There have been two significant developments in the ongoing restructuring case for the Commonwealth of Puerto Rico. First, as was widely expected, District Judge Laura Taylor Swain entered orders on February 4 and 5, respectively, approving the Commonwealth’s entry into the Commonwealth-COFINA settlement (which we reported on here) and confirming the Title III Plan of Adjustment for COFINA. The dispute over ownership of the sales taxes pledged to pay the COFINA bonds has complicated the Commonwealth’s bankruptcy case since it was commenced in 2017. Had Judge Swain been forced to resolve the dispute it could have wiped out the COFINA bondholders entirely, or assured them a 100% recovery. But, with a settlement of this dispute in hand, and a confirmed plan of adjustment confirmed for COFINA, the Debtors were poised to pivot towards pursuing a consensual plan for the Commonwealth itself.

Just over a week later, however, on February 15, the First Circuit Court of Appeals introduced fresh new uncertainty into these cases, which was not expected. It held that the members of the Financial Oversight and Management Board created by PROMESA were appointed in contravention of the Appointments Clause of the U.S. Constitution because they were not nominated by the President and confirmed by the Senate.[1] President Obama selected the members but, under the applicable provisions of PROMESA, his selections were never put to a Senate vote. The failure to obtain “the Advice and Consent of the Senate” was fatal to these appointments in the Court’s view, notwithstanding the authority granted to Congress pursuant to the “Territorial Clause” to establish rules and regulations regarding U.S. territories.[2]

In recognition of the potentially enormous ramifications of its decision for Puerto Rico’s debt restructuring, the First Circuit took two steps to minimize its impact on “innocent third parties who have relied on the Board's actions until now.”[3] “There is no question but that in fashioning a remedy to correct the constitutional violation we have found it is unlikely that a perfect solution is available. In choosing among potential options, we ought to reduce the disruption that our decision may cause.”[4] First, relying on the “de facto officer” doctrine and the severability provisions contained within PROMESA, the Court declined to dismiss the Title III case or to invalidate any action taken by the Board to date. Id. at 53. Second, the Court delayed the effectiveness of its ruling for 90 days, “so as to allow the President and the Senate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause. . . . During the 90-day stay period, the Board may continue to operate as until now.” Id. at 54.

There does not appear to be any consensus about a way around, over or through the First Circuit’s decision. Senate approval of the existing members of the Board would offer the simplest and quickest solution, as one current member of the Board has argued.[5] But, a number of commentators have expressed skepticism that a legislative solution can be achieved in the 90 days provided by the Court’s decision. An appeal to the Supreme Court is also a possibility, but perhaps only if the First Circuit will grant a stay of its decision for longer than 90 days. For now, the case can continue, but with looming uncertainty: the First Circuit’s decision will take effect on May 16.