Puerto Rico's electrical workers' union joined hedge funds led by Aurelius Capital Wednesday in urging a judge to declare Puerto Rico’s bankruptcy unconstitutional.

Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday.
Judge Laura Taylor Swain said the attorneys' oral arguments made for an "extraordinarily important day." U.S. Courts

Aurelius and UTIER (the main union of workers for the Puerto Rico Electric and Power Authority) both argued that the Puerto Rico Oversight, Management and Economic Stability Act violated Article 2 of the U.S. Constitution, which governs federal appointments.

“The fact that the socialist UTIER had the same argument [as] Aurelius only confirms the old saying ‘Politics and war make strange bedfellows,’” said Puerto Rico attorney John Mudd in an email.

The United States Attorney General Office, Puerto Rico Oversight Board, Puerto Rico Fiscal Agency and Financial Advisory Authority, the Ad Hoc Group of COFINA Seniors Group, made arguments in favor of the law's consitutionality.

PROMESA Title III bankruptcy judge Laura Taylor Swain allowed over three hours of oral presentation in the case.

“This has been an extraordinarily important day,” Swain said at the end of arguments in the proceedings for Aurelius and UTIER, which were discussed simultaneously. She said she would take the matter under advisement.

Aurelius, which holds $473 million in Puerto Rico debt, is among investors who may receive 25% or less of debt payments due under a fiscal plan being considered by Oversight Board. The Board threw PREPA into title III bankruptcy under the law, rejecting a consensual plan worked out between the utility and its bondholders.

During the oral presentations in Swain’s courtroom in the United States Courthouse for the Southern District of New York, Swain asked more questions of the attorneys saying PROMESA was unconstitutional than of those arguing the reverse, though her questions weren’t aggressive.

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.

All the lawyers at Wednesday’s hearing basically agreed that PROMESA didn’t set up the Oversight Board in that manner. In PROMESA the Senate majority leaders 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.

There was disagreement 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. There was also disagreement over how much flexibility the constitution gave the federal government in its handling territorial governments.

Theodore Olson, representing Aurelius, questioned language in PROMESA that defined the board as being part of Puerto Rico’s government. He cited a Supreme Court ruling in another case saying the federal government’s definition of something as being a non-federal body didn’t necessarily make it that way.

The board enforces public rights, namely concerning the debt, and exercises U.S. statutes, Olson said. This indicates the board is composed of U.S. officers. He said that the board members answered to no one else besides the U.S. president and that this makes them principal officers.

UTIER’s attorney Rolando Emmanuelli said he supported Aurelius’ arguments against PROMESA. Emmanuelli spent most of his time arguing that the union had legal standing to file the adversary proceeding. Emmanuelli is president of Bufete Emmanuelli, C.S.P.

Arguing for the Puerto Rico Oversight Board, attorney Donald Verrilli said that the board members were territorial officers and not U.S. officers. He said the board was 100% funded by the Puerto Rico government. He noted that the Freedom of Information Act and several other acts don’t apply to the board.

U.S. Deputy Assistant Attorney General Thomas Ward said that if Swain were to rule with Aurelius and UTIER, it would be tantamount to saying all the territorial governments are unconstitutional. Ward said history was filled with territorial officials appointed without Congressional approval of presidential appointments. He cited democratically elected officials.

Swain questioned Olson on whether the democratic election of officials in the territories was consistent with Aurelius’ argument that Article 2 was needed to appoint principal officers.

Olson said there was a history of the courts recognizing democratically-elected governments as being legitimate in territories, if Congress had authorized these sorts of governments. However, he argued, since the board was operating pursuant to federal authority and the president could remove its members, they had to be appointed consistent with Article 2.

Matthew McGill, also representing Aurelius, said Swain should declare PROMESA void, though she should put a stay on the decision pending any appeals that would surely happen.

“Given the many questions posed to [Aurelius attorney] Olson by Judge Swain and only one to defendants, [it] seems that she is inclined to find against Aurelius,” Mudd said.

On the other hand, Mudd said Swain "seemed very disturbed" when the U.S. Attorney suggested an additional hearing to allow him to brief her on the repercussions of ruling for Aurelius with a stay on the decision.

If Aurelius wins, at best the Title III and other board actions would be delayed for at least one to two years, Mudd continued. “At worst, all board actions would be invalid and hence void and null.”

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