Puerto Rico’s sovereignty issues raise concerns over responsibility for debt load
Will the United States Pay to the Order of…?
BY PHILIPE SCHOENE ROURA & EVA LLORÉNS VÉLEZ
For more than a half-century, July 25 marked a momentous occasion in Puerto Rico’s history; that was the date on which the Commonwealth—el Estado Libre Asociado—was officially created in 1952, through certification by the U.S. Congress and the subsequent signing of the island’s Constitution.
With that act, the United States obtained the consent of the governed and sent a message to the world that it had rid itself of its old colony. So, too, did the metropolitan authority make certain to include language in the island’s Magna Carta that debt issued by the Commonwealth was constitutionally guaranteed.
Nearly 65 years later, Puerto Rico’s sovereignty is having layers peeled back—first, in a U.S. Supreme Court decision in the case of Sánchez Valle v. the Commonwealth, which determined Puerto Rico lacks sovereignty—thus exposing the farce of self-determination struck in 1952.
That decision by the Supremes was a precursor to affirm the island’s territorial nature, an important dictum to pave the way for U.S. Congress to push through the Puerto Rico Oversight, Management & Economic Stability Act (Promesa). Importantly, Promesa granted Puerto Rico access to bankruptcy-like proceedings through Title III to restructure its $72 billion in bond debt, while it gave a mandate to the Financial Oversight & Management Board (FOMB) to achieve structurally balanced budgets for three years running and obtain access to the municipal markets for the island. Establishing the territorial nature of the board was important—that it is only available to territories—because the last thing Congress wanted was a conga line of distressed municipalities storming Capitol Hill for a similar mechanism.
The issue of sovereignty is also extremely important because of the deep concerns held by policy wonks who deal with Puerto Rico affairs that the island’s debt might be deemed the responsibility of the sovereign United States. Puerto Rico, through Article 4 of the U.S. Constitution, is under the plenary powers of the U.S. Congress.
“Well, I would say they are as concerned today as they were during the Obama administration, and the reason I say that is that there is never a wholesale change of people at the federal level from administration to administration,” says Javier Ortiz, who is the executive director of FixPuertoRico.org, an advocacy group dedicated to educating people about Puerto Rico issues. “So, because of that, many of the same folks who were working on the issue during the Obama administration are probably some of the same folks who are working on the issue today.”
Those federal lifers, who were hard at work to provide a debt-restructuring mechanism for the island when they drafted Promesa, admit the concern over the ultimate responsibility for Puerto Rico’s debt underpins the many decisions coming down the pike.
“That is something we had been concerned about and that is why when you look at Promesa there’s a section [Title II] that says, regardless of whatever happens, the federal government will not be responsible for any claims pursuant to this action,” one House committee aide told Caribbean Business. “The United States will not be responsible for any money that comes out of this. So, yes, it was something we had great concern over as they were drafting Promesa.”
One recent case, Altair Global Credit Opportunities v. United States, which was filed in 2017, is seeking $3 billion in payments in an action for just compensation from the United States of America for the taking of its “constitutionally protected property.” The firm used the Federal Court of Claims because it is the forum tasked with primarily dealing with money claims founded upon the Constitution, federal statutes, executive regulations or contracts, express or implied in fact, with the United States. In recent years, it has heard numerous Fifth Amendment takings cases like the one claimed by Altair. Appeals from the Court of Federal Claims are taken to the U.S. Court of Appeals for the Federal Circuit and a judgment there is conclusive unless reviewed by the Supreme Court on a writ of certiorari. More importantly, decisions of the Court of Claims are “binding precedent on both its appellate and trial court successors,” so it is no wonder officials are concerned.
In Altair, the firm contended it purchased Employees Retirement Systems bonds, which were secured by collateral consisting of employer contributions from Puerto Rico government employers, including municipal employers, public corporations and the central government of Puerto Rico. The FOMB, which was conferred broad powers by Congress to dictate Puerto Rico’s finances, mandated legislation that in 2017 transferred alleged collateral to the commonwealth. Altair requested payment of their investment and all legal fees.
In a ruling issued in July 2018, Claims Court Senior Judge Susan Braden declined a U.S. petition to dismiss the case as the government had requested. She first ruled that the Federal Court of Claims had standing to see the case under the Tucker Act, which is a federal statute by which the U.S. government has waived its sovereign immunity with respect to certain lawsuits.
In the ruling—which was issued around the same period U.S. District Court Judge Laura Taylor Swain determined in another case that the Oversight Board was a territorial and not federal entity—Judge Braden ruled that the Oversight Board was a federal entity and thus the court had jurisdiction to see the case.
Federal in a territorial sense?
In making such a determination, Judge Braden noted that the Congressional Budget Office was told to treat the FOMB as a federal entity; that its members are selected by the president from a list provided by Congress; that the governor is a nonvoting member; and the board was established by a special federal law enacted by Congress to straighten out Puerto Rico’s finances.
While the costs of the board are financed by the commonwealth, Judge Braden said court precedents have said that is just consideration to be taken in determining whether an entity is federal or not. More importantly, federal control is evident, because Congress retained the right to terminate the Oversight Board, if certain conditions are met, she said.
Judge Braden noted that the court of claims had standing to preside over the Altair case because Congress authorized the Oversight Board “to design, approve and direct the Legislature to enact the resolution” that took away Altair’s property. “A claim for just compensation under the Takings Clause of the Fifth Amendment of the U.S. Constitution must be brought in the [U.S.] Court of Federal Claims in the first instance, unless Congress has withdrawn the Tucker Act grant of jurisdiction in the relevant statutes,” she said.
While Promesa, which created the Oversight Board, does not allow for the use of federal funds to pay Puerto Rico’s debt, Judge Braden said Altair was not seeking to collect a “dollar-for-dollar” payment from the United States for the commonwealth debt but merely just compensation if their Takings Clause proceeds.
Importantly the judge punctuated the decision with this: “For all of the aforesaid reasons, the court has determined the Takings Clause claim alleged in the Oct. 31, 2017 Amended Complaint is not an action against the Oversight Board; instead, it is an action against the United States.” Those words raised concern among policy lifers in the federal government who saw their concerns over responsibility for Puerto Rico’s debt coming to the fore.
In January of this year, Judge Braden was removed from the case, which was taken over by Chief Judge Margaret M. Sweeney because she found “that the transfer of this case is necessary for the efficient administration of justice.” A stay on the case was extended pending the U.S. First Circuit Court of Appeals decision on several lawsuits that challenged the constitutionality of the Oversight Board. The U.S. First Circuit Court ruled Promesa violated the appointments clause of the U.S. Constitution for the fashion in which those federal officials were named. In that regard, both parties in February said the Altair case should continue. Judge Sweeney ordered both sides to submit documents stating how the U.S. First Circuit Court ruling impacts the Altair case and the ruling issued by Judge Braden. A ruling should be issued after May, when the last of the arguments has to be submitted.
“I disagree with the Court of Claims decision and I think a lot of people agree with me, that it is not something realistic,” the House committee aide reacted. Fix Puerto Rico’s Ortiz, who was a part of President Trump’s Transition Team and often advises the White House on Puerto Rico affairs, agrees with that assessment. “I think that if I were in the governor’s shoes, or somebody who works with the governor, I would push back with that and I would say to you: ‘Well, that is just one judge’s opinion; she stayed her own opinion in her own order until other things get [re]solved,’” Ortiz said, as he segued into an argument on the importance of recent rulings in the U.S. Supreme Court.
“So, I think the case that is probably more interesting is one that has already been decided by the Supreme Court. In the Sánchez Valle case, it specifically said two things are important: That Puerto Rico doesn’t have its own sovereignty and it actually, very specifically says which entities under the U.S. Constitution have sovereignty—the federal government, the states under the 10th Amendment and the tribes. So, Puerto Rico and the other territories fall under Article IV of the U.S. Constitution. That is federal law; nobody has argued that. And we know it is federal law because it is, in fact, the territorial clause that Congress invoked to create Promesa.”
Ortiz believes a decision in the Court of Claims is a moot point as pertains to Promesa because Congress did not disagree with the Sánchez Valle case. “In fact, they used it as a basis for putting together Promesa, empowering seven people with delegated constitutional powers—with very specific tasks that go beyond just debt restructuring,” Ortiz explains.
Beyond Title III for debt restructuring, Promesa includes Title II for the drafting and compliance with fiscal plans, Title V for expediting critical projects and Title VI for consensual action to help bind holdouts in deals that meet a threshold bringing at least 70 percent of creditors on board in debt-restructuring deals.
“Restructuring government and making it smaller and all that is involved, but it also means some third-party actors—the New York investment banking crowd and the market in general—have to show up and vote with their feet and the way to do that is to buy new Puerto Rico debt,” Ortiz explained. “These are tests that have to be met for the board to cease to exist. That is a challenge of enormous magnitude that requires an incredible amount of work to accomplish. And that was before [Hurricane] Maria. After Maria, the needs that exist in Puerto Rico are even more dire.”
The recent decision by the First Circuit Court of Appeals in Boston, which affirmed that the Oversight Board was a territorial entity, declared that Oversight Board members are principally U.S. officers and should have been appointed by the president “with the advice and consent of the Senate.”
The Oversight Board has said it will appeal, contending it is as an entity within the government of Puerto Rico and not the federal government, and the U.S. Constitution’s Appointments Clause does not apply to its members.
The board also said it is seeking to put on hold the U.S. First Circuit Court of Appeals’ decision to set a 90-day period to allow Trump and the Senate to constitutionally validate the appointments or reconstitute the board.
“I see four scenarios. One, the White House can appeal and seek a stay, and a favorable outcome there would return everything to the status quo. You would have more time to see how everything plays out—that’s a decent option,” the congressional aide told Caribbean Business. “Option two; we could wait and see if the White House renominates the existing board—I think we would avoid a nomination fight there. It would be pretty streamlined, and we could do it within the 90 days. Option three, Trump nominates new people—I can see the benefit to that. I think the creditors and a lot of the stakeholders would advocate for that. However, the problem with that is every single one of those who are new are going to face a nomination fight…. That is running against the 90 days very easily. For a White House that has been very hesitant to put its fingers on Promesa, I do not really see them doing that. And then the fourth one—they don’t do anything, and they just let everything fall apart. In which case, you don’t have an Oversight Board; you have a Title III process that mandates and depends on an Oversight Board existing. So, Title III would kind of go away and Promesa would fail and so you are kind of back at an Argentina-like scenario.”
The administration of Gov. Ricardo Rosselló is spinning the First Circuit Court’s decision as a swipe against the legitimacy of the FOMB and its actions. Many people on the Hill disagree with that interpretation. “It is surprising because I read the decision and to me this is the worst-case scenario for Puerto Rico because the first circuit read into Promesa that the board…has a lot more powers than the law gives it,” the committee aide told Caribbean Business. “And so, the fact they say the board…has authority over legislation and that sort of thing, which is really not power that exists; if the governor believes this renders the board unempowered—then so be it.”
“It is untested law. So, 2016 was very active in that two cases were decided on the same constitutional grounds. Congress then decided to enact Promesa by invoking Article IV powers, and lots of cases will come over time because that is how our system of government works,” Ortiz added. “People on the losing side of whatever argument will go to court because they hope that one day their case will be decided their way. And it will ultimately go to the Supreme Court—none of that has happened [yet] under Promesa.”