On Friday, February 15, the First Circuit Court of Appeals issued its ruling on Judge Laura Swain’s prior decision that had affirmed the PROMESA Board as constitutional.
In a surprise finding, the Court of Appeals overruled Judge Swain, finding that the PROMESA Board members were not appropriately appointed.
The issue in dispute is whether the members of the PROMESA Board are required to receive the consent of the U.S. Senate. In particular, under PROMESA, President Obama appointed the seven members of the PROMESA Board by using a list of board members the U.S. Congress recommended. At the time, since all stakeholders appeared to have been given a vote in the appointment process, there was little objection to the PROMESA Board members. Then, in May 2017, the PROMESA Board placed Puerto Rico in a bankruptcy-like proceeding under Title III of the Act. Prior to the enactment of PROMESA, many investors – both retail and institutional – had relied on the fact that Puerto Rico could not file for Title 9 bankruptcy as insurance against ever receiving anything less than the par value of their bonds from Puerto Rico. PROMESA, with its Title III bankruptcy-like process, changed that insurance policy for many investors.
Aurelius Investment, LLC, (“Aurelius”) a hedge fund with significant investments in Puerto Rico bonds and Assured Guaranty Corporation (“Assured”), a monoline insurer of billions in Puerto Rico debt, filed a constitutional challenge to the Board once it made the decision to file for Title III protection. Aurelius and Assured sued both the Commonwealth and the Board arguing that the members of the Board were required to receive Senate approval under the Appointments Clause of the U.S. Constitution. As a result, Aurelius and Assured argued that the Title III filing was invalid and effectively everything the Board has done over the last two years must be undone (with the obvious goal of unwinding the Title III process). Judge Swain previously ruled that the Territories Clause in the U.S. Constitution gave Congress plenary powers over unincorporated territories, such as Puerto Rico. According to Judge Swain, that meant the process required under the Appointments Clause did not have to be followed.
In overruling Judge Swain’s decision, the Court of Appeals sought to harmonize the Appointments Clause and Territories Clause. Ultimately, the Appellate Court ruled that while the Territories Clause does give Congress plenary powers and does not require that territories receive all of the same protections and benefits as U.S. States, that does not mean that substantive protections provide for in the Constitution, such as the Appointments Clause, can be ignored.
While the finding that the Board was not constitutionally appointed was the result Aurelius and Assured wanted, the remedy the Court of Appeals fastened is not what Aurelius and Assured had requested. In fact, the Court of Appeals specifically refused to invalidate the prior actions of the Board, instead saying the law supports that in such situations, the acts of the Board were done in good faith and would not be undone. As it related to the Title III bankruptcy-like path of Puerto Rico, the Court of Appeals stated very clearly we “decline to order dismissal of the Board’s Title III petitions.” In explaining that decision, the Court of Appeals was very pragmatic, finding that to give Aurelius and Assured the remedy they were seeking would undermine years of progress. “At a minimum, dismissing the Title III petitions and nullifying the Board’s years of work will cancel out any progress made towards PROMESA’s aim of helping Puerto Rico ‘achieve fiscal responsibility and access to the capital markets.’”
In addition to not undoing any of the Board’s prior work, the Court of Appeals gave a three-month reprieve on the order, saying that “our mandate in these appeals shall not issue for 90 days, so as to allow the President and the Senate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause.” Moreover, aware that the island would have to continue to move forward during that three-month window, the Court of Appeals stated that “[d]uring the 90-day stay period, the Board may continue to operate as until now.”
Ultimately, it is unclear how this new decision will change things moving forward and whether the U.S. Supreme Court will ultimately be asked to weigh in on the issue. However, Puerto Rico bonds will continue to trade and investors will be forced to price in this new information.
Shepherd, Smith, Edwards & Kantas, LLP (“SSEK Law Firm”) has been working with Puerto Rico investors both on the island and on the mainland to help them recover losses over the last five years. SSEK Law Firm has represented hundreds of investors and helped them recover tens-of-millions in losses related to Puerto Rico securities. If you invested in Puerto Rico and lost money, reach out to us for a no cost, no obligation consultation as to your options for recovery.