Weekly Update – January 16, 2018

Welcome to your weekly Title III update for January 16, 2018.  I am presenting this on Tuesday since Monday was Martin Luther King. Proceedings this week were dominated by the January 10 hearing on the Aurelius and Utier’s constitutional challenge, but a few more important things happened.

As you may know from my report on the oral argument of January 10, Judge Swain took under advisement both the Aurelius challenge and the UCC’s request for reconsideration. She also denied the reconsideration but granted the UCC a chance to amend the complaint in order to make the constitutional challenge to the transfer of the SUT to COFINA. The UCC filed its amended complaint and memorandum quickly, but predictably, Ambac and other objected. Essentially, the constitutional challenge to the SUT transfer, if successful, would leave COFINA, a Puerto Rican corporation which has no income except the SUT contribution, holding the bag of the $17.6 billion debt. That way, COFINA bondholders would get zero but the Commonwealth would not owe a penny. On the other hand, if COFINA is unconstitutional, the obligation, to wit, the bonds, would be inexistent and since the Commonwealth took the money, it would owe the majority of the COFINA debt. Under this scenario, even as unsecured creditors, COFINA bondholders could claim against the Commonwealth, instead of a penniless entity.

In the previous update, I mentioned that attorney Gregorio Igartua filed a request to present an amicus curiae brief, in which he argued that Puerto Rico is an incorporated territory, which is what AFFAF should have done. Unfortunately, Judge Swain denied Mr. Igartua’s request. Oh, well.

Last week, AFFAF, on behalf of HTA, filed a motion to extend deadlines to oppose Adrián Mercado Jiménez’ request for the payment of $16,448 allegedly owed to him pursuant to a settlement agreement dated December 9, 2016. Allegedly, “HTA is continuing to analyze the Motion and it remains HTA’s hope that the parties can reach a consensual resolution of the Motion. Considering that HTA and AFFAF’s lawyers charge over $1,000 an hour, sixteen hours of work on this issue equals what is owed. Apparently, AFFAF does not want to pay and/or wants a reduction on the debt and therefore procrastinates payment. Not the best way to spend the limited resources of the Commonwealth if you ask me.

Utier, aside from its adversary proceeding challenging the Board’s appointment, also filed another case, 17-229, where it challenges the PREPA Fiscal Plan, etc., claiming, inter alia, that the Board’s actions violate the contracts clause of the US Constitution. For all its claims during the Aurelius argument that the Board was a part of the Puerto Rico government, the Board claimed as follows:

 “The FOMB is authorized by PROMESA to certify fiscal plans and budgets and to commence Title III cases, see PROMESA §§ 201(e), 202(e), 304(a), but the FOMB has not legislated here. Moreover, the FOMB has acted pursuant to a federal, not a Commonwealth, statute.” (underlining added)

As my Native American ancestors would say, the Board speaks with a forked tongue.

Finally, this past week the Board made some moves on the Commonwealth. Governor Rosselló was supposed to present the Fiscal Plans on January 10, but the Board sent him a letter telling him his request for extension had been granted and they were now due on January 24. But the Governor insisted he was ready to present the plans and the Board extended the deadline. If this was true, why didn’t the Government file the plan?

In addition, the Board informed the Governor that the law approved by the legislature over his veto, Act 119, was not in compliance with the Fiscal Plan or the budget. The Board, contrary to most of what the press said, ordered to correct the inconsistencies or to explain to the Board’s satisfaction.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.

The Hearing on the Constitutional Challenge to the Board’s Appointment

On Wednesday January 10, 2018, Judge Swain heard arguments on the constitutional challenge by Aurelius and Utier to the appointment of the Board. The first to argue was Ted Olson, former Solicitor General of the United States, presenting Aurelius’ position. Mr. Olson started by stressing the necessity of having this issue decided quickly. Olson argued that the Appointments Clause of the US Constitution, like the other structural protections of the Constitution, exists to safeguard individual liberty.

Judge Swain weighed in with the first questions: The Board is a territorial entity according to PROMESA, what is your take on this?

Mr. Olson answered that under Metro. Wash. Airports Auth. v. Citizens for Abatement of Aircraft Noise, Inc. and Buckley v. Valeo, the Board was subject to the Appointments Clause since it exercised significant federal authority under federal law. He enumerated the powers of the Board and compared them to the Board in the Metro case and argued that the name of the thing does not make it whatever Congress says.

This brought up another question: Metro Airport was about separation of powers? Why do you cite it?

Mr. Olson explaining that the exercise of legislative power by that Board was a different constitutional violation but the case shows that Congress is subject to the structural requirements of the Constitution even when it acts regarding federal property or territories.  He noted the fact that clerks of the Territorial Courts were federal officials according to Supreme Court precedent. He also mentioned that in Marbury v. Madison, the issue was the appointment of a justice of the peace for DC, and because he was a federal officer, he needed a federal commission and thus brought suit.  Mr. Olson mentioned footnote 15 at page 34 of the US brief where he believes the Government was conceding that future members of the Board would have to be appointed as per the Appointments Clause.

The US denied that was the case but when we examine it, I believe Mr. Olson is right. The footnote states:

PROMESA also provides that if any of the seven members had not been appointed by September 1, 2016, then the President would have to appoint an individual from the list associated with the vacant position by September 15, 2016. See 48 U.S.C. § 2121(e)(2)(G). That provision, however, never came into play, and will not have any constraining effect on the President’s authority going forward. PROMESA provides that future vacancies will be filled “in the same manner in which the original member was appointed.” Id. § 2121(e)(2). That provision is most naturally read to mean that the President can choose future candidates off a congressional list (supplemented, as needed, by additional names) or select his own candidates subject to Senate confirmation. This reading is consistent with the text and the well-settled doctrine of constitutional avoidance. See Edward J. DeBartolo Corp. v. Florida Gulf Coast Building & Constr. Trades Council, 485 U.S. 568, 575 (2009) (“The so-called canon of constitutional avoidance is an interpretive tool, counseling that ambiguous statutory language be construed to avoid serious constitutional doubts.”).

Why mention the constitutional avoidance principle if you don’t mean that doing so will comply with the Constitution? The footnote thus presumes that the Appointments Clause applies to Puerto Rico.

In any event, Judge Swain asked another question: Is the fundamental power of Congress discussed in Sánchez Valle limited to criminal law? Does that power come from Congress or do you argue it comes from the people?

This is a good question, the implication being, does Sánchez Valle require the appointment of the Governor of Puerto Rico? Olson answered cleverly by saying the Governor of Puerto Rico does not wield significant federal authority and that the Governor is accountable to the people of Puerto Rico but the Board is not. He cited as precedent the case of Free Enter. Fund v. Pub. Co. Accounting Oversight Bd. and Freytag v. C.I.R.

Mr. Olson also argued that the Appointments Clause was a fundamental right but the other side argued that not all states have adopted its requirements so it can’t be an essential right. The USA gave several examples where that was not the case. It is unlikely this argument will be adopted since this would force the states to adopt the Appointments Clause. As he finished, Mr. Olson again urged a quick decision and stated that if the Court agreed with Aurelius’s position, they would consent to a stay during appeal, citing Marathon Pipeline as precedent.

Mr. Rolando Emmanuelli argued on the same side of Aurelius and at one point expressly adopted its submissions and arguments. He is representing UTIER, the principal union of PREPA. He argued that the Insular cases should be reversed, although but these cases can only be reversed by the Supreme Court, and also said the Court should not extend their holdings.

Judge Swain asked: If I recommend the repudiation of the Insular cases, would Puerto Rico have all the rights in the Constitution?

Mr. Emmanuelli sidestepped the answer saying that Congress would have to act. The right answer, however, would be that it would have the same rights of all territories, meaning no discrimination by Congress on assignment of funds for federal programs but that there would not be a right to send representatives to Congress or send electors to the Electoral College. Mr. Emmanuelli is not a statehooder.

Judge Swain asked another good question: As to exclusive federal powers, the debtor in a Chapter 9 or a Chapter 11 is allowed by Federal law to file a plan. Is that exercise of substantial federal power?

Emmanuelli said it is not. The answer, however, is much more complex since an isolated exercise of federal power does not make one into a federal official.

After Mr. Emmanuelli, the issue turned to Aurelius arguing as to its motion of lifting of the stay, which took about five minutes.

Donald Verrilli, Solicitor General under President Obama, argued for the Board insisting on the power of Congress to legislate as to territories, pushing Downes as good law.  Predictably, he disagreed with Mr. Olson and suggested a different test from Buckley, to wit, the structural relationship between the Board and Puerto Rico and the Board and the Federal Government. He stressed the Board was funded by Puerto Rico, it would not receive a penny from the USA, that several federal laws did not apply to the Board and that the statute says it is part of the Puerto Rican government. He continued mentioning that there was no territorial case cited in Aurelius brief and that Congress had broad authority when it legislate as to territories.

Then came the only question to him from the Judge: Congress can create agencies that carry Constitutional limitations outside the Territorial Clause? Where do you draw the line?

Verrilli answered that Congress has to follow the Constitution when legislating for Puerto Rico. Judge Swain then said your opponent will say that Territorial Courts are not Article III Courts. Verrilli countered that Congress allowed popular election in 1947. If in 1946, the governor was an official of the US, what changed? Congress retained the fundamental role which it delegated to the people but the ultimate source of the authority of Puerto Rico was Congressional Authority.

Mr. Verrilli continued defending the appointment by saying that President Obama had options in the appointment of the Board, contrary to Mr. Olson’s reading from the Congressional Record that the purpose was for a Republican Congress to select the members of the Board. President Obama, he argued, could have asked for more names also. He ended by claiming an independent Board was imbedded in the Government of Puerto Rico and the President was given removal powers to put some control on it. That begs the question, why place the power in the President if it is a Puerto Rico agency?

In a telling manner, the USA argued briefly, telling the Judge that if she adopted Aurelius’s argument, the Government of Puerto Rico would be unconstitutional, that Sánchez Valle and the Insular cases (and of course, Downes) all agree that territorial governments all owe their existence to Congressional Authority. Moreover, Mr. Ward surprised Judge Swain by saying that the USA would not necessarily agree to a stay if she granted Aurelius’s motion. The Government would want a time to brief the Court on the consequences of this action. Judge Swain was clearly dumbfounded by what the USA told her.

Walter Dellinger, acting Solicitor General under President Clinton, argued for AFFAF, surprisingly saying very little. He denounced the Insular cases, contrary to what he did in his brief where he cited Downes as good law, but said that the Appointments Clause exception was not dependent on them. He repeated the argument of what the Board could do in the name of the US. Unbelievably, he stated that the power of the Board, if it disappeared, would revert to PR. How it is that the power to file for Title III or to file the Plan of adjustment would revert to Puerto Rico is beyond my ken.

Other parties argued their points, but mostly in less than five minutes and not adding any significant points to the discussion, some rejecting the Insular cases, some arguing the UTIER did not have standing.  Martin Bienenstock briefly argued against the lifting of the stay saying Aurelius wanted to dismiss the Title III proceeding and rush to Court.  That’s not what the Aurelius brief says, but such comments from Bienenstock are par for the course in these proceedings.

In rebuttal, Mr. Emmanuelli discussed the standing issue, but the question still remains in my mind if, at this time, vis-à-vis, when the Plan of Adjustment is filed, the union has a cause of action.

Mr. Olson started his rebuttal by restating the question of the argument: Whether the Board members were officers of the US.

Judge Swain asked: Why do you think Congress said the Board is part of the Government of PR?

Olson answered probably because it was worried about the Appointments Clause.

Judge Swain asked: What if the President had a list of Board members and submitted them to the people of Puerto Rico for an election, would that make them a local or federal Board?

Olson said that it would be federal since it wields substantial federal authority.

She then asked: In 1947, there was a change on how the governor was selected, how does this change the authority?

He answered that this was done in all other territories and discussed the Northwest Ordnance.

Judge Swain changed the question to: Do you have any specific case law that says that elections obviate the Appointments Clause?

Olson answered that it all hinged on whether the party wielded federal authority.

Next Judge Swain asked: If Congress requires the President to make a list for governor and for the people to elect them?

Olson stated this creates constitutional problems and that that her hypothetical did not include what type of authority was wielded.

She finally asked: The president had time to appoint other persons to the Board but decided not to object?

Olsen answered that Congress had not given him time if n the Senate would not act.

After this, Judge Swain said she was taking the controversy under advisement. Although I think movants’ Constitutional argument is quite correct, given the many questions to Mr. Olsen and only one to those opposing him, I doubt Judge Swain will find in favor of Aurelius. That said, Judge Swain asked the parties about the stay of proceedings in case she decided in favor of Aurelius and was genuinely disturbed and dumbfounded by the USA’s refusal to go with the stay agreement, which could tip the scales. I don’t see the opinion coming out before February or March since Judge Swain knows the loser will take the issue to the US Supreme Court.

Later in the afternoon, Judge Swain heard argument on a motion for reconsideration of her dismissal of the UCC’s constitutional challenge to COFINA. I agree with the UCC that the stipulation does provide for constitutional challenges and only Ambac took exception to it. Judge Swain again took it under advisement and on January 11, 2018, issued an order denying the motion. However, she allowed the UCC the following:

“[The UCC] may file an urgent motion seeking leave to file a revised proposed Second Amended Complaint, with a redlined copy of the new proposal and a memorandum of law explaining the consistency of the proposal with the Court’s Scope ruling, by 6:00 p.m. (Atlantic Standard Time) on Thursday January 11, 2018. Any opposition to that urgent motion must be filed by 1:00 p.m (Atlantic Standard Time) on Friday January 12, 2018. Any reply must be filed by 10:00 p.m. (Atlantic Standard Time) on Friday January 12, 2018.”

Hence, the issue is still alive but the UCC has to very fine tune its averments.

Monday Update – January 8, 2018

Welcome to your weekly Title III update for January 8, 2018. After a short vacation, we are back to discuss the happenings in PROMESA. While not much happened, much will happen soon.

Foremost for this week, and even for this year, is the oral argument of the Aurelius and Utier constitutional challenge to the appointment of the members of the Board. Aurelius’s Objection and Motion to Dismiss presents a single yet fundamental question: Whether the members of the Board should be secretly hand-picked by four members of Congress or selected by the President and publicly confirmed by the Senate.

After a lengthy delay, the US Office of the Solicitor General informed the Court that it would defend the PROMESA appointments’ clause. Nothing surprising there since the office of the Solicitor General defends the overwhelming majority of constitutional challenges to acts of Congress. The last time I remember the Solicitor General deciding not to defend a law was when President Obama changed his mind about the Defense of Marriage Act.

The US Solicitor General wisely steered as far away as it could from the “Insular Cases,” especially the racist piece of resistance, Downes v. Bidwell, deciding instead in concentrating on cases before the 1898 dawn of the Imperial American Age.

The Board and AFFAF, however, in their motions reinforced the Territorial Clause of the US Constitution and Downes, which is the basis for Congressional discrimination against Puerto Rico in most federal programs. The Board claimed in its opposition to Aurelius motion that “[i]n a series of cases, the Court recognized that the U.S. Constitution applies ‘only in part in unincorporated Territories.’” The reference ends with a footnote citing Downes for the proposition that the Appointments Clause of the US Constitution does not apply to PR as an unincorporated territory. This probably explains why AFFAF did not argue in its brief that PR is an incorporated territory as Judge Gelpí decided in Consejo de Salud de Playa de Ponce v. Rullan. It seems that “[i]n the eyes of the Board and Governor Rosselló, it is better to have 100 more years of colonialism and discrimination than to have to pay the island’s debt.” See my Caribbean Business column, http://caribbeanbusiness.com/column-et-tu-ricky-and-jose/. Interestingly, Aurelius’ argument did not make any mention of the Territorial Clause.

Contrary to what some commentators believe, this challenge is important enough for the Board to have hired Donald Verrilli, President Obama´s former Solicitor General to argue its case and even used a reply to the US Solicitor General’s brief to further snipe at Aurelius, forcing the Court to allow the latter for file an unusual sur-reply. Anticipating the importance of the case, Aurelius hired Ted Olsen, George W. Bush’s Solicitor General and Matthew McGill, who successfully argued the Franklin California challenge to the Puerto Rico Recovery Act.

In addition, some of the same commentators that argued that the Aurelius challenge was not to be taken serious now claim that to grant the bondholder’s request would mean the dismissal of the Title III cases. In its reply to the Board’s motion to dismiss, Aurelius made clear how it envisioned the result of its successful challenge:

“In fact, the Opposing Parties agree with Aurelius that the proper remedy here is narrow andeminently practical: The Court should simply sever the offending portions of Section 2121(e). Board Opp. 34–35. That would cure the constitutional problem by allowing the President to decide for himself, with the Senate’s consent, who is best suited to serve on the Board. The parties also agree that the Court has procedural tools to ensure an orderly transition from the current Board to one that complies with the Appointments Clause. See, e.g., Dkt. 1627 (“GO Bondholders’ Stmt.”) at 2–3; see also Board Opp. 34; Dkt. 1629 (“Retiree Comm. Opp.”) at 35; Dkt. 1640 (“AAFAF Opp.”) at 31; Dkt. 1631 (“Unsecured Creditors Opp.”) at 28. In particular, this Court could simply stay its order of dismissal pending appeal, and the First Circuit, following appellate review, could stay its mandate pending the nomination and confirmation of a new Board. The Opposing Parties’ prophecies of disaster are belied by their own view of the remedies. They are also revealing. The Opposing Parties presuppose that the President would not select, or the Senate would not confirm, the same people who currently occupy the Board’s seats—even if that were necessary to prevent the sky from falling in Puerto Rico. If the President did determine that the current members are unworthy of their offices or not capable of discharging the Board’s important responsibilities in the wake of the hurricanes, and the Senate did not disagree, that would be to the good. There is no legitimate reason to shield the Board from this public scrutiny.”

The oral argument is going to be epic and lengthy. Judge Swain has allotted 90 minutes for each side. Argument starts at 11 am AST and 10 am EST in New York. Given the importance of the issue, I have no doubt Judge Swain will decide quickly and any appeal to the First Circuit will be expedited

The Aurelius constitutional challenge, however, is not the only thing in the agenda. At 3 pm AST and 2 pm EST, there will be the consideration of the UCC’s request for reconsideration on Judge Swain’s dismissal of some of its causes of action for allegedly going beyond the scope of its appointment in the Commonwealth v. COFINA case. Specifically, the UCC, quite correctly, points out that although its causes of action challenging the constitutionality of the COFINA structure were struck down, similar causes of action presented by the Ad Hoc Group of GO bondholders and Bettina Whyte as COFINA agent were not. Let’s see what Judge Swain decides.

In addition, several bondholders had filed requests for Rule 2004 discovery and the Court signaled its agreement to it subject to specific objections. The parties filed a report informing the Court where they agree and where (surprise surprise) they did not and subsequently, the Ad Hoc GO Group filed a motion objecting to following:

“Some of these Fiscal Plan Development Materials—such as the live model that underlies the Commonwealth Fiscal Plan, certified in March 2017—were provided to Movants in the “data room.” Those data room materials are subject to the strict constraints of an NDA (or in some cases, the mediation agreement), which prohibits their use in any way in the litigation. Among other things, they cannot be used as evidence-in-chief or for impeachment purposes, nor can they ever be shown to the Court. As for the rest of the Fiscal Plan Development Materials—such as versions of the new fiscal plan submitted to (but not certified by) the Oversight Board—Respondents refuse to produce them at all. Joint Rpt. at 3. Either way, Respondents, who continue to tout their “commitment to transparency” (Dkt. 1928 at 1), insist that these Fiscal Plan Development Materials must never see the light of day.”

As I have mentioned many times before, the Board is anything but transparent and will fight to the end to continue obfuscating the truth. Some Supervisory Board!

Also this past week, Gregorio Igartua, who has filed many cases to get Puerto Rico to vote for President, filed a petition for permission to file a brief of amicus curiae and included it with his pleading. In essence, it requests:

“As it can be seen, for Federal Courts to follow the Insular Cases, the case of Balzac, and/or the case of Harris v Rosario to legally support Puerto Rico’s special relation with the U.S. as a non-incorporated territory is today legally unfounded and incorrect. The practice of treating Puerto Rico as a non-incorporated territory where constitutional dispositions do not apply, and as an incorporated for others, must end.”

Finally someone arguing what the Government of Puerto Rico should have argued, for example, that Puerto Rico is an incorporated territory and the full power of the Constitution applies to it. Too bad that this is too little, too late.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.