Aurelius Capital Files Lawsuit Seeking To Have Puerto Rico Bankruptcy Case Dismissed

In the United States District Court in San Juan, the hedge fund Aurelius Capital has filed a lawsuit seeking to have Puerto Rico’s bankruptcy case dismissed. Aurelius Capital is the holder of more than $470 million of Puerto Rico General Obligation bonds (“GO Bonds”). All Puerto Rico GO bonds were supposed to have been guaranteed under the Commonwealth’s constitution. Now, however, GO bonds are subject to a five-year plan that could force bondholders to take substantial reductions on what they are owed upon repayment.

Puerto Rico filed for Title III bankruptcy protection in May. Although bankruptcy protection was not originally available to Puerto Rico, under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the law was changed to allow for Puerto Rico to file a bankrupt-like procedure if it could not resolve all of its debt with bondholders.

As with other bankruptcies, the island has been granted a “stay” from creditors. Now, Aurelius wants the federal court to lift the stay, which has prevented it and other creditors from suing the Puerto Rican government.

In its complaint, the hedge fund pointed to the U.S. Constitution’s appointments clause, which mandates that the president appoint all of the federal government’s principal officers, who the Senate must then confirm. Aurelius contends that neither occurred when the members of PROMESA’s oversight board, charged with managing the island’s finances, were selected.

Instead, contends the hedge fund, specific members of Congress “handpicked” the board members and none of them were confirmed by the Senate. Now, Aurelius wants the oversight board to cease operation until it can be reestablished in a manner that honors the appointments clause.

A Puerto Rico Union Also Sues, Questioning Federal Oversight Board’s Legitimacy
Also suing to challenge the federal oversight board’s constitutionality and its authority to bring bankruptcy-court like proceedings on behalf of Puerto Rico is the Irrigation & Electrical Workers Union (UTIER). The group represents about 30% of Puerto Rico’s Electrical Power Authority (PREPA) employees.

According to Caribbean Business News, UTIER also contends that the U.S. Constitution was violated because of the way that the board’s members were appointed. The union claims that the selection process did not honor the separation of powers, which gives the US president the power to make such nominations.

PREPA, like Puerto Rico and a number of its other utilities, has filed for bankruptcy protection. Recently, a group of bondholders disclosed how much in PREPA bonds they are holding. According to, Oppenheimer Funds Inc. (OPY) holds $478.7 million of these bonds, Franklin Adviser Inc. holds $712.8 million, Marathon Asset Management holds $440.8 million, BlueMountain Capital Management LLC holds $392 million, Angelo, Gordon & Co. LP holds $321.9 million, and Knighthead Capital Management, LLC holds $235 million.

Puerto Rico Bond Fraud Cases
As general obligation bondholders, COFINA bondholders, PREPA bondholders, and other creditors fight for repayment of what they are owed, our Puerto Rico bond fraud lawyers and closed-end bond fraud attorneys represent investors who have sustained losses because they invested in the island’s municipal bonds or closed-end funds. Unfortunately, many investors were not properly apprised of the actual risks involved in these investments—risks that their portfolios were never equipped to handle to begin with, yet their broker and broker-dealer sold them the securities regardless.

If you are an investor who lost money investing in Puerto Rico bonds that were recommended to you by a broker from UBS Puerto Rico (UBS-PR), Santander Securities (SAN), Banco Popular, Oriental Securities, Morgan Stanley (MS), or another brokerage firm, contact Shepherd Smith Edwards and Kantas, LTD LLP today to find out if we can help you recover your investment losses.

Hedge Fund Sues to Have Puerto Rico’s Bankruptcy Case Thrown Out, The New York Times, August 7, 2017

Appointments Clause, Heritage.Org

Puerto Rico workers union sues fiscal board, Caribbean Business News, August 7, 2017

Bondholders Disclose $3 Billion of Puerto Rico Electricity Debt, Bloomberg, August 2, 2017

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