On Monday, August 7, 2017, the Aurelius Capital Management hedge fund, as a $468 million holder of Puerto Rico’s general obligation bonds, filed a lawsuit in the United States District Court in San Juan arguing that the federal Oversight Board, created by the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), was unconstitutionally established.

Claims of Dismissal Lawsuit

The lawsuit cited the “Appointments Clause” of the United States Constitution, which calls for all principal officers of the federal government to be appointed by the President and confirmed by the U.S. Senate. The lawsuit claims this did not happen when the seven members of the Oversight Board were selected. Instead, the members were “handpicked by individual members of Congress” through “an intricate system of Balkanized lists, designed to severely constrain the President’s appointment powers.”

The lawsuit claims that no official Senate confirmation proceedings occurred. However, senators of both parties were among the members of Congress who made recommendations.

Aurelius also asked the District Court in San Juan to lift the “stay” of PROMESA which currently keeps Puerto Rico’s creditors from suing the government. Aurelius said it wanted to seek declaratory and injunctive relief to keep the Oversight Board from operating until it could be reconstituted in compliance with the Appointments Clause.1

Puerto Rico Electric Power Authority

Regarding Puerto Rico Electric Power Authority (PREPA), a local electric-utility labor union also filed on August 7 similar objections to those of Aurelius in the hopes of undoing the Oversight Board’s decision to place PREPA under court bankruptcy protections.

As previously reported, in June 2017 Assured Guaranty, Ltd, a bond insurer, called for presidential intervention in its dispute with the Oversight Board saying the Board went too far when it approved bankruptcy protections for PREPA. Assured Guaranty said in a statement that either President Donald Trump or the U.S. Congress must act to “restore the rule of law,” claiming the Oversight Board exceeded its authority by rejecting the pre-existing $9 billion restructuring deal.2

Puerto Rico Employment Retirement System

A group of hedge funds has filed a lawsuit against the federal government in the United States Court of Federal Claims. The group consists of Puerto Rico holders of bonds issued in 2008 to help the island’s Puerto Rico Employment Retirement System (ERS) stay afloat. Unfortunately, beginning in 2013, the ERS investments faltered leading the pension system toward bankruptcy.

The complaint comes after the Oversight Board placed the island’s biggest public retirement fund under bankruptcy protection to help restructure $3 billion in pension obligation bonds.

The ERS’s bonds can be paid for by pension contributions that public employers make toward the retirements of their employees. The hedge fund plaintiffs thought that these payments would go to them first. However, in June, the Oversight Board approved legislation to transfer the employer contributions beyond the pension system and away from these creditors. Now, the hedge funds want a court order determining that the move was illegal. They are seeking $3.1 billion in principal plus interest on the ERS bonds.

Judge Laura Taylor Swain will address each side’s final arguments on these issues at a hearing on October 31.

Other Puerto Rico Bondholders Continue to Fight for Repayment

In early July in Puerto Rico Judge Swain approved an agreement between a group of ERS bondholders and the Commonwealth’s government. Under the deal, the island agreed to put aside more than $90 million over the next 3 ½ months and pay about $14 million a month in interest payments through October, as well as fulfill a debt payment that was due on July 1 of this year.

As previously reported, holders of Puerto Rico general obligation bonds are still trying to get paid before the owners of other Puerto Rico debt. They are adamant that their securities are guaranteed by the Commonwealth’s constitution. They want the island’s sales tax revenue to go toward paying back the general obligation bonds instead of holders of other Puerto Rico debt, including those holding specific sales tax bonds, commonly called Cofina bonds, that were contractually guaranteed to be paid first.3

Millennials Help Lift Puerto Rico

As the tide of Puerto Ricans leaving the island continues unabated, including many professionals, like doctors, engineers and teachers, a small but critical wave of educated millennials are choosing to return home or stay put on the island. They are opening restaurants and bars, fueling start-ups and small businesses or jump-starting moribund sectors, like agriculture. They are motivated both by an urge to help lift Puerto Rico out of the quagmire, but also by a profound attachment to the island – its beaches and countryside, its friendliness, its intimacy and the tug of family.

Since 2004, more than 400,000 people have left Puerto Rico, the population of which is now 3.4 million.

As the island enters its 11th year of recession, though, the crisis is slowly giving way to new opportunities that are elbowing aside more conventional ways of thinking. Puerto Rico’s governor, Ricardo Rossello announced in May that the government had certified 260 new companies that would be creating around 1,000 jobs in large part through a program of tax incentives aimed at helping entrepreneurs. They are mostly small operations, and more than 75 percent are run by people under the age of 35.

The mind-set that anything that came from outside the island was better is slowly changing.4


  1. Walsh, Mary Williams, “Hedge Fund Sues to Have Puerto Rico’s Bankruptcy Case Thrown Out,” The New York Times, August 7, 2017. Hals, Tom, Nick Brown and Daniel Bases, “Aurelius Hedge Fund Seeks to Toss Puerto Rico’s Bankruptcy Filing,” www.reuters.com, August 7, 2017.
  1. Scurria, Andrew, “Aurelius Capital Challenges Puerto Rico Oversight Board Structure,” The Wall Street Journal, August 7, 2017. Peluso, Romano I., “Puerto Rico Electric Power Authority Defaults,” Perkins Coie LLP, corporatetrustinsider.com, July 17, 2017.
  1. Shepherd Smith Edwards & Kantas LTD LLP, “Hedge Funds Sue The U. S. Government Over Puerto Rico Bonds,” July 20, 2017. Ortiz, Luis J. Valentin, “Court green lights deal between Puerto Rico gov’t Retirement System bondholders, Caribbean Business, July 17, 2017.
  1. Alvarez, Lizette, “Staying or Returning Home, Millennials Help Lift Puerto Rico,” The New York Times, August 6, 2017.