First Circuit Rules Puerto Rican Debt Restructuring Board Unconstitutional

Steven D. Schwinn, John Marshall Law School

The First Circuit ruled last week that the congressionally created Board to oversee the restructuring of Puerto Rico's debt was constituted in violation of the Appointments Clause. The court, however, stopped short of halting the Board's federal lawsuit to initiate debt adjustment proceedings on behalf of Puerto Rico, giving the government 90 days to cure the appointments defect.

The ruling in Aurelius Investment v. Commonwealth of Puerto Rico puts the ball in the government's court to get the Board members properly appointed before the debt readjustment proceeding can move forward.

The case involves the Financial Oversight Management Board created under the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). Congress created the Board to provide independent supervision and control over Puerto Rico's financial affairs and to help the Island "achieve fiscal responsibility and access to capital markets." Under the Act, Board members are appointed by the President from a slate of candidates created by congressional leadership. (If the President doesn't select a member from one of these lists, the Senate has to confirm the President's nominee. But current Board members all came from a list, without Senate confirmation.)

The Board filed for debt readjustment on behalf of Puerto Rico. Debt-holders sought to dismiss the suit, arguing that the Board lacked authority to file, because Board members weren't appointed pursuant to the Appointments Clause. The Board responded that Congress had authority to constitute the Board this way under the Territorial Clause.

The First Circuit ruled against the Board. The court first acknowledged that the Territorial Clause gives Congress broad authority over U.S. territories, but rejected the argument that the the Clause is so powerful as to allow Congress to bypass the Appointments Clause. The court applied the specific-governs-the-general canon and held that the specific Appointments Clause prevails over the more general Territorial Clause. Moreover, the court said that the Territorial Clause doesn't allow Congress to override the requirement of other structural provisions, like presentment (under the Presentment Clause); so, too, it it doesn't allow Congress to override the requirements of the Appointments Clause.

The court also rejected the claim that the nondelegation doctrine, which operates more flexibly in territories (allowing Congress wider berth to delegate lawmaking authority), gives Congress room to bypass the Appointments Clause. Moreover, the court rejected arguments based on congressional control over the D.C. courts, and declined to read the Insular Cases as creating an Appointments Clause-free-zone in Puerto Rico.

As to the Appointments Clause itself, the court ruled that Board members are "officers" and therefore subject to the Clause, because the positions are "continuing," the incumbent exercises significant authority, and that authority is exercised pursuant to the laws of the United States. On this last point, the court noted that "[e]ssentially everything [Board members] do is pursuant to federal law." The court distinguished high-level Puerto Rican officials who are elected by Puerto Ricans, even though their ultimate authority traces to Congress. "So the elected Governor's power ultimately depends on the continuation of a federal grant. But that fact alone does not make the laws of Puerto Rico the laws of the United States, else every claim brought under Puerto Rico's laws would pose a federal question."

Finally, the court held that Board members are "principal" officers, because, under Edmond, "[t]hey are answerable to and removable only by the President and are not directed or supervised by others who were appointed by the President with Senate confirmation." As such, they must be nominated by the President, with advice and consent of the Senate.

The court declined to dismiss the Board's Title III petitions, however, because "[a]t a minimum, dismissing the Title III petitions and nullifying the Board's years of work will cancel out any progress made towards PROMESA's aim of helping Puerto Rico 'achieve fiscal responsibility and access to the capital markets.'" Moreover, the court stayed its ruling for 90 days to give the government time for Senate confirmation.