New York Times

WASHINGTON — For most observers, the main issue raised in the Supreme Court case Bank Markazi v. Deborah Peterson was whether victims of some of the bloodiest terrorist attacks of the 20th century would finally be paid reparations.

But it is another legal question at the core of the case that has set up a profound test of the balance of power between Congress and the judiciary. And the party raising the issue is even more remarkable: the central bank of the Islamic Republic of Iran.

The bank’s lawyers argued that Congress usurped the authority of the courts, under Article 3 of the Constitution, when it passed a law in 2012 declaring that $2 billion in frozen Iranian assets should be available to compensate victims of terrorism.

Lower courts have ordered that the money go to the victims of terrorism sponsored by Iran. The Iranian government did not defend itself against the accusations of sponsoring terrorism, but the bank filed suit in a bid to avoid forfeiting the money, which Congress and the Treasury Department said was brought into the United States in violation of sanctions.

“It’s rather remarkable,” said Senator John McCain, Republican of Arizona, who has sharply criticized the Obama administration’s nuclear deal that removes sanctions against Iran.

While debates about the balance of power between the executive and legislative branches are relatively common, such questions about the relative authority of the legislative and judicial branches are rare.

Some lawmakers said they could understand that Americans might be dismayed by the ability of Iran to have such access to the nation’s highest court.

“That’s the incredible part of our democracy — that since we are a country of rule of law, those who feel somehow wronged under our laws can pursue it even though, in fact in this case, they are a terrorist state,” said Senator Robert Menendez, Democrat of New Jersey, who as chairman of the Foreign Relations Committee led the push to help victims of terrorist attacks receive compensation.

“It would almost be unimaginable for the central bank of the United States or a United States entity to be able to pursue these same claims in an Iranian court of law,” Mr. Menendez added.

The potential threat to the legislative authority of Congress is so great that Republicans and Democrats have joined forces and lawyers representing the House and Senate as institutions have weighed in, urging the justices to reject Iran’s argument.

The law that Iran is challenging, the Iran Threat Reduction and Syrian Human Rights Act of 2012, included a provision specifying that Congress wanted to use the nearly $2 billion in frozen Iranian assets that had been identified in a court case in New York to compensate victims of terrorist attacks.

Many legal experts on Capitol Hill said they feared that the Supreme Court’s main interest was to protect its own power and possibly curtail the authority of the legislature. Congress and the Obama administration have long expressed their support for compensating the victims of terrorism, and numerous federal courts have found Iran responsible for sponsoring attacks and have ordered monetary awards.

Lawyers for the House and for the Senate declined to comment publicly on the pending case, but their briefs submitted to the Supreme Court make clear just how seriously they viewed the challenge posed by the Iranian bank’s argument.

“The Senate has a strong interest in defending the constitutionality” of “its authority to legislate with particularity, including in ongoing cases, as circumstances require,” Patricia M. Bryan, a lawyer in the Office of Senate Legal Counsel wrote

In a similar brief, Isaac B. Rosenberg, a lawyer for the House, said that a ruling by the court in favor of the Iranian bank “would impose grossly artificial limits on Congress’s constitutional prerogative to write laws as broadly or narrowly as the Congress deems necessary.” Mr. Rosenberg added that accepting the bank’s view “promises only to muddy the line between legislative and judicial power, and frustrate the constitutional system wrought by the framers.”

Senator Menendez said that Congress had not overstepped its bounds or sought to dictate how the courts would rule in a specific case.

“Congress has been keenly interested in locating and freezing funds of foreign terrorist states to pay victims of terrorism,” Mr. Menendez said in a telephone interview.

“This was about basically two things, Congress making available funds that were illicitly entered into the United States, and hence were frozen. And allowing those assets to compensate victims of terrorism if, in fact, those victims got a judgment in a court of law.”

Concerns about the case on Capitol Hill have been heightened because the lawyers making the principal arguments in the case have focused more on the terror victims and on the broader authority of the federal government, particularly the executive branch, to decide matters of foreign policy.

Lawyers for the victims of terrorism, for instance, have made clear that their goal has never been to tell the Supreme Court justices where to draw the line between judicial and legislative power, and simply seek a ruling that ultimately allows reparations to be paid.

The legal precedent that has long set the parameters for the balance of power between Congress and the courts is a case dating from 1871, United States v. Klein, that arose out of issues related to the Civil War. Chief Justice John G. Roberts Jr. seemed particularly interested in revisiting issues related to that precedent during the oral arguments.

When it was originally reported out of the Senate Banking Committee, the provision on frozen Iranian assets made no reference to the court case in New York.

Officials drafting the legislation were focused on addressing a longstanding challenge: how to make clear that certain assets that appeared to belong to a foreign government accused of sponsoring terrorism could be legally seized by the courts and used to pay compensation to victims of terrorism.

But as the legislation came under scrutiny, the banking industry, particularly the Depository Trust and Clearing Corporation, which plays a crucial role in processing and verifying global financial transactions, raised concern that the legislation was overly broad and could create unintended complications for global financial institutions.

The final version of the bill signed into law by President Obama in August 2012 included language referring specifically to the “assets that are identified in the subject of proceedings in the United States District Court for the Southern District of New York in Peterson et al. v. Islamic Republic of Iran et al.”

That eased the banking industry’s concerns, but it created an opening for lawyers representing Iran’s central bank, who said Congress was inappropriately meddling in the outcome of a court case.

Senator Richard Blumenthal, Democrat of Connecticut and a former state attorney general, said Congress had acted within its constitutional authority. “The Congress is not supposed to pick winners and losers individually,” Mr. Blumenthal said. “But it can choose classes of people, in this case terrorists who should pay and victims who should be compensated, and assure them justice.”

“This case has been made very complicated,” Mr. Blumenthal added. “At the end of the day, it’s really about simple, humanitarian justice.”