SCOTUS to Review Constitutionality of Puerto Rico’s Oversight Board

On February 15, 2019, in Aurelius Investment, LLC v. Commonwealth of Puerto Rico, the U.S. Court of Appeals for the First Circuit held that the appointment of the members of the Oversight Board violated the Appointments Clause and consequently was unconstitutional. The First Circuit held that Oversight Board members are officers of the United States because they have significant authority, including the right to initiate and prosecute the largest U.S. municipal bond bankruptcy in history and the power to rescind or revise Puerto Rico laws that are inconsistent with PROMESA. As officers of the United States, the Oversight Board members’ appointment would therefore require compliance with the Appointments Clause of the U.S. Constitution (i.e., appointment by the President and confirmation by the U.S. Senate).

Despite invalidating the Oversight Board members’ appointment, the First Circuit did not invalidate the Oversight Board’s actions to date or dismiss Puerto Rico’s or its instrumentalities’ Title III cases. The First Circuit invoked the de facto officer doctrine, which confers validity on acts performed by an officer of the United States even though it is later discovered that the officer’s appointment to office was deficient.

The First Circuit gave the President and Senate ninety days to validate the current appointments or reconstitute the Oversight Board in accordance with the Appointments Clause. The Court also allowed the Oversight Board to continue to operate during the 90-day period, which the Court later extended to July 15, 2019.

On April 23, 2019, the Oversight Board petitioned the Supreme Court for review of the First Circuit’s decision; the Oversight Board argued that the Court erred in holding that its members are officers of the United States, rather than territorial officers, who do not need to be appointed in accordance with the Appointments Clause.^[1] Respondent Aurelius Investment LLC^[2] agreed with the First Circuit’s holding on the merits, but petitioned the Supreme Court for review of the First Circuit’s use of the de facto officer doctrine “to uphold all of the [Oversight] Board’s actions prior to ... as well as ... for 150 days after the First Circuit’s judgment.”^[3]

On June 18, 2019, the President nominated the Oversight Board’s current members to allow them to complete their current terms, which will expire on August 30, 2019. In response, the Senate Energy and Natural Resources Committee announced that it expects to receive paperwork for the nominees “within several weeks and will announce a hearing ... shortly thereafter.” Concerned about timing, the Oversight Board has asked the First Circuit to stay issuance of its mandate pending the Supreme Court’s final disposition of the case.^[4]

In the wake of this, on June 20, 2019, the Supreme Court granted certiorari to consider the various challenges to the First Circuit’s ruling, indicating oral argument would be scheduled during the second week of October 2019.^[5]

Potential Implications

• The apparent delay by the Senate could result in failure to approve the Oversight Board members’ appointment and prior actions before the end of their original terms, though this should not result in automatic nullification of their prior actions or undermine the Supreme Court’s review. However, if the First Circuit does not stay the issuance of its mandate, then this may result in the Oversight Board’s inability to operate after July 15, 2019, halting Puerto Rico’s debt restructuring process midstream. As a result, the Oversight Board has expressed concerns that creditors may attempt to dismiss the Title III cases or may file suits seeking immediate payment of billions of dollars of obligations.^[6]
• Given Aurelius’ challenge of the First Circuit’s application of the de facto officer doctrine, the Supreme Court’s review could unravel (if it accepted Aurelius’ reasoning) the Oversight Board’s actions during the past three years. As the First Circuit explained when it applied the de facto officer doctrine, this may “have negative consequences for the many, if not thousands, of innocent third parties who have relied on the Board’s actions until now.”^[7] Moreover, unraveling critical developments like the confirmation of the Puerto Rico Sales Tax Financing Corporation’s (COFINA) plan of adjustment may be a significant setback for Puerto Rico’s debt restructuring process given that it took almost two years after the Title III cases were filed to negotiate the plan and the underlying settlements (with a significant number of constituents).
• The President’s nomination of the Oversight Board members four months after the First Circuit’s decision and two months shy of the expiration of their three-year terms may call into question whether the President will appoint new members after August 30, 2019.^[8]

[1]   Petition for a Writ of Certiorari at 3, Fin. Oversight and Mgmt. Bd. for Puerto Rico v. Aurelius Inv., LLC, No. 18-1334, 2019 WL 1874201, *13-29 (Apr. 23, 2019).

[2]   Aurelius Investment LLC first challenged the appointment of the Oversight Board members when it moved to dismiss the Title III cases. See In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 318 F. Supp. 3d 537 (D.P.R. 2018). 

[3]   Petition for a Writ of Certiorari at i, Aurelius Inv., LLC v. Commonwealth of Puerto Rico, No. 18-1475, 2019 WL 2285729 (May 24, 2019).

[4]   Motion of Appellee the Financial Oversight and Management Board for Puerto Rico to Stay the Mandate Pending Supreme Court Disposition, Aurelius Inv., LLC v. Commonwealth of Puerto Rico, No. 18-1671 (1^st Cir. June 18, 2019).

[5]   See Fin. Oversight and Mgmt. Bd. for Puerto Rico v. Aurelius Inv., LLC, --- S. Ct. ----, No. 18-1334, 2019 WL 1790539 (June 20, 2019) (granting petition for writ of certiorari and consolidating various appeals); Aurelius Inv. LLC v. Puerto Rico, --- S. Ct. ----, No. 18-1475, 2019 WL 2270062 (June 20, 2019) (same). 

[6]   Motion of Appellee the Financial Oversight and Management Board for Puerto Rico to Stay the Mandate Pending Supreme Court Disposition at 6.

[7]   Aurelius Inv., LLC v. Commonwealth of Puerto Rico, 915 F.3d at 862.

[8]   Upon expiration of the three-year term, Oversight Board members may continue to serve until a successor has been appointed. See 48 U.S.C. § 2121(e)(5)(C).