The Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.), does not violate the Appointments Clause of Article II, Section 2, Clause 2 of the U.S. Constitution, even though members of the Financial Oversight and Management Board of Puerto Rico were not nominated by the President and confirmed by the Senate, according to District Judge Laura Taylor Swain.
Aurelius Investment LLC and affiliates filed a motion in August 2017 seeking dismissal of Puerto Rico’s debt arrangement proceedings, arguing that the filing of the petition on behalf of the Commonwealth of Puerto Rico by the Oversight Board under Title III of PROMESA violated the Appointments Clause.
Holders of Puerto Rico general obligation bonds joined Aurelius but were opposed by the Oversight Board, the official unsecured creditors’ committee, and COFINA bondholders, among others.
Judge Swain held a hearing on the motion to dismiss in January. In her 35-page opinion on July 13, Judge Swain held that PROMESA and the Oversight Board were properly constituted under the Territories Clause of the Constitution, Article IV, Section 3, Clause 2.
The Constitution of the Oversight Board
In June 2016, the Supreme Court ruled 5-2 that Congress excluded Puerto Rico from chapter 9 municipal bankruptcy and precluded the island commonwealth from adopting local laws to deal with the insolvencies of its instrumentalities, such as municipal power and water companies. Within days, Congress adopted PROMESA to afford the island an ability to deal with its crushing debt burden.
After an initial effort at negotiating a compromise with creditors out of court, the Oversight Board commenced debt adjustment proceedings for the commonwealth and its instrumentalities beginning on May 3, 2017. Aurelius contended in its motion to dismiss that the requirements of Title III of PROMESA were not satisfied because the Oversight Board was allegedly an unlawful entity, since its members were appointed in violation of the Appointments Clause.
The Oversight Board, the only entity authorized to initiate debt adjustment proceedings, is “an entity within the government of Puerto Rico,” Judge Swain said, but “it is not subject to the supervision or control by the Governor of Puerto Rico . . . or the Legislature of Puerto Rico.”
The Oversight Board is constituted of seven members, one appointed at the sole discretion of the President and six selected from a list of candidates provided by leaders of Congress. If any members appointed by the President were not on the congressional list, Senate confirmation would be required. Since the six were all on the list, there was no Senate confirmation.
Judge Swain’s Analysis
Rejecting arguments by Aurelius, Judge Swain’s opinion is a lesson in history about the governance of territories of the U.S., citing Supreme Court opinions going back to the eighteenth century.
Judge Swain explained that the Appointments Clause prescribes methods for appointing “Officers of the United States.” In turn, the clause distinguishes between “principal officers,” who must be nominated by the President and confirmed by the Senate, and “inferior officers,” who may be appointed by the President alone, or by courts or heads of departments.
For Judge Swain, the “principal question” was whether members of the Oversight Board had to be appointed under the Appointments Clause. She held, though, that “Congress has plenary powers under the Territories Clause to establish governmental institutions for territories . . . that would not comport with the requirement of the Constitution if they pertained to governance of the United States.” She noted that Congress cited the Territories Clause as the sole authority for enacting PROMESA.
Judge Swain then proceeded to find “that neither Presidential nomination nor Senate confirmation of the appointees of the Oversight Board is necessary as a constitutional matter . . . because the members of the Oversight Board are not ‘Officers of the United States’ subject to the Appointments Clause.”
In sum, Judge Swain said that “the Oversight Board is a territorial entity and its members are territorial officers.” Therefore, she said, “Congress had broad discretion to determine the manner of selection of the Oversight Board.”
Judge Swain summarized her analysis and holding by saying that the “Oversight Board is an instrumentality of the territory of Puerto Rico . . . , that its members are not ‘Officers of the United States’ who must be appointed” under the Appointments Clause, “and that there is accordingly no constitutional defect in the method of appointment provided by Congress for members of the Oversight Board.”
Consequently, Judge Swain denied the motion to dismiss the PROMESA proceedings.