The judge in the Puerto Rico Title III bankruptcy cases is scheduled to weigh motions by Puerto Rico Electric Power Authority and Puerto Rico Sales Tax Finance Corp. (COFINA) bondholders at a hearing Wednesday.
Judge Laura Taylor Swain is scheduled to consider PREPA bondholders’ and bond insurers’ motion to lift the stay on litigation concerning the more than $8 billion of bonds. This would open the door to their petitioning for a receiver to be appointed. Normally, the creditors would nominate a receiver subject to approval by a judge.
She will also consider a bid by holders of COFINA senior bonds to allow a resumption of payments to them.
The latest hearing comes two days after Aurelius Capital, a hedge fund that said it has "a substantial amount" of Puerto Rico bonds, filed a challenge to the legitimacy of the Puerto Rico Oversight Board and the Title III cases. According to Puerto Rico Gov. Ricardo Rosselló, the Title III judge must follow the 10-year fiscal plan which calls for payment of about 23% of the debt service due.
Swain is expecting to spend an hour on the PREPA motion at the end of the morning session, from roughly 11 a.m. to noon.
The hearing will start at 9:30 a.m. in courtroom 3 of the Clemente Ruiz Nazario United States Courthouse, the United States District Court for the District of Puerto Rico. It will be video broadcast to courtroom 17C of Daniel Patrick Moynihan Courthouse, the United States District Court for the Southern District of New York.
Swain will also consider a motion by the COFINA Senior Bondholders’ Coalition to modify the judge’s order granting interpleader to the COFINA bonds trustee, Bank of New York Mellon. Through the interpleader, the bank was told to not release the funds for the COFINA payment due on July 1.
The COFINA Seniors are asking Swain to modify the interpleader to state that that the trustee is holding the funds for the benefit of the COFINA bondholders and to order the trustee to make all past unpaid and future due payments for the current interest COFINA senior bonds. Swain expects to spend 30 minutes on the issue starting at about 1:50 p.m.
Aurelius Capital filed its objection and motion to dismiss the Title III petition for Puerto Rico government debts. While the hedge fund didn’t ask for the Title III cases affecting other Puerto Rico public sector entities to be dismissed, the investment fund’s logic, if approved in this case, could be used to do the same for those cases.
In the complaint Aurelius says the Title III bankruptcy petition should be dismissed because its filing wasn’t authorized by a validly constituted oversight board. In particular, the firm says that the appointments clause of the U.S. Constitution was breached in appointing the board’s members.
According to the Constitution all “principal officers” of the United States must be appointed by the U.S. president and approved by the U.S. Senate. Aurelius argues that the board members are “principal officers” of the U.S.
The board’s appointment procedure, like Title III, was established in the Puerto Rico Oversight, Management and Economic Stability Act, signed into law by then-President Barack Obama in the summer of 2016. In PROMESA the Republican leaders of the Senate and House of Representatives each nominated two people to the board, the Democratic minority leaders of the Senate and House each nominated one person the board. Obama could name someone on his own and approve the other nominations. No Senate hearings were held to approve the nominations.
In the filing Aurelius, states, “To our knowledge, since 1789, every civilian official appointed by the federal government to oversee the operation of a territorial government has been recognized as a principal federal officer, with advice-and-consent Senate appointment. This includes all governors of Puerto Rico until Congress granted Puerto Rico’s citizens the right to select their governors.”
According to Aurelius, during the consideration of PROMESA U.S. Sen. Maria Cantwell (D-Wash.) said, “The appointments clause requires that these officers, who are being appointed under the authority of federal law, be appointed by the president and confirmed by the Senate.”
“Because the board is unconstitutional, its acts are void,” Aurelius stated. Since it was the board that referred Puerto Rico’s debts to Title III, the firm calls for the judge to dismiss the Title III case.
Chapman Strategic Advisors managing director Jim Spiotto said that the success of Aurelius’ case would depend on whether the judge agreed the Oversight Board members were “principal officers” of the U.S. One key issue will be whether they are working for the United States or for Puerto Rico.