U.S. Justice Department defends Puerto Rico fiscal board’s constitutionality

Argues Congress has power to appoint territorial officers

SAN JUAN — The U.S. Justice Department has appealed to the U.S. Supreme Court a U.S. First Circuit Court of Appeals ruling that declared Puerto Rico’s Financial Oversight and Management Board unconstitutional because its members were not appointed confirmed by the U.S. Senate.

“The U.S. court of appeals struck down an act of Congress. If left undisturbed, the court’s ruling would have serious and potentially dire consequences for the Commonwealth of Puerto Rico; would threaten home rule for all U.S. territories; and would unduly constrain Congress’s ability to exercise its Article IV authority in the future,” the petition filed late Wednesday reads.

In a case brought by Aurelius Capital Management, a New York hedge fund, on Feb. 15 the First Circuit Court of Appeals declared the island’s fiscal oversight board unconstitutional because members were not appointed as stipulated by the Appointments Clause. However, the court validated the board’s actions in Puerto Rico’s bankruptcy-like process and gave Congress time to remedy the constitutional issues. Aurelius went to the Supreme Court to invalidate the board’s actions.

U.S. Solicitor General Noel Francisco said he was going to fight Aurelius’s request with his department’s own petition. The board was appointed by Congress in 2016 under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa), which created the process to deal with Puerto Rico’s $74 billion debt and $49 billion in pension liabilities. Promesa was enacted because federal law did not permit the island to file for bankruptcy.

Former President Obama appointed all seven voting members of the board, six of whom were chosen from lists provided by the congressional leaders. The president did not request the lists be supplemented before the appointments were made, nor did he invoke his prerogative to nominate other non-list candidates with the advice and consent of the Senate.

The board serves as Puerto Rico’s sole representative in the bankruptcy-like Title III proceedings under Promesa, and it is the only entity with the faculty to propose a debt-adjustment plan on behalf of Puerto Rico and its instrumentalities. Creditors have filed about 165,000 proofs of claim in those proceedings, according to the board.

Led by Aurelius, in August 2017, a group of hedge funds and other entities holding outstanding bonds issued by the commonwealth, collectively moved the district court to dismiss the commonwealth’s Title III proceeding, arguing that the board’s members were unconstitutionally appointed, thus lacked authority to file a Title III petition on Puerto Rico’s behalf.

The district court denied Aurelius’s motion to dismiss, saying: “Congress has plenary power under the Territories Clause to establish governmental institutions for territories that are not only distinct from federal government entities but [that] include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States.”

Affirming that “the Oversight Board is a territorial entity and its members are territorial officers,” the court determined there was “no constitutional defect in the method of appointment provided by Congress” for the board’s members.

In separate decisions, the district court dismissed two other adversary complaints: one filed by the Irrigation & Electrical Workers Union (Utier by its Spanish acronym) in the Title III proceeding initiated on behalf of the Puerto Rico Electric Power Authority; and another filed by Assured Guaranty, in the commonwealth’s Title III proceeding initiated on behalf of the Puerto Rico Highways & Transportation Authority.

Subsequently, Aurelius appealed the decision in the appeals court, which overturned the lower court.

The middle court rejected the board’s argument that Congress can assume what is otherwise a power of the president, namely, to appoint executive officers under the Territorial Clause. It said the Appointments Clause was one of strict enforcement.

“The Court’s review is warranted. The Court often grants certiorari ‘in light of the fact that a Federal Court of Appeals has held a federal statute unconstitutional,’ even in the absence of a circuit conflict,” the Justice Department said.

The court of appeals also said that board members qualify within the rubric of officers of the United States, comparing them to major federal appointments to Puerto Rico’s civil government throughout the first half of the 20th century that had been made in accordance with the Appointments Clause.

Turning to the appropriate remedy for the Appointments Clause violation, the court of appeals determined that the provisions in Promesa authorizing the appointment of the board’s members without Senate confirmation were separate from the rest of Promesa, and ordered invalidation only of those provisions.

The court then rejected Aurelius’s request to dismiss the Title III petitions in their entirety. Instead, the court determined that the board’s prior acts were subject to the de facto officer doctrine, which “confers validity upon acts performed by a person acting under the color of official title.” The court granted 90 days to fix the constitutionality problem.

On April 29, the Trump announced that, in light of the court of appeals’ decision, he intended to re-nominate the current board members for Senate consideration and reappointment to the remainder of their current terms.

In its appeal to the U.S. Supreme Court, the Justice Department said Congress has plenary powers to appoint territorial officers, who do not have to be appointed as per Appointments Clause.

The court of Appeals in Boston “has declared an act of Congress unconstitutional, and in doing so has simultaneously imperiled Puerto Rico’s recovery from the worst fiscal crisis in its history and cast substantial doubt on the constitutionality of territorial self-governance,” the Justice Department said.

“This case accordingly presents a question of exceptional importance that warrants this Court’s review. The decision below implicates fundamental issues regarding Congress’s exercise of its plenary Article IV authority. For the first time in the Nation’s history, a court has declared that territorial officials must be appointed in conformity with the Appointments Clause. That holding, which cannot be squared with this Court’s precedents, necessarily implies that the government of Puerto Rico has been unconstitutional since its inception,” the department asserted.

The court of appeals’ reasoning similarly calls into question territorial home rule, including statutes that establish popular elections in Puerto Rico, Guam and the U.S. Virgin Islands, Justice further said.

“Although the court of appeals purported to distinguish elected territorial officials on the ground that they exercise only ‘authority pursuant to the laws of the territory,’ that assertion is flatly inconsistent with this Court’s holding in Puerto Rico v. Sanchez Valle, that the authority exercised by Puerto Rico officials derives from federal law. If allowed to stand, the court of appeals’ decision would have devastating practical consequences for the ongoing economic recovery in Puerto Rico,” the department reiterated.

The court’s ruling, according to the department, calls into question “all the work done by the Board to improve Puerto Rico’s financial health since its creation; it also jeopardizes current Title III proceedings as they go forward. In an abundance of caution, the President has announced his intention to re-nominate the Board’s members to the remainder of their current terms, but the citizens and creditors of Puerto Rico can have no assurance that the political process will reach a timely resolution. Nor, given the virtual certainty that Aurelius and other debtholders will continue to challenge the Board’s legality after its members have been reappointed, will the Commonwealth be able to achieve the fresh start that Congress envisioned. Only this Court can prevent the damage done by the court of appeals’ erroneous constitutional ruling,” the Justice Department argued.