Puerto Rico Board appointment dispute gets Supreme Court review

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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. The appellate panel also said the board’s past decisions could stay in force. Both sides in the dispute asked the Supreme Court to intervene.

The high court indicated it will hear the case on a faster-than-usual basis, with arguments in October.

Bondholders led by Aurelius Investment LLC are challenging the board’s structure and aiming to unravel much of its work. A ruling against the board would stall oversight of the island’s finances and raise questions about which of its actions could stand.

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.

The federal appeals court said the board’s members need to be nominated by the president and confirmed by the Senate to comply with the Constitution’s appointments clause.

But the panel also said it wouldn’t throw out the Puerto Rico bankruptcy proceedings or categorically invalidate all the board’s work. It 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.

Bloomberg News
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