U.S. Court Rejects Puerto Rico Board Nominations, Keeps Bankruptcy Alive

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SAN JUAN (Reuters) – A U.S. appeals court ruled on Friday that members of Puerto Rico’s federally created supervisory board were unconstitutionally appointed, but declined to dismiss bankruptcy filings the board had filed for the American Commonwealth.

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

The United States Court of Appeals for the First Circuit has set a 90-day period for President Donald Trump and the United States Senate to constitutionally validate the nominations or reconstitute the board.

US District Court Judge Laura Taylor Swain, who is hearing the island’s bankruptcy, ruled in July that the US Congress’ creation of the supervisory board under a law known as PROMESA and the appointment council members were not violating the US Constitution.

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

The bankrupt island’s creditors, including Aurelius Investment LLC and bond insurer Assured Guaranty Corp, had filed a lawsuit, alleging a violation of the appointment clause of the US Constitution and seeking the dismissal of the bankruptcy cases of the Commonwealth Title III.

Under the 2016 federal PROMESA Act, then-President Barack Obama appointed six board members from lists of nominees recommended by Congress, along with a seventh member. Nominations were not subject to Senate confirmation.

PROMESA gave the board the power to push financially troubled Puerto Rico toward a court-supervised restructuring similar to bankruptcy.

The appeals court was suspicious of the cancellation of the actions of the supervisory board, pointing the finger at “innocent third parties” who relied on it.

“Furthermore, a summary invalidation of everything the board has done since 2016 will likely further delay a historic debt restructuring process that has already been upended once before by the devastation of the hurricanes that hit Puerto Rico in September 2017,” the ruling said.

Jose Cedeno, spokesman for the oversight board, said the appeals court’s decision was being evaluated and the board was considering legal options.

Last week, Swain approved an adjustment plan restructuring about $17 billion of Puerto Rico’s sales tax-backed debt. In November, a consensual settlement with creditors covering approximately $4 billion in debt related to the island government’s Development Bank was approved by the court.

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

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