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)
Copyright (c) 2020 Dow Jones & Company, Inc.