Restructuring. Nor do the Objectors address the 

Stay Order other than to emphasize that the Stay Order provides that the “Debtors and the 

Oversight Board” are authorized to implement the terms of the order.14 Presumably, the 

Oversight Board means to imply that this somehow excludes the Committee from reminding the 

Oversight Board (and GDB/AAFAF) that it is bound by the Stay Order it sought and obtained. 

This argument is illogical and not supported by the language of the Stay Order. Even worse, the 

 

11 Stay Order ¶ 2. There can be no question that the Commonwealth and the GDB are each a “governmental unit,” 

as defined in section 101(27) of the Bankruptcy Code, which definition includes both a “Commonwealth” and a 

Territory, and the GDB is indisputably an instrumentality of the Commonwealth. 

12 Stay Order ¶ 3 (emphasis added). 

13 Id. ¶ 15. 

14 See Oversight Bd. Obj. ¶ 34. 

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logic of this argument would preclude not only the Committee from enforcing the Stay Order, 

but would even preclude the Court from enforcing its own order.15 

II. Sections 303 and 305 of PROMESA Do Not Apply to Automatic Stay Issues Raised 

by Stay Motion 

11. The GDB Objection does not even attempt to dispute the Committee’s central 

argument: that the GDB Restructuring would, absent sections 303 and 305 of PROMESA, 

violate the automatic stay. Instead, the objection is premised on the argument that the GDB 

Restructuring (i) “reflects an exercise by the Commonwealth of its governmental or political 

powers to control itself and the Title III Debtors,” thus precluding Court review by virtue of 

section 303, and (ii) reflects the decision of each Title III Debtor with regards to its political and 

governmental powers and the use of its property, thus precluding Court review by virtue of 

section 305 of PROMESA.16 However, neither section is applicable here. 

A. GDB Restructuring Is Not Exercise of Political or Governmental Powers 

12. Section 303 of PROMESA preserves the power of the Commonwealth to control 

its territory and its instrumentalities through the exercise of its “political or governmental 

powers.” In other words, the Commonwealth’s powers over its territory and its instrumentalities 

are not impaired by the filing of the Title III Cases—provided that the powers the 

Commonwealth seeks to wield are part of its “political or governmental powers.”17 

13. “[Section] 903 ‘political or governmental’ powers relate to basic requirements of 

government and political polity and exclude financial and employment relations.”18 The political 

 

15 Of course, the Court also can enforce the stay sua sponte. See, e.g., In re Hart, 282 B.R. 70, 73, 77-78 (B.A.P. 

1st Cir. 2002) (raising stay violation sua sponte). 

16 Id. 

17 See In re City of Stockton, 526 B.R. 35, 52 (Bankr. E.D. Cal.) (“Stockton IV”) (subsequent history omitted) 

(“key to the analysis of the §§ 903 and 904 restrictions is the meaning of exercise of ‘political or governmental 

powers’”). 

18 Id. at 54. 

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or governmental functions referred to in section 903 of the Bankruptcy Code and in section 303 

of PROMESA therefore “refer to basic matters of the organization and operation of government 

that are incidents of sovereignty, but do not extend to financial relations between the state 

and its municipalities.”19 In contrast, the GDB Restructuring is purely a financial transaction, 

and thus does not fall within the Commonwealth’s political or governmental powers. For 

example, the GDB Restructuring is premised on the mandatory setoff of claims against the GDB 

and, as AAFAF itself acknowledges, “the resolution of the interrelated claims among the 

Commonwealth, its instrumentalities, and GDB.”20 These are precisely the type of “financial 

relations between the [Commonwealth] and its [instrumentalities]” that are excluded from the 

definition of “political or governmental powers” protected by section 303 of PROMESA.21 The 

Court should not allow AAFAF to “hid[e] behind” section 303 of PROMESA and blatantly 

ignore the realities of the flawed GDB Restructuring.22 

14. Moreover, the GDB Restructuring Act also eliminates the Title III Debtors’ 

claims against the GDB and the GDB Releasees, including claims on account of avoidable 

transfers that enable the Oversight Board, or a trustee appointed under section 926 of the 

Bankruptcy Code, to avoid transfers that are preferential or fraudulent, even if the transferee is 

another instrumentality of the Commonwealth.23 As explained by Stockton IV, the “political or 

governmental” powers of section 303 of PROMESA “do not include the financial relations that 

 

19 Id. (emphasis added). 

20 See GDB Obj. ¶ 36 

21 See Stockton IV, 526 B.R at 54. AAFAF also tries to differentiate the GDB Restructuring Act from the holding 

of Stockton IV by asserting, incredibly, that Stockton IV was concerned with the “protection of profit-making 

rights.” See GDB Obj. ¶ 34. As discussed above, the proper characterization of government actions, not some 

vague “profit making,” was at issue on Stockton IV. Indeed, the word “profit” does not appear in Stockton IV. 

22 See Stockton IV, 526 B.R at 54 (“hiding behind the § 903 protection of the exercise of ‘political or 

governmental’ powers does not work”). 

23 See id. at 53 (“municipal debtor can avoid certain liens and transfers in favor of the state”). 

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are implicit in these avoiding powers.”24 Therefore, it cannot be said that the elimination of such 

claims is the valid exercise of political or governmental power—it is simply the adjustment of 

financial claims. Thus, the GDB Restructuring is not protected from Court interference as an 

exercise of governmental and political powers under section 303 or section 305 of PROMESA.25

15. AAFAF attempts to cloud the obvious financial nature of the GDB Restructuring 

by repeatedly arguing that the GDB Restructuring Act “has a public purpose” and “permits the 

provision of essential public services”;26 that it lays “foundational bricks”27 and “protects public 

rights.”28 But repetition does not alter the true nature of the transaction, nor does the Puerto Rico 

Legislature’s proclamation that the GDB Restructuring has a “public purpose” serve as a valid 

interpretation of section 303’s language referring to “political or governmental powers”—

interpreting the language of a federal statute is the province of the Court, not the Puerto Rico 

legislature. The GDB Restructuring is nothing more than the liquidation of a failed financial 

institution that has no banking operations. It has no impact on the provision of services or other 

governmental functions to the people of Puerto Rico, nor does it have any impact on the 

organization and operation of government—indeed, AAFAF concedes that GDB has already 

“essentially froze[n] its bank functions.”29 

 

24 Id. 

25 Further, the case law is clear that the analysis of “political or governmental” powers is the same for purposes of 

sections 903 and 904 of the Bankruptcy Code (the counterparts to sections 303 and 305 of PROMESA). See

Stockton IV, 526 B.R at 54 (“the concept of ‘political or governmental’ powers is central to both sections 903 

and 904” and the analysis of one “inform[s] the analysis of” the other). 

26 See GDB Obj. at ¶ 15. 

27 See GDB Obj. at ¶ 34. 

28 See GDB Obj. at ¶ 37. 

29 See GDB Obj. at ¶ 11. Though the Committee has not asserted in its Stay Motion that the GDB Restructuring 

runs afoul of sections 303(1), (2), or (3) of PROMESA, GDB has reserved its rights to contest any future 

assertions by the Committee regarding those provisions. The Committee likewise reserves its rights to assert 

arguments based on these provisions in future pleadings. 

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B. Application of Automatic Stay to GDB Restructuring Is Not Interference 

Prohibited by Section 305 

16. Section 305 of PROMESA, like section 904 of the Bankruptcy Code, provides 

that, absent the consent of the Oversight Board (or, in the case of section 904, the debtor), “the 

court may not, by any stay, order, or decree, in the case or otherwise, interfere with” a title III 

debtor’s political and governmental powers, its property, and its revenues, or its decisions in 

connection therewith. By its plain language, section 305 only applies when the Court interferes. 

Critically, therefore, section 305 by its own terms is inapplicable to the imposition of the stay 

and its protection of the Title III Debtors and their creditors from the GDB Restructuring. 

17. To be clear, the Committee is not asking the Court to interfere with any of the 

enumerated categories of section 305 of PROMESA. In fact, the Committee is not asking the 

Court to do anything other than confirm the application of the automatic stay and enforce its Stay 

Order. The automatic stay is “not the result of any actions taken by a bankruptcy court as part of 

the case or in a proceeding arising in, arising under, or related to a bankruptcy case. Rather and 

as the descriptive terminology for [it] indicates, [it] is imposed automatically upon the filing of a 

chapter 9 case,”30 is self-effectuating, and is created by Congress.31 

18. This crucial understanding of what section 305 of PROMESA does and does not 

prohibit is also consistent with the First Circuit’s recent opinion limiting the reach of section 

305.32 There, the First Circuit recognized that section 305 of PROMESA does not entirely “tie 

the Title III court’s hands” and that section 305 “states specifically what [the Court] may not do: 

 

30 In re Jefferson Cty., 474 B.R. 228, 275 (Bankr. N.D. Ala. 2012) (noting that no one has asked the court to take 

any action that would interfere with alleged government property or political or governmental functions). 

31 Id. (internal citations omitted). 

32 In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, No. 17-2079, 2018 WL 3751014, at *2 (1st Cir. Aug. 8, 

2018). 

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‘interfere with’ certain powers and assets of the debtor.”33 Because the PREPA bondholders that 

had sought Court involvement had not asked the Court to “issue any such stay, order, or decree, 

that itself interfere[d] with the debtor’s powers or assets,” section 305 was not a bar to the 

requested relief.34 In other words, the First Circuit, consistent with the Jefferson County court, 

held that involvement is not interference. 

19. Like the PREPA bondholders, the Committee requests Court involvement, but not 

interference, and does not ask the Court to “issue any . . . stay.”35 The automatic stay does not 

have to be issued—it arises automatically. Therefore, section 305 does not prevent the Court 

from entering an order enforcing the automatic stay, let alone simply interpreting and enforcing 

its own Stay Order, as requested in the Stay Motion. 

III. The GDB Restructuring Violates Automatic Stay Notwithstanding 

Commonwealth’s Alleged Consent

20. The Oversight Board argues that GDB’s acts to enforce its claims against the Title 

III Debtors are merely examples of the “use, sale, or lease of property.” According to the 

Oversight Board, these acts should be allowed without Court oversight because the 

Commonwealth has consented to them and because section 363 of the Bankruptcy Code is not 

incorporated into PROMESA. Contrary to the Oversight Board’s arguments, these acts are 

clearly prohibited by section 362 of the Bankruptcy Code and the Stay Order. 

21. First, section 362 of the Bankruptcy Code does not contain a “non-consensual” 

element. The text of the statute plainly applies to actions or proceedings to recover claims 

against the Title III Debtors that arose pre-petition,36 acts to obtain property of the Title III 

 

33 Id. 

34 Id. 

35 Id.

36 11 U.S.C. § 362(a)(1). 

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Debtors,37 acts to create, perfect, or enforce liens against property of the Title III Debtors,38 acts 

to collect, assess, or recover claims against the Title III Debtors,39 and the setoff of debt owing to 

the Title III Debtors.40 None of these provisions create exceptions in cases where a debtor 

consents. The same is the case for the text of the Stay Order, which stays, among other things, 

“[a]ll entities, including all persons and foreign and domestic governmental units, and all those 

acting on their behalf from . . . in any way, seizing, attaching, foreclosing upon, levying against, 

or taking any action to obtain possession or control over any and all property of the Debtors, 

wherever located.”41

22. Second, the Oversight Board’s actual contention here—that the Title III Debtors 

and the Oversight Board can consent to a lifting of the stay without a Court order—has already 

been rejected by this Court. As discussed in the Stay Motion, separate from the Stay Order, on 

October 12, 2017, this Court entered an order (the “Stay Procedures Order”)42 directing the Title 

III Debtors to file lift stay motions every sixty days identifying consensual, agreed-to stay

modifications and seeking Court approval thereof.43 Since then, the Title III Debtors have 

complied with the Stay Procedures Order and sought relief from the automatic stay in order to 

effectuate even the consensual settlement of claims.44

 

37 11 U.S.C. § 362(a)(3). 

38 11 U.S.C. § 362(a)(4). 

39 11 U.S.C. § 362(a)(6). 

40 11 U.S.C. § 362(a)(7). 

41 Stay Order ¶ 3 (emphasis added). 

42 Order Directing the Debtors to Submit a Revised Proposed Order in Connection with Debtors Entities’ Motion 

to Amend Second Amended Notice, Case Management and Administrative Procedures to Further Revise 

Protocol for Stay Relief Motions [Docket No. 1434]. (“Section 362(d) of the title 11 of the United States Code, 

made applicable to these proceedings by 48 U.S.C § 2161, provides that the ‘Court shall grant relief from the 

[automatic] stay” on “request of a party in interest and after notice and a hearing.’”). 

43 Id. 

44 See e.g.; Debtors’ Fifth Omnibus Motion for Approval of Modifications to the Automatic Stay [Docket No. 

3781] Ex. 1, at page 1, modification number 2 and page 6, modification number 14; Debtors’ Fourth Omnibus 

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23. If the Stay Procedures Order requires relief from the automatic stay in connection 

with consensual settlement of claims (which the Objectors do not dispute), it surely requires such 

relief with respect to the GDB Restructuring. If consented-to actions to settle claims asserted 

against the Title III Debtors did not implicate the stay, then the Court would not have required a 

procedure in which the Title III Debtors must request Court approval of precisely these types of 

actions. Thus, the Court’s order requiring that the stay only be lifted upon Court order is now 

law of the case.45 Moreover, the GDB RSA itself states that it is “part of a proposed settlement 

of matters that could otherwise be the subject of litigation.”46 Just as the Title III Debtors must 

obtain an order lifting the stay in order to settle the claims of litigants under the Case 

Management Procedures, they must be required to obtain such an order to settle the GDB’s 

claims against them.47

24. More fundamentally, the actions taken by GDB pursuant to the GDB 

Restructuring consist of more than just the use, sale, or lease of property as described in section 

363; they are actions specifically designed to enforce the GDB’s claims against the Title III 

Debtors and to disallow the claims of the Title III Debtors against the GDB, including by 

 Motion for Approval of Modifications to the Automatic Stay [Docket No. 3320], Ex. 1, at page 3, modification 

number 3, and page 5, modification number 9. 

45 See Christianson v. Colt Indus. Operating Operating Corp., 486 U.S. 800, 815–16, 108 S.Ct. 2166, 2177, 100 

L.Ed.2d 811 (1988) (“As most commonly defined, the doctrine [of the law of the case] posits that when a court 

decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the 

same case.” (quoting Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382, 1391, 75 L.Ed.2d 318 (1983))).

46 GDB RSA ¶ 25. 

47 This conclusion is further supported by the Court’s opinion in the Assured v. HTA adversary proceeding with 

respect to section 922(d) of the Bankruptcy Code. In that instance, the Court rejected the plaintiffs’ theory that 

the stay exemption contained in section 922(d) exempts the enforcement actions of special revenue bondholders 

from the automatic stay, explaining that “the plain language and the legislative history of Section 922(d) 

suggest that Congress, in granting the exemption, only permitted municipalities and others in possession of 

pledged special revenues to apply those revenues to the relevant debt without running afoul of the automatic 

stay.” In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 582 B.R. 579, 596 (D.P.R. 2018) (emphasis added). 

In other words, because there is a special exception (i.e., section 922(d)), the Title III Debtors can voluntarily 

apply special revenues to the underlying debt. By clear implication, in the absence of the special exception in 

section 922(d) it would violate the stay for the Debtor to voluntarily pay the bondholders’ claims—in other 

words, voluntary transfers are not excepted from the automatic stay. . 

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handing out releases to the GDB Releasees. Setoff is the classic example of such prohibited 

enforcement activity, defined as a “counter-claim demand which defendant holds against 

plaintiff”48 and considered a “device[] ordinarily available to creditors seeking to recover from 

debtors.”49 Setoff is available “only under the circumstances described in 11 U.S.C. § 553, and 

against a debtor already in bankruptcy only by seeking relief from the automatic stay” because 

“the bankruptcy laws are generally designed to maximize the debtor’s assets for the benefit of all 

creditors, and allowing a creditor to invoke setoff might allow the creditor an unfair advantage 

over other creditors.”50 The setoff of claims (in violation of the automatic stay) is one of the

fundamental components of the GDB Restructuring.51 These points are uncontested and are 

alone sufficient to conclude that the GDB Restructuring violates the automatic stay (regardless of 

any arguments related to section 363 of the Bankruptcy Code).

IV. Section 304(i) Does Not Insulate GDB Restructuring from Stay Violation 

25. Section 304(i) of PROMESA allows for the holder of a claim to vote on or 

consent to a proposed modification of such claim in a Title VI case notwithstanding the 

automatic stay. Section 304(i) does not apply here, however, because it is the GDB 

Restructuring Act—not the Title VI Proceeding—that effectuates the major stay violations raised 

by the Committee. The GDB Restructuring Act is the vehicle for (a) the setoff of the Title III 

Debtors’ deposits,52 (b) the creation of a lien against public funds held in trust or in a fiduciary 

 

48 United Structures of Am., Inc. v. G.R.G. Eng'g, S.E., 9 F.3d 996, 998–99 (1st Cir. 1993). 

49 Id.

50 Id.

51 Section 553 of the Bankruptcy Code is incorporated into Title III of PROMESA, and expressly makes the 

exercise of setoff subject to section 362. 11 U.S.C. § 553(a). The Committee reserves the right to assert in 

other pleadings that the GDB Restructuring violates section 553’s requirements for set off or Puerto Rico law 

with respect to set off, independent of automatic stay considerations. 

52 GDB Restructuring Act, art. 302. 

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capacity until they are to be transferred to the Recovery Authority,53 (c) the transfer of 

substantially all of GDB’s valuable assets, including public funds, to the Recovery Authority 

(and authorization of such transfer),54 (d) the releases handed out to the GDB Releasees,55 (e) the 

elimination of the Title III Debtors’ rights with respect to challenges to the GDB Restructuring,56

and (f) a broad exculpation of any of the Title III Debtors’ claims against parties based on 

actions in connection with the GDB Restructuring. 57 Indeed, GDB and AAFAF emphasize that 

the Title VI case is on a separate “parallel path”58 apart from the GDB Restructuring Act.59

26. Thus, that the Title III Debtors may be able to consent to a Title VI case without 

violating the stay is irrelevant to the issue of whether the stay is violated as a result of separate 

Puerto Rico legislation. That the effectiveness of the Restructuring Act depends on the 

effectiveness of the Title VI modification, and vice versa, does not change this conclusion.60 The 

GDB cannot use a Puerto Rico claims-enforcement law (i.e., the GDB Restructuring Act) to 

violate the automatic stay and then attempt to “cleanse” this stay violation through Title VI.61 

 

53 GDB Restructuring Act, art. 402. 

54 GDB Restructuring Act, art. 403(i) (authorizing transfer) and 404(a) (ordering transfer on closing date). 

55 GDB Restructuring Act, art. 702. 

56 GDB Restructuring Act, art. 703. 

57 GDB Restructuring Act, art. 704. 

58 GDB Obj. ¶ 17. 

59 GDB Objection to Committee Standing (“Title VI’s only impact on the rights of non-Bond holders is to 

preclude them from launching a challenge to or collateral attack on the Qualifying Modification; Title VI 

otherwise specifically preserves any rights they may have”) 

60 Nor does this interdependence raise any sort of ripeness issue, as the Title VI case is already under way and its 

consummation is imminent. 

61 Similarly, the fact that section 201(b)(1)(M) of PROMESA allows resources of one instrumentality to be used 

for the benefit of another instrumentality pursuant to a Qualifying Modification does not mean that a Qualifying 

Modification can be used as cover for violations of the automatic stay committed through illegal and void 

legislation. The GDB Restructuring is an attempt by GDB to collect on claims against the Title III Debtors, and 

so is stayed, regardless of what section 201(b)(1)(M) of PROMESA allows. Moreover, it is conceded that the 

transfer of GDB’s assets is effectuated through the GDB Restructuring Act and not through Title VI. Nor is the 

Oversight Board’s suggestion that the court can order retroactive relief from stay relevant, as none of the 

Objectors have requested such relief or said they will do so. And if they do, they will have to confront the 

difficult standard for obtaining retroactive stay relief in the First Circuit, where it is considered “the long-odds 

exception, not the general rule.” In re Soares, 107 F.3d 969, 977 (1st Cir. 1997). 

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V. GDB Restructuring Is Not Excepted from Automatic Stay as Exercise of 

Commonwealth’s Police Power Under Section 362(b)(4)

27. The police and regulatory exception in section 362(b)(4) of the Bankruptcy Code 

is a narrowly construed exception to the automatic stay,62 and it cannot be used to except the 

GDB Restructuring from the automatic stay because the GDB Restructuring has precisely 

nothing to do with the Commonwealth’s police and regulatory power. Section 362(b)(4) applies 

where, “the bankruptcy court, after assessing the totality of the circumstances” determines that 

“the particular regulatory proceeding at issue is designed primarily to protect the public safety 

and welfare” and is not “a governmental attempt to recover from property of the debtor estate.”63 

In addition, proceedings do not fit within the section 362(b)(4) exception where they are “not 

predicated upon any allegation of wrongdoing.”64 And the mere fact that a proceeding advances 

or reflects public policy does not mean that it will fall within section 362(b)(4) when the 

proceeding is focused on the pecuniary interests of particular parties.65 

28. As discussed above, the GDB Restructuring is, despite the Objectors’ recitation of 

platitudes regarding its alleged public purpose, manifestly a purely financial measure to liquidate 

a non-operating financial institution and to recover property from the Title III Debtors for the 

benefit of GDB and certain of its favored creditors while handing out free releases to the GDB 

 

62 See In re McMullen, 386 F.3d 320, 325 (1st Cir. 2004) (“[G]iven the expansiveness of subsection 362(a), the 

exception contained in subsection 362(b)(4) is to be narrowly construed.”).

63 In re McMullen, 386 F.3d at 325. See also In re Nortel Networks, Inc., 669 F.3d 128, 139-40 (3d Cir. 2011). 

“[I]f the action is an attempt by the government to recover property from the estate, it has a pecuniary purpose 

and so remains subject to the stay.” See also S. Rep. No. 95–989 at 52 (1978), reprinted in 1978 U.S.C.C.A.N. 

5787, 5838 (section 362(b)(4) applies to where “governmental unit is suing a debtor to prevent or stop 

violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws, 

or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the 

automatic stay”) (emphasis added). 

64 In re Nortel Networks, Inc., 669 F.3d 128, 141 (3d Cir. 2011). 

65 Id. (though “the passage of the U.K. Pensions Act 2004 and the system established by the Act clearly reflect 

public policy decisions,” “it [did] not follow . . . that the purpose of the particular U.K. [pension fund protection 

proceedings] at issue here was to protect the public” when such proceedings “focused on the pecuniary 

interests” of the U.K. Board of the Pension Protection Fund and pension beneficiaries). 

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and the GDB Releasees.66 The GDB Restructuring will do nothing to regulate the health and 

safety of the people of Puerto Rico or punish wrongdoers for conduct that would put public 

health and safety in jeopardy. Moreover, the fact that public policy may have contributed to the 

design of the GDB Restructuring does not mean that section 362(b)(4) applies when the GDB 

Restructuring is so clearly undertaken to protect the pecuniary interests of particular favored 

GDB creditors (its bondholders and certain municipal and private depositors), and not to protect 

the public. If anything the pecuniary interests of the public generally, as represented by the Title 

III Debtors, are prejudiced by the deal. 

29. In any event, by its plain language, section 362(b)(4) has no applicability to the 

setting off of accounts or the creation of liens, both of which are major components of the GDB 

Restructuring. Thus, even if section 362(b)(4) did apply, it would only be a partial defense.67 

VI. Whether Title III Debtors Have Net Claims Against GDB Is Irrelevant and Not Yet 

Determined

30. The Oversight Board’s contentions that the “facts show the Debtors have no net 

positive claims” against GDB and that “it is beyond credulity that the Commonwealth, HTA, and 

PREPA can have meritorious claims” against GDB are completely irrelevant to the question of 

 

66 The cases cited by the Oversight Board on this issue are completely unpersuasive, dealing with obvious 

regulatory matters or situations that did not involve the automatic stay at all. See In re Commerce Oil Co., 847 

F.2d 291, 292 (6th Cir. 1988) (proceeding to fix civil fines and penalties under state water quality regulatory 

law); See also Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502, 503, 62 S. Ct. 1129, 1130, 86 L. 

Ed. 1629 (1942) (dealing with constitutionality of state insolvency law, not automatic stay); Home Bldg. & 

Loan Ass'n v. Blaisdell, 290 U.S. 398, 415–16, 54 S. Ct. 231, 231, 78 L. Ed. 413 (1934) (same). And the 

Oversight Board’s citations to cases concerning the regulatory powers of the Puerto Rico government are 

irrelevant—the Committee’s contention is not that the Puerto Rico government cannot enact regulatory 

legislation, but that the GDB Restructuring serves no regulatory purpose whatsoever and instead concerns itself 

exclusively with the resolution of financial claims for the pecuniary benefit of certain favored GDB creditors. 

67 Section 362(b)(4) only applies to an “action or proceeding” under paragraph “(1), (2), (3), or (6) of subsection 

(a)” of section 362 to enforce a governmental unit’s police or regulatory power. 11 U.S.C. 362(b)(4). See Alan 

N. Resnick & Henry J. Sommer, 3 Collier on Bankruptcy ¶ 362.05[5][b] (16th ed. 2015)(“The governmental 

unit may prosecute an action and obtain a judgment or order, but may not take or perfect a lien on property of 

the estate, setoff claims, or take other action that would violate the [automatic stay”]). Setting off deposits and 

creating liens are so obviously and purely financial in nature that there is no way such acts could be considered 

excepted from the stay under section 362(b)(4) even absent the textual exclusion. 

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the automatic stay. There is no exception to the automatic stay based on a debtor’s lack of net 

claims against a creditor. 

31. In addition to being irrelevant, the issue of the Title III Debtors’ net claims 

against GDB is one that has not yet been decided—additional investigation and analysis is 

required to understand the true nature of such claims. Indeed, the Oversight Board’s premature 

conclusion that the Title III Debtors have no net claims against the GDB is profoundly troubling 

given the Oversight Board’s role in the Title III cases. The Oversight Board is the Title III 

Debtors’ trustee and representative, a fiduciary charged with maximizing the Title III Debtors’ 

assets.68 Yet, without any analysis, it is eager to abandon potential claims against GDB in order 

to facilitate the GDB Restructuring. 

32. This is particularly troubling given that the Oversight Board’s own investigator 

has produced a report that discusses, among other things, how GDB officials directed the 

Commonwealth to borrow additional debt even as they were plotting for a restructuring by hiring 

restructuring counsel and restructuring financial advisors before the issuance of the $3.5 billion 

GO bond offering in March 2014 (which they failed to disclose to the general market). These 

same GDB officials controlled the 2014 GO offering, as they did for all of the Puerto Rico bond 

 

68 The Oversight Board has argued elsewhere that section 315(b) of PROMESA simply makes the Oversight 

Board the representative of the Debtor in a title III but does not make the Oversight Board a fiduciary. See

Motion of the Financial Oversight and Management Board for Puerto Rico to Dismiss Plaintiffs’ First 

Amended Adversary Complaint Pursuant to Fed R. Civ. P. 12(B)(1) and 12(B)(6), at 30 n. 15, Pinto Lugo v. 

United States [Docket No. 36 in Adv Proc. No. 18-041-LTS]. The Supreme Court has recognized that a 

“trustee for a debtor out of possession” owes fiduciary obligations to creditors and shareholders. See

Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 355 (1985) (“if a debtor remains in 

possession—that is, if a trustee is not appointed—the debtor’s directors bear essentially the same fiduciary 

obligation to creditors and shareholders as would the trustee for a debtor out of possession”). Moreover, courts 

have explained that these fiduciary obligations arise out of the trustee’s appointment, pursuant to 11 U.S.C. § 

323, as the representative of the estate. See, e.g., In re WHET, Inc., 750 F.2d 149, 149 (1st Cir. 1984) (“A 

trustee has been appointed. He is a “representative of the estate,” 11 U.S.C. § 323, and as such he owes a 

fiduciary duty to debtor and creditors alike to act fairly and protect their interests.”); In re Jack Greenberg, Inc., 

189 B.R. 906, 910 (Bankr. E.D. Pa. 1995) (“Section 323 provides that the trustee is the representative of the 

estate. In that capacity the trustee is a fiduciary and intended to be independent.”). Here, section 315(b) of 

PROMESA provides that the Oversight Board “is the representative of the debtor.” Just as section 323 of the 

Bankruptcy Code makes the trustee a fiduciary, so too does section 315(b) of PROMESA. 

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offerings, utilizing proceeds of such offering to repay the GDB, so that GDB and its directors 

and officers would be off the hook from any liability—all of this at a time when both the 

Commonwealth and the GDB appeared to be at least undercapitalized, if not insolvent.69 The 

Committee has separately discussed its concerns regarding the Kobre & Kim report in its 

informative motion, dated September 5, 2018 [Docket No. 3866]. 

VII. The Committee Has Standing to File Stay Motion and Has Properly Done So

33. Finally, the Court should reject the Oversight Board’s argument that the 

Committee lacks standing to prosecute the Stay Motion and bring to the Court’s attention the 

automatic stay violations posed by the GDB Restructuring. Abundant authority establishes that 

the automatic stay protects creditors as well as debtors,70 and here the Committee clearly has 

standing as a party in interest under section 1109(b) of the Bankruptcy Code.71 Moreover, 

 

69 See Official Statement for 2014 GO Bonds (Mar. 11, 2014) (available at 

http://www.gdbpr.com/investors_resources/documents/CommonwealthPRGO2014SeriesA-FinalOS.PDF) 

(“The Commonwealth will use the proceeds of the Bonds to (i) repay amounts due to Government 

Development Bank for Puerto Rico (‘GDB’) under certain lines of credit extended to the Commonwealth 

and Puerto Rico Public Buildings Authority (‘PBA’).”) (emphasis added). 

70 See, e.g., In re Soares, 107 F.3d 969, 977 (1st Cir. 1997) (“Because the stay is a fundamental protection for 

all parties affected by the filing of a petition in bankruptcy, it should not be dismantled without good reason.); 

In re Maloney, 204 B.R. 671, 674 (Bankr. E.D.N.Y. 1996) (Swain, J.) (“The imposition of the automatic stay 

protects the estate for the benefit of creditors and promotes the orderly disposition of the property of the 

estate.”) (emphasis added); see also Ostano Commerzanstalt v. Telewide Sys., Inc., 790 F.2d 206, 207 (2d Cir. 

1986) affirmed in part and reversed in part on other grounds, (“Since the purpose of the stay is to protect 

creditors as well as the debtor, the debtor may not waive the automatic stay.”) (emphasis added). 

71 See, e.g., In re Indian Motocycle Co., Inc., 266 B.R. 243, 263 (Bankr. D. Mass. 2001) (courts have “answered [] 

question clearly” in favor of allowing standing to creditors to raise “any violation of the automatic stay against 

the bankruptcy estates which might affect its interests”) (subsequent history omitted); In re Lake Country Invs. 

Ltd., No. 99-20287, 1999 WL 33490220, at *9 (Bankr. D. Idaho Sept. 22, 1999) (section 1109(b) gives a party 

in interest right to “bring[] a potential or actual stay violation to the attention of the Court”); see also 7 Collier 

on Bankruptcy ¶ 1109.04 (16th ed. 2018) (“[S]ection 1109(b) should be interpreted as written to permit any 

party in interest to raise, appear and be heard with respect to any issue in the case, regardless of the nature of the 

proceeding in which the issue arises.”). In addition, if the Committee has standing to intervene in an adversary 

proceeding under section 1109(b), as was recently clarified by the First Circuit Court of Appeals, it clearly has 

standing to enforce the automatic stay. See In re Fin. Oversight & Mgmt. Bd. for Puerto Rico for Puerto Rico, 

872 F.3d 57, 60 (1st Cir. 2017) (holding that Committee had standing under section 1109(b) to intervene in 

adversary proceeding). Further, though the First Circuit in dicta in F.D.I.C. v. Shearson-Am. Exp., Inc., 996 

F.2d 493, 497 (1st Cir. 1993) questioned a creditor’s standing to challenge an alleged violation of the stay 

(without deciding the issue), that statement was based on a citation to In re Pecan Groves of Arizona, 951 F.2d 

242, 245 (9th Cir.1991), in which the Ninth Circuit denied a creditor’s standing in a chapter 7 case (where 

section 1109(b) does not apply) and only with regard to the specific issue of whether a creditor could appeal 

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because Committee has standing to object to GDB’s proofs of claim, it must have standing to 

seek enforcement of the automatic stay to protect its ability to contest such proofs of claim.72

34. The Court should also reject the argument that the Committee has pursued an 

improper procedure by filing the Stay Motion because section 601(n) of PROMESA establishes 

a procedure for contesting a Title VI Qualifying Modification. The existence of one procedure in 

a separate court proceeding does not deprive the Committee of its ability to raise violations of the 

Bankruptcy Code in these Title III cases. The argument that the Committee must raise Title III 

issues in the Title VI Proceeding makes no sense at all and is, in fact, another attempt by the 

Oversight Board to muzzle the Committee. The automatic stay is a foundational element of the 

Title III process, and the Oversight Board’s assertion that there is no procedure to ensure that the 

automatic stay is enforced simply cannot be countenanced.73 

[Remainder of page intentionally left blank.] 

 where the trustee failed to do so. See St. Paul Fire & Marine Ins. Co. v. Labuzan, 579 F.3d 533, 542–43 (5th 

Cir. 2009) (explaining and criticizing Pecan Groves). 

72 See footnote 10 supra. 

73 The Objectors are also wrong when they state that the Committee, in filing the Stay Motion, is itself violating 

the stay. Oversight Board Obj., at 14 n. 21, GDB Obj. at ¶ 3. The automatic stay does not apply to actions in 

the Bankruptcy Court; the Court expressly recognized this in the Stay Order, which states that “nothing in this 

Order shall be deemed to interfere with any party’s right to bring, prosecute, or to otherwise litigate or engage 

in an adversary proceeding or contested matter in these Title III Cases against any other party.” Stay Order ¶14. 

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WHEREFORE, the Committee respectfully requests that the Court enforce the automatic 

stay and the Stay Order by entering an order declaring that (a) the GDB Restructuring violates 

the automatic stay under section 362 of the Bankruptcy Code and the Stay Order, (b) any 

limitations on or releases of claims that have been or may be asserted by the Title III Debtors 

against GDB or related third-parties are void, (c) any transfer or “shielding” of assets pursuant to 

the GDB Restructuring that could have been used, prior to the implementation of the GDB 

Restructuring, to satisfy claims of the Title III Debtors by GDB, is void, and (d) granting such 

other relief as is just and proper 

Dated: September 6, 2018 

 

/s/ Luc A. Despins .

PAUL HASTINGS LLP 

Luc. A. Despins, Esq. (Pro Hac Vice) 

James R. Bliss, Esq. (Pro Hac Vice)

James T. Grogan, Esq. (Pro Hac Vice) 

Nicholas A. Bassett, Esq. (Pro Hac Vice) 

200 Park Avenue 

New York, New York 10166 

Telephone: (212) 318-6000 

lucdespins@paulhastings.com 

jamesbliss@paulhastings.com 

jamesgrogan@paulhastings.com 

nicholasbassett@paulhastings.com 

Counsel to the Official Committee of Unsecured 

Creditors

- and - 

/s/ Juan J. Casillas Ayala .

CASILLAS, SANTIAGO & TORRES LLC 

Juan J. Casillas Ayala, Esq., USDC - PR 218312 

Diana M. Batlle-Barasorda, Esq., USDC - PR 213103 

Alberto J. E. Añeses Negrón, Esq., USDC - PR 302710 

Ericka C. Montull-Novoa, Esq., USDC - PR 230601 

El Caribe Office Building 

53 Palmeras Street, Ste. 1601 

San Juan, Puerto Rico 00901-2419 

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Telephone: (787) 523-3434 

jcasillas@cstlawpr.com 

dbatlle@cstlawpr.com 

aaneses@cstlawpr.com 

emontull@cstlawpr.com 

Local Counsel to the Official Committee of Unsecured 

Creditors

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