February 15, 2019 / 11:15 PM / 6 months ago

U.S. court faults Puerto Rico board appointments, keeps bankruptcy alive

SAN JUAN (Reuters) - A U.S. Appeals Court ruled on Friday that members of Puerto Rico’s federally created oversight board were unconstitutionally appointed but declined to dismiss the bankruptcy cases the board filed for the U.S. commonwealth.

The ruling allows the island’s 2017 federal court cases seeking to restructure about $120 billion of debt and pension obligations to continue and leaves court-approved restructuring deals in place.

The U.S. Court of Appeals for the First Circuit set a 90-day period to allow President Donald Trump and the U.S. Senate to constitutionally validate the appointments or reconstitute the board.

U.S. District Court Judge Laura Taylor Swain, who is hearing the island’s bankruptcy, ruled in July that the creation by the U.S. Congress of the oversight board under a law known as PROMESA and the appointment of the board’s members did not violate the U.S. Constitution.

The appeals court disagreed, ruling the board members are principal U.S. officers and should have been appointed by the president “with the advice and consent of the Senate.”

Creditors of the bankrupt island, including Aurelius Investment LLC and bond insurer Assured Guaranty Corp, had sued, claiming a violation of the U.S. Constitution’s Appointments Clause and seeking a dismissal of the commonwealth’s Title III bankruptcy cases.

Under the 2016 federal PROMESA law, then-President Barack Obama appointed six board members from lists of candidates recommended by Congress, as well as a seventh member. The appointments were not subject to Senate confirmation.

PROMESA gave the board authority to push fiscally struggling Puerto Rico into a court-supervised restructuring akin to bankruptcy.

The appeals court was wary about voiding the oversight board’s actions, pointing to “innocent third parties” who have relied on them.

“In addition, a summary invalidation of everything the board has done since 2016 will likely introduce further delay into a historic debt restructuring process that was already turned upside down once before by the ravage of the hurricanes that affected Puerto Rico in September 2017,” the ruling said.

Jose Cedeno, a spokesman for the oversight board, said the appeals court ruling was being evaluated and that the board was considering legal options.

Last week, Swain approved a plan of adjustment restructuring about $17 billion of Puerto Rico’s sales tax-backed debt. In November, a consensual deal with creditors over about $4 billion of debt related to the island’s Government Development Bank won court approval.

Reporting by Luis Valentin Ortiz in San Juan and Karen Pierog in Chicago; Editing by Matthew Lewis

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