Courts/Litigation

Courts/Litigation

Suit Challenges Constitutionality of Oversight Board Appointments

Two bond insurance subsidiaries of Assured Guaranty Ltd. have filed an adversary complaint challenging the constitutionality of appointments to the Financial Oversight and Management Board for Puerto Rico (Oversight Board). The lawsuit contends that appointments to the Oversight Board violated the Appointments Clause of the United States Constitution, and asks the Title III Court to dismiss the Puerto Rico Highways and Transportation Authority’s Title III petition based on the Oversight Board’s lack of lawful authority to initiate such Title III proceeding. Since its inception, the Oversight Board has failed to engage meaningfully with Assured Guaranty and other creditors and stakeholders, as it was mandated to do under PROMESA.

As stated in the complaint, none of the Oversight Board members were appointed in conformity with the Appointments Clause. Rather, under PROMESA’s appointments procedures, the Oversight Board members were effectively chosen by individual members of Congress and were never confirmed by the U.S. Senate. There is no historical precedent for this unique approach, which dismantles significant constitutional safeguards designed to prevent congressional encroachment upon the Executive Branch and to ensure public accountability for the appointment process. Further, in another Puerto Rico-related lawsuit, the U.S. Court of Federal Claims found that the Oversight Board is a Federal Government entity, a conclusion squarely at odds with a key part of the Title III Court’s decision to dismiss the Appointments Clause lawsuit in the Commonwealth’s Title III case.

By asserting a level of discretion and legal authority that PROMESA does not grant them, the unconstitutionally appointed Oversight Board members have claimed an insulation from accountability and judicial review that threatens not only Puerto Rico’s economic recovery but also the rules-based order on which our financial and legal systems depend.

 


PREPA

The Importance of the First Circuit Court of Appeals’ Decision Regarding the PREPA Lift Stay Motion

On August 8, 2018, the First Circuit Court of Appeals affirmed the right of secured creditors to take action to prevent deterioration of their collateral after a debtor files for bankruptcy protection. The First Circuit overruled the Title III Court’s dismissal of a motion filed by a group of creditors of the Puerto Rico Electric Power Authority (PREPA). The creditors had sought relief from the automatic stay that prevents actions against PREPA during its Title III proceedings. Lifting the stay would allow the creditors to exercise their right to seek the appointment of a receiver in a non-Title III Court in order to protect their collateral from misuse by PREPA and to install independent and professional management of the utility. The First Circuit ruled that PROMESA does not categorically prohibit stay relief and granting stay relief does not indirectly interfere with a debtor’s property or revenues. The First Circuit ruled that, on the contrary, lifting the stay would not be interfering but merely standing aside to allow the processes of state or territorial law to operate in normal course.

The decision has allowed PREPA’s creditors to resume seeking relief from the stay and the appointment of a receiver under Commonwealth law. Since creditors first sought to install a receiver, political interference and management turmoil have only increased at PREPA. A well-qualified, experienced receiver could provide the necessary leadership to transform PREPA into a well-managed and efficient electricity provider. Additionally, the First Circuit has reaffirmed well-established secured creditor’s rights that underpin revenue bond contracts across the U.S. municipal bond market, with implications for cases involving diversions of creditors’ collateral at other Puerto Rico agencies, such as the Highways and Transportation Authority.

Click here to read the First Circuit’s August 8, 2018 decision.

Click here to read the renewed motion for stay relief filed October 4, 2018.

 


Title III

Title III of PROMESA creates a bankruptcy-like restructuring process for Puerto Rico and its instrumentalities, but requires consensual out-of-court negotiations to be conducted before Title III can be invoked. In May of 2017, Puerto Rico’s Financial Oversight and Management Board circumvented the PROMESA requirement to conduct out-of-court negotiations and sought Title III protection for the Commonwealth, COFINA, the Highways and Transportation Authority, and the Employees Retirement System. As a result, Assured Guaranty and other creditors filed litigation challenging the Oversight Board’s actions. Meanwhile, creditors have continued to repeat their invitation for consensual negotiations in lieu of litigation.