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Assured challenges constitutionality of Puerto Rico fiscal board appointments

By on July 24, 2018

SAN JUAN – Two bond insurance subsidiaries of Bermuda-based holding company Assured Guaranty Ltd. have filed an adversary complaint challenging the constitutionality of appointments to the Financial Oversight and Management Board for Puerto Rico.

The lawsuit contends that the appointments to the fiscal oversight board violated the Appointments Clause of the U.S. Constitution, and asks the court overseeing the bankruptcy-like proceedings under the Puerto Rico Oversight, Management, and Economic Stability Act’s (Promesa) Title III to dismiss the Puerto Rico Highways and Transportation Authority’s (HTA) Title III petition based on the board’s “lack of lawful authority to initiate such Title III proceeding,” according to the monoline bond insurer’s release Monday.

“Given the Title III Court’s recent dismissal of a similar lawsuit filed by another party in the Commonwealth of Puerto Rico’s Title III case, Assured Guaranty expects to participate in the appellate phase of the various Appointments Clause lawsuits,” the release reads in reference to a lawsuit filed by Aurelius Investment, which argued that federal officer appointments require  the advice and consent of the Senate.

Judge says Puerto Rico fiscal board is territorial entity and not subject to Appointments Clause

Judge Laura Taylor Swain concluded that the board’s members are not federal officers but territorial officers appointed by Congress by virtue of the Territorial Clause and, as such, did not need to meet the requirements of the Appointment Clause.

Assured states in its complaint that none of the board members were appointed “in conformity with the Appointments Clause. Rather, under PROMESA’s appointments procedures, the Oversight Board members were effectively chosen by individual members of Congress and were never confirmed” by the Senate.

There is no historical precedent for this unique structure, which dismantles significant constitutional safeguards designed to prevent congressional encroachment upon the Executive Branch and to ensure public accountability for the appointment process,” the insurer said, adding that the U.S. Court of Federal Claims’ recent opinion on the matter is “squarely at odds with a key part of the Title III Court’s decision to dismiss the Appointments Clause lawsuit in the Commonwealth’s Title III case.”

Judge denies U.S. gov’t request to dismiss creditor suit over Puerto Rico debt

The case was not only a blow to Aurelius, but also to other plaintiffs such as the Puerto Rico power company’s main labor group, the Irrigation & Electrical Workers Union (Utier by its Spanish acronym), which questions the board’s legitimacy.

Assured said its decision to file the lawsuit “was necessitated by the manifest constitutional defects in the Oversight Board’s appointment process and its consistent pattern of exceeding its legal authority and disregarding the creditor protections and legal requirements built into” Promesa.

The company added in its release that “Puerto Rico has utilized Assured Guaranty bond insurance to reduce its cost of borrowing in the municipal bond market in order to finance a wide range of projects, and the associated savings benefited Puerto Rico as soon as the bonds were issued. Today, more than $5 billion of those insured bonds are outstanding, and Assured Guaranty has already paid more than $820 million to cover Puerto Rico’s failure to honor its commitment to pay the debt service on those bonds.”

The firm assured it “has not acquired its exposure through purchases of discounted bonds, but rather through its role as a long-term partner of the island,” and that it is committed “to the health of the Puerto Rico economy.”

However, Assured warned that the island’s “long-term economic sustainability depends on future investment and access to capital markets,” adding that investors “will not be willing to make those investments if previous agreements are not honored.”

Saying that it has “in many instances come to the aid of other distressed issuers to arrive at good faith consensual resolutions that help municipalities regain their financial footing and promote the best long term interests of all parties involved,” it argued that, “since its inception, the Oversight Board has failed to engage meaningfully with Assured Guaranty and other creditors and stakeholders, as it was mandated to do under” the Puerto Rico oversight law.

“By enacting PROMESA, Congress intended to encourage consensual settlements between creditors and Puerto Rico, including its instrumentalities, in order to restore the capital market access necessary for Puerto Rico to achieve a sustainable economic recovery. This mandate has been turned on its head by the Oversight Board,” Assured Guaranty President and CEO Dominic Frederico says in the company’s release. “Although we originally believed the PROMESA framework, however imperfect, would minimize political interference, accelerate the necessary negotiations, and curtail litigation that would impede the island’s recovery, the board members’ disregard for the rule of law has had the opposite effect, leading us to reexamine the manner in which they were appointed.”

The board’s decisions, Assured further said, “have harmed Puerto Rico’s recovery effort. The Commonwealth and HTA are in dire need of a speedy resolution of their fiscal distress, and the Oversight Board, with its failure to advance consensual settlements with Commonwealth and HTA creditors, has been co-opted by a group of high-priced attorneys, consultants and lobbyists who profit from a drawn-out process and continued litigation – all while the people of Puerto Rico suffer.”

Moreover, by “asserting a level of discretion and legal authority that PROMESA does not grant them, the unconstitutionally appointed Oversight Board members have claimed an insulation from accountability and judicial review that threatens not only Puerto Rico’s economic recovery but also the rules-based order on which our financial and legal systems depend,” Assured wrote Tuesday, adding that the actions the “unconstitutionally appointed” board “has taken since its inception are therefore void, including its approval of fiscal plans for the Commonwealth and HTA that violate PROMESA and allocate $1.5 billion for litigation and related expenses without providing for debt service.”

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