Aurelius Inv., LLC v. Puerto Rico
Opinion
*842 The matter before us arises from the restructuring of Puerto Rico's public debt under the 2016 Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). This time, however, we are not tasked with delving into the intricacies of bankruptcy proceedings. Instead, we are required to square off with a single question of constitutional magnitude: whether members of the Financial Oversight and Management Board created by PROMESA ("Board Members") are "Officers of the United States" subject to the U.S. Constitution's Appointments Clause. Title III of PROMESA authorizes the Board to initiate debt adjustment proceedings on behalf of the Puerto Rico government, and the Board exercised this authority in May 2017. Appellants seek to dismiss the Title III proceedings, claiming the Board lacked authority to initiate them given that the Board Members were allegedly appointed in contravention of the Appointments Clause.
Before we can determine whether the Board Members are subject to the Appointments Clause, we must first consider two antecedent questions that need be answered in sequence, with the answer to each deciding whether we proceed to the next item of inquiry. The first question is whether, as decided by the district court and claimed by appellees, the Territorial Clause displaces the Appointments Clause *843 in an unincorporated territory such as Puerto Rico. If the answer to this first question is "no," our second area of discussion turns to determining whether the Board Members are "Officers of the United States," as only officers of the federal government fall under the purview of the Appointments Clause. If the answer to this second question is "yes," we must then determine whether the Board Members are "principal" or "inferior" United States officers, as that classification will dictate how they must be appointed pursuant to the Appointments Clause. But before we enter fully into these matters, it is appropriate that we take notice of the developments that led to the present appeal.
BACKGROUND
The centerpieces of the present appeals are two provisions of the Constitution of the United States. The first is Article II, Section 2, Clause 2, commonly referred to as the "Appointments Clause," which establishes that:
[The President] ... shall nominate, and by and with the Advice and Consent of the Senate, shall appoint ... all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
U.S. Const. art. II, § 2, cl. 2.
The second is Article IV, Section 3, Clause 2, or the "Territorial Clause," providing Congress with the "power to dispose of and make all needful Rules and Regulations respecting the Territory ... belonging to the United States." U.S. Const. art. IV, § 3, cl. 2.
A. Puerto Rico's Financial Crisis
The interaction between these two clauses comes into focus because of events resulting from the serious economic downfall that has ailed the Commonwealth of Puerto Rico since the turn of the 21st Century, see Center for Puerto Rican Studies, Puerto Rico in Crisis Timeline , Hunter College (2017), https://centropr.hunter.cuny.edu/sites/default/files/PDF_Publications/Puerto-Rico-Crisis-Timeline-2017.pdf; see generally Juan R. Torruella, Why Puerto Rico Does Not Need Further Experimentation with Its Future: A Reply to the Notion of "Territorial Federalism" , 131 Harv. L. Rev. F. 65 (2018), and its Governor's declaration in the summer of 2015 that the Commonwealth was unable to meet its estimated $72 billion public debt obligation, see Michael Corkery & Mary Williams Walsh, Puerto Rico's Governor Says Island's Debts Are "Not Payable" , N.Y. Times (June 28, 2015), https://www.nytimes.com/2015/06/29/business/dealbook/puerto-ricos-governor-says-islands-debts-are-not-payable.html. This obligation developed, in substantial part, from the triple tax-exempt bonds issued and sold to a large variety of individual and institutional investors, not only in Puerto Rico but also throughout the United States. 1 Given the unprecedented expansiveness of the default in terms of total debt, the number of creditors affected, and the creditors' geographic diversity, it became self-evident that the Commonwealth's insolvency necessitated a national response from Congress. Puerto Rico's default was of particular detriment to the municipal bond market where Commonwealth *844 bonds are traded and upon which state and local governments across the United States rely to finance many of their capital projects. See Nat'l Assoc. of Bond Lawyers, Tax-Exempt Bonds: Their Importance to the National Economy and to State and Local Governments 5 (Sept. 2012), https://www.nabl.org/portals/0/documents/NABL_White_Paper.pdf.
From 1938 until 1984, Puerto Rico was able, like all other U.S. jurisdictions, to seek the protection of Chapter 9 of the U.S. Bankruptcy Code when its municipal instrumentalities ran into financial difficulties.
See
Franklin Cal. Tax-Free Trust
v.
Puerto Rico
,
B. Congress Enacts PROMESA
On June 30, 2016, Congress's next incursion into Puerto Rico's economic fortunes took place in the form of Public Law 114-187, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA),
2
To implement PROMESA, Congress created the Financial Oversight and Management Board of Puerto Rico (the "Board"). Congress charged the Board with providing independent supervision and control over Puerto Rico's financial affairs and helping the Island "achieve fiscal responsibility and access to the capital markets."
Although PROMESA places the Board "within" the Puerto Rico territorial government, Section 108 of PROMESA, which is labeled "Autonomy of Oversight Board,"
(a) ... Neither the Governor nor the Legislature may --
(1) exercise any control, supervision, oversight, or review over the ... Board or its activities; or
(2) enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this chapter, as determined by the ... Board.
PROMESA also provides additional authority and powers to the Board with similarly unfettered discretion. For example, Section 101(d)(1)(A) grants the Board, "in its sole discretion at such time as the ... Board determines to be appropriate," the designation of "any territorial instrumentality as a covered territorial instrumentality that is subject to the requirements of [PROMESA]."
PROMESA also requires the Board to have an office in Puerto Rico and elsewhere as it deems necessary, and that at any time the United States may provide the Board with use of federal facilities and equipment on a reimbursable or non-reimbursable basis.
We thus come to PROMESA's Title III, the central provision of this statute, which creates a special bankruptcy regime allowing the territories and their instrumentalities to adjust their debt.
An important provision of PROMESA's bankruptcy regime is that the Board serves as the sole representative of Puerto Rico's government in Title III debtor-related proceedings,
C. Appointment of Members to PROMESA's Board
PROMESA establishes that the "Board shall consist of seven members appointed by the President," who must comply with federal conflict of interest statutes.
Pursuant to Section 101(f) of PROMESA, individuals are eligible for appointment to the Board only if they:
(1) ha[ve] knowledge and expertise in finance, municipal bond markets, management, law, or the organization or operation of business or government; and
(2) prior to appointment, [they are] not an officer, elected official, or employee of the territorial government, a candidate for elected office of the territorial government, or a former elected official of the territorial government.
Of particular importance to our task at hand is Section 101(e)(2)(A), which outlines the procedure for the appointment of the Board Members:
(A) The President shall appoint the individual members of the ... Board of which -- *847 (i) the Category A member should be selected from a list of individuals submitted by the Speaker of the House of Representatives;
(ii) the Category B member should be selected from a separate, non-overlapping list of individuals submitted by the Speaker of the House of Representatives;
(iii) the Category C member should be selected from a list submitted by the Majority Leader of the Senate;
(iv) the Category D member should be selected from a list submitted by the Minority Leader of the House of Representatives;
(v) the Category E member should be selected from a list submitted by the Minority leader of the Senate; and
(vi) the category F member may be selected in the President's sole discretion.
In synthesis, pursuant to this scheme, six of the seven Board Members shall be selected by the President from the lists provided by House and Senate leadership, with PROMESA allowing the President to select the seventh member at his or her sole discretion. Senatorial advice and consent is not required if the President makes the appointment from one of the aforementioned lists.
As was arguably inevitable, on August 31, 2016, the President chose all Category A through E members from the lists submitted by congressional leadership and appointed the Category F member at his sole discretion. 8
*848 It is undisputed that the President did not submit any of the Board member appointments to the Senate for its advice and consent prior to the Board Members assuming the duties of their office, or, for that matter, at any other time.
D. Litigation Before the District Court
In May 2017, the Board initiated Title III debt adjustment proceedings on behalf of the Commonwealth in the U.S. District Court for the District of Puerto Rico. See Title III Petition, In re Commonwealth of P.R. , Bankruptcy Case No. 17-BK-3283 (LTS) (D.P.R. May 3, 2017). This was followed by the filing of several other Title III proceedings on behalf of various Commonwealth government instrumentalities. See Title III Petitions in: In re P.R. Sales Tax Fin. Corp. (COFINA) , Bankruptcy Case No. 17-BK-3284 (LTS) (D.P.R. May 5, 2017); In re Emps. Ret. Sys. of the Gov't of the Commonwealth of P.R. (ERS) , 17-BK-3566 (LTS) (D.P.R. May 21, 2017); In re P.R. Highways and Transp. Aut. (HTA) ; Bankruptcy Case No. 17-BK-3567 (LTS) (D.P.R. May 21, 2017); In re P.R. Elec. Power Auth. (PREPA) [hereinafter In re PREPA ], Bankruptcy Case No. 17-BK-4780 (LTS) (D.P.R. Jul. 7, 2017). Thereafter, some entities -- now the appellants before us -- arose in opposition to the Board's initiation of debt adjustment proceedings on behalf of the Commonwealth.
Among the challengers are Aurelius Investment, LLC, et al. and Assured Guaranty Corporation, et al. ("Aurelius"). Before the district court, Aurelius argued that the Board lacked authority to initiate the Title III proceeding because its members were appointed in violation of the Appointments Clause and the principle of separation of powers. The Board rejected this argument, positing that its members were not "Officers of the United States" within the meaning of the Appointments Clause, and that the Board's powers were purely local in nature, not federal as would be needed to qualify for Appointments Clause coverage. The Board further argued that, in any event, the Appointments Clause did not apply even if the individual members were federal officers, because they exercised authority in Puerto Rico, an unincorporated territory where the Territorial Clause endows Congress with plenary powers. This, according to the Board, exempted Congress from complying with the Appointments Clause when legislating in relation to Puerto Rico. In the alternative, the Board argued that the Board Members' appointment did not require Senate advice and consent because they were "inferior officers." The United States intervened on behalf of the Board, pursuant to
The other challenger to the Board's appointments process, and an appellant here, is the Unión de Trabajadores de la Industria Eléctrica y Riego ("UTIER"), a Puerto Rican labor organization that represents employees of the government-owned electric power company, the Puerto Rico Electric Power Authority ("PREPA"). The Board had also filed a Title III petition on behalf of PREPA, see In re PREPA , supra , which led the UTIER to file an adversary proceeding as a party of interest before the District Court in which it raised substantially the same arguments as Aurelius regarding the Board Members' defective appointment, see Unión de Trabajadores de la Industria Eléctrica y Riego v. P.R. Elec. Power Auth. , No. 17-228 (LTS) (D.P.R. Aug. 15, 2018); see also *849 Adversary Complaint, Unión de Trabajadores de la Industria Eléctrica y Riego v. P.R. Elec. Power Auth. , No. 17-229 (LTS) (D.P.R. Aug. 7, 2017) (describing the terms of the UTIER-PREPA collective bargaining agreement).
E. The District Court's Opinion
The district court, in separate decisions, ruled against Aurelius and UTIER and rejected their motions to dismiss the Board's Title III petitions. In re Commonwealth of P.R. , Bankruptcy Case No. 17-BK-3283 (LTS) (D.P.R. July 3, 2018); Assured Guar. Mun. Corp. v. Fin. Oversight and Mgmt. Bd. for P.R. , No. 18-87 (LTS) (D.P.R. Aug. 3, 2018); UTIER v. PREPA , No. 17-228 (LTS). In brief, the district court determined that the Board is an instrumentality of the Commonwealth government established pursuant to Congress's plenary powers under the Territorial Clause, that Board Members are not "Officers of the United States," and that therefore there was no constitutional defect in the method of their appointment. The court arrived at this conclusion after considering the jurisprudence and practice surrounding the relationship between Congress and the territories, including Puerto Rico, along with Congress's intent with regards to PROMESA.
The district court based its ruling on the premise that "the Supreme Court has long held that Congress's power under [the Territorial Clause] is both 'general and plenary.' " Such a plenary authority is what, according to the district court, allows Congress to "establish governmental institutions for territories that are not only distinct from federal government entities but include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States." The district court further pronounced that Congress "has exercised [its plenary] power with respect to Puerto Rico over the course of nearly 120 years, including the delegation to the people of Puerto Rico elements of its ... Article IV authority by authorizing a significant degree of local self-governance."
The district court also relied on judicial precedents holding that Congress may create territorial courts that do not "incorporate the structural assurances of judicial independence" provided for in Article III of the Constitution -- namely, life tenure and protection against reduction in pay -- as decisive authority. From the perdurance of these non-Article III courts across the territories (excepting, of course, Puerto Rico which although still an unincorporated territory has had, since 1966, an Article III court), 9 the district court reasoned that "Congress can thus create territorial entities that are distinct in structure, jurisdiction, and powers from the federal government."
Turning to the relationship between Congress and Puerto Rico, the district court noted that "Congress has long exercised *850 its Article IV plenary power to structure and define governmental entities for the island," in reference to the litany of congressional acts that have shaped Puerto Rico's local government since 1898, including the Treaty of Paris of 1898, the Foraker Act of 1900, the Jones-Shafroth Act of 1917, and Public Law 600 of 1950.
Furthermore, with regards to PROMESA and its Board, the district court afforded "substantial deference" to "Congress's determination that it was acting pursuant to its Article IV territorial powers in creating the ... Board as an entity of the government of Puerto Rico." The district court then proceeded to consider whether Congress can create an entity that is not inherently federal. It concluded in the affirmative, because finding otherwise would "ignore[ ] both the plenary nature of congressional power under Article IV and the well-rooted jurisprudence ... establish[ing] that any powers of self-governance exercised by territorial governments are exercised by virtue of congressional delegation rather than inherent local sovereignty." Accordingly, the district court found that the "creation of an entity such as the ... Board through popular election would not change the ... Board's ultimate source of authority from a constitutional perspective." The court deemed this so because "neither the case law nor the historical practice ... compels a finding that federal appointment necessarily renders an appointee a federal officer." The district court therefore concluded that the Board is a territorial entity notwithstanding
[t]he fact that the ... Board's members hold office by virtue of a federally enacted statutory regime and are appointed by the President[,] [because this] does not vitiate Congress's express provisions for creation of the ... Board as a territorial government entity that "shall not be considered to be a department, agency, establishment, or instrumentality of the Federal Government."
After ruling that the Board is a "territorial entity and its members are territorial officers," the district court finally determined that "Congress had broad discretion to determine the manner of selection for members of the ... Board," which Congress "exercised ... in empowering the President with the ability to both appoint and remove members from the ... Board." On this final point, the district court observed that "[a]lthough historical practice ... indicates that Congress has required Senate confirmation for certain territorial offices, nothing in the Constitution precludes the use of that mechanism for positions created under Article IV, and its use does not establish that Congress was obligated to invoke it."
The district court was certainly correct that Article IV conveys to Congress greater power to rule and regulate within a territory than it can bring to bear within the fifty states. In brief, within a territory, Congress has not only its customary power, but also the power to make rules and regulations such as a state government may make within its state.
See
U.S. Const. art. IV, § 3, cl. 2 ;
D.C.
v.
John R. Thompson Co.
,
*851 DISCUSSION
A. The Territorial Clause Does Not Trump the Appointments Clause
However much Article IV may broaden the reach of Congress's powers over a territory as compared to its power within a state, this case presents no claim that the substance of PROMESA's numerous rules and regulations exceed that reach. Instead, appellants challenge the way the federal government has chosen the individuals who will implement those rules and regulations. This challenge trains our focus on the power of Congress vis-à-vis the other branches of the federal government. Specifically, the Board claims that Article IV effectively allows Congress to assume what is otherwise a power of the President, and to share within the two bodies of Congress a power only assigned to the Senate.
We reject this notion that Article IV enhances Congress's capabilities in the intramural competitions established by our divided system of government. First, the Board seems to forget -- and the district court failed to recognize and honor -- the ancient canon of interpretation that we believe is a helpful guide to disentangle the interface between the Appointments Clause and the Territorial Clause:
generalia specialibus non derogant
(the "specific governs the general").
See
,
e.g.
,
Turner
v.
Rogers
,
The Territorial Clause is one of general application authorizing Congress to engage in rulemaking for the temporary governance of territories.
See
Reid
v.
Covert
,
Consider next the Presentment Clause of Article I, Section 7. Under that clause, a bill passed by both chambers of Congress cannot become law until it is presented to, and signed by, the President (or the President's veto is overridden). U.S. Const. art. I, § 7, cl. 2. Surely no one argues that Article IV should be construed so as to have allowed Congress to enact PROMESA without presentment, or to have overridden a veto without the requisite super-majority vote in both houses. Nor does anyone seriously argue that Congress could have relied on its plenary powers under Article IV to alter the constitutional roles of its two respective houses in enacting PROMESA.
Like the Presentment Clause, the Appointments Clause constitutionally regulates how Congress brings its power
*852
to bear, whatever the reach of that power might be. The Appointments Clause serves as one of the Constitution's important structural pillars, one that was intended to prevent the "manipulation of official appointments" -- an "insidious ... weapon of eighteenth century despotism."
Freytag
v.
Comm'r
,
It is true that another restriction that is arguably a structural limitation on Congress's exercise of its powers -- the nondelegation doctrine -- does bend to the peculiar demands of providing for governance within the territories. In normal application, the doctrine requires that "when Congress confers decisionmaking authority upon agencies," it must "lay down by legislative act an intelligible principle to which the person or body authorized to [act] is directed to conform."
Whitman
v.
Am. Trucking Ass'ns
,
*853
The territorial variations on the traditional restrictions of the nondelegation doctrine pose no challenge by Congress to the power of the other branches. Any delegation must take the form of a duly enacted statute subject to the President's veto. Furthermore, the territorial exception to the nondelegation doctrine strikes us as strongly implicit in the notion of a territory as envisioned by the drafters of the Constitution. The expectation was that territories would become states.
See
Downes
v.
Bidwell
,
None of these justifications for limiting the nondelegation doctrine to accommodate one of Congress's most salient purposes in exercising its powers under Article IV applies to the Appointments Clause. Nor does the teaching of founding era history. To the contrary, the evidence suggests strongly that Congress in 1789 viewed the process of presidential appointment and Senate confirmation as applicable to the appointment by the federal government of federal officers within the territories. That first Congress passed several amendments to the Northwest Ordinance of 1787 "so as to adopt the same to the present Constitution of the United States."
More difficult to explain is
United States
v.
Heinszen
,
For the foregoing reasons, we find in the nondelegation doctrine no apt example to justify an exception to the application of the Appointments Clause within the territories. An exception from the Appointments Clause would alter the balance of power within the federal government itself and would serve no necessary purpose in the transitioning of territories to states.
Further, the Board points us to
Palmore
v.
United States
,
Finally, nothing about the "Insular Cases"
11
casts doubt over our foregoing analysis. This discredited
12
lineage of
*855
cases, which ushered the unincorporated territories doctrine, hovers like a dark cloud over this case. To our knowledge there is no case even intimating that if Congress acts pursuant to its authority under the Territorial Clause it is excused from conforming with the Appointments Clause, whether this be by virtue of the "Insular Cases" or otherwise. Nor could there be, for it would amount to the emasculation from the Constitution of one of its most important structural pillars. We thus have no trouble in concluding that the Constitution's structural provisions are not limited by geography and follow the United States into its unincorporated territories.
See
Downes
,
Notwithstanding this doctrine, appellant UTIER asks us to go one step further and reverse the "Insular Cases." Although there is a lack of enthusiasm for the perdurance of these cases,
13
which have been regarded as a "relic from a different era,"
Reid
,
In this respect, we are aided again by the Supreme Court's decision in Reid , which although refusing to reverse the "Insular Cases" outright, provides in its plurality opinion instructive language that outlines the appropriate course we ought to pursue in the instant appeal:
The "Insular Cases" can be distinguished from the present cases in that they involved the power of Congress to provide rules and regulations to govern temporarily territories with wholly dissimilar traditions and institutions whereas here the basis for governmental power is American citizenship.... [I]t is our judgment that neither the cases nor their reasoning should be given any further expansion.
Reid
,
The only course, therefore, which we are allowed in light of Reid is to not further expand the reach of the "Insular Cases." Accordingly, we conclude that the Territorial Clause and the "Insular Cases" do not impede the application of the Appointments *856 Clause in an unincorporated territory, assuming all other requirements of that provision are duly met.
B. Board Members Are "Officers of the United States" Subject to the Appointments Clause
We must now determine whether the Board Members qualify within the rubric of "Officers of the United States," the Appointments Clause's job description that marks the entry point for its coverage. The district court determined that the Board Members do not fall under such a rubric. We disagree.
We begin our analysis by turning to a triad of Supreme Court decisions:
Lucia
v.
SEC
, --- U.S. ----,
First, Board Members occupy "continuing positions" under a federal law since PROMESA provides for their appointment to an initial term of three years and they can thereafter be reappointed and serve until a successor takes office.
Second, the Board Members plainly exercise "significant authority." For example, PROMESA empowers the Board Members to initiate and prosecute the largest bankruptcy in the history of the United States municipal bond market,
see
Yasmeen Serhan,
Puerto Rico Files for Bankruptcy
, The Atlantic (May 3, 2017), https://www.theatlantic.com/news/archive/2017/05/puerto-rico-files-for-bankruptcy/525258/, with the bankruptcy power being a quintessential federal subject matter,
see
U.S. Const. art. I, § 8, cl. 4 ("The Congress shall have Power ... [t]o establish uniform Laws on the subject of Bankruptcies throughout the United States."). The Supreme Court recently reminded the Commonwealth government of the bankruptcy power's exclusive federal nature in
Franklin Cal. Tax-Free Trust
,
The Board Members' federal authority includes the power to veto, rescind, or revise Commonwealth laws and regulations that it deems inconsistent with the provisions of PROMESA or the fiscal plans developed pursuant to it.
See
*857
§ 2141(d)(2) (authorizing the Board to develop a "Revised Fiscal Plan"); and when it exercises its sole discretion to file a plan of adjustment for Commonwealth debt,
Moreover, Board Members' investigatory and enforcement powers, as carried out collectively by way of the Board, exceed or are at least equal to those of the judicial officers the Supreme Court found to be "Officers of the United States" in
Lucia
.
See
Third, the Board Members' authority is exercised "pursuant to the laws of the United States." The Board Members trace their authority directly and exclusively to a federal law, PROMESA. That federal law provides both their authority and their duties. Essentially everything they do is pursuant to federal law under which the adequacy of their performance is judged by their federal master. And this federal master serves in the seat of federal power, not San Juan. The Board Members are, in short, more like Roman proconsuls picked in Rome to enforce Roman law and oversee territorial leaders than they are like the locally selected leaders that Rome allowed to continue exercising some authority.
See
,
e.g.
, Louis J. Sirico, Jr.,
The Federalist and the Lessons of Rome
,
The United States makes two arguments in support of the district court's opinion and PROMESA's current appointments protocol that warrant our direct response at this point. First, the United States argues that historical precedent suggests the inapplicability of the Appointments Clause to the territories. Second, the United States contends that if we find for appellants, such a ruling will invalidate the present-day democratically elected local governments of Puerto Rico and the other unincorporated territories because the officers of such governments took office without the Senate's advice and consent. We reject each argument in turn.
The relevant historical precedents of which we are aware lead us to a different conclusion than that claimed by the United States. Excepting the short period during which Puerto Rico was under military administration following the Spanish-American War, the major federal appointments to Puerto Rico's civil government throughout the first half of the 20th century all complied with the Appointments Clause.
Beginning in 1900 with the Foraker Act, the Governor of Puerto Rico was to be nominated by the President and confirmed by the Senate to a term of four years "unless sooner removed by the President."
*858
An Act temporarily to provide revenues and a civil government for Porto Rico, ch. 191,
The Foraker Act regime lasted until 1917, when Congress passed the Jones-Shafroth Act.
See
An Act to provide a civil government for Porto Rico, ch. 145,
As the United States would have it, Congress's requirement of Senate confirmation for presidential nominees in all of the aforementioned contexts was mere voluntary legislative surplusage. This position, however, directly contravenes the published opinions of the United States' own Office of Legal Counsel issued as recently as 2007.
See
"Officers of the United States Within the Meaning of the Appointments Clause,"
*859
NLRB
v.
Noel Canning
,
The United States, as well as the Board, also point to the manner in which Congress has for centuries allowed territories to elect territorial officials, including for example the governor of Puerto Rico since 1947.
See
An Act to amend the Organic Act of Puerto Rico, ch. 490,
We disagree. The elected officials to which the Board and the United States point -- even at the highest levels -- are not federal officers. They do not "exercise significant authority pursuant to the laws of the United States."
See
Lucia
,
It is true that the Commonwealth laws are themselves the product of authority Congress has delegated by statute.
See
Puerto Rico
v.
Sánchez Valle
, --- U.S. ----,
C. The Board Members are Principal Officers of the United States
Having concluded that the Board Members are indeed United States officers, we now turn to the specific means by which they must be appointed pursuant to the Appointments Clause. If the officer is a "principal" officer, the only constitutional
*860
method of appointment is by the President, by and with the advice and consent of the Senate. U.S. Const. Art. II, § 2, cl. 2 ;
Edmond
,
In
Morrison
v.
Olson
, the Supreme Court held that an independent counsel was an "inferior" officer because she was subject to removal by the attorney general and because she had limited duties, jurisdiction, and tenure, among other factors.
The Board Members clearly satisfy the
Edmond
test. They 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.
THE REMEDY
Having concluded that the process PROMESA provides for the appointment of Board Members is unconstitutional, we are left to determine the relief to which appellants are entitled. Both Aurelius and the UTIER ask that we order dismissal of the Title III petitions that the Board filed to commence the restructuring of Commonwealth debt. In doing so, appellants suggest that we ought to deem invalid all of the Board's actions until today and that this case does not warrant application of the
de facto
officer doctrine. It would then be on a constitutionally reconstituted Board, they say, to ratify or not ratify the unconstitutional Board's actions. Appellants also request that we sever from
There is no question but that in fashioning a remedy to correct the constitutional violation we have found it is unlikely that a perfect solution is available. In choosing among potential options, we ought to reduce the disruption that our decision may cause. But we are readily aided by several factors in this respect.
First, PROMESA itself contains an express severability clause, stating as follows:
Except as provided in subsection (b) [regarding uniformity of similarly situated territories], if any provision of this chapter or the application thereof to any person or circumstance is held invalid, the remainder of this chapter, or the application of that provision to persons or circumstances other than those as to which it is held invalid, is not affected thereby, provided that subchapter III is not severable from subchapters I and II, and subchapters I and II are not severable from subchapter III.
Such a clause "creates a presumption that Congress did not intend the validity of the statute in question to depend on the validity of [a] constitutionally offensive provision."
Alaska Airlines, Inc.
v.
Brock
,
Severability in this instance is especially appropriate because Congress, within PROMESA, has already provided an alternative appointments mechanism, at least as to six of the Board Members. PROMESA directs that if the mechanism we found unconstitutional is not employed, "[w]ith respect to the appointment of a Board member ... such an appointment
shall be by and with the advice and consent of the Senate
, unless the President appoints an individual from a list, ... in which case no Senate confirmation is required."
Accordingly, we hold that the present provisions allowing the appointment of Board Members in a manner other than by presidential nomination followed by the Senate's confirmation are invalid and severable. We do not hold invalid the remainder of the Board membership provisions, including those providing the qualifications for office and for appointment by the President with the advice and consent of the Senate.
Second, we reject appellants' invitation to dismiss the Title III petitions and cast a specter of invalidity over all of the Board's *862 actions until the present day. To the contrary, we find that application of the de facto officer doctrine is especially appropriate in this case.
An ancient tool of equity, the
de facto
officer doctrine "confers validity upon acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person's appointment ... to office is deficient."
Ryder
v.
United States
,
Here, the Board Members were acting with the color of authority -- namely, PROMESA -- when, as an entity, they decided to file the Title III petitions on the Commonwealth's behalf, a power squarely within their lawful toolkit. And there is no indication but that the Board Members acted in good faith in moving to initiate such proceedings.
See
Leary
v.
United States
,
Other considerations further counsel for our application of the
de facto
officer doctrine. We fear that awarding to appellants the full extent of their requested relief will have negative consequences for the many, if not thousands, of innocent third parties who have relied on the Board's actions until now. In addition, a summary invalidation of everything the Board has done since 2016 will likely introduce further delay into a historic debt restructuring process that was already turned upside down once before by the ravage of the hurricanes that affected Puerto Rico in September 2017.
See
Stephanie Gleason,
Puerto Rico's Bankruptcy Delayed, Moved to New York Following Hurricane María
, The Street (Sept. 26, 2017), https://www.thestreet.com/story/14320965/1/puerto-rico-s-bankruptcy-delayed-moved-to-new-york-following-hurricane-maria.html. At 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."
We therefore decline to order dismissal of the Board's Title III petitions. Our ruling, as such, does not eliminate any otherwise valid actions of the Board prior to the issuance of our mandate in this case. In so doing, we follow the Supreme Court's exact approach in
Buckley
,
Finally, our mandate in these appeals shall not issue for 90 days, so as to allow the President and the Senate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause.
Cf.
Weinberger
v.
Romero-Barcelo
,
CONCLUSION
In sum, we hold that the Board Members (other than the ex officio Member) must be, and were not, appointed in compliance with the Appointments Clause. Accordingly, the district court's conclusion to the contrary is reversed. We direct the district court to enter a declaratory judgment to the effect that PROMESA's protocol for the appointment of Board Members is unconstitutional and must be severed. We affirm, however, the district court's denial of appellants' motions to dismiss the Title III proceedings. Each party shall bear its own costs.
So ordered.
Reversed in part and Affirmed in part .
Since 1917 Congress has authorized exemption of Puerto Rico bonds from taxation by the federal, state, and municipal governments.
See
An Act to provide a civil government for Porto Rico, and for other purposes, ch. 145, § 3,
Since its proposed enactment this legislation has been labeled by the acronym "PROMESA," which in the Spanish language stands for "promise."
A new account -- under the Board's exclusive control -- was required to be established by the Puerto Rico government within its Treasury Department to fund Board operations.
We note that
Section 2121(e)(1)(A) of PROMESA cross-references section 2129(a), which, for its part, incorporates
As will be discussed in detail below, the assigned category affects a prospective Board member's eligibility requirements and appointment procedure.
Section 209 of PROMESA states that the Board shall terminate when it certifies that:
(1) the applicable territorial government has adequate access to short-term and long-term credit markets at reasonable interest rates to meet the borrowing needs of the territorial government; and
(2) for at least 4 consecutive fiscal years --
(A) the territorial government has developed its Budgets in accordance with modified accrual accounting standards; and
(B) the expenditures made by the territorial government during each fiscal year did not exceed the revenues of the territorial government during that year, as determined in accordance with modified accrual accounting standards.
President Obama Announces the Appointment of Seven Individuals to the Financial Oversight and Management Board for Puerto Rico , The White House Off. of the Press Sec'y (Aug. 31, 2016), https://obamawhitehouse.archives.gov/the-press-office/2016/08/31/president-obama-announces-appointment-seven-individuals-financial . The appointees included Andrew G. Biggs , a resident scholar at the American Enterprise Institute, and former holder of multiple high ranking positions in the Social Security Administration; José B. Carrión III , an experienced insurance industry executive from Puerto Rico and the President and Principal Partner of HUB International CLC, LLC, which operates therein; Carlos M. García , a resident of Puerto Rico, the Chief Executive Officer of BayBoston Managers LLC, Managing Partner of BayBoston Capital LP, who formerly served as Senior Executive Vice President and board member at Santander Holdings USA, Inc. (2011-2013), among other executive posts at Santander entities (1997-2008), and as Chairman of the Board, President, and CEO of the Government Development Bank for Puerto Rico (2009-2011); Arthur J. González , a Senior Fellow at the New York University School of Law and former U.S. Bankruptcy Judge in the Southern District of New York (1995-2002); José R. González , CEO and President of the Federal Home Loan Bank of New York, which he joined in 2013, former Chief Executive Officer and President of Santander Bancorp (2002-2008), and President of Santander Securities Corporation (1996-2001) and the Government Development Bank of Puerto Rico (1986-1989); Ana J. Matosantos , President of Matosantos Consulting, former Director of the State of California's Department of Finance (2009-2013) and Chief Deputy Director for Budgets (2008-2009); and, David A. Skeel Jr. , professor of Corporate Law at the University of Pennsylvania Law School, which he joined in 1999.
Act of Sept. 12, 1966, Public Law 89-571,
No Appointments Clause challenge has been brought concerning the Governor of Puerto Rico, or the Governor's designee, who serves as an
ex officio
Board member without voting rights.
See
De Lima
v.
Bidwell
,
See
,
e.g.
, Christina Duffy Burnett,
A Convenient Constitution?: Extraterritoriality After Boumediene
,
See supra note 12.
The early appointments to high-level office in the territorial governments of the Philippines, Guam, and the Virgin Islands also conformed with the Appointments Clause.
See
Organic Act of Guam of 1950, § 6,
There has been long-lasting confusion as to whether
Morrison
is still good law.
See
NLRB
v.
SW Gen., Inc.
, --- U.S. ----,
Reference
- Full Case Name
- AURELIUS INVESTMENT, LLC, Et Al., Appellants, v. Commonwealth of PUERTO RICO, Et Al., Appellees. Assured Guaranty Corporation, Et Al., Appellants, v. Financial Oversight and Management Board, Et Al., Appellees. Unión De Trabajadores De La Industria Eléctrica Y Riego (Utier), Appellant, v. Puerto Rico Electric Power Authority, Et Al., Appellees.
- Cited By
- 23 cases
- Status
- Published