Supreme Court to Say Whether Puerto Rico Oversight Board Was Constitutionally Appointed

With extraordinary alacrity, the Supreme Court granted certiorari on June 20 to decide whether the appointment of the members of the Financial Oversight and Management Board of Puerto Rico violated the Appointments Clause of the Constitution because they were not nominated by the President and confirmed by the Senate.

In the order granting certiorari, the justices accelerated the briefing schedule and directed that oral argument be held on October 15 or 16, the second week of arguments in the Court’s new term.

It is unclear whether the high court will eventually hear or decide the case, because the President on June 18 sent nominations of the current Board to the Senate for confirmation. Should the Senate confirm the appointment of the current Board members, the appeal in the Supreme Court presumably will become moot in large part, if not entirely.

The Puerto Rico case is the second bankruptcy matter that the Supreme Court has decided to review in the next term. By ruling on Ritzen Group Inc. v. Jackson Masonry LLC, 18-938 (Sup. Ct.) (cert. granted May 20, 2019), the high court will shed more light on what is or is not a final order conveying a right of appeal in a bankruptcy case. For ABI’s discussion of Ritzen, click here.

The Proceeding Below and the Motion for a Stay

After the Supreme Court ruled in June 2016 that Puerto Rico was ineligible for chapter 9 municipal bankruptcy, Congress quickly adopted the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.). PROMESA was designed so that the island commonwealth could restructure its unsupportable mountain of debt.

The members of the Financial Oversight and Management Board of Puerto Rico were not nominated by the President and confirmed by the Senate. Instead, PROMESA allowed the President to appoint one member of the Oversight Board. The President selected six more 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 have been required. Since the six were all on the list, there was no Senate confirmation.

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, in district court in Puerto Rico.

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 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.

District Judge Laura Taylor Swain of New York, sitting in the District of Puerto Rico by designation, handed down an opinion in July 2018 holding that PROMESA and the Board were properly constituted under the Territories Clause of the Constitution, Article IV, Section 3, Clause 2. In re The Financial Oversight and Management Board for Puerto Rico, 318 F. Supp. 3d 537 (D.P.R. July 13, 2018). To read ABI’s discussion of the district court opinion, click here.

On appeal, the First Circuit reversed, holding that the appointment of the members of the Oversight Board violated the Appointments Clause of the Constitution because they were not nominated by the President and confirmed by the Senate. Relying on the de facto officer doctrine, the appeals court went on to rule that its opinion would “not eliminate any otherwise valid actions of the Board prior to the issuance of our mandate in this case.” Aurelius Investment LLC v. Commonwealth of Puerto Rico, 915 F.3d 838 (1st Cir. Feb. 15, 2019). For ABI’s report on the First Circuit opinion, click here.

Without prompting from the parties, the First Circuit held up the issuance of the mandate for 90 days, giving the Senate time to confirm the appointment of the Board members. The appeals court did not enter a stay.

The Oversight Board filed its petition for certiorari on April 23. Four other petitions followed, by the U.S. Solicitor General, Aurelius, the official creditors’ committee, and a labor union in Puerto Rico.

The justices of the Supreme Court met in conference on Thursday, June 20, to consider the petition. Ordinarily, the Court issues orders granting or denying petitions on the following Monday. Instead, the Court issued its order on June 20 granting the petition, setting out a briefing schedule, and stating that oral argument will be held on October 15 or 16, the second week the justices will hear arguments in the coming term.

Meanwhile, the First Circuit had declined to issue a stay at the Board’s request but instead further delayed issuance of the mandate until July 15. On June 18, the Oversight Board filed a motion again asking the First Circuit to delay issuance of the mandate until the Supreme Court finally disposes of the appeal. The Board asked the appeals court to act by June 24, so time enough would remain to ask the Supreme Court for a stay pending appeal.

The Questions Presented

The justices granted certiorari to review two questions: (1) Did the Appointments Clause of the Constitution require Senate confirmation of the members of the Oversight Board; and (2) does the de facto officer doctrine allow the Board to continue acting validly prior to the issuance of the mandate?

The first briefs are due by July 25, with the last briefs due on October 8. The justices slapped page limits on all the briefs, with the longest allocated 20,000 words.

Senate confirmation of Board members would seemingly moot the appeal in the Supreme Court. However, the Board told the First Circuit “there is virtually no possibility that the Senate will confirm the Board members before the mandate issues on July15.”

Even if the chief issues become moot following Senate Confirmation, questions remain regarding the validity of actions taken by the Board before and after the First Circuit’s opinion. It is questionable whether the Supreme Court would reach out to decide those more amorphous questions if the issue in chief becomes moot. If questions remain, the Court might remand the case to the First Circuit.