The U.S. government filed notice Monday that it would defend the court supervised restructuring of Puerto Rico's debt against a constitutional challenge by an investor.

The U.S. responded in the Title III bankruptcy case concerning Puerto Rico’s government debt to an adversary proceeding filed in August by the Aurelius Capital hedge fund. Aurelius, which owned $473 million of Puerto Rico bonds as of July, argued that the Title III bankruptcy petition should be dismissed because its filing wasn’t authorized by a validly constituted oversight board. In particular, the firm said that the appointments clause of the U.S. Constitution was breached in appointing the board’s members.

The board was appointed under the Puerto Rico Oversight Management and Economic Stability Act to oversee fiscal and economic management in the territory and the restructuring of more than $70 billion of debt that the Puerto Rico government said couldn't be repaid under current economic conditions.

Activists protested Aurelius Capital in Midtown Manhattan Thursday.
Activists protesting Aurelius Capital's impact on Puerto Rico in a New York City demonstration in August Robert Slavin

According to the Constitution all “principal officers” of the U.S. 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 majority and minority leaders of the Senate and U.S. House and President Obama appointed the board members. Neither Senate committees nor the Senate as a whole voted on them.

Aurelius wrote, “Because the board is unconstitutional, its acts are void.” Since it was the board that referred Puerto Rico’s debts to Title III, the firm called for Title III Judge Laura Taylor Swain to dismiss the case.
On Monday six attorneys with the U.S. Department of Justice filed notice to the court that it would file a memorandum supporting PROMESA’s constitutionality on or before Dec. 6.

On the Department of Justice’s filing, attorney and observer of the Title III process John Mudd said in an email, “No surprise there, it is rare for the Solicitor General not to defend laws and I think Aurelius has a very good argument but the case will probably go all the way to the [U.S. Supreme Court].”

The U.S. filing comes the business day after several other key groups filed memorandums on the Aurelius adversary proceeding. The Ad Hoc Group of General Obligation bondholders submitted a brief memo Friday supporting the Aurelius position.

Also on Friday, Puerto Rico’s government, the COFINA Seniors Bondholders Coalition, the Unsecured Creditors Committee, the Official Committee of Retired Employees of the Commonwealth of Puerto Rico entered memos against the Aurelius position.

The Puerto Rico government’s argument was that Aurelius was seeking PROMESA’s stay on litigation outside of the bankruptcy process be lifted. It says that Aurelius is seeking actions against the debtor and the Oversight Board outside the Title III process and that PROMESA bars this.

The COFINA Seniors argue that the Oversight Board’s membership is constitutional because Congress’s power over the territories is plenary and not subject to the structural limitations of the United States constitution.

The Unsecured Creditors argued that the “U.S. Constitution gives Congress virtually unlimited authority to govern unincorporated territories directly, or to delegate that power to such agencies as it” deems fit. This group said that there is precedent for the board members’ appointment procedures. They say the board members are territorial officials and not U.S. government officials, as Aurelius claims.

For their part, the retired employees group made an argument similar in some respects to those of the COFINA Seniors and Unsecured Creditors. They wrote that the “appointments clause does not apply to the appointment of territorial officials like the [Oversight Board] members.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.