Hedge Fund Can’t Derail Puerto Rico Oversight Board

MANHATTAN (CN) – A federal judge overseeing Puerto Rico’s bankruptcy rejected a hedge fund’s challenge to the constitutionality of the oversight board tasked with restructuring $120 billion in debt and pension liabilities.

“In summary, Congress has plenary power under the Territories Clause to establish governmental institutions for territories that are not only distinct from federal government entities but include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States,” U.S. District Judge Laura Taylor Swain wrote in a 35-page opinion issued Friday.

The New York-based hedge fund Aurelius Capital Management, run by Republican donor Mark Brodsky, lists nearly $500 million in Puerto Rican bonds and led the charge against the oversight board’s legitimacy. Brodsky’s fund also spent years in court with the Argentinian government, whose then-President Cristina Fernandez de Kirchner pilloried entities like Aurelius as “vultures” pecking apart at their struggling economy.

At the heart of the hedge fund’s latest challenge is the Financial Oversight & Management Board established by Congress two years ago through the passage of the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, a law design to rescue Puerto Rico from its debt crisis.

“The principal question thus presented for the court on this motion practice is whether the Constitution required compliance with the Appointments Clause in the appointment of the oversight board members,” the opinion states.

Swain, a New York-based federal judge tapped by Supreme Court Chief Justice John Roberts to steward the debt restructuring, found that this clause did not apply to the territory.

“Having examined the factors argued by the parties, the court finds that Congress’s invocation of the Territories Clause is consistent with the entity it purported to create, that the method of selection that Congress fashioned for the membership of the oversight board is consistent with the exercise of plenary congressional power under that Clause, and that neither presidential nomination nor Senate confirmation of the appointees to the oversight board is necessary as a constitutional matter to legitimize the exercise of the oversight board’s powers under PROMESA because the members of the oversight board are not ‘officers of the United States’ subject to the Appointments Clause,” she wrote.

The Financial Oversight and Management Board for Puerto Rico applauded the ruling.

“We welcome Judge Swain’s thorough and well-reasoned opinion holding that Congress was not constrained by the Appointments Clause when creating the Oversight Board and therefore the appointments of the Oversight Board are constitutional,” the board said in an unsigned statement.

“The Oversight Board is committed to continuing this important work in order to achieve PROMESA’s mandate of restoring fiscal responsibility and market access to Puerto Rico,” the board added later.

The hedge fund’s attorney Ted Olson, from the firm Gibson Dunn & Crutcher, did not immediately respond Friday to an email request for comment.

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