Monday, October 22, 2018

Judge Swain to consider whether Puerto Rico fiscal board was constitutionally appointed

By on January 10, 2018

SAN JUAN – U.S. District Court Judge Laura Taylor Swain took under advisement Wednesday, and is expected to rule in coming weeks, whether members of the Financial Oversight and Management board for Puerto Rico were constitutionally appointed.

Aurelius Capital Management, which reportedly holds nearly half a billion dollars in Puerto Rico debt, and the Irrigation & Electrical Workers Union (Utier by its Spanish acronym), which represents power utility workers on the island, are seeking to have Puerto Rico’s bankruptcy case thrown out, arguing the U.S. Senate did not confirm the board’s members.

Their claim is that Congress is not exempt from the Constitution’s appointments clause and other structural protections when it legislates with respect to the U.S. territories.

The clause states that federal government officials must be appointed by the president and then confirmed by the Senate. The seven members of the board were not confirmed by the Senate. Former President Barack Obama chose the members from lists of candidates selected by congressional leaders.

In announcing that she would take the issue under advisement, Judge Swain said it was “an extraordinarily long and extraordinarily important” hearing.

At issue is whether board members are federal officials who should have been confirmed by the Senate or territorial officials exempt from the confirmation process set by the appointment clause.

The suit is important because what Aurelius and Utier posit is virtually a constitutional challenge to the Promesa federal law, which was enacted in 2016 to create a bankruptcy-like process for the island to deal with its $69 billion debt.

At the hearing, however, Aurelius lawyers said that if they are correct in that the board is unconstitutional, it would not invalidate Promesa in its entirety nor deprive Puerto Rico of the law’s Title III bankruptcy-like protections.

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Lawyers said the outcome would only result in that the president nominate and the Senate confirm a new board consistent with the appointments clause. While that proceeds, they said the court could file a stay pending appeal and that the Appeals Court could, in turn, stay its mandate pending reformation of the board.

In arguing that the fiscal board members are federal officials, Aurelius lawyer Theodore Olson, a solicitor general under George W. Bush, noted the board’s authority is exercised by virtue of Promesa and that its members exercise “significant authority” because it extends “beyond local matters,” for they decide not only on matters related to money owed to local residents, but also to millions abroad.

He argued that whenever the board has to make decisions, it refers to Promesa and not to local laws.

“What Congress intended here was to create a federal board of federal officials to oversee the financial affairs of Puerto Rico,” he said. “They were not interested in allowing local officials to handle financial matters.”

Fiscal board attorneys and a lawyer from the U.S. Justice Department, however, said the problem with Aurelius’s argument is that if it were true, then all commonwealth elected officials and the governor would have to be appointed by the president and confirmed by the Senate because their authority derives from a congressional law.

If that were the case, then “Puerto Rico has bigger problems because its government is also unconstitutional,” noted Thomas Ward, a U.S. Justice Department lawyer.

Judge Swain asked Olson that if board members were federal officers, then why did Congress state in Promesa that the board was a territorial entity. Olson replied that the label did not make the board a territorial entity because it was created by federal law to enforce a federal statute. He cited a court ruling in the case of a panel created by Congress to oversee Washington airports, which the courts ruled was a federal entity.

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In response to a question from Judge Swain, Olson said the appointments clause would still require Senate confirmation of the board members even if Congress had said the president’s selection of the members had to be ratified by voters in Puerto Rico.

Judge Swain then asked Olson, “What changed” in 1947 when Congress enacted a law that allowed Puerto Ricans to elect a governor for the first time. Olson replied that Congress delegated its authority to local officials, which exercised it by virtue of local laws. He noted that officials elected by the people of a territory are not federal officials because they are elected by the people.

He said the “source of the authority” is what determines whether an official is a federal or a territorial officer. “[Congress] may have called it a territorial board but it intended to create a federal board,” he said, referring to Promesa’s language.

Utier lawyer Rolando Emanuelli, meanwhile, argued that the board was not a territorial entity because it has the power to adjust debt obligations for all bondholders, including those stateside. “Adjustment of debt is an exclusive federal power,” he said, adding that the federal government has exclusive jurisdiction over bankruptcy laws.

Lawyers who opposed Aurelius’s petition to declare the board unconstitutional noted that the Supreme Court, in the Sanchez Valle case said Congress has broad latitude to develop innovative approaches to territorial governance.

Board counsel Donald Verrilli Jr., also a former solicitor general under President Obama, argued that its members are territorial officers serving in the commonwealth and not the federal government. He said their expenses are paid for by the local government. “Promesa applies only to Puerto Rico,” he added.

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