High Court Rules Against Vulture Fund in Puerto Rican Debt Case

The Puerto Rican Capitol in San Juan on July 29, 2015. (AP Photo/Ricardo Arduengo, File)

WASHINGTON (CN) — A hedge fund holding nearly $500 million in distressed Puerto Rican debt lost its Supreme Court fight Monday over the creation of a board designed to rescue the territory from its financial crisis.

When the oversight board filed several bankruptcy petitions on behalf of Puerto Rico, bondholder Aurelius Capital Management, a New York hedge fund run by Republican donor Mark Brodsky, sought to invalidate those proceedings by taking aim at the board’s structure.

The seven-member board had been put in place by then-President Barack Obama, but Aurelius argues that the Appointments Clause of the U.S. Constitution required these appointments to go before the Senate for confirmation.

When the First Circuit sided with Aurelius last year, the board petitioned the Supreme Court for a reversal, emphasizing that the hedge fund’s victory was exacerbating a humanitarian crisis.

On Monday the justices were unanimous that the Senate should indeed confirm the appointment of “all officers of the United States, including those located in Puerto Rico,” but that the board here doesn’t qualify since its members possess powers and duties of a primarily local nature.

These local duties mostly involve “representing Puerto Rico in bankruptcy proceedings and supervising aspects of Puerto Rico’s fiscal and budgetary policies,” Justice Stephen Breyer wrote for the court.

“For that reason, the Appointments Clause does not dictate how the board’s members must be selected,” he added.

As for the board’s investigatory powers, Breyer noted that functions such as issuing subpoenas, taking evidence, and demanding data from governments and creditors alike “are backed by Puerto Rican, not federal, law.”

“Subpoenas are governed by Puerto Rico’s personal jurisdiction statute; false testimony is punishable under the law of Puerto Rico; the Board must seek enforcement of its subpoenas by filing in the courts of Puerto Rico,” the ruling states.

Most of the court joined the opinion in full, but Justices Sonia Sotomayor and Clarence Thomas each filed opinions concurring in the judgment.

“The board members, tasked with determining the financial fate of a self-governing territory, exist in a twilight zone of accountability, neither selected by Puerto Rico itself nor subject to the strictures of the Appointments Clause,” wrote Sotomayor, whose parents were born in Puerto Rico, making her the court’s first Latina justice. “I am skeptical that the Constitution countenances this freewheeling exercise of control over a population that the federal government has explicitly agreed to recognize as operating under a government of their own choosing, pursuant to a constitution of their own choosing.” 

Justice Thomas described Monday’s lead opinion as “amorphous.”

“The court fails to provide any explanation for what makes an officer’s duties ‘primarily local,’” he wrote. “Is it the relative importance of the duties? Or is it the number of duties exercised pursuant to each power? And what ratio is required for duties to be primarily local? The court’s opinion has no answers and does not even acknowledge the questions.”

Munger, Tolles & Olson attorney Donald Verrilli, who represented the board, did not immediately return a request for comment. The Department of Justice also did not immediately return a request for comment, nor did Theodore Olson of Gibson Dunn who represents the Aurelius.

The hedge fund’s owner Brodsky is no stranger to buying the distressed debt of poor nations for pennies on the dollar and then suing for the full amount. During a years-long dispute with the Argentinian government, then-President Cristina Fernandez de Kirchner pilloried such entities as “vultures” pecking apart at Argentina’s struggling economy.

The case was argued live before the court in October.

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