Puerto Rico Teeters On Edge Of Massive Default
CNN  — 

A board charged with reorganizing Puerto Rico’s debt in the wake of financial crisis can continue its work, the Supreme Court held unanimously Monday, rejecting a constitutional challenge that threatened the restructuring of billions of dollars of debt.

The court turned away a constitutional challenge from hedge funds and a labor organization to the makeup of the Financial Oversight and Management Board, an entity created by Congress in 2016 to help stabilize Puerto Rico by allowing the territory to seek bankruptcy protection after years of inability to pay its debt.

Hedge funds that are creditors and a Puerto Rican Labor organization claimed the board lacked authority because the appointments of the board members were not all confirmed by the Senate, which they claimed was in violation of the so-called appointments clause of the Constitution that applies to federal officers “of the United States.”

But Justice Stephen Breyer wrote in the opinion that the board’s duties were “primarily local” and that the President has the power to appoint the board members “without Senate confirmation” because they are not considered “Officers of the Unites States.”

“For that reason,” Breyer wrote, “the Appointments Clause does not dictate how the board’s members must be selected.”

Puerto Rico’s Financial Oversight Board was created by Congress in 2016 to monitor the territory’s financial health, after it declared itself unable to pay its debts in June of that year. Puerto Rico filed for the largest municipal bankruptcy in US history two years later.

“These cases had been closely watched by everyone with financial interests in Puerto Rico because of the potential implications of a ruling that the oversight board Congress created in response to the financial crisis was unconstitutionally created – and the massive uncertainty such a decision could have caused for all manner of contracts, investments, and debts,” said Steve Vladeck, CNN Supreme Court analyst and professor at the University of Texas School of Law.

“By upholding the board’s composition, the Supreme Court today has taken the air out of challenges to the board – such that its work can proceed apace,” Vladeck added.

In September, the oversight board released a plan to restructure $35 billion of Puerto Rico’s debt and more than $50 billion of pension liabilities. The plan would cut the debt by more than 60%.

Pursuant to law, the board has seven members and one non-voting member appointed by the governor of Puerto Rico. According to the law, Congress submits a list of six candidates, and the President appoints the seventh. No Senate confirmation is required.

In the nearly three years since its inception, the board has prosecuted debt restructuring proceedings representing over $100 billion dollars in claims and instituted significant fiscal and governance reforms, lawyers for the Board told the court.

A federal appeals court held in 2019 that because the work of the members was federal, the members were officers of the United States who must be Senate confirmed. The appeals court also concluded that at least some of the board’s actions could nevertheless be sustained because it was acting with apparent, if not actual, authority. The court allowed past actions of the board to stand and left it up to Congress to act.

Lawyers for the board and the Trump administration asked the Supreme Court to reverse the decision, arguing that the members didn’t need Senate confirmation under the Appointments Clause because the nature of their work was primarily local and specific to Puerto Rico. They said that Congress’ authority to pass the law rested with a different part of the Constitution aimed at the territories.