Supreme Court Finds No Appointment Clause Violation in Puerto Rico’s Oversight Board

Although the members of the Financial Oversight and Management Board of Puerto Rico were not nominated by the President nor confirmed by the Senate, the Supreme Court ruled today that the appointment of the Board did not violate the Appointments Clause of the Constitution because they exercise “primarily local duties.”

All of the justices agreed in the judgment reversing the First Circuit, which had held that the Board’s appointment violated the Appointments Clause. The decision by the high court means there will be no lingering doubt about the validity of Puerto Rico’s debt arrangement.

Justice Stephen G. Breyer wrote the opinion of the court.

Justices Clarence Thomas and Sonia Sotomayor concurred in the judgment, which means they agreed with the result but for different reasons. In her opinion, Justice Sotomayor raised but did not answer questions about the ability of Congress to set aside Puerto Rico’s democratically elected government by appointing a federal board to take over the island commonwealth’s fiscal powers and responsibilities.

The Creation and Appointment of the Oversight Board

The Supreme Court ruled in June 2016 that Puerto Rico was ineligible for chapter 9 municipal bankruptcy. To allow the island commonwealth to restructure its unsupportable debt, Congress almost immediately adopted the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.).

The members of the Oversight Board were not nominated by the President nor were they confirmed by the Senate. Rather, 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 its 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.

Designated by the Chief Justice and sitting in the District of Puerto Rico to preside over the PROMESA proceedings, District Judge Laura Taylor Swain of New York handed down an opinion in July 2018 holding the Board was properly constituted under the Territories Clause of the Constitution, Article IV, Section 3, Clause 2. In re 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.

The First Circuit Reversal

On appeal, the First Circuit reversed, holding that the appointment of the members of the Oversight Board violated the Appointments Clause 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.

The appeals court entered an order that operated as a stay to remain in effect until the Supreme Court ruled on the case.

The Oversight Board filed a petition for certiorari in April 2019. Four other petitions followed, by the U.S. Solicitor General, Aurelius, the official creditors’ committee and a labor union in Puerto Rico.

The Supreme Court granted certiorari on June 20 to decide 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?

Oral argument took place on October 15. To read ABI’s report on oral argument, click here.

In retrospect, two issues raised by the justices at oral argument presaged the result: (1) Were they to uphold the First Circuit, some justices were concerned that the precedent would undermine the governance of the District of Columbia and the territories; and (2) Counsel for the Oversight Board and the bondholders agreed that the case turned on whether the Board acted primarily locally or primarily nationally.

Counsel for the Board argued that its members were performing primarily local functions because they were supplanting Puerto Rico’s legislature and governor. The bondholders contended that the Board’s functions were national in scope because the proceedings would affect billions of dollars of investments and investors throughout the country who held the debt.

The Opinion for the Court by Justice Breyer

The Appointments Clause of the Constitution, Art. II, §2, cl. 2, provides that the President “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States . . . .”

To decide whether Board members are Officers of the U.S., Justice Breyer — like Justice Thomas — leaned heavily on eighteenth century history and actions taken by Congress in dealing with territories immediately after adoption of the Constitution.

Justice Breyer quickly made a distinction between “ordinary” officers of the U.S. to whom the Appointments Clause applies and officers of the District of Columbia and the territories to whom the clause may nor may not apply in view of Article I, §8, cl. 17, pertaining to the District, and Article IV, §3, cl. 2, applicable to territories.

Justice Breyer did not leave the reader wondering about the result.

On the first page of his 22-page decision, he said that the “Board’s statutory responsibilities consist of primarily local duties, namely, representing Puerto Rico in bankruptcy proceedings and supervising aspects of Puerto Rico’s fiscal and budgetary policies.” He held “that the Board members are not ‘Officers of the United States.’ For that reason, the Appointments Clause does not dictate how the Board’s members must be selected.”

Justice Breyer did not disagree entirely with the First Circuit. He agreed with the Boston-based appeals court to the extent that “Appointments Clause restricts the appointment of all officers of the United States, including those who carry out their powers and duties in or in relation to Puerto Rico.”

In other words, he held that the clause applies to “all ‘Officers of the U.S,’ . . . even when those officers exercise power in or related to Puerto Rico.” [Emphasis in original.] Although the Appointments Clause applies to officers of the District of Columbia and the territories, he limited the holding by saying that the clause “does not restrict the appointment of local officers that Congress vests with primarily local duties under Article IV, §3, or Article I, §8, cl. 17.” [Emphasis in original.]

Justice Breyer then turned to the question of whether the Board’s powers and duties were primarily local. Parsing PROMESA, he concluded that “the Board’s members have primarily local duties, such that their selection is not subject to the constraints of the Appointments Clause.”

Rejecting the bondholders’ reliance on the nationwide effect of the Board’s decisions, Judge Breyer said that “[t]aking actions with nationwide consequences does not automatically transform a local official into an ‘Officer of the U.S.’” The “same might be said of any major municipal, or even corporate bankruptcy.”

Basing the ruling on the Appointments Clause, Justice Breyer avoided having to overrule the so-called Insular Cases from the very early twentieth century, which have been criticized for justifying colonialism. He was also not required to opine on the de facto officer doctrine.

The Concurrence by Justice Thomas

In his 11-page opinion, Justice Thomas agreed there was no violation of the Appointments Clause. However, he could not agree with the majority’s “dichotomy between officers with ‘primarily local versus primarily federal’ duties,” which he called an “amorphous test.”

Instead, Justice Thomas relied on his understanding of the “original meaning” of the Appointments Clause. In his view, Board members are territorial officers performing duties under Article IV of the Constitution and “are not federal officers within the original meaning of that phrase . . . .”

Justice Thomas would also reverse the First Circuit, because the Board’s members perform duties under Article IV and thus “do not qualify as ‘Officers of the U.S.’” In his view, the majority’s “primarily local” test would enable Congress to evade the Appointments Clause
“by supplementing an officer’s federal duties with sufficient territorial duties, such that they become ‘primarily local,’ whatever that means.”

The Concurrence by Justice Sotomayor

The opinion by Justice Sotomayor is required reading for anyone concerned about depriving residents of Puerto Rico of their constitutional rights. She focused on the 1950 compact with Puerto Rico, enacted by Congress as Public Law 600, where residents of the island were given the right of self-governance.

In her 24-page opinion, Justice Sotomayor repeatedly asked whether Congress had the right to take away Puerto Rico’s self-governance once residents of the island had been ability to elect their own officials. At a minimum, she questioned whether taking away rights of self-governance turned the Board members into federal officials.

The board members “exist in a twilight zone of accountability,” Justice Sotomayor said, because they were “neither selected by Puerto Rico itself nor subject to the strictures of the Appointments Clause. I am skeptical that the Constitution countenances this freewheeling exercise of control over a population that the Federal Government has explicitly agreed to recognize as operating under a government of their own choosing, pursuant to a constitution of their own choosing.”

Justice Sotomayor “reluctantly” concurred in the judgment because, in her view, the most important issues were not presented in the case. She saw the case as raising a “serious questions about when, if ever, the Federal Government may constitutionally exercise authority to establish territorial officers in a Territory like Puerto Rico, where Congress seemingly ceded that authority long ago to Puerto Rico itself.”