On July 13, 2018, the United States District Court for the District of Puerto Rico issued a decision in In re: The Financial Oversight and Management Board for Puerto Rico as representative of the Commonwealth of Puerto Rico, denying a motion to dimiss the Oversight Board's bankruptcy petition under the Puerto Rico Oversightm, Management, and Economic Stability Act (PROMESA).
Under the terms of the Act, the Financial Oversight and Management Board had filed a petition in federal court to restructure Puerto Rico's debt. Three of the creditors, Aurelius Investment, LLC, Aurelius Opportunity Fund, LLC and Lex Claims, LLC moved to dismiss the petition, arguing that the Oversight and Management Board was appointed in a manner inconsistent with the Appointments Clause of Article II, Section 2 of the U.S. Constitution. The following is an excerpt of the facts. Footnotes and citations have been removed.
In 2016, in response to the longstanding and dire fiscal emergency of theCommonwealth, Congress enacted PROMESA “pursuant to article IV, section 3 of the Constitution of the United States, which provides Congress the power to dispose of and make allneedful rules and regulations for territories.” PROMESA established, among other things, federal statutory authority pursuant to which federalterritories, including the Commonwealth, may restructure their debts.
The Oversight Board is composed of seven voting members, with the Governor or his designee serving ex officio as an additional non-voting member. PROMESA provides that the President "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 by congressional leaders. (emphasis added). PROMESA does not require Presidential nomination and Senate confirmation for the President's discretionary appointeess and members chosen from the congressional lists. However, in the event that the President appoints members that are not named on the congressiaional lists, Senate confirmation is required under PROMESA.
Aurelius argued that the Appointments Clause procedures were mandatory because members of the Board are either (i) principal "Officers of the United States" who could only be appointed with Senate confirmation; or (ii) inferior officers of the United States whose appointment was improperly delegated to the President.
The United States intervened to defend PROMESA's constitutionality. It argued that PROMESA’s appointment mechanism is not subject to the Appointments Clause because (i) the Oversight Board members are territorial officers rather than “Officers of the United States,” and (ii) the Appointments Clause does not govern the appointment of such territorial officers.
In addition, the Board argued that the Appointments Clause is not a "fundamental" constitutional provision and so does not apply of its own force to Puerto Rico, under the Territorial Incorporation Doctrine, and, in the alternative, even if were applicable, the Board members were properly appointed.
The Court avoided the tricky question of whether the Appointments Clause applies to Puerto Rico, because it determined that the members of the Board were territorial officers and not "Officers of the United States." As such, regardless of whether the Clause applied, it would not govern the appointment of Board members.
The Court relied on Congress's plenary power under Article IV, Sec. 3 of the Constitution to "make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States...." It held that despite the fact the officers are appointed by the President and are only removable by him, they are not "Officers of the United States" within the meaning of the Appointments Clause. Because territories are not inherently sovereign, like states, the federal government plays two roles in overseeing them - the more familiar federal role, and it can act as states do with regard to their own governments. The court likened territories to municipal corporations, such as counties. When acting in that role, the federal government creates officers that belong to the territory and it has the authority to determine how such officers shall be appointed.
This can be a confusing area of law, since most people are not accustomed to thinking of federal power as being divided in this way. It can also be confusing, given that the Supreme Court has held that the territory's sovereign powers flow from the federal government, such that the two are not distinguishable for Double Jeopardy purposes. Nevertheless, this distinction between territorial and federal officers is long recognized and it allowed the Court to avoid the more tricky question that would arise under the Board's theory, arising as it does from the Insular Cases.
Hat tip to Bob Loeb at Orrick for posting a copy of the decision.