UPDATE 1-U.S. Supreme Court justices skeptical about voiding Puerto Rico board appointments

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WASHINGTON (Reuters) – U.S. Supreme Court justices on Tuesday signaled reluctance to overturn appointments to Puerto Rico’s federally created financial oversight board in a dispute that could disrupt the panel’s restructuring of about $120 billion of the bankrupt U.S. territory’s debt.

FILE PHOTO: The exterior of the U.S. Supreme Court in Washington, U.S., as seen on September 16, 2019. REUTERS/Sarah Silbiger/File Photo

The justices are considering an appeal by the board after a lower court ruled that the 2016 appointments of its seven members violated the U.S. Constitution’s so-called appointments clause because they were not confirmed by the Senate.

The legal challenge to the board’s composition was brought in 2017 by Puerto Rico creditors including Aurelius Investment, LLC, a hedge fund that holds Puerto Rico bonds, and Unión de Trabajadores de la Industria Eléctrica y Riego, Inc, a labor group that represents workers at Puerto Rico’s government-owned electricity utility.

Bondholders face losses as a result of debt restructuring while the labor group has said the board’s proposed restructuring of the utility’s debt would lead to its members having worse working conditions.

Several of the nine justices appeared concerned about the potential broad ramifications of a victory for the challengers in part because of the effect it could have on other appointees in U.S. territories and the District of Columbia. Justice Brett Kavanaugh described it as a “serious concern.”

The Boston-based 1st U.S. Circuit Court of Appeals said in its February ruling that board members are federal officers who exercise the power of the federal government and therefore must be confirmed by the Senate. The board and its allies have argued that Congress can create positions in federal territories that require Senate approval or can chose not to if the officials predominantly work on local issues.

They have argued that a ruling invalidating the appointments would raise questions about the lawfulness of Congress allowing people to vote for elected officials in territories such as Puerto Rico as well as the District of Columbia.

‘EXCESSIVELY CYNICAL’

Deputy Solicitor General Jeffrey Wall, arguing for President Donald Trump’s administration, said that a ruling for the challengers would “condemn in its entirety” efforts by Congress to give territories and the District of Columbia local control.

The challengers have said that is not the case but their lawyer, Theodore Olson, faced skeptical questions on that point from the justices.

Olson also faced a stinging question from Justice Samuel Alito, who wondered if it was “excessively cynical” to ask if the creditors had a financial interest in the outcome of the case.

“There’s no money issue involved here?” Alito asked sarcastically.

The ruling ultimately is likely to hinge on whether the justices think that the board primarily has control over local issues or is exercising federal control. Several seemed to indicate that they saw the board as being more an instrument of the territorial government, which would favor those defending the current appointments.

“Its focus is on Puerto Rico,” Chief Justice John Roberts said of the board.

A ruling is due by the end of June.

In an effort to resolve the dispute, the White House on June 18 officially sent nominations for the board’s current members to the Senate, which has yet to act. Although the members’ terms ended in August, they continue to serve until they are replaced.

The Trump administration filed its own appeal to the Supreme Court and is defending the board appointments.

While the appeals court declined to void actions taken by the board, the decision created uncertainty as the panel continues its efforts to restructure Puerto Rico’s debt and pension obligations.

FILE PHOTO: People arrive to attend a meeting of the Financial Oversight and Management board for Puerto Rico, a year after Hurricane Maria devastated Puerto Rico in San Juan, Puerto Rico, September 18, 2018. Picture taken September 18, 2018. REUTERS/Carlos Barria/File Photo

In September, a long-awaited proposal to restructure Puerto Rico’s core government debt, consisting of $35 billion of bonds and claims and more than $50 billion of pension liabilities, was filed in U.S. federal court by the oversight board.

So far, the federal judge hearing Puerto Rico’s bankruptcy cases has approved restructurings of billions of dollars of debt from the island’s Government Development Bank and Sales Tax Financing Corporation, known as COFINA, while the Electric Power Authority reached a deal with creditors that could lead to its bankruptcy exit.

The U.S. Congress created the board in 2016 to address Puerto Rico’s fiscal crisis. The law stated that the board is part of Puerto Rico’s government, not a separate federal agency, and that the president can appoint members without Senate approval from a list approved by lawmakers.

Reporting by Lawrence Hurley; Editing by Will Dunham

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