(Recasts with ruling by Swain on appointment of agents)
June 28 (Reuters) - The judge in Puerto Rico's landmark bankruptcy on Wednesday shot down a proposal to appoint fiduciary agents to represent warring creditors in debt restructuring talks.
Judge Laura Taylor Swain, at a hearing in San Juan, denied the proposal by the federal board in charge of managing Puerto Rico's finances, giving credence to concerns of some creditors that the board cannot be objective in certain investor disputes.
Puerto Rico, battling more than $70 billion of debt and a decade of economic contraction, last month filed the biggest bankruptcy in U.S. municipal history.
A major clash in the case is between creditors of Puerto Rico's central government and creditors of its sales tax authority, COFINA. Together, they own about half the island's debt, and each side claims an ironclad right to repayment from Puerto Rico's sales tax revenue.
The board had proposed appointing agents to advocate for each side in settlement talks, but the plan would have given the board a hand in selecting the agents.
This riled COFINA holders who believe the board plans to side with GO creditors, and feared the COFINA agent would not be independent.
Swain, in her bench ruling, raised similar concerns, in a nod to the board's delicate position.
The board's job is to help Puerto Rico's government grow its economy and regain access to bond markets. Swain suggested a COFINA agent beholden to the board might not be able to advocate for the best possible recoveries for COFINA, if doing so could squeeze Puerto Rico's government long-term.
"Maximizing the return for COFINA might get tied up in the notion that Puerto Rico needs to be healthy in years, and is not solely a question of grabbing everything thats on the table," Swain said, instructing sides to confer on a new approach.
Separately at Wednesday's hearing, federal Judge Barbara Houser, who is leading a team of mediators in Puerto Rico's bankruptcy, set an initial meeting with the U.S. territory and its creditors for July 12 in New York.
Houser, addressing the court at the opening of the hearing, said the meeting would be introductory, not substantive, and would be mandatory for all stakeholders.
Houser said mediation could save time and money in the case. Professional fees in the massive bankruptcy are expected to reach the hundreds of millions of dollars. (Reporting by Nick Brown; Editing by Bernard Orr)