By Jess Bravin and Andrew Scurria 

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

The court, in an opinion by Justice Stephen Breyer, rejected that claim, ruling that Congress had broad power to structure the government of U.S. territories that aren't states, a status also held by the District of Columbia, the U.S. Virgin Islands, Guam, the Northern Mariana Islands and American Samoa.

The opinion drew a distinction between local and national officials, finding that the oversight board properly was classified as an agency local to Puerto Rico and therefore exempt from the requirement that senior national officials be Senate-confirmed presidential nominees.

Lurking behind the decision -- and made explicit in a concurring opinion by Justice Sonia Sotomayor -- was the broader question of Puerto Rico's political status. With more than 3 million residents, it dwarfs the other U.S. territories in population, and its organized government predates the English settlements at Jamestown and Plymouth Rock by more than a century.

The immediate stakes of the question before the court were enormous, as Justice Breyer noted: "In 2006, tax advantages that had previously led major businesses to invest in Puerto Rico expired. Many industries left the island. Emigration increased. And the public debt of Puerto Rico's government and its instrumentalities soared, rising from $39.2 billion in 2005 to $71 billion in 2016," he wrote. "Puerto Rico found that it could not service that debt. Yet Puerto Rico could not easily restructure it."

That is because Congress excluded Puerto Rico from chapter 9 of the bankruptcy code, which sets out a process for local governments to restructure their debt. When the financial crisis exploded, Congress instead invoked its complete power over the territory to set up the Financial Oversight and Management Board for Puerto Rico.

The board was empowered to file for bankruptcy and modify the territory's laws to accomplish its mission. The law required the president to select six members from lists submitted by Congress and appoint a seventh of his choosing. Puerto Rico's elected governor is a nonvoting member.

The board welcomed the decision. The "appointment process has established a bipartisan Oversight Board, ensuring balanced decisions to help Puerto Rico recover and prosper," it said in a statement, helping "Puerto Rico recover from an unsustainable debt burden and decades of fiscal mismanagement."

The board has been piloting Puerto Rico's court-supervised bankruptcy and in 2018 pushed through a forced restructuring of $18 billion in sales-tax bonds. But it has stalled in efforts to push labor, business and tax reforms and to restructure other swaths of the territory's vast bond and pension liabilities. Elected leaders in Puerto Rico have resisted unpopular austerity measures and refused to green light a planned increase in electricity rates.

The coronavirus pandemic also has derailed the board's strategy. Last week it went back on its commitments to government bondholders, saying its proposal for writing down $35 billion in public bonds and other claims was no longer workable. The decision reflected the economic damage from Covid-19-related business and travel restrictions, as well as political leaders' refusal to implement the board's suggested reforms.

Aurelius Capital had no comment.

The creditors argued that the vast impact of Puerto Rico's bankruptcy was a matter of national consequence and that therefore the board members should be considered federal officials subject to Senate confirmation. A federal appeals court in Boston, which oversees appeals from Puerto Rico, agreed, but held that the board's actions could be ratified if the Senate subsequently confirmed the members.

Justice Breyer wrote that while it was possible for Congress to appoint national officials who are based in Puerto Rico, the oversight board properly was established as part of the territorial government. For one, Congress said it was invoking its territorial powers in establishing the board, he wrote, and placed the board's functions, including subpoena power, under Puerto Rico rather than federal law.

"It acts not on behalf of the United States, but on behalf of, and in the interests of, Puerto Rico," Justice Breyer wrote, joined by Chief Justice John Roberts and Justices Ruth Bader Ginsburg, Samuel Alito, Elena Kagan, Neil Gorsuch and Brett Kavanaugh.

Justice Sotomayor's 24-page concurrence recounted Puerto Rico's political history since Spain ceded it to the U.S. in the 1898 Treaty of Paris. She argued that both federal law and international obligations suggested that Puerto Rico should have authority to select the oversight board, rather than Washington.

In the 1950s, she observed, the U.S. and Puerto Rico entered into a compact establishing self-government for the island. The Constitution's territorial clause, she suggested, had been designed to allow Congress to administer new territories as they were organized and prepared for statehood, not to empower perpetual rule from Washington.

Justice Clarence Thomas also agreed with the result, but filed a concurring opinion saying that all officials chosen to administer a territory should be exempt from Senate confirmation.

Write to Jess Bravin at jess.bravin@wsj.com and Andrew Scurria at Andrew.Scurria@wsj.com

 

(END) Dow Jones Newswires

June 01, 2020 18:05 ET (22:05 GMT)

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