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Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation

posted by Melissa Jacoby

The lives of Puerto Rico residents remain profoundly disrupted by the aftermath of Hurricane Maria measured by metrics such as electricity, clean water, and health care access, with death tolls mounting. This week, though, in a federal court hearing on January 10, 2018, Puerto Rico has the extra burden of confronting Hurricane Aurelius.

Aurelius Capital Management seeks to invalidate a key element of PROMESA, the 2016 law that, among other things, created a bankruptcy process for the Puerto Rico that has been underway since May 2017, managed by an Oversight Board that has been working through its PROMESA tasks for many months longer.  (For those looking for PROMESA, it is codified as Chapter 20 of Title 48 of the U.S. Code). Specifically, Aurelius challenges the Oversight Board selection process as violating the Appointments Clause of Article II of the U.S. Constitution. Defenders of the law's constitutionality, including the Trump Administration, say the Appointments Clause does not apply to the Oversight Board for a host of reasons.

Bipartisanism doesn’t guarantee that any law is constitutional, of course. But this dispute stings a bit more because PROMESA was perhaps the most collaborative and bipartisan pieces of legislation in the last Congress, if not the last two or three, and the Oversight Board selection process, per PROMESA's requirements, was consultative. Among bondholders and insurers, Aurelius is almost certainly not alone in wishing the restructuring was going differently and that the current Oversight Board were more in their corner. But other financial creditors may be too chastened by the ongoing devastation facing the residents of Puerto Rico from Hurricane Maria to use a major constitutional battle in the hopes of collecting a few more cents on the dollar under such circumstances. Or by the relatively thin state of Appointments Clause scholarship and that the pieces that must come together to establish an Appointment Clause violation here remain an uphill battle.* Not Aurelius. It persists in pushing for the ultimate do-over. The track record of this hedge fund, including what was recently reported in a recent federal bankruptcy court decision in Oi Brasil Holdings,** speaks for itself.  

The relief sought in the Puerto Rico Appointments Clause litigation is outright dismissal of Puerto Rico's bankruptcy (along with the automatic stay on collection) on the basis that all of the Oversight Board's acts to date are void ab initio. A new Oversight Board would have to be appointed with advice and consent (how long that would take in today's Washington D.C. is anyone's guess). Perhaps Aurelius is rolling the dice that, if it prevails, President Trump would appoint to the Oversight Board people willing to keep Puerto Rico out of bankruptcy. That won't make Puerto Rico any richer. It just allows for an Argentina-style situation in which a deep-pocketed party can press hard for a higher return to keep all for itself, whatever the consequences for everyone else.

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*Blocher and Gulati have raised concerns about the role of the Insular cases in this dispute. I don't see those cases as integral to PROMESA's constitutionality.

**As Drew Dawson pointed out in comments on an earlier Gulati post, the lengthy and detailed court decision carefully outlines Aurelius' strategy in a transnational insolvency. 

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