Friday, March 24, 2023

Aurelius maintains Puerto Rico fiscal board actions are ‘null and void’

By on March 22, 2019

(Screen capture of

Public Buildings Authority creditors defend legality of their bonds

SAN JUAN – Aurelius Capital Management said it reserves its rights to challenge any actions taken by the Puerto Rico fiscal oversight board’s seven members since the First Circuit Court of Appeals’ ruling on Feb. 15  held that the statutory provision used in the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) to select the panel is unconstitutional.

The hedge fund sued in 2017 to have the island’s bankruptcy-like case thrown out, arguing that the fiscal board was unconstitutionally established.

Aurelius cited the U.S. Constitution’s appointments clause, which requires principal officers of the federal government to be appointed by the president and confirmed by the Senate. The members of the fiscal board were instead “handpicked by individual members of Congress,” the firm said, through “an intricate system of Balkanized lists, designed to severely constrain the president’s appointment powers.”

While Aurelius lost the case in U.S. District Court, the matter was reversed on appeal but only as to the legality of the board. The First Circuit court upheld the actions undertaken by the board using the so-called de facto officer doctrine. It also gave the White House 90 days for President Trump and the Senate to validate the appointments or reconstitute the board in accordance with the appointments clause.

The middle court also said that during the 90-day stay period, the board may continue to operate legally. Aurelius, however, sees it differently.

“Even assuming for present purposes that the de facto officer doctrine could validate the past actions of an unconstitutionally appointed Board, that doctrine certainly cannot preemptively validate any actions taken by the Board after the First Circuit declared it unconstitutionally structured but before that defect has been remedied,” Aurelius said.

“To our knowledge, there is literally zero authority for the proposition that the de facto officer doctrine validates actions taken in the shadow of a ruling declaring the officials to be acting beyond their constitutional authority,” the hedge fund added in a court document submitted Thursday.

While the First Circuit gave 90 days for the president to validate the current board or appoint a new one, Aurelius said it was incorrect to assert, as the board recently did, that because of this stay, the panel’s “actions, at least until May 16, 2019, are not null and void.”

PBA Funds protest

The PBA Funds, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the QTCB Noteholder Group, asked U.S. District Court Judge Laura Taylor Swain to reject efforts by the Unsecured Creditors Committee (UCC) and others to nullify Puerto Rico Public Buildings Authority (PBA) leases, contending they are disguised financing transactions.

“Plaintiffs attempt to side-step this fatal shortcoming by arguing (but failing to plausibly allege facts showing) that the PBA is a sham or ‘alter ego’ of the Commonwealth that does not really ‘own’ its property at all, because it and the Commonwealth are one and the same, under ‘common control.’

“Plaintiffs have made the same allegation in another proceeding to support the argument that the PBA Bonds are, in reality, direct obligations of the Commonwealth that should be included in the calculation of the constitutional debt limit, all in service of a quixotic effort to repudiate over $6 billion of validly-issued, constitutionally-senior debt,” the creditors said.

Further, the hedge funds and PBA Funds said that the contention that the PBA is a “sham and mere alter ego of the Commonwealth” has been rejected five times, including by the commonwealth’s Supreme Court and the U.S. First Circuit Court of Appeals.

They said the leases provide for rental payments of operating expenses, which cover PBA’s maintenance, administrative and capital expenses, as “landlord,” including salaries and benefits of PBA’s more than 1,000 employees.

Finally, the plaintiffs said the UCC–”which is not a tenant, landlord, or third-party beneficiary under the Leases”–lacks standing to pursue the complaint.

You must be logged in to post a comment Login