Two prominent observers of a court hearing this week say the judges seemed inclined to overturn the appointment of the Puerto Rico Oversight Board.
That outcome could reverse the steps toward resolving Puerto Rico's debt crisis that have stemmed from passage of the Puerto Rico Oversight, Management, and Economic Stability Act, in 2016.
The hearing on Monday was an appeal of a July ruling from Title III Puerto Rico bankruptcy Judge Laura Taylor Swain. A hedge fund, a Puerto Rico union, and a bond insurer had their similar arguments heard in the First Circuit Court of Appeals in Boston on Monday.
They argued that the so-called Appointments Clause of the U.S. Constitution barred the method of appointment that PROMESA specified for the board.
Lawyer John Mudd and Puerto Rico House Minority Leader Rafael Hernandez Montañez said the three judges at Monday’s hearing seemed inclined to overturn Swain’s ruling supporting the constitutionality of PROMESA.
Mudd, based in Puerto Rico, is a Title III bankruptcy observer. Hernandez Montañez is Puerto Rico Popular Democratic Party House Minority Leader. The Popular Democratic Party is the main opposition party in Puerto Rico and in November filed amici curiae with in the cases led by Aurelius Investments, LLC and Assured Guaranty Corp.
Unión de Trabajadores de la Industria Eléctrica y Riego, one of the unions at the Puerto Rico Electric Power Authority, filed the third case heard at Monday’s hearing.
“From my experience in the First Circuit, the questions posed by the judges and the answers to the questions, I would say that Aurelius has a good chance of having Judge Swain reversed, although of course I may be mistaken,” Mudd wrote in his Control Board Watch blog. “This would result in the grinding halt of the Title III proceedings and the board’s authority over the Puerto Rico government, who actually would be the only winner since no action could be enforced against it.”
Section 2 of Article 2 of the U.S. Constitution says, among other things, that the U.S. president will appoint “officers of the United States” with the advice and consent of the U.S. Senate.
PROMESA didn’t set up the Oversight Board in that manner.
Instead, in PROMESA the U.S. Senate majority leader named two members, the House Speaker named two members, the Senate and House minority leaders each named one member, and the president named one member. As a result Republicans named four members and Democrats named three.
If the plaintiffs get their way, Republican President Trump may be allowed to name all seven members and then seek the approval of a Republican-majority Senate.
The lawyers in the three cases heard on Monday disagree on whether the board’s seven members should be thought of as principal officers of the U.S. government or simply as part of Puerto Rico’s government.
“Given that President Trump is not happy with Puerto Rico and the Senate controlled by the Republicans would have to confirm the new board, there is a chance of not having the same members again,” Mudd said. “What would be the result is anyone’s guess.”
Mudd said before Monday’s arguments the board’s counsel Martin Bienenstock was probably confident Swain’s decision would be upheld. “He and his team might be in for a rude awakening.”
However the First Circuit judges rule, Mudd said the loser in the case will immediately appeal to the U.S. Supreme Court, which sees less than 1% of requests.
Hernandez Montañez agreed that the judges seemed to be leaning toward repealing Swain’s decision. A repeal “could be very significant.”
Oversight Board executive director Natalie Jaresko said, “Judge [Laura Taylor] Swain’s thorough and well-reasoned decision earlier this year ruled that Congress was not constrained by the Appointments Clause of the U.S. Constitution when creating the Oversight Board. We are confident that the Court of Appeals will affirm the constitutionality of the appointment of the Oversight Board as established by Congress under PROMESA.”
According to Mudd, Hernandez Montañez, and an El Nuevo Día story on the hearing, two or more of the judges were concerned about the consequences of a ruling.
Chief Judge Juan Torruella “asked about the federal government’s argument of chaos if they decided in Aurelius’ favor,” Mudd said. Aurelius lead attorney Ted Olson said “that a stay could be implemented and the board could act but knowing that the new board would review all of its decisions.”
Olson declined to comment for this story.
Torruella was born in Puerto Rico in 1933. Former Pres. Ronald Reagan appointed him to the First District Court.
What would happen if the appeals court judges overturn Swain is unclear. All the actions of the board, including putting much of Puerto Rico’s debt into bankruptcy could be declared immediately invalid. The stay on debt-related litigation connected with the bankruptcy could be immediately lifted. The board’s approved budgets and fiscal plans could become instantly without force.
Indeed, the already approved Government Development Bank for Puerto Rico debt deal and the nearing-approval Puerto Rico Sales Tax Financing Corp. (COFINA) deals could be scuttled.
Trump could name board members more inclined to be generous to bondholders and that could lead to a different future for both bondholders and Puerto Ricans.
Alternately, the judges could overrule Swain but set up stay conditions leading to little immediate change. The federal government could confirm the same board members and little more than a delay could result from overturning the First Circuit decision.
According to a 2017 story on the web site of Committee for the Abolition of Illegitimate Debt, Aurelius had $3.3 billion of Puerto Rico bonds consisting of general obligation and Highways and Transportation Authority bonds. Aurelius is explicitly calling for the judges to overthrow the Title III cases, which put a stay on enforcing claims on various forms of Puerto Rico debt.
Swain has been overridden every time in the three appeals of her decisions so far ruled on. Mudd said in a tweet that the circuit court judges could issue a ruling in December or January.
Hernandez Montañez said the current PROMESA system needs to be replaced with greater democracy for Puerto Ricans. He said that Puerto Rico’s governor and his legal team should represent Puerto Rico in the bankruptcy proceedings. As things stand in PROMESA, the board appoints the legal team representing Puerto Rico’s interests in the bankruptcies.
Prior to PROMESA very few Puerto Ricans supported the Puerto Rico Independence party, Hernandez Montañez said. Now many are turning to the independent, socialist, or communist parties. Some in the PDP and the reigning New Progressive Party are echoing these new extreme positions. If the judges overturn the appointment of the board and a tougher board is appointed, that would only accentuate these trends, he said.
For this and other reasons, if the federal government is given the opportunity, Hernandez Montañez said it should reform PROMESA to allow for more democracy.
