43890790.v5

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

In re:

THE FINANCIAL OVERSIGHT AND

MANAGEMENT BOARD FOR PUERTO RICO

as representative of

THE COMMONWEALTH OF PUERTO RICO et al.,

Debtors.1

PROMESA

Title III

Case No. 17-BK-03283 (LTS)

RESPONSE IN SUPPORT OF 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

[Dkt. # 3797]

Financial Guaranty Insurance Company (“FGIC”), by and through its attorneys Rexach

& Picó, CSP and Butler Snow LLP, files this response (this “Response”) in support of 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 [Dkt. # 3797] (the

“Motion”).2In support of the Motion, FGIC respectfully states as follows:

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 (“Commonwealth”) (Bankruptcy

Case No. 17 BK 3283-LTS) (Last Four Digits of Federal Tax ID: 3481); (ii) Puerto Rico Sales Tax Financing

Corporation (“COFINA”) (Bankruptcy Case No. 17 BK 3284-LTS) (Last Four Digits of Federal Tax ID: 8474);

(iii) Puerto Rico Highways and Transportation Authority (“HTA”) (Bankruptcy Case No. 17 BK 3567-LTS) (Last

Four Digits of Federal Tax ID: 3808); (iv) 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); and

(v) Puerto Rico Electric Power Authority (“PREPA”) (Bankruptcy Case No. 17 BK 4780-LTS) (Last Four Digits of

Federal Tax ID: 3747).

2 Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms as in

the Motion.

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1. FGIC provides financial guaranty insurance covering in excess of $1.17 billion in

principal amount of bonds outstanding and issued by the Commonwealth of Puerto Rico (the

“Commonwealth”) and various Commonwealth instrumentalities.3FGIC insures approximately

$282.4 million in principal amount of outstanding general obligation bonds issued by the

Commonwealth and bonds guaranteed by the Commonwealth (e.g. Public Building Authority

bonds). As “public debt,” general obligation bonds are entitled to a first-priority payment status

under the constitution of the Commonwealth and related statutes and are entitled to payment

before all other obligations payable from the Commonwealth’s general revenues.

2. FGIC also insures approximately $447 million in principal amount of outstanding

bonds issued by the Puerto Rico Highways and Transportation Authority (“PRHTA”). In

addition, FGIC insures bonds issued by the Puerto Rico Convention Center District Authority

and the Puerto Rico Infrastructure Financing Authority. The bonds issued by these authorities,

including PRHTA, are secured by, among other things, enforceable, perfected liens on pledged

special revenues.

3. To date, however, the Oversight Board has disputed that the Commonwealth’s

general obligation bonds are protected and secured by a first lien on all available resources of the

Commonwealth. The Oversight Board has also contested the validity of the statutory and

perfected contractual liens securing certain of the authority bonds insured by FGIC. To the extent

that the bonds insured by FGIC (or FGIC’s related claims) ultimately may be determined to be

less than fully secured, then FGIC’s claims that are not fully secured are unsecured claims, and

3 Under relevant provisions of the applicable bond documents, bond insurance policies, and applicable law,

payment by FGIC neither satisfies nor discharges an issuer’s obligation to pay and, to the extent FGIC makes such

payments, it obtains assignments of rights from the bondholders, becomes owner of the bonds, and/or becomes

subrogated to the rights of bondholders and effectively steps into the shoes of such bondholders.

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with respect to such unsecured claims against the Title III Debtors, the Committee acts in all

respects as a fiduciary to FGIC.

4. As the Committee states in the Motion, the GDB Restructuring Act and the

proposed GDB Restructuring violate the automatic stay by, among other things, providing for the

setoff of certain of the Title III Debtors’ deposits, the creation of a lien against public funds held

in trust or in a fiduciary capacity until they are to be transferred to the Recovery Authority and

the transfer of GDB’s assets, including public funds, to the Recovery Authority. See Motion, ¶

23. Consequently, any action to recover, transfer or setoff such funds is expressly stayed

pursuant to section 362 of the Bankruptcy Code, section 301(a) of PROMESA, and the Stay

Order pending a hearing and order from this Court modifying or lifting the automatic stay. As a

creditor of the Commonwealth and PRHTA, FGIC is affected by any provision of the GDB

Restructuring affecting assets of the Title III Debtors and has standing under section 1109(b) of

the Bankruptcy Code to appear and be heard in connection with any such motion for relief from

the automatic stay.

5. In particular, in at least one instance, a setoff of deposited funds against the claims

of a Title III Debtor would satisfy a Title III Debtor’s obligations to the GDB that are

subordinate to a Title III Debtor’s bondholders. Specifically, PRHTA is purportedly indebted to

the GDB with respect to certain lines of credit. Such repayment, however, is subordinated to the

repayment of PRHTA bonds. For example, the 2010 official statement for the PRHTA bonds

states that “[PRHTA] has financed some of its recent capital expenditures and working capital

requirements with Government Development Bank lines of credit, the repayment of which is

subordinate to the [PRHTA Bonds].”

4

4

See Highway Revenue Refunding Bonds Offering Official Statement at 32 (June 17, 2010),

http://www.gdb-pur.com/investors_resources/documents/PRHighwayaFIN_000.pdf (emphasis added).

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6. The Title III Debtors’ funds held by the GDB are property of the Title III Debtors

and serve to secure certain of the bonds issued by certain of the Title III Debtors. The GDB

Restructuring and the GDB Restructuring Act may not abrogate the rights of the Title III Debtors

in their property or the rights of bondholders in their collateral under the guise of a Title VI

proceeding.

7. FGIC has not undertaken an investigation of any other claims and assets of the

Title III Debtors that are referenced by the Committee in the Motion. As a fiduciary for all

unsecured creditors, the Committee has appropriately undertaken such an investigation. FGIC

supports the Committee’s efforts to pursue and protect those assets.

8. Accordingly, for the reasons stated herein and in the Motion, FGIC respectfully

requests that the Court grant the Motion and enter the Proposed Order attached thereto, and to

grant any and all relief that the Court deems appropriate under these circumstances.

Dated: August 29, 2018

Respectfully submitted,

REXACH & PICÓ, CSP

By: María E. Picó

María E. Picó

USDC-PR 123214

802 Ave. Fernández Juncos

San Juan PR 00907-4315

Telephone: (787) 723-8520

Facsimile: (787) 724-7844

E-mail: mpico@rexachpico.com

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BUTLER SNOW LLP

By: Martin A. Sosland

Martin A. Sosland (pro hac vice)

5430 LBJ Freeway, Suite 1200

Dallas, TX 75240

Telephone: (469) 680-5502

Facsimile: (469) 680-5501

E-mail: martin.sosland@butlersnow.com

Stanford G. Ladner (pro hac vice)

1700 Broadway, 41st Floor

New York, NY 10019

Telephone: (646) 606-3996

Facsimile: (646) 606-3995

E-mail: stan.ladner@butlersnow.com

Christopher R. Maddux (pro hac vice)

J. Mitchell Carrington (pro hac vice)

1020 Highland Colony Parkway, Suite 1400

Ridgeland, MS 39157

Telephone: (601) 985-2200

Facsimile: (601) 985-4500

E-mail: chris.maddux@butlersnow.com

mitch.carrington@butlersnow.com

Jason W. Callen (pro hac vice)

150 3rd Avenue, South, Suite 1600

Nashville, TN 37201

Telephone: (615) 651-6774

Facsimile: (615) 651-6701

E-mail: jason.callen@butlersnow.com

Attorneys for Financial Guaranty Insurance

Company

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