The Supreme Court heard oral argument yesterday in the case 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 worst case, the nation’s high court could hand down a ruling that vaporizes three years of work toward restructuring Puerto Rico’s debt. However, the justices’ grasp of the practical aspects of the case suggest that they will at least give the Senate and the President a chance to resurrect the Oversight Board’s work.
In the best case, the Supreme Court will reverse the First Circuit and hold that the Board members did not require Senate confirmation, thus validating the steps already taken to adjust the debt of the island commonwealth.
In the 80 minutes of oral argument, the justices continually focused on the precedential effects of the opinion they would issue. They clearly understood that invaliding the Oversight Board could mean that the governments of territories and even the District of Columbia had been formed in contravention of the Constitution.
The Proceedings Below
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 Oversight Board 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.
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. The Oversight Board, the official unsecured creditors’ committee, and COFINA bondholders, among others, opposed Aurelius.
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.
Initially, 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. Later, the appeals court entered an order that in substance operated as a stay to remain in effect until a decision could be handed down from the Supreme Court.
The Oversight Board filed a petition for certiorari on April 23, 2019. Four other petitions followed, by the U.S. Solicitor General, Aurelius, the official creditors’ committee, and a labor union in Puerto Rico. With unusual alacrity, the Supreme Court granted certiorari on June 20.
The justices are confronting two questions: (1) Should the members of the Oversight Board have been nominated by the President and confirmed by the Senate; and (2) if the appointment was unconstitutional, does the de facto officer doctrine validate actions already taken by the Oversight Board?
Back and Forth at Oral Argument
Oral argument gave no definitive clue as to how the Court will rule. There was a surprising ideological split involving some of the justices.
Justice Sonia Sotomayor, who was the most vocal at the outset, seemed skeptical about the formation of the Oversight Board without nomination and Senate ratification. Justices Elena Kagan and Ruth Bader Ginsburg were likewise skeptical in the first half of oral argument when the attorney for the Oversight Board tried to explain why the First Circuit was wrong.
In contrast, Justices Neil M. Gorsuch and Brett M. Kavanaugh appeared to take a more practical approach and seemed partial to the notion that the appointment passed constitutional muster.
Oral argument pitted two former U.S. Solicitors General against one another. Donald B. Verrilli, Jr., argued on behalf of the Oversight Board, while Theodore B. Olson took the case for Aurelius, a major bondholder. Verrilli was Solicitor General for five years under President Barack Obama, while Olson was Solicitor General for three years under President George W. Bush.
The Principal Deputy Solicitor General, Jeffrey B. Wall, argued on behalf of the government, contending there was no violation of the Appointments Clause.
The Elusive Constitutional Principle
Existing Supreme Court precedent didn’t seem to give the justices much guidance for how they should rule. Part of the argument was devoted to formulating a test to determine whether the Oversight Board should have been seated only after Senate confirmation.
Late in oral argument, the lawyer for bondholder Aurelius agreed with Justice Gorsuch on a test proposed by the Oversight Board’s counsel: Was the board acting primarily locally or primarily nationally?
Naturally, the Oversight Board argued that its members were performing primarily local functions because they were supplanting Puerto Rico’s legislature and governor. Aurelius, on the other hand, contended that the board’s work was primarily national given the billions of dollars in play and the effect of the PROMESA proceedings on creditors throughout the U.S.
Justice Kagan framed what she called a “functional test.” She asked whether the Oversight Board was “doing the sorts of things that would be done by state officials in states, or are they doing the sorts of things that would be done by federal officials.”
The Oversight Board wants the justices to focus on the precedent they will set. For example, the board’s counsel argued that upholding the First Circuit “would federalize some number of officers who have always been thought of as territorial or local, whether in D.C. or in the territories.”
While the lawyer for the Oversight Board had rough sledding, the justices were equally rough on counsel for the bondholder. Chief Justice John G. Roberts, Jr., along with Justices Ginsburg and Kavanaugh, seemed to focus on the local effects of the board’s work. Justice Gorsuch suggested that PROMESA took local power away from the governor and the Puerto Rico legislature and gave it to the Oversight Board.
Oral argument had moments of levity overlaying deadly serious practical concerns. Justice Samuel A. Alito asked counsel for Aurelius, “Are you and your client here just to defend the integrity of the Constitution, or would one be excessively cynical to think that something else is involved here involving money?”
The lawyer for the Oversight Board answered the question at the end of argument when he contended that Aurelius would “fight ratification by the Board tooth and nail for years and years to come and do everything possible to keep this thing in a situation [where] they have the hope to get a different Board that will accomplish their objectives.”
Remedy
If the Court decides that the board contravened the Constitution, it is a fair guess that the justices will follow the First Circuit and invoke the de facto officer doctrine to ratify actions already taken by the Oversight Board. Ruling otherwise would set off a maelstrom of litigation and might end up forcing the Supreme Court to decide whether equitable mootness is valid doctrine in federal practice.
If the Court finds that the board should have been nominated and confirmed, counsel for the board asked the justices to delay the issuance of the mandate for six months, pointing to Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), as precedent. There, the Court found that the jurisdictional underpinnings of the bankruptcy court contravened the constitution, but the justices gave Congress six months to rectify the statutory mess. As it turned out, Congress did not act in time.
In the case of the Bankruptcy Code, a patchwork of local rules enabled bankruptcy courts to continue functioning. For Puerto Rico, a lapse in the board’s power could produce chaotic results.
The Supreme Court heard oral argument yesterday in the case 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 worst case, the nation’s high court could hand down a ruling that vaporizes three years of work toward restructuring Puerto Rico’s debt. However, the justices’ grasp of the practical aspects of the case suggest that they will at least give the Senate and the President a chance to resurrect the Oversight Board’s work.
In the best case, the Supreme Court will reverse the First Circuit and hold that the Board members did not require Senate confirmation, thus validating the steps already taken to adjust the debt of the island commonwealth.
In the 80 minutes of oral argument, the justices continually focused on the precedential effects of the opinion they would issue. They clearly understood that invaliding the Oversight Board could mean that the governments of territories and even the District of Columbia had been formed in contravention of the Constitution.