A hedge fund sued on Monday to have Puerto Rico’s bankruptcy case thrown out, arguing that the federal board guiding the island’s financial affairs was unconstitutionally established.
In a lawsuit filed in US District Court in San Juan, Puerto Rico, the hedge fund, Aurelius Capital, cited the “appointments clause” of the US Constitution, which calls for all principal officers of the federal government to be appointed by the president, and then confirmed by the Senate.
That did not happen when the seven members of the Financial Oversight and Management Board for Puerto Rico were selected, Aurelius said in its motion to dismiss the bankruptcylike proceedings.
The board members were instead “hand-picked by individual members of Congress,” it said, through “an intricate system of Balkanized lists, designed to severely constrain the president’s appointment powers.”
No Senate confirmation proceedings occurred, although senators of both parties were among the members of Congress who made recommendations last year to President Barack Obama for the board.
The oversight board was established last year, when Puerto Rico was sinking under $123 billion of public debt and pension obligations that it amassed by years of borrowing to plug deficits.
The federal bankruptcy code bans Puerto Rico from declaring bankruptcy, and by 2016, it was defaulting haphazardly on payment after payment, without any way to take shelter from the many resulting creditor lawsuits.
Congress last year enacted a law called Promesa, which gives insolvent territories a way to seek court protection from their creditors. Title III of Promesa gives Puerto Rico the power to abrogate contracts unilaterally—but it has no access to Title III without the oversight board’s authorization.
Aurelius sued just days after the governor of Puerto Rico, Ricardo Rosselló, defied the oversight board for his own reasons. He said last Friday that the board’s five-year fiscal-reform plan was excessively harsh and that he would shut down much of the government two days every month for the rest of the fiscal year to save money and streamline operations.
Aurelius Capital sued in its capacity as a holder of Puerto Rico’s general obligation bonds. When those bonds were issued, Puerto Rico’s Constitution, in effect, guaranteed