Puerto Rico Title III bankruptcy Judge Laura Taylor Swain shot down a bid by bondholder groups to overthrow the legislation that enabled the territory’s municipal debt restructuring.

Hedge funds Aurelius Investment, Aurelius Opportunities Fund, and Lex Claims filed suit in August 2017 against the Puerto Rico Oversight, Management, and Economic Stability Act and the Title III bankruptcy, saying they were contrary to the U.S. Constitutions appointments clause. The Ad Hoc Group of General Obligation filed a submission in the adversary complaint in the Title III case in support of Aurelius’ position.

Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday.
Judge Laura Taylor Swain said that the appointment of the Oversight Board members didn't breach the U.S. Constitutions appointments clause. U.S. Courts

In a decision released Friday afternoon, Swain denied Aurelius’ motion to dismiss the Title III bankruptcy case. “Affording substantial deference to Congress and for the foregoing reasons, the court finds that the Oversight Board is an instrumentality of the territory of Puerto Rico, established pursuant to Congress’s plenary powers under Article IV of the constitution, that its members are not ‘officers of the United States’ who must be appointed pursuant to the mechanism established for such officers by Article II of the Constitution, and that there is accordingly no constitutional defect in the method of appointment provided by Congress for members of the Oversight Board. … Aurelius’ motion to dismiss the petition is denied.”

Earlier in Swain’s order she said, “The court agrees with the Oversight Board that neither the case law nor the historical practice cited by Aurelius compels a finding that federal appointment necessarily renders and appointee a federal officer.”

“The fact that members of the Oversight Board may not be removed by the governor or the legislature and are, instead, only removable by the president ‘for cause’ is indicative of the autonomy and independence that Congress intended for the Oversight Board rather than of control by the federal government,” Swain said.

On Friday afternoon the oversight board released a statement in support of Swain’s decision. In a possible effort by the board to indicate that Swain may uphold the board against Puerto Rico’s governor suit filed on July 5, the board said, “As stated in Judge Swain’s opinion, PROMESA empowers the Oversight Board to ‘approve the fiscal plans and budgets of the Commonwealth and its instrumentalities’ and ‘override Commonwealth executive and legislative actions that are inconsistent with approved fiscal plans and budgets.' "

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