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.
The lawsuit contends that appointments to the Oversight Board violated the Appointments Clause of the U.S. Constitution, and asks the 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 proceeding.
“Given the Title III Court’s recent dismissal of a similar lawsuit filed by another party in the Commonwealth of Puerto Rico’s Title III case, Assured Guaranty expects to participate in the appellate phase of the various Appointments Clause lawsuits,” the company stated.
“Assured Guaranty’s decision to file this lawsuit was necessitated by the manifest constitutional defects in the Oversight Board’s appointment process and its consistent pattern of exceeding its legal authority and disregarding the creditor protections and legal requirements built into the Puerto Rico Oversight, Management and Economic Stability Act,” the bond insurer added.
For more than 30 years, Assured Guaranty has helped more than 10,000 local, state and territorial governments more affordably fund public projects such as the construction of hospitals, schools, roads and bridges.
Puerto Rico has utilized Assured Guaranty bond insurance to reduce its cost of borrowing in the municipal bond market in order to finance a wide range of projects, and the associated savings benefited Puerto Rico as soon as the bonds were issued.
At present, more than $5 billion of those insured bonds are outstanding, and Assured Guaranty has already paid more than $820 million to cover Puerto Rico’s failure to honor its commitment to pay the debt service on those bonds.
Assured Guaranty has not acquired its exposure through purchases of discounted bonds, but rather through its role as a long-term partner of the island. Assured Guaranty guarantees the full payment of the insured bonds’ principal and interest and is obligated to cover defaults for the life of the bonds. It has a long-term commitment to the health of the Puerto Rico economy.
Puerto Rico’s long-term economic sustainability depends on future investment and access to capital markets. Investors will not be willing to make those investments if previous agreements are not honored, the company noted.
Assured Guaranty has in many instances come to the aid of other distressed issuers to arrive at good faith consensual resolutions that help municipalities regain their financial footing and promote the best long term interests of all parties involved. However, 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.
“By enacting PROMESA, Congress intended to encourage consensual settlements between creditors and Puerto Rico, including its instrumentalities, in order to restore the capital market access necessary for Puerto Rico to achieve a sustainable economic recovery. This mandate has been turned on its head by the Oversight Board,” said Assured Guaranty President and CEO Dominic Frederico.
“Although we originally believed the PROMESA framework, however imperfect, would minimize political interference, accelerate the necessary negotiations, and curtail litigation that would impede the island’s recovery, the board members’ disregard for the rule of law has had the opposite effect, leading us to reexamine the manner in which they were appointed,” he said.
The Oversight Board’s decisions have harmed Puerto Rico’s recovery effort, Assured said.
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 structure, which dismantles significant constitutional safeguards designed to prevent congressional encroachment upon the Executive Branch and to ensure public accountability for the appointment process,” Assured noted in the legal claim.
“Further, in another Puerto Rico-related lawsuit, we note the U.S. Court of Federal Claims recently 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,” it added.