Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, LLC

LII note: after this preview was written, the U.S. Supreme Court decided Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, LLC .

Issues 

Are members of the Financial Oversight and Management Board for Puerto Rico “principal” officers of the United States subject to the Appointments Clause; and, if their appointment that bypassed Senate confirmation is unconstitutional, what would be the appropriate remedy?

Oral argument: 
October 15, 2019

The Supreme Court will decide if the Appointments Clause governs the appointment of members of the Financial Oversight and Management Board for Puerto Rico (the “Board”). In response to Puerto Rico’s debt crisis, Congress enacted the Puerto Rico Oversight, Management and Economic Stability Act of 2016 (PROMESA), which created the Board that institutes Title III proceedings on behalf of Puerto Rico. In 2017, a number of creditors filed complaints seeking to dismiss the Board’s debt adjustment proceedings, challenging President Obama’s appointment of the board members. On appeal, the First Circuit held that the Board members’ appointments are unconstitutional but sustained the Board’s Title III proceedings under the de facto officer doctrine. The Board and other Petitioners argue that the Board members’ appointments are constitutional because the Appointments Clause does not apply when Congress acts in the U.S. territories pursuant to its Article IV authority. The creditors and other Respondents counter that all constitutional safeguards, including the Appointments Clause, always apply in the U.S. territories. The outcome of this case has implications for Congress’s authority in providing administrative structures to govern the U.S. territories.

Questions as Framed for the Court by the Parties 

Whether the Appointments Clause governs the appointment of members of the Financial Oversight and Management Board for Puerto Rico.

Facts 

In June 2016, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) to address the dire financial crisis in Puerto Rico. PROMESA created the Financial Oversight and Management Board for Puerto Rico (the “Board”) that, among others, established a process for restructuring Puerto Rico’s debt. In 2019, Aurelius Investment, LLC (“Aurelius”) and the Unión de Trabajadores de la Industria Eléctrica y Riego (“UTIER”), a hedge fund and a union, respectively, both of which invested in Puerto Rican bonds, disliked the results of their restructuring hearing. They filed lawsuits seeking to dismiss the Board’s restructuring proceedings, arguing that the Board members' appointments violated the Appointments Clause of the U.S. Constitution.

The Appointments Clause empowers the President to nominate, with the advice and consent of the U.S. Senate, “all Officers of the United States” and allows Congress to delegate to the President the sole power to appoint “inferior Officers.” The Board is composed of seven voting members. If the President selects six of them from lists of candidates provided by Congress, those six candidates and the seventh member chosen at the President’s sole discretion would not require Senatorial advice and consent. Aurelius contends that this alternative appointment mechanism used to appoint the Board members in 2016 violated the Appointments Clause because it allowed the President to de facto nominate principal “Officers of the United States” by circumventing the required constitutional procedure under the Appointment Clause.

Four of the five Petitioners—the Board, the United States, the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (“Retirees”), and the Official Committee of Unsecured Creditors (the “Committee”)—counter that the Appointments Clause does not apply to the Board members because the Territorial Clause grants Congress plenary powers to create and follow laws outside the scope of normal constitutional procedure. The Territorial Clause allows Congress broad discretion to create laws for the territories, but the Constitution itself does not provide whether the Territories Clause allows Congress to circumvent the Appointments Clause. If the Territories Clause does not preempt the Appointments Clause, all Petitioners argue that Board members are inferior officers because they are territorial officers who exercise territorial, not federal, authority.

The Puerto Rico District Court ruled against Aurelius and UTIER. It held that Congress, acting under the Territorial Clause, need not follow the Appointments Clause, and that the Board members are not principal “Officers of the United States.” The United States Court of Appeals for the First Circuit (the “First Circuit”) held that the Territorial Clause does not prevent the application of the Appointments Clause. According to the First Circuit, the Board members were principal officers, and they required Senate confirmation. However, the court used the de facto officer doctrine to both uphold the appointments of the Board members and preemptively validate their future actions. The de facto officer doctrine validates all previous actions of an officer who acted under a colorable title but had a defective appointment.

The Board petitioned the Supreme Court of the United States for a writ of certiorari, asking the Court to hold that the Appointments Clause does not apply to the Board. The Supreme Court granted certiorari on June 20, 2019.

Analysis 

THE APPOINTMENTS CLAUSE IN THE TERRITORIES

Four of the five Petitioners—the Board, the United States, the Retirees, and the Committee—all argue that when Congress acts under its Article IV authority within the territories, it is not bound by the Appointments Clause. They explain that Article IV allows Congress to “make all needful Rules and Regulations respecting the Territor[ies].” According to the United States, Article IV furnishes Congress with the same control over a territory as a state has over its municipalities. They explain that states are only required to provide their municipalities with “fundamental personal rights,” or the rights “which are the basis of all free government,” neither of which includes the Appointments Clause; therefore, Congress can withhold that protection in the territories. Moreover, since Congress could normally give the President complete control over the territory, they argue that it could also grant the President control to appoint certain officials without congressional approval.

According to the United States, both history and prior cases from the Supreme Court suggest that Article IV allows Congress to circumvent the separation-of-powers doctrine in the U.S. territories. The Board also asserts that the Government has consistently appointed territorial officers and structured territorial governments in circumvention of the Appointments Clause. The Retirees suggest that the Supreme Court has allowed territorial judges to ostensibly rule on Article III matters because the territorial courts were created under Article IV. Likewise, the Court has allowed Congress to delegate its Article I legislative authority to the territories, despite it traditionally being non-delegable.

Respondents—UTIER and Aurelius—and Petitioner AAFAF counter that the Appointments Clause limits Congress’s Article IV territorial authority. Indeed, they argue that Article IV authority allows Congress to empower “a territorial legislature to enact territorial law,” but does not allow Congress to infringe on other parts of the Constitution. Therefore, Article IV allows territorial sovereignty but does not allow Congress to bypass normal constitutional constraints such as the Appointments Clause.

Both Aurelius and UTIER also suggest that this interpretation allows for the historical practice of establishing principal officers through practices that might appear otherwise to violate the Appointments Clause. They explain that this allows the territories to have locally elected officials in a practice that would otherwise violate the Appointments Clause. Additionally, the President has appointed territorial governors with the Senate’s advice and consent, thereby establishing a precedent for following normal constitutional procedures. Therefore, they assert that the Appointments Clause must apply in the territories; either the Constitution applies everywhere or nowhere. UTIER and AAFAF also contend that the claim that constitutional protections do not apply within the territories mirrors the “racist” holding of the Insular Cases which held that the territories do not deserve the same constitutional protections.

PRINCIPAL OFFICERS OF THE UNITED STATES

All five Petitioners unite to argue that the Board members are not principal “Officers of the United States.” Under the Appointments Clause, only principal “Officers of the United States” require the Senate’s advice and consent. The Board, however, argues that its members are not principal “Officers of the United States” because they are officers of Puerto Rico and thus need not abide by the Appointments Clause. Based on Palmore v U.S., the United States argues that an entity belongs to the territory if it is created “under Article IV, [and Congress] establishes the entity in the territorial government, and charges the entity with territorial work.” Here, the United States contends that Congress explicitly invoked its Article IV powers in the statute when creating the Board, making them territorial officers. The United States also notes that Congress placed the Board within the Puerto Rican government by not providing any federal government funding, exempting it from federal law, and not classifying the Board’s members as federal employees. Also, the United States and the AAFAF assert that the board members are not principal officers as their work is local in nature because it is not located within a federal agency, and it only reports to the federal government if it deems Puerto Rico as noncompliant with its budget.

The United States, Retirees, and AAFAF emphasize that historical practice suggests that no branch of government has ever considered territorial officers to be principal officers of the federal government. ; They explain that Congress has previously circumvented the Appointments Clause by allowing territorial elections for officers and allowing territorial officers to appoint other territorial officers. Similarly, they point out that the President has directly appointed principal officers for territories without Senatorial advice or with limits from congressionally-furnished lists. The Retirees further argue that Congress governed the Northwest Territories without adhering to the Appointments Clause; these actions, so close to the framing of the Constitution, imply that territorial officers are not principal officers of the United States.

On the other hand, Aurelius counters that the Board members are principal officers who, under the Appointments Clause, must be appointed with the Senate’s advice and consent. Based on Buckley v. Valeo, Aurelius and UTIER argue that a principal officer is one who occupies a continuing position established by federal law and exercises significant federal authority. Aurelius criticizes the Palmore test for not having been used before and creating a category—territorial officers—which has no constitutional significance.

Following the Buckley test, Respondents contend that Board members occupy “a continuing position” because the members can be fired only by the President for cause, the position does not expire until four years after Puerto Rico achieves fiscal solvency, and Board members do not have to step down until they are formally replaced.In addition, Respondents assert that the Board members exercise significant federal authority because they have the sole authority to execute PROMESA, a federal law, in federal court; that power includes the authority to initiate bankruptcy proceedings, which are also governed by federal law. Moreover, Respondents can only be appointed by members of the federal government and exercise the authority of Puerto Rico’s creditors which is national in scope. Respondents maintain that these facts indicate that the Board acts with a federal prominence that thereby satisfies the Buckley test and makes the Board members principal officers. Therefore, they argue, Congress violated the Appointments Clause when it limited the President to selecting Board members from a pre-approved list.

DE FACTO OFFICER DOCTRINE

Aurelius and UTIER argue that the First Circuit should not have used the de facto officer doctrine to uphold the Board’s prior actions nor validate future acts pending Supreme Court review. They explain that the de facto officer doctrine validates all acts made by officers whose appointment is later found to be deficient. Traditionally, Aurelius and UTIER explain, the de facto officer doctrine has applied only when there are “merely technical statutory defects in an officer’s appointment” such as a failure to administer an oath of office, or when raised in a “‘collateral attack’ on a judgment” to prevent enforcement. They point out that it has never been applied when the officer in question was not appointed in accordance with the Appointments Clause and has never been applied to cure future defects.

Aurelius and UTIER urge the Supreme Court to invalidate all past bankruptcy proceedings and allow new proceedings with appropriately appointed Board members. According to them, such relief is appropriate because “the Board never possessed the legal authority to file those [bankruptcy suits].” They recommend that the Supreme Court vacate all judgments from the Board’s actions but stay its ruling. This will give the Senate time to consent to the Board members’ appointments and allow a district court to potentially ratify existing settlements.

In response, COFINA counters that the public interest is the principal factor in determining the de facto validity of an officer’s actions. According to COFINA, the Court in deciding whether to apply the de facto officer doctrine has first considered the interests of third parties and the public, and avoided invalidating past actions where it would cause harm to them. . COFINA argues that here, the First Circuit correctly assessed the potential harm to Puerto Ricans if it invalidated the Board and its actions, and upheld the Board and its actions to prevent such harm. COFINA also contends that case law supports the broad application of the de facto officer doctrine, especially in the legislative context and even to the prior actions of unconstitutionally appointed officials.

Discussion 

LEGITIMACY OF OTHER TERRITORIAL OFFICES

The Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) contends that the First Circuit’s holding that the Appointments Clause applies to any principal “Officers of the United States” would strip the legitimacy of all officers in U.S. territories because they were not appointed in accordance with the Appointments Clause. According to Alan Mygatt-Tauber, if the Appointments Clause does apply to such territorial officers, all actions taken by these officers would rest on shaky ground because decisions taken by officers who fail to comply with the Appointments Clause are open to challenge. He argues that this could possibly imperil the self-governance of territories because offices such as that of the Governor will no longer be elected by the People of these territories; instead, they will have to follow the Appointments Clause procedure and be appointed with the Senate’s advice and consent. Even if one could create an exception for Puerto Rico due to its commonwealth status, Mygatt-Tauber notes, the holding could implicate the home rule of Guam and United States Virgin Islands, which cannot claim such protection for themselves as their officials derive their powers purely from federal statutes, thus bringing them under the Appointments Clause. Mygatt-Tauber also contends that Respondents cannot claim an Appointments Clause exception for “elected” territorial officers that are unlike the “appointed” Board members because there is no “election” exception to the Appointments Clause.

In response, the Elected Officers of the Commonwealth of Puerto Rico (the “Officers”) assert that because elected officials derive their authority from the “will of the People,” they need not go through the same rigors as appointed officials who come to power through presidential designation and the Appointments Clause. Consequently, the Officers argue that there are no concerns about these territorial officers violating the Appointments Clause and therefore, about the legitimacy of their appointment and the actions they have taken to date. Additionally, Aurelius and Assured assert that irrespective of a territory’s Commonwealth status, its officers must wield significant federal authority for the Appointments Clause to apply to those officers. They also note that elected territorial officers, whether in Puerto Rico or in Guam, do not wield significant federal authority, therefore, the Appointments Clause does not apply to them. To the extent that these Governors enforce some federal laws, that is not their “primary responsibility” and thus they do not wield significant federal authority.

EFFECTS ON THIRD PARTIES

The DRA Entities (“DRA”) voice concern that if the Court decides to accept Aurelius’ stance and hold that the violation of the Appointments Clause vitiates all actions taken by the Board, thousands of innocent Puerto Ricans who relied on the Board’s restructuring proceedings will be thrown back into a crisis. Such a decision would be a huge setback for all the progress the Board has made to date in alleviating Puerto Rico’s debt—including the $4.7 billion debt that was resolved by the issuance of new bonds and similar restructuring negotiations worth $35 billion currently underway.

The Pacific Legal Foundation (“PLF”) counters that there are alternative remedies that can protect the reliance interests of innocent third parties. According to PLF, Respondents could have argued in front of a district court on whether the past actions of the unconstitutional board should be ratified. It explains that this would allow a meaningful remedy even though the proceedings could result in upholding all past actions of the unconstitutional board. The Washington Legal Foundation (“WLF”) states that third parties affected by the Board’s past action can legitimately argue reasonable reliance. According to WLF, any challenge now brought against a completed restructuring negotiation would be untimely and should therefore be barred.

Edited by 

Acknowledgments 

The authors would like to thank Professor Joshua C. Macey for his guidance and insights into this case.

Additional Resources