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Judge says Puerto Rico fiscal board is territorial entity and not subject to Appointments Clause

By on July 13, 2018

SAN JUAN – U.S. District Judge Laura Taylor Swain dismissed Friday Aurelius Investment’s lawsuit seeking to have the Puerto Rico Title III bankruptcy case thrown out, arguing that the island’s financial oversight board members were not properly appointed.

Aurelius had argued that board members were not appointed as per the Appointments Clause of the Constitution, which calls for the president to appoint federal officers with the advice and consent of the Senate.

Judge Swain, in essence, concluded that the board members are not federal officers but territorial officers appointed by Congress by virtue of the Territorial Clause and, as such, their appointments did not need to meet the requirements of the Appointment Clause.

The case is not only a blow to Aurelius but to other plaintiffs such as the Puerto Rico power company’s principal worker group, the Irrigation & Electrical Workers Union (Utier by its Spanish acronym), which have questioned the board’s legitimacy.

The fiscal board is composed of seven voting members, with Puerto Rico’s governor or his designee serving ex officio as an additional non-voting member. The Puerto Rico Oversight, Management and Economic Stability Act (Promesa) provides that the President of the United States “shall appoint” the seven voting members as follows: one “may be selected in the President’s sole discretion” and six “should be selected” from specific lists of candidates provided by congressional leaders.

Promesa does not require presidential nomination or Senate confirmation, the latter having been clarified. However, in the event that the president appoints members that are not named on the congressional lists, Senate confirmation is required under Promesa.

The Appointments Clause of Article II of the Constitution distinguishes between “principal officers,” who must be nominated by the U.S. president with advice and consent of the Senate, and “inferior officers,” who may be appointed by the “President alone, Courts of Law, or department heads.”

Aurelius argued that the Appointments Clause procedures were mandatory, notwithstanding Promesa’s statutory appointment provisions because the members of the board are either principal “Officers of the United States” who could only be validly appointed through presidential nomination and Senate confirmation or, in the alternative, inferior officers whose appointment was improperly delegated to the president.

Late Thursday, the United States defended Promesa’s constitutionality, arguing that Promesa’s appointment mechanism is not subject to the Appointments Clause because the members of the board established pursuant to the law are territorial officers rather than “Officers of the United States,” and the Appointments Clause does not govern the appointment of such territorial officers.

Judge Swain agreed with the U.S.’s motion. She said the main question presented was whether the Constitution required compliance with the Appointments Clause in the appointment of the board members and, if not, whether Promesa’s method for appointing members was sufficient to meet the constitutional requirement.

After providing a historical background of the Territorial Clause, which was the authority used by Congress to enact Promesa, she concluded that Congress has plenary power under the clause to establish governmental institutions for territories that are not only distinct from federal government entities, but also include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States.

The United States “has exercised this power with respect to Puerto Rico over the course of nearly 120 years, including the delegation to the people of Puerto Rico elements of its plenary Article IV authority by authorizing a significant degree of local self governance. Such territorial delegations and structures may, however, be modified by Congress,” she said.

Because Congress used its plenary powers under the Territorial Clause to enact Promesa, she added, “the method of selection that Congress fashioned for the membership of the Oversight Board is consistent with the exercise of plenary congressional power under that Clause, and that neither Presidential nomination nor Senate confirmation of the appointees to the Oversight Board is necessary as a constitutional matter to legitimize the exercise of the Oversight Board’s powers under Promesa…. Congress is entitled to substantial deference when it acts pursuant to its plenary Article IV power,” she said.

The judge dismissed Aurelius’s argument that individuals appointed to their office by the federal government are federal officers, whether or not the office has federal or national responsibilities.

She said Congress can create entities that are not considered federal.

“Under the premise advanced by Aurelius, Congress is incapable of both creating and filling a territorial office or entity. Rather, the only officers who may be considered ‘territorial’ are those who are popularly elected by the residents of a federal territory,” Judge Swain further said. “Popular elective authority in territories of the United States derives from Congress, which explicitly states in Promesa that it has exercised its own power to create a territorial entity.”

The jurisprudence, historical practice and Congress’ express intention establish that it can and has created a territorial entity in this case, she said.

Judge Swain’s opinion seemingly puts a lawsuit filed by Puerto Rican Gov. Ricardo Rosselló in jeopardy. He seeks to prevent the board from imposing its own budget.

Puerto Rico fiscal board seeks dismissal of gov’s lawsuit

She said Promesa created the fiscal panel as “an entity within the territorial government” of Puerto Rico, which funds the board, which in turn is tasked with developing “a method for Puerto Rico to achieve fiscal responsibility and access to the capital markets.”

“In aid of that purpose, Promesa empowers the Oversight Board to, among other things, approve the fiscal plans and budgets of the Commonwealth and its instrumentalities, override Commonwealth executive and legislative actions that are inconsistent with approved fiscal plans and budgets, and commence a bankruptcy-type proceeding in federal court on behalf of the Commonwealth or its instrumentalities,” she said.

The board took note of the ruling in a statement issued late Friday:
“We welcome Judge Swain’s thorough and well-reasoned opinion holding that Congress was not constrained by the Appointments Clause when creating the Oversight Board and therefore the appointments of the Oversight Board are constitutional.

“As stated in Judge Swain’s opinion, Promesa empowers the Oversight Board to ‘approve the fiscal plans and budgets of the Commonwealth and its instrumentalities’ and ‘override Commonwealth executive and legislative actions that are inconsistent with approved fiscal plans and budgets’.”


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