By Jess Bravin and Andrew Scurria
WASHINGTON -- The Supreme Court on Tuesday appeared likely to
uphold the special board that Congress created to resolve Puerto
Rico's debt crisis, despite claims from creditors that its members
were wrongly appointed.
The dispute turns on whether the oversight board supervising
Puerto Rico's finances is best considered a federal agency whose
members must be presidential nominees confirmed by the Senate, or
an entity structured by Congress under its authority to administer
the U.S. territories. So far, it has functioned as the latter.
The stakes are high, with the past three years of effort to
resolve the nation's largest municipal bankruptcy on the line.
Bondholders include Aurelius Capital Management LP, a hedge-fund
manager that bet on Puerto Rico's debt. Aurelius sued to try to
disrupt the bankruptcy proceedings begun by the board to
restructure roughly $125 billion in bond and pension debt.
On Tuesday, Justice Samuel Alito questioned what the investor
hoped to accomplish. "I'd like to know what's really going on
here," he asked Theodore Olson, a lawyer representing Aurelius.
"Are you and your client here just to defend the integrity of the
Constitution, or would one be excessively cynical to think that
something else is involved here involving money?"
Mr. Olson wouldn't identify a particular decision the board made
or a dollar figure at issue. But the board has proposed a
settlement that would pay back hundreds of millions of dollars in
general obligation bonds held by Aurelius and other creditors at 35
to 45 cents on the dollar, below their current market value.
"My client is being subjected to a process that is governed by
officials that were appointed in violation of the separation of
powers," Mr. Olson said.
Tuesday's case involved a constitutional provision that grants
Congress power over the organization of territories, similar to its
control of the District of Columbia. It has used such power to
grant home rule to Washington, D.C., and significant autonomy to
Puerto Rico and other territories that lack voting representation
in Congress.
Justice Brett Kavanaugh suggested that if the creditors'
definition of a federal officer requiring Senate confirmation was
correct, it could put territorial self-government in jeopardy.
"What would that do for home rule and the territories with
elected governors?" he said. "What would it do for the District of
Columbia with the elected mayor, city council, the judges'
appointments?"
Mr. Olson suggested that his theory would leave home rule intact
for local matters -- "speed limits, zoning and things of that
nature, as opposed to federal statutes that deal with a national
crisis," he said.
The arguments largely revolved around whether the board's
functions were akin to those of a state or local agency rather than
a federal one.
The board's lawyer, Donald Verrilli, pointed out that Congress
specifically invoked its territorial powers in creating the board,
directed it to work in Puerto Rico's interest and insulated its
members from political interference by giving them three-year terms
during which they could be removed only for cause.
On the other hand, Justice Sonia Sotomayor observed, the three
million Puerto Ricans who must live under the board's decisions had
no say in its creation.
"How you can label this a territorial officer as opposed to a
federal officer...when none of the people of Puerto Rico have
voted?" she asked.
Mr. Verrilli said the idea that the Constitution gives
territorial residents the right to a say in their government was
"not consistent with the history of this country." For years, he
said, even the mayors of Washington, D.C., were presidential
appointees rather than elected by those they governed.
Mr. Olson, though, said the board's powers are "national in
scope," including bringing lawsuits against financial institutions
located in the mainland U.S., reporting its decisions to federal
officials and recommending changes to federal law.
A federal appeals court in Boston ruled in February that the
board's members were federal officers requiring Senate
confirmation. But it also found that the structural flaw could be
remedied if the Senate voted to confirm the members -- President
Obama's appointees who, as a backstop, subsequently were nominated
by President Trump. A confirmed board could then simply ratify its
past actions.
"So what you're talking about is a delay of possibly days while
the Senate gets its act together to confirm the people that they
already recommended?" said Justice Stephen Breyer. "That's what
this case is about?"
Justice Department lawyer Jeffrey Wall said a ruling against the
board would offer creditors opportunities to delay Puerto Rico's
recovery in hopes of getting more money from the ultimate
settlement.
"We're litigating for years on that view. It's just a question
of how much we're going to have to litigate with them if the court
decides we're wrong," Mr. Wall said.
A decision in the case, Financial Oversight and Management Board
for Puerto Rico v. Aurelius Investment LLC, is expected by
June.
Write to Jess Bravin at jess.bravin@wsj.com and Andrew Scurria
at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
October 15, 2019 17:28 ET (21:28 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.