High Court Suggests Support for Puerto Rico Oversight Board

(Bloomberg) -- U.S. Supreme Court justices suggested reluctance to throw out the work of the oversight board responsible for pulling Puerto Rico out of its record bankruptcy, hearing arguments in a case that will shape the economic future of an island still recovering from a 2017 hurricane.

In an 80-minute session Tuesday, the justices appeared mostly skeptical of contentions that the seven members of the Financial Oversight and Management Board were appointed in violation of the Constitution.

Bondholders led by Aurelius Investment LLC are seeking to unravel much of the board’s work and eventually get more for their stakes than the oversight panel is offering.

The argument took place less than three weeks after the board filed its plan with a federal bankruptcy court for restructuring $35 billion in debt and other liabilities. The proposal would cut that sum, which includes $17.8 billion in commonwealth-guaranteed debt, by 65% to $12 billion. It would also address a pension system that owes current and future retirees $50 billion.

Congress created the board in 2016 as part of federal legislation aimed at solving Puerto Rico’s debt crisis. President Barack Obama selected the members, three Democrats and four Republicans, from a list provided by congressional leaders of both parties.

Aurelius says that process violated the Constitution’s appointments clause, which requires Senate confirmation for “officers of the United States.” The board and the Trump administration contend that the board members don’t qualify as “officers of the United States” because their authority covers only local matters.

‘Some of Each’

Some of the the board’s strongest support came from the court’s conservative wing.

Chief Justice John Roberts said the board’s “focus is on Puerto Rico” rather than on national affairs, though he later said “it obviously is some of each.” Justice Brett Kavanaugh repeatedly asked the bondholders’ lawyer whether his side would lose if the court concluded the board’s work was primarily local.

“I think the question is if, but for this statute, who would be doing these activities,” Justice Neil Gorsuch said. “And if it would be the governor of Puerto Rico, then doesn’t that tell us something?”

Justice Samuel Alito pressed the bondholders lawyer, Theodore Olson, on why his clients were so interested in pressing a constitutional claim.

“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?“ Alito asked. “And if so, what is it? What did the board do that hurt your client?”

Aurelius Capital Management, which oversees Aurelius Investments, held about $360 million of Puerto Rico general obligations as of March 6, according to court documents. The firm has a history of litigating to achieve better recoveries. It was among a band of holdout investors who refused to accept a plan to resolve Argentina’s debt crisis, in a battle that lasted 15 years.

Territorial Officer

Justice Sonia Sotomayor, whose parents were born in Puerto Rico, was perhaps the most skeptical of the board’s arguments. She questioned whether the board could be considered a local entity when the Puerto Rican people don’t have any say over its work.

“Let me ask you how you can label this a territorial officer as opposed to a federal officer handling federal issues, a federal mandate, when none of the people of Puerto Rico have voted in any way on any of the directives that this agent has received,” Sotomayor said to Donald Verrilli, the lawyer representing the board.

The case offers the Supreme Court a menu of possible outcomes, ranging from a full victory for the oversight board to a ruling that voids the appointments and throws out at least some of the work the board has done over the past two-plus years.

In between is an approach adopted by an federal appeals court in February. That court said the board members were unconstitutionally appointed, but it refused to apply the decision retroactively or toss out any of the five bankruptcy cases the board filed starting in May 2017.

Puerto Rico is still coping with the aftermath of Hurricane Maria, which slammed into the island in September 2017, destroying its electrical grid and killing thousands of people.

The Supreme Court has put the case on a fast track, something that was urged by both sides. That could mean a ruling by late this year or early next year.

The lead case is Financial Oversight and Management Board v. Aurelius, 18-1334.

--With assistance from Michelle Kaske.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Laurie Asséo

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