PROMESA Amicus

Last week, I filed an amicus brief in the PROMESA case that the Supreme Court will be hearing on October 12. A summary of the brief’s arguments follows:

Taken to its logical conclusion, the First Circuit’s holding below would imperil self-rule in unincorporated territories. While the court tries to cabin its holding to members of the Financial Oversight and Management Board for Puerto Rico, the court’s logic sweeps far more broadly and would encompass many territorial officials, including those currently subject to popular election.

The First Circuit held that the members of the Oversight Board are “Officers of the United States” subject to the Appointments Clause of Article II, Section 2 of the U.S. Constitution. That status, the Court determined, stems from the fact that the members of the Oversight Board held continuing offices and exercised “significant authority” pursuant to the laws of the United States. Aurelius Investment, LLC, et al. v. Commonwealth of Puerto Rico, et al., 915 F.3d 838 at 856-57 (1st Cir. 2019). In making that determination, however, the Court failed to distinguish between members of the Oversight Board and many other territorial office-holders whose selection or appointment does not comport with the requirements of the Appointments Clause. This omission places territorial self-governance in doubt.

Even if one can distinguish between members of the Oversight Board and other members of the Puerto Rican government because of the island’s Commonwealth status, the First Circuit’s test also implicates the home rule of Guam and the United States Virgin Islands, which cannot claim the protection of that status for themselves. In light of these implications, the Court should carefully consider the results of the First Circuit’s reasoning so as not to strip U.S. territories of their longstanding self-governance.

The full brief can be found here.

Court grants cert in PROMESA case

I’m a bit late to this, but during its last week of the term, the Supreme Court granted cert in five petitions seeking to review the First Circuit’s decision striking down PROMESA, the Puerto Rico Oversight, Management, and Economic Stability Act. The First Circuit held that the members of the Oversight Board created by the Act were “Officers of the United States” and that the scheme for appointing said officers violated the Appointments Clause of Article II. Specifically, it held that they were principle officers, subject to appointment by the President and confirmation by the Senate.

This decision appears to fly in the face of the text of the statute. First, Congress notes that it is exercisign its power under Article IV, Sec. 3, to make needful rules for the territories of the United States. Second, Section 101(b) expressly declares that the Oversight Board is created as an entity within the territorial government and shall not be considered to be a federal entity. It is funded entirely from territorial funds.

Furthermore, the implications of the holding are quite sweeping. If the members of the Oversight Board are Officers of the United States, it is hard to understand why the Governor of Puerto Rico would not be. Thus, under the First Circuit’s argument, he or she could not be popularly elected, but would have to be appointed by the President and confirmed by the Senate. (In fact, prior to 1947 this is precisely how the Governor was selected).

The First Circuit also relies on the argument that PROMESA is a federal law. It attempts to distinguish between the Governor and the Oversight Board by arguing that the Governor exercises authority arising from the laws of the territory, specifically the Puerto Rican Constitution. However, it rightfully acknowledges that the Constituton itself stems from a congressional grant of power from the federal government, citing the Supreme Court’s recent double jeopardy decision, Puerto Rico v. Sanchez-Valle, 136 S. Ct. 1863 (2016). It’s only answer is that if all Puerto Rican laws were federal laws, then every claim brought under Puerto Rico’s laws would pose a federal question, and that can’t possibly be right. Color me unconvinced by this argument, which the Court spends only one paragraph on.

There is truly no cabining the First Circuit’s decision to just the Oversight Board. If allowed to stand, it creates truly grave questions for the future of self-government not just in Puerto Rico, but in all of the territories currently governed by Congress under Article IV.

Puerto Rico and the Appointments Clause

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.

Further reading:

In re The Financial Oversight and Management Board for Puerto Rico as representative of Commonwealth of Puerto Rico, No. 17 BK 2383-LTS.

Hat tip to Bob Loeb at Orrick for posting a copy of the decision.