Supreme Court’s Puerto Rico decision closes some doors, opens others

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The U.S. Supreme Court’s decision striking down a constitutional challenge to the Puerto Rico Oversight Board-appointment law closed some doors in Puerto Rico’s future but it opened other opportunities for change to the board.

This legal approach to undermining the Puerto Rico Oversight, Management, and Economic Stability Act has been stopped and, sources said, along with it at least one other bondholder legal attack has been weakened. On the other hand, other legal challenges continue. And with Monday’s Supreme Court decision, board members will have to be appointed for new terms and the board’s membership will likely change.

Federal officials have held off on appointing replacements for the board members while the Aurelius case threatened to negate the existing board and the board appointment process. Now that is gone, people close to the board have said that some members may want to leave it.

The current board members were appointed by the leaders of the U.S. House of Representatives, Senate, and then President Obama. Following the PROMESA provisions, Republicans got to pick four members and Democrats three.

If the federal government chooses a new board before early January, when a new Congress and possibly a new president will be sworn in, Republicans would still be able to pick four members and Democrats three. The federal government will likely make the appointments before January.

Assured Guaranty Spokesman Robert Tucker
Assured Guaranty Managing Director Robert Tucker said the Supreme Court's decision will lead to federal consideration of who should serve on the Oversight Board for the next three-year term.

Cleary Gottlieb Partner Richard Cooper said at the Ravitch Fiscal Reporting session on Puerto Rico that the Aurelius hedge fund challenge, decided Monday, was “by far the most prominent” challenge to PROMESA.

The decision “certainly is good news for Puerto Rico’s stakeholders,” Cooper said Tuesday. “Even as [a] tactical effort to gain leverage, it was always hard to see how bringing this suit served any useful purpose even for those prosecuting the case.”

New York University Sadler Family Professor of Constitutional Law Rick Pildes said, “The decision [Monday] was fully expected by most constitutional law experts, which is reflected in the fact that it was unanimous... All the uncertainties about [the board’s constitutionality and powers] that were created by the lower court decision are now removed.”

By the end of Monday the price of the Puerto Rico 8% GO maturing in 2035 rose to $57.50 from $54.25 at the end of Friday, according to IHS Markit.

On behalf of bond insurer Assured Guaranty, Senior Managing Director Robert Tucker said the board members’ “three-year terms expired in August 2019, nearly a full year ago. Now that the issue of the constitutionality of their appointment has been resolved, the issue of their expired terms comes front and center.

“As does the fact that for nearly four years the current Oversight Board members have failed to implement PROMESA in accordance with its original intent and meaning as envisioned by Congress and spent hundreds of millions of dollars on aggressive litigation that seeks to violate the property interests of bondholders and other stakeholders, all of which has served to prolong Puerto Rico’s path to economic recovery,” Tucker said.

Bufete Emmanuelli Partner Jessica Méndez Colberg said of the Supreme Court’s action, “This decision puts in manifest the colonial status of Puerto Rico.” Méndez Colberg presented the case orally to the Supreme Court on behalf of Unión de Trabajadores de la Industria Eléctrica y Riego, whose similar suit to the Aurelius suit was combined with it and heard by the Supreme Court.

UTIER is the main union for the Puerto Rico Electric Power Authority.

Méndez Colberg said that earlier Supreme Court decisions in 2016 in Sanchez Valle and Franklin Trust had also underlined the island’s colonial status. However, she said UTIER was happy that the court didn’t attempt to extend earlier colonialist “insular” cases regarding Puerto Rico.

In a separate opinion, Supreme Court Justice Sonia Sotomayor laid the foundation for other challenges to Puerto Rico’s inferior position, Méndez Colberg said.

Méndez Colberg said her law firm is pursing two other cases attacking PROMESA in the First Circuit Court of Appeals. One challenges the board’s legal right to impair job contracts. Another says that PROMESA is unconstitutional because breaks Puerto Ricans' voting rights.

In another court challenge, in late May bond insurer Ambac Financial Group, on behalf of its subsidiary Ambac Assurance Corp., filed an adversary complaint against the board in U.S. District Court for Puerto Rico.

Ambac is arguing that PROMESA is contrary to the uniformity clauses of the U.S. Constitution’s Bankruptcy Clause. Ambac says the clause requires Congress to create bankruptcy laws that are uniform for all debtors. PROMESA picked out the island’s government entities for special treatment, the bond insurer said.

Adversary proceedings are like lawsuits within the PROMESA Title III bankruptcy process.

Méndez Colberg said that Monday’s Supreme Court decision undermines the case of Altair Global Credit Opportunities hedge fund in its case against the United States in the U.S. Court of Federal Claims. Altair’s argument rests on the claim that the board was a federal and not a local entity.

A U.S. Court of Federal Claims judge in the summer of 2018 seemed sympathetic to the argument and open to possibly ordering the federal government to compensate bondholders for any losses imposed by the board. However, she wanted to hear the result of Aurelius case.

She has since been replaced and on Monday the Supreme Court found in the Aurelius/UTIER case that the board is a local and not a federal entity.

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Puerto Rico Commonwealth of Puerto Rico Puerto Rico Electric Power Authority Puerto Rico Highway & Transportation Authority Puerto Rico Public Buildings Authority Puerto Rico Aqueduct & Sewer Authority Puerto Rico Sales Tax Financing Corp (COFINA) PROMESA