February 26, 2020

Financial Oversight and Management Board of Puerto Rico v. Aurelius Investment, LLC

THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO

Does the Appointments Clause Govern the Appointments of Members of the Financial Oversight and Management Board for Puerto Rico?

CASE AT A GLANCE

In response to the worst financial crisis in Puerto Rican history, Congress enacted a law that, among other things, created the Financial Oversight and Management Board as an “entity within the territorial government of Puerto Rico.” Congress vested the Board with authority to file cases to reorganize Puerto Rico’s debt (actions that are similar to bankruptcy proceedings). Congress provided for the appointment of Board members by the President. The appointment process required the President to select from a slate of candidates offered by congressional leadership, or to submit nominees for Senate confirmation. President Obama appointed members from the lists offered by congressional leadership (and did not submit them for Senate confirmation). When the Board filed claims to reorganize Puerto Rico’s debt, debt-holders argued that the Board lacked authority, because its members were appointed in violation of the Appointments Clause.

Docket Nos. 18-1334, 18-1475, 18-1496, 18-1514, and 18-1521
Argument Date: October 15, 2019
From: The First Circuit
by Steven D. Schwinn
University of Illinois Chicago John Marshall Law School, Chicago, IL

INTRODUCTION

The Appointments Clause provides that officers of the United States shall be appointed by the President, with the advice and consent of the Senate. But Congress created the Board as an entity “within the territorial government of Puerto Rico,” under its Territory Clause authority to “make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” Because of the way Congress created the Board, there is a question whether Board members are officers of the United States or officers of Puerto Rico, and thus whether the Appointments Clause applies at all. If it does not, the Board and its actions are probably valid. If it does, the Board and its actions may be invalid.

ISSUE

Does the Appointments Clause apply to the appointment of members of the Puerto Rican Financial Oversight and Management Board?

FACTS

In response to the worst financial crisis in Puerto Rico’s history, Congress in June 2016 enacted the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). As part of the Act, Congress created the Financial Oversight and Management Board to oversee Puerto Rico’s finances. In particular, the Act authorizes the Board to approve financial plans and budgets for Puerto Rico; to enforce those plans and budgets; and to supervise Puerto Rico’s debts, including representing Puerto Rico in federal judicial proceedings to restructure Puerto Rico’s debts. (Puerto Rico cannot file for bankruptcy, but the Act authorizes the Board to file these cases that are modeled on bankruptcy.) The Act establishes the Board as an entity “within the territorial government” of Puerto Rico. It provides that the Board “shall terminate” when Puerto Rico balances its budget for four years and reestablishes access to credit markets.

The Board has eight members. The President appoints seven voting members, and the Governor of Puerto Rico appoints one nonvoting member. The Act authorizes the President to select one of the seven voting members in his “sole discretion.” The Act, however, establishes a special appointment process for the other six voting members. Under the Act, the President “should” select the other six from lists of candidates offered by the Speaker of the House of Representatives, the Majority Leader of the Senate, and the Minority Leaders of the House and Senate. If the President selects a candidate from one of those lists, “no Senate confirmation is required,” and the selectee takes his or her seat on the Board. But if the President selects a candidate not on those lists, the appointment requires “the advice and consent of the Senate.” Each voting member serves for three years, but remains in office after the term expires “until a successor has been appointed.”

In August 2016, President Obama appointed all seven voting members of the Board. He appointed six members from the lists provided by congressional leadership. As a result, none of the seven voting members received Senate confirmation.

Starting in May 2017, the Board commenced a series of cases on behalf of Puerto Rico to restructure Puerto Rico’s debts. Creditors filed around 165,000 proofs of claim in those cases, amounting to about $74 billion in bond debt and around $49 billion in unfunded pension liabilities.

In August 2017, a group of entities holding outstanding bonds moved to dismiss the case, arguing that the Board members violated the Appointments Clause. Other entities filed adversary complaints raising similar challenges. The United States intervened and argued in favor of the Board.

The district court denied the motion to dismiss, but the United States Court of Appeals for the First Circuit reversed. The appeals court ruled that Board members were officers of the United States, subject to the Appointments Clause, and that their appointments violated the Appointments Clause. Nevertheless, the court validated the Board’s previous acts under the de facto officer doctrine, which validates “acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person’s appointment to the office is deficient.” Ryder v. United States, 515 U.S. 177 (1995). The court stayed its ruling pending final outcome at the Supreme Court. This appeal followed.

In the meantime, President Trump nominated new members to the Board for Senate consideration. The Senate has yet to take up those nominations.

CASE ANALYSIS

This case asks the Court to contend with two constitutional provisions. The first one, the “Territory Clause,” empowers Congress “to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” U.S. Const. Art. IV, § 3, cl. 2. Congress cited this clause as its authority to enact PROMESA. The second one, the Appointments Clause, says that “[T]he President shall nominate, and by and with the Advice and Consent of the Senate, shall appoint…all other Officers of the United States…but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone….” U.S. Const. Art. II, § 2, cl. 2.

The case sits at the intersection of these two provisions because a congressional action pursuant to the Territory Clause (like PROMESA) may render the Appointments Clause inapplicable. In other words, the way Congress created the Board, pursuant to the Territory Clause and as part of the Puerto Rican government, may mean that Board members are Puerto Rican officers, and therefore not subject to the Appointments Clause. That’s the core of the dispute between the parties. (The government argues that the Appointments Clause does not apply, and that the Board members’ appointments were valid. The Union de Trabajadores de la Industria Electrica y Riego, Inc. (UTIER) and Aurelius argue separately that it does apply, and that the appointments were invalid. Because UTIER’s and Aurelius’s arguments are complementary, we combine them below.)

The government argues that the Appointments Clause does not apply to territorial governments. The government contends that the Appointments Clause language, which refers only to “Officers of the United States,” governs national offices, not territorial offices. It says that this reading is confirmed by “centuries” of law that distinguishes between officers of a sovereign and officers of a subordinate government. It also says that other provisions in the Constitution similarly distinguish between the national government and territorial governments and illustrate a “pattern [that] suggests that the phrase ‘Officers of the United States’ similarly refers to officers of the national government.”

The government argues that the Territory Clause confirms its reading. It contends that under the Territory Clause, Congress has plenary authority over the territories—as much power as a state legislature has to determine the structure of a state government. It claims that just as a state government is not bound by the Appointments Clause, neither is the federal government in organizing a territorial government.

The government argues that the overall structure and history of the Constitution further confirm its reading. It claims that the Constitution is a blueprint for the organization of the national government, not the organization of territorial governments, and that its separation-of-powers provisions, including the Appointments Clause, do not apply in the territories. It contends that this accords with longstanding historical practice: “From 1789 to the present day, Congress has used methods not contemplated by the Appointments Clause to choose territorial officers.”

Applying these principles to the Board, the government argues the Appointments Clause does not apply to Board members, because Board members are officers of Puerto Rico, not the national government. The government contends that in establishing the Board as a Puerto Rican entity, Congress complied with all three determinants that the Court established for evaluating whether an entity is local rather than national for constitutional purposes. Palmore v. United States, 411 U.S. 389 (1973). First, Congress invoked its plenary power under the Territory Clause to establish the Board. Next, Congress organized the Board as “an entity within the territorial government,” so that the national government “does not direct the Board’s operations, represent the Board in court, or control the Board’s finances.” And third, Congress vested the Board with powers over only local, not national, matters. According to the government, because the Board is a Puerto Rican entity, its members are not subject to the Appointments Clause.

Aurelius counters that the Board exercises significant federal authority, and so the Appointments Clause applies. Aurelius claims that the government mischaracterizes the Board’s authority as limited to matters involving Puerto Rico. But according to Aurelius, Congress actually vested the Board with “powers that exceed the ones exercised by territorial officials.” Aurelius points particularly to the Board’s power to commence and prosecute debt-reorganization proceedings in federal court: it claims that this is an exclusively federal power (like the power of bankruptcy, which is exclusively federal) that touches on debt obligations that extend well beyond Puerto Rico and have an “extensive impact in the interstate commerce, which only Congress is empowered to regulate.” Aurelius says that its position is limited to the Board, which exercises significant national powers, and does not mean that the Appointments Clause would apply to congressionally created “territorial officers, departments and forms of government that confine to the borders of the territories.”

Aurelius argues next that PROMESA is a substantial intrusion into Puerto Rican sovereignty and the rights of Puerto Rican citizens. It notes that neither Puerto Rican debt-holders nor Puerto Rican residents had any say in the establishment of the Board or the appointments of its members, and that PROMESA “obliterated the prerogatives of the Commonwealth’s elected officials, rendering them as mere subordinates of the Oversight Board without any authority to carry out any substantial political powers vested in them by the Constitution of the Commonwealth.” Aurelius contends that this is in tension with individual rights and federalism principles embodied in the Constitution, and that it represents a discriminatory and selective non-extension of certain structural provisions of the Constitution to the territories that recalls the widely criticized Insular Cases. (The Court held in the Insular Cases that the Constitution and its individual-rights protections do not automatically apply in U.S. territories like Puerto Rico.)

Aurelius argues next that the appointment process under PROMESA violates the Appointments Clause. It contends that PROMESA impermissibly specifies how the President may exercise the appointment authority (by requiring the President to select from a slate of candidates), and thus ties the President’s hands in violation of the Appointments Clause. In particular, Aurelius claims that Board members “are clearly Officers of the United States,” and that their nomination and appointment process under PROMESA adds requirements that are not part of the Appointments Clause. Aurelius says that Congress cannot evade the requirements of the Appointments Clause, even by acting pursuant to its Territory Clause power.

Moreover, Aurelius argues that the lower court wrongly validated the Board members’ appointments under the de facto officer doctrine. It contends that the Court in Ryder held that the de facto officer doctrine does not permit courts to validate government actions that violate the Appointments Clause “over an undefined period,” or “to legalize any future actions by unconstitutionally appointed officers.” It claims that this is exactly what happened here: the appeals court wrongly validated the appointments for past and future Board actions, even though Board members were appointed three years ago.

Finally, Aurelius argues that because Board members were invalidly appointed, the Court should categorically void all prior and current Board actions.

SIGNIFICANCE

This case is important for two key reason. First, and most importantly, the case tests the validity of a significant, perhaps singular, part of Congress’s plan to address Puerto Rico’s financial and humanitarian crisis. Since 2016, the Board has filed five restricting cases that involved more than $100 billion in claims. Most of these remain ongoing. The Board has also “negotiated intensively with the Governor and the Legislature to identify a range of structural reforms and strategic investments.” Even so, according to the Board, there is still quite a bit more to do: “tens of billions of dollars in debt still must be restructured through [court proceedings], and additional reforms are necessary for Puerto Rico to achieve sustainable solvency.” This case puts at issue the Board’s past, current, and future work to help Puerto Rico achieve fiscal solvency. Moreover, if the Court rules against the Board, it may spur debtors to file lawsuits against Puerto Rico seeking payment of the billions of dollars it owes, causing further damage to the Puerto Rican economy and people.

Second, the case touches on congressional authority over United States territories. The Board argues that the lower court’s holding that Board members are officers under the Appointments Clause would threaten the appointment of other officials elected and appointed under Puerto Rico’s constitution (because ultimately Congress authorized Puerto Rico to promulgate a constitution and establish those offices). According to the Board, that reasoning could even threaten the whole of Puerto Rico’s delegated self-governance. On the other hand, Aurelius argues that the Board substantially usurps Puerto Rican sovereignty, without the consent of, and to the significant detriment of, the Puerto Rican people. According to Aurelius, a ruling not to apply the Appointments Clause would perpetuate this form of colonialism.

Whatever happens at the Court, this case may not be the end of the Board—or at least some board. That’s because the President could appoint members only with Senate confirmation (as President Trump seeks to do), or Congress could rewrite the appointment process to comply with the Appointments Clause. Those fixes, however, would not resolve the current dispute, which deals only with the current Board, as appointed by President Obama.

Steven D. Schwinn is a professor of law at the University of Illinois Chicago John Marshall Law School and coeditor of the Constitutional Law Prof Blog. He specializes in constitutional law and human rights. He can be reached at sschwinn@jmls.edu or 312.386.2865.

PREVIEW of United States Supreme Court Cases 47, no. 1 (October 7, 2019): 29–32. © 2019 American Bar Association

ATTORNEYS FOR THE PARTIES

  • Attorney for Petitioner Puerto Rico Fiscal Agency and Financial Advisory Authority (Walter Dellinger, 202.383.5300)
  • Attorney for Petitioner Financial Oversight and Management Board for Puerto Rico (Donald B. Verrilli Jr., 202.220.1101)
  • Attorney for Respondent United States (Noel J. Francisco, Solicitor General, 202.514.2217)
  • Attorney for Respondent Official Committee of Retired Employees of the Commonwealth of Puerto Rico (Ian Heath Gershengorn, 202.639.6869)
  • Attorney for Respondent Unión de Trabajadores de la Industria Eléctrica y Riego, Inc. (“UTIER”) (Jessica Esther Mendez, 787.848.0666)
  • Attorney for Respondent Official Committee of Unsecured Creditors of All Title III Debtors (other than COFINA) (Neal David Mollen, 202.551.1738)
  • Attorney for Respondent Aurelius Investment, LLC, Aurelius Opportunities Fund, LLC, Lex Claims, LLC, Assured Guaranty Corp., and Assured Guaranty Municipal Corp. (Theodore B. Olson, 202.955.8500)
  • Attorney for Respondent COFINA Senior Bondholders’ Coalition (Kathleen Marie Sullivan, 212.849.7000)

AMICUS BRIEFS

In Support of the First Circuit’s Ruling on the Appointments Clause

  • American Civil Liberties Union Foundation and the ACLU of Puerto Rico (Adriel I. Cepeda Derieux, 212.549.2500)
  • Anthony Michael Sabino (Anthony Michael Sabino, 516.294.3199)
  • Elected Officers of the Commonwealth of Puerto Rico (Jorge Martinez-Luciano, 787.999.2972)
  • Former Federal and Local Judges (Gregory Jacob Dubinsky, 646.837.5151)
  • Former Governor of Puerto Rico Anibal Acevedo-Vila (Anibal S. Acevedo-Vila, 787.467.6700)
  • Former Governors Sila M. Calderon and Alejandro Garcia Padilla (Jose A. Hernandez-Mayoral, 787.607.4867)
  • Scholars of Constitutional Law and Legal History (David N. Rosen, 203.787.3513)
  • Virgin Islands Bar Association (John-Russell Bart Pate, 340.777.7283)

In Support of the First Circuit’s Ruling on the Appointments Clause and Challenging the De Facto Officer Ruling

  • Autonomous Municipality of San Juan (Julissa Reynoso, 212.294.4756)
  • DRA Entities (Robert Mark Loeb, 202.339.8475)
  • Washington Legal Foundation (Richard A. Samp, 202.588.0302)
  • Challenging the Appointments Clause Ruling
  • Alan Mygatt-Tauber (Alan Michael Mygatt-Tauber, 253.271.9585)
  • Challenging the De Facto Officer Ruling
  • Cato Institute (Ilya Shapiro, 202.842.0200)
  • Chamber of Commerce of the United States of America (Ruthanne Mary Deutsch, 202.868.6915)
  • Pacific Legal Foundation (Daniel Moshe Ortner, 916.419.7111)

In Support of Neither Party

  • Equally American Legal Defense and Education Fund (Steven S. Rosenthal, 202.618.5000)