Securities Regulation Daily SCOTUS upholds constitutionality of PROMESA board appointments
Monday, June 1, 2020

SCOTUS upholds constitutionality of PROMESA board appointments

By Anne Sherry, J.D.

The Supreme Court held that the Appointments Clause extends to all officers of the United States, including in Puerto Rico, but does not restrict the appointment of local officers vested with primarily local duties, like the board members responsible for managing Puerto Rico’s bankruptcy and fiscal policies.

The Supreme Court unanimously upheld the constitutionality of the PROMESA board, reversing a First Circuit decision that the selection of board members violated the Appointments Clause. PROMESA, enacted in 2016 to aid resolution of Puerto Rico’s debt crisis, created an oversight board and allowed the president to appoint its seven members without Senate confirmation. While the Appointments Clause does extend to U.S. officers in Puerto Rico, the Court held, it has never restricted the appointment of those with primarily local powers and duties (Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, LLC, June 1, 2020, Breyer, S.).

The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was enacted to relieve Puerto Rico from a restructuring limbo where it was not eligible to file for federal bankruptcy protection nor make use of its own local restructuring statutes. PROMESA established a seven-member Financial Oversight and Management Board authorized to file for bankruptcy on behalf of Puerto Rico or its instrumentalities. The statute allows the president to appoint the seven board members without Senate confirmation, as long as six are selected from lists prepared by congressional leaders; President Obama did so in August 2016.

Several of Puerto Rico’s creditors moved to dismiss the bankruptcy proceedings on the grounds that the selection violated the Appointments Clause, which says that the president "by and with the Advice and Consent of the Senate, shall appoint all other Officers of the United States." The First Circuit agreed but concluded that the board’s previous actions remained valid under the de facto officer doctrine.

Applicability in Puerto Rico. First, the Supreme Court concluded that the Appointments Clause constrains the appointments power as to all "Officers of the United States," including those who exercise power in or related to Puerto Rico. This interpretation is consistent with the structure of the Constitution and the allocation of responsibility among the three branches of government. The clause has no exception for Article IV entities such as Puerto Rico, and a historical examination supports the inference that the First Congress expected the Appointments Clause to apply at least to some territorial appointees.

Local powers and duties. A more difficult question for the Court was whether the Financial Oversight and Management Board members are "officers of the United States." The Court felt that this language suggested a distinction between federal and nonfederal officers, with the Constitution authorizing Congress to legislate for localities where no state government can exercise local power. Specifically, Congress can make local law directly and can create structures of local government staffed by local officials who can make and enforce local law. This "suggests that when Congress creates local officers using these two unique powers, the officers exercise power of the local government, not the Federal Government." Subsequent history concerning the District of Columbia and the territories, including Puerto Rico, reveals a long standing practice of selecting local public officials outside of the Appointments Clause.

The Court accordingly held that the Appointments Clause does not restrict the appointment of local officers that Congress vests with primarily local duties. It also concluded that the Board members had primarily local duties, distinguishing the three cases on which the First Circuit had relied. Those cases each concerned duties that were federal in nature: federal election-related duties, special judges serving on federal tax courts, and, in Lucia v. SEC, federal administrative law judges carrying out Securities and Exchange Commission duties. In contrast, the Board’s duties under PROMESA relate to Puerto Rico’s fiscal and budgetary matters, bankruptcy proceedings, and related investigatory powers backed by Puerto Rican law. Some Board actions may have nationwide consequences, but, the Court reasoned, this is true of many actions taken by governors or other local officials and does not transform a local official into an "officer of the United States." Similarly, any major municipal or even corporate bankruptcy is likely to have nationwide effects.

Concurrences. Justice Thomas concurred in the judgment but felt the majority’s examination of whether an official’s duties are local in nature was "amorphous." Instead, Justice Thomas reiterated his concurrence in Lucia, where he construed the original public meaning of "officers of the United States" as describing federal civil officials who perform an ongoing, statutory duty. The Board’s members perform duties pursuant to Article IV and do not qualify as "officers of the United States" as the founders understood the phrase. Justice Sotomayor also concurred in the judgment but expressed doubts, not raised by the parties, about whether and when the Federal Government may establish territorial officers after Congress has ceded that authority to the territory itself. "[T]erritorial status should not be wielded as a talismanic opt out of prior congressional commitments or constitutional constraints," she wrote.

The case is No. 18-1334.

Attorneys: Donald B. Verrilli, Jr. (Munger, Tolles & Olson LLP) for the Finanical Oversight and Management Board for Puerto Rico. Theodore B. Olson (Gibson Dunn & Crutcher LLP) for Aurelius Investment, LLC.

Companies: Aurelius Investment, LLC

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