By Jess Bravin 

WASHINGTON -- The Supreme Court unanimously rejected a challenge to the federal financial rescue plan for Puerto Rico's territorial government, finding Monday that the board Congress created to resolve the island's debt crisis meets constitutional standards.

Bondholders including Aurelius Capital Management LP, a hedge-fund manager that bet on Puerto Rico's debt, sued to try to disrupt the bankruptcy proceedings begun by the board to restructure roughly $125 billion in bond and pension debt.

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 cents to 45 cents on the dollar, below their current market value.

Creditors argued Congress ignored requirements that federal officers be nominated by the president and confirmed by the Senate.

Senior officials of the federal government, including cabinet secretaries, ambassadors, agency heads and hundreds of others must in most circumstances be appointed through that mechanism.

But Congress explicitly invoked a separate power in creating the oversight board: its near-total authority over U.S. possessions that aren't states, such as the District of Columbia, the U.S. Virgin Islands and territories that subsequently attained statehood, such as Arizona and Oklahoma.

Under the 2016 legislation, President Barack Obama appointed the seven-member board from candidates proposed by congressional leaders -- four from Republicans, who then controlled both houses of Congress, and three from Democrats. The members serve three-year terms and can only be removed for cause.

At oral argument in October, lawyers debated 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, said that the board, which in some instances can overrule Puerto Rico's elected governor and legislature, is part of the territorial government structure that is specifically directed to work in the best interest of the island's residents.

But a lawyer for Aurelius, Theodore Olson, said the board's power extended to national banks and financial markets far afield from territorial questions such as local speed limits or zoning regulations. That, he argued, made it effectively a federal agency that should be subject to the same constitutional rules as other government boards that can influence the national economy.

A federal appeals court in Boston ruled last year 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 -- Obama appointees who, as a backstop, subsequently were nominated by President Trump. A confirmed board likely would be able to ratify its past actions, providing little relief to the debtholders.

Lurking behind the technical legal dispute was the broader question of Puerto Rico's political status. The island, held by the U.S. since it was given over by Spain in 1898, is home to 3.2 million U.S. citizens, a population larger than that of nearly 20 states. Yet Puerto Rico has no voting representation in Congress or, as the debt crisis underscored, control of its own laws or finances like that held by the 50 states.

But the court chose not to address those questions, focusing instead on the immediate issue before it.

Write to Jess Bravin at jess.bravin@wsj.com

(END) Dow Jones Newswires

June 01, 2020 11:12 ET (15:12 GMT)

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