Mark Brodsky’s distressed debt hedge fund Aurelius Capital Management alleged in a court filing on Monday that an element of Puerto Rico’s historic $72 billion bankruptcy case violates the U.S. Constitution and should be dismissed.
The commonwealth’s federally appointed oversight board initiated a broad swath of cost-cutting measures in May under the authority of the 2016 Puerto Rico Oversight Management and Economic Stability Act, better known as PROMESA, since Puerto Rico is barred from declaring traditional municipal bankruptcy protection via Chapter 9 of the U.S. code.
Accordingly, affiliates of Aurelius contend in the filing, the creation of the oversight board is violation of the Appointments Clause of the Constitution, since its members answer only to the U.S. president but were never officially confirmed by the Senate, thus violating the separation of powers principle.
The board is the entity that, under PROMESA, technically brought the bankruptcy filing.
Aurelius, which owns approximately $468 million in debt whose principal is essentially guaranteed by the Puerto Rico constitution, seeks to bar the board from operating until it has been properly constituted, according to a Reuters article. Although initially supported by many of the Commonwealth’s creditors, the board has sought to impose severe haircuts to bondholders while also pushing for broad austerity and cost-cutting measures for the island in general.
Brodsky, a former bankruptcy lawyer at Paul Singer’s Elliott Associates, founded New York-based Aurelius Capital Management in 2005 and has more than $4.5 billion in AUM. It rose to prominence during a long and ultimately profitable battle with Argentina over its defaulted sovereign debt.