Puerto Rico Board Appointment Dispute Gets Supreme Court Review

(Bloomberg) -- The U.S. Supreme Court agreed to hear a case that could upend the work of the oversight board tasked with pulling Puerto Rico out of its record bankruptcy.

The justices will review a federal appeals court ruling that said the Financial Oversight and Management Board’s members were appointed in violation of the Constitution. At the same time, the appellate panel said the board’s past decisions could stay in force, and both sides in the dispute asked the Supreme Court to intervene.

Bondholders led by Aurelius Investment LLC are challenging the board’s composition and aiming to unravel much of its work. A win for Aurelius could threaten two tentative debt-restructuring deals: an accord with creditors of the island’s only electric utility, known as Prepa, and a recent agreement with a group of commonwealth bondholders.

Underscoring the urgency of the case, the high court indicated it will hear it on a faster-than-usual basis, with arguments in October. Both sides had urged expedited review.

“The cloud of uncertainty that now hangs over the board’s actions is intolerable,” the board argued in its appeal.

Along with certifying fiscal plans of the commonwealth and its agencies, the board restructured $4 billion of debt of the island’s former Government Development Bank in November and $17.6 billion of sales-tax debt in February.

On June 16, the board and creditors holding $3 billion of commonwealth bonds announced a tentative restructuring deal that would reduce nearly $18 billion of Puerto Rico debt. The board in 2017 filed bankruptcy for Puerto Rico, the island’s government-owned electric utility and other agencies.

Senate Confirmation

Congress created the board in 2016 as part of federal legislation aimed at solving Puerto Rico’s debt crisis. President Barack Obama picked three Democrats and four Republicans to serve as board members from a list provided by congressional leaders of both parties.

The appeals court said the board members should have been subject to Senate confirmation, as required under the Constitution’s appointments clause. The three-judge panel rejected contentions that a different part of the Constitution governing U.S. territories overrides the appointments clause when it comes to Puerto Rico.

But the appeals court also refused to categorically invalidate all the board’s work. The panel pointed to a legal principle known as the “de facto officer doctrine,” under which courts won’t nullify actions taken in good faith by someone whose appointment is later declared invalid.

“We fear that awarding to appellants the full extent of their requested relief will have negative consequences for the many, if not thousands, of innocent third parties who have relied on the board’s actions until now,” Judge Juan Torruella wrote for the court.

In its appeal, Aurelius and its allies said it received “no meaningful remedy.” The appeals court “granted Congress free license to pass laws that violate the appointments clause,” the bondholders argued.

Aurelius has a history of litigating debt restructurings. It was part of a group of holdout investors that rejected deals to resolve Argentina’s debt crisis in a dispute that lasted 15 years. The firm held $360 million of Puerto Rico general obligation bonds and $18.8 million of the island’s Highways and Transportation Authority debt, as of March 6, according to court documents.

Retroactive Ratification

A Supreme Court decision favoring Aurelius wouldn’t necessarily invalidate past board actions, but it would almost certainly spawn a new round of litigation. One possibility is that a newly appointed board, once confirmed by the Senate, could try to retroactively ratify the prior work.

The Trump administration joined the board in urging the Supreme Court to overturn the appointments-clause part of the ruling. The administration said the lower court’s reasoning is so broad it “necessarily implies that the government of Puerto Rico has been unconstitutional since its inception.”

The terms of the court’s current members expire Aug. 30. Earlier this month, President Donald Trump nominated the current members to complete their terms, a step aimed at minimizing the impact of the appeals court decision going forward.

The lead case is Financial Oversight Board v. Aurelius, 18-1334.

To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net;Michelle Kaske in New York at mkaske@bloomberg.net;Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Laurie Asséo, Steve Geimann

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