Courts: U.S. Supreme Court Decision Settles Appointments Clause Issue; Leaves Unresolved Matter of Current Oversight Board Member Terms Having Expired in August 2019
Since the Oversight Board members three year-terms expired nearly a year ago in August 2019, the June 1st U.S. Supreme Court decision helps shed light on how new Oversight Board members will be appointed. The Oversight Board member appointment process established back in 2016 under PROMESA allows for the top leadership of the US House, the US Senate and the White House to each select 1-2 picks to serve on the Oversight Board. Now that the appointment issue has been settled, it will be up to Congressional leaders and the White House to decide what to do about the expired Oversight Board member terms – as the Puerto Rico bankruptcy proceedings enters its fourth year and as California utility PG&E emerges out of bankruptcy after less than 19 months.
- In testimony submitted in June to Congress, Natalie Jaresko, the Oversight Board’s Executive Director, appeared to tout the lawsuits and bond invalidations as accomplishments of the Oversight Board: “Through its Special Claims Committee, the Board objected to the validity of over $11 billion of general obligations bonds and filed several hundred complaints against entities to recover their payment related to issuance of that debt. That committee also filed complaints against over 20 banks, law firms and other parties to recover fees earned in issuance of nearly $9 billion in bonds.”
- Yet, in response to Congress’s potential consideration of amendments to PROMESA, Ms. Jaresko warned that the Oversight Board having less authority to finish the debt proceedings could render the issuance of future municipal debt in Puerto Rico and throughout the United States more expensive.
- However, an increase in borrowing costs across the U.S. could arguably be attributed, at least in part, to the Oversight Board’s failure to respect the rule of law and creditors’ rights and the resulting market concern over a repeat performance in other municipalities and by other control boards. In fact, the Oversight Board’s attempts to invalidate at billions of G.O. bonds have already led to a copycat bond invalidation lawsuit against the state of Illinois.
Below are some articles exploring these issues:
Supreme Court Upholds Federal Response to Puerto Rico Debt: The case concerned the constitutionality of appointments to a government board charged with restructuring billions of dollars of debt
(The New York Times, 6/1/20)
U.S. Reps, Puerto Rico gov’t and its fiscal board spar at congressional hearing: Gov seeks Promesa amendment to curb authority of board whose director warns that would hinder island debt’s restructuring
(Caribbean Business, 6/12/20)
Puerto Rico Gov’t Sues fiscal board for challenging 6 laws
(Caribbean Business, 6/12/20)
Jaresko: PROMESA amendments could derail debt reorganization
(The Bond Buyer, 6/12/20)
Throughout their appointments, the actions of the Puerto Rico Oversight Board members have generated controversy. In particular, the Oversight Board’s decisions to enter the Puerto Rico government into bankruptcy in May 2017 and simultaneously reject the PREPA restructuring agreement that was already in place before PROMESA became a law came as a surprise to industry observers and municipal investors and seemed to run counter to the Oversight Board’s mandate to efficiently restructure the island’s debt – these decisions also generated concerned letters from Congress. Their decisions set the stage for the next three years of costly and complicated bankruptcy proceedings, including lawsuits initiated by the Oversight Board against bondholders, vendors and other parties.
Puerto Rico Fiscal Oversight Board Sues Fuel Suppliers
Puerto Rico Seeks to Have $9 Billion in Debt Ruled Unconstitutional
(The New York Times, 5/2/19)
Puerto Rico Oversight Board sues 230 government suppliers
(The Bond Buyer, 5/1/19)
Puerto Rico Court Reduces Protections Available to Special Revenue Bondholders
(Chapman and Cutler, 2/6/18)