Monday Update – July 16, 2018

Welcome to your weekly Title III update for July 16, 2018. Again, a lot has happened in the Title III case.

After Aurelius filed its motion reminding Judge Swain that two new cases related to it’s Appointments Clause challenge to the Board had come down from the Supreme Court, the US, the Board, Governor Rosselló and others filed oppositions. On Friday, Judge Swain issued its ruling and not surprisingly, sided with the Board.

In synthesis, Aurelius and Utier, PREPA’s principle union, had challenged the Title III and other Board actions by averring that the Board had not been properly appointed as per the Appointments Clause of Article II, Section 2, Clause 2 of the Constitution of the United States. As stated before, a ruling favorable to the Board was expected but how the ruling was made will have a profound impact in US-Congress relations to Puerto Rico. The Court explained defendants’ positions:

The United States, which has exercised its statutory authority to intervene in these proceedings to defend PROMESA’s constitutionality (see 28 U.S.C. § 2403(a)), argues that PROMESA’s appointment mechanism is not subject to the Appointments Clause because (i) the Oversight Board members are territorial officers rather than “Officers of the United States,” and (ii) the Appointments Clause does not govern the appointment of such territorial officers. (See generally U.S. Mem. of Law.) In support of its position, the United States cites historical practice and argues that Congress’s plenary power over the territories is not subject to the distribution of powers provisions that regulate the federal government. (Id. at 8-15.) The Oversight Board primarily raises the same argument. (Docket Entry No. 1622, the “FOMB Opposition,” at 7-21.) In addition, the Oversight Board contends that (i) the Appointments Clause does not constitute a “fundamental” constitutional provision and, as such, it does not apply to Puerto Rico, and (ii) even if the Appointments Clause is applicable, the Oversight Board members were properly appointed. (Id. at 23-31.) The other opponents raise substantially similar arguments to those advanced by the United States and the Oversight Board. (See generally, Docket Entry Nos. 1610, 1629, 1631, 1634, 1638, 1640.) . . .

The principal question thus presented for the Court on this motion practice is whether the Constitution required compliance with the Appointments Clause in the appointment of the Oversight Board members.

Judge Swain, the Solicitor General and the Board all knew that the Appointments Clause applied, unless the Territorial Clause could trump it. In order to do so, Judge Swain analyzed Congressional power over Puerto Rico. She stated:

The Territories Clause of Article IV of the Constitution vests Congress with the “[p]ower to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” U.S. Const., Art. IV, § 3, cl. 2. The Supreme Court has long held that Congress’s power under this clause is both “general and plenary.” Late Corp. of the Church of Jesus Christ of Latter-Day Saints v. United States, 136 U.S. 1, 42 (1890) (reasoning that the people of the United States became the “sovereign owners” of the territory of Utah upon its acquisition, that the United States as their government exercises power over the territory subject only to the provisions of the Constitution, and that Congress therefore could supersede pre-acquisition legislative acts). Acting under the Territories Clause, Congress may, for example, create local governments for the territories of the United States. See, e.g., United

States v. Wheeler, 435 U.S. 313, 321-22 (1978) (stating that “a territorial government is entirely the creation of Congress,” while noting the unique status of Native American tribes, whose prior sovereignty is preserved in certain respects). The constitutional division between state sovereignty over affairs within state borders and affairs ceded to the federal government pursuant to the Constitution is not applicable to territories, whose governments are “the creations, exclusively, of [Congress], and subject to its supervision and control.” Benner v. Porter, 50 U.S. 235, 242 (1850); see also Cincinnati Soap Co. v. United States, 301 U.S. 308, 323 (1937) (explaining that “[i]n dealing with the territories . . . Congress in legislating is not subject to the same restrictions which are imposed in respect of laws for the United States considered as a political body of states in union”).

The Court continues its explanation:

A federal territory’s “relation to the general government is much the same as that which counties bear to the respective States, and Congress may legislate for them as a State does for its municipal organizations.” First Nat’l Bank v. Yankton Cty., 101 U.S. 129, 133 (1879). Congress can thus amend the acts of a territorial legislature, abrogate laws of territorial legislatures, and exercise “full and complete legislative authority over the people of the Territories and all the departments of the territorial governments.” Id. With respect to territorial governance, Congress exercises the governance powers reserved under the Constitution to the people in respect of state matters. Id. In this sense, Congress occupies a dual role with respect to the territories of the United States: as the national Congress of the United States, and as the local legislature of the territory. See Cincinnati Soap Co., 301 U.S. at 317 (“A [territory] has no government but that of the United States, except in so far as the United States may permit. The national government may do for one of its dependencies whatever a state might do for itself or one of its political subdivisions, since over such a dependency the nation possesses the sovereign powers of the general government plus the powers of a local or a state government in all cases where legislation is possible.”); see also Keller v. Potomac Elec. Power Co., 261 U.S. 428, 442–43 (1923) (recognizing that, in exercising Congress’s substantially identical power over the District of Columbia, Congress had power to create courts “of the District, not only with the jurisdiction and powers of federal courts in the several states, but with such authority as a state (1828) (recognizing the power of Congress to create a territorial court with jurisdiction that could not otherwise have been constitutionally granted to a state court); United States v. McMillan, 165 U.S. 504, 510–11 (1897) (explaining that territorial courts are not “courts of the United States, and do not come within the purview of acts of Congress which speak of ‘courts of the United States’ only,” although Congress exercises the combined powers of the general government, and of a state government with respect to territories and could directly legislate for any territory or “extend the laws of the United States over it, in any particular that congress may think fit.”) may confer on her courts”); Am. Ins. Co. v. 356 Bales of Cotton, 26 U.S. (1 Pet.) 511, 546 (1828) (recognizing the power of Congress to create a territorial court with jurisdiction that could not otherwise have been constitutionally granted to a state court); United States v. McMillan, 165 U.S. 504, 510–11 (1897) (explaining that territorial courts are not “courts of the United States, and do not come within the purview of acts of Congress which speak of ‘courts of the United States’ only,” although Congress exercises the combined powers of the general government, and of a state government with respect to territories and could directly legislate for any territory or “extend the laws of the United States over it, in any particular that congress may think fit.”). (emphasis supplied)

At footnote 11, Judge Swain dismisses Aurelius’ arguments as to the two new SCOTUS cases stating the following:

On July 6, 2018, the Court received and reviewed a supplemental informative motion filed by Aurelius (Docket Entry No. 3451, the “Aurelius Supplement”) The Court subsequently received and reviewed informative motions filed by the Oversight Board, the United States, and the COFINA Seniors in response to the Aurelius Supplement. (Docket Entry Nos. 3494, 3495, 3500.) In its submission, Aurelius cites the Supreme Court’s June 22, 2018 decision in Ortiz v. United States, 138 S. Ct. 2165 (2018), for the

propositions that military and territorial courts are created pursuant to similar powers, and if separation of powers concerns pertain to one they must necessarily pertain to the other. (Docket Entry No. 3451 at 5.) The Ortiz Court’s focus has no such implications, however. The Court was examining the question of whether the military court rulings before it were within its appellate jurisdiction. It cited past examples of judicial proceedings in state, military and territorial courts from which it had entertained appeals, emphasizing the judicial review, as opposed to executive action or original determination, aspects of the matter that was before it in Ortiz. Ortiz does not speak to the question of whether Congress can create a territorial court or any other entity that is not a court of the

United States and is not subject to the Appointments Clause. The Ortiz Court’s treatment of the Appointments Clause is similarly inapposite, as the Court held that Congress was empowered to permit the challenged military officer to perform in the job in question and the appellant’s Appointments Clause argument (which the Court rejected) concerned whether a single person could be both a principal and an inferior officer of the United States, an issue that is not raised here. See Ortiz, 138 S. Ct. at 2183-84. The supplemental informative brief also cites the Lucia case, which is similarly inapposite as it involved a distinction between an officer of the United States and an employee. Lucia v. S.E.C., 138 S. Ct. 2044 (2018).

Judge Swain summarized her view of Puerto Rico’s relation to Congress and said:

In summary, Congress has plenary power under the Territories Clause 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. It has exercised this 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 plenary Article IV authority by authorizing a significant degree of local self-governance. Such territorial delegations and structures may, however, be modified by Congress. John R. Thompson, 346 U.S. at 109. Congress purported to do so in creating the Oversight Board as an entity of the territorial government of Puerto Rico. (emphasis supplied)

Judge Swain then dispatches Aurelius strongest argument, to wit, that the Board wields substantial federal power, by saying;

The Oversight Board’s statutory objectives and scope of authority thus mark its character as territorial rather than federal.

You could literally hear the applause at Fortaleza and the Board’s offices after Swain’s ruling; however, their joyful mood may be temporary. In a surprising twist, the Federal Court of Claims denied the motion of the United States to dismiss in a case where several bond insurers are claiming that PROMESA constituted a taking without just compensation by the United States. The United States claimed:

[T]he court does not have jurisdiction to adjudicate Plaintiffs’ Takings Clause claim, because: (1) the Oversight Board is not part of the United States Government; (2) Congress authorized the United States District Court for the District of Puerto Rico with exclusive jurisdiction to adjudicate creditors’ claims against the Commonwealth and the Oversight Board; (3) the October 31, 2017 Amended Complaint is barred by 28 U.S.C. § 1500; (4) Plaintiffs’ takings Clause Claim is not ripe for adjudication; and, in the alternative, (5) Plaintiffs’ October 31, 2017 Amended Complaint fails to state a claim on which relief may be granted.

What is very important is that the Federal Claims Court determined that the Board was part of the United States – meaning Federal not Territorial. In doing so, it stated:

The text of PROMESA provides that the Oversight Board is an entity of the Commonwealth, but specified that it “shall not be considered to be a department, agency, establishment, or instrumentality of the Federal Government.” 48 U.S.C. § 2121(c). Statements made by Congress during the passage of PROMESA, however, refer to the Oversight Board as a “federal oversight board.”15 In addition, the House Report on PROMESA directed the Congressional Budget Office to “treat the Oversight Board as a federal entity[,] because of the ‘significant degree of federal control involved in [the Oversight Board’s] establishment and operations.’” H.R. Rep. No. 114-602 at 72. Although this legislative history is relevant in determining whether the Oversight Board is a federal entity, the court does not need to rely on legislative history, because established precedent is dispositive of this threshold issue. (emphasis supplied)

Although Judge Swain dismissed Aurelius mention of two new cases of the SCOTUS with a footnote, Judge Susan G. Branden discussed Lucia v. SEC at length with approval and said:

On June 21, 2018, the United States Supreme Court issued a decision in Lucia v. S.E.C., 138 S. Ct. 2044 (2018), that held certain administrative law judges (“ALJs”) were “Officers of the United States,” under Article II, Section 2, Clause 2, because they “hold a continuing office established by law.” Lucia, 138 S. Ct. at 2047; see also Freytag v. C.I.R., 501 U.S. 868, 881 (1991) (holding that “[t]he office of special trial judge is established by [l]aw . . . and the duties, salary, and means of appointment for that office are specified by statute.”) (internal quotation marks omitted). In this case, Oversight Board members hold a continuing office established by Congress that specifies their “duties . . . and means of appointment.” Freytag, 501 U.S. at 881; see also 48 U.S.C. §§ 2121–2129. Similarly to the ALJs in Lucia, Oversight Board members exercise “significant discretion” in carrying out their “important functions.” Lucia, 138 S. Ct. at 2053 (quoting Freytag, 501 U.S. at 882). Although the special trial judges in Freytag and the ALJs in Lucia were engaged in different and much more limited duties than those exercised by Oversight Board members, there is little doubt that the latter are also “federal civil officials ‘with responsibility for an ongoing statutory duty.’” Lucia, 138 S. Ct. at 2056 (Thomas, J., concurring) (quoting NLRB v. SW General, Inc., 137 S. Ct. 929, 946 (2017) (Thomas, J., concurring); see also Lion Raisins, Inc. v. United States, 416 F.3d 1356, 1362 (Fed. Cir. 2005) (“There is no question that the United States, in general, incurs takings liability for the acts of its agents. That is, a takings claim against the United States may be based on the acts of an agent of the United States.”) (internal quotation marks omitted).

Importantly, Judge Branden stayed the case stating:

The separate issue of whether the Oversight Board members’ manner of appointment violates Article III, Section 2, Clause 2, is presently pending before the United States District Court for the District of Puerto Rico in two separate lawsuits. See Objection And Motion Of Aurelius To Dismiss Title III Petition, In re The Financial Oversight and Management Board for Puerto Rico, No. 17-03283-LTS (D.P.R. Aug. 7, 2017), Dkt. No. 913; see also First Amended Adversary Complaint, Union de Trabajadores de la Industria Electrica y Riego v. Puerto Rico Elec. Power Auth., No. 17-228, Dkt. No. 75 (D.P.R. Nov. 10, 2017). In the event that the United States District Court for the District of Puerto Rico determines that it does, the “appropriate remedy” may render the actions of the Oversight Board alleged in the October 31, 2017 Amended Complaint unlawful and require restoration or restitution of the Pledged Property that served as collateral for the ERS bonds owned by Plaintiffs.

Therefore, the court has determined that the Government’s 28 U.S.C. § 1500 challenge and alternative motion to dismiss the October 31, 2017 Amended Complaint, pursuant to RCFC 12(b)(6), are not ripe. Accordingly, the interests of justice require that this case be stayed, at least until a decision and final judgment is entered in each of the above-referenced cases: In re The Financial Oversight and Management Board for Puerto Rico, No. 17-03283-LTS; and Union De Trabajadores De La Industria Electrica Y Riego v. Puerto Rico Electric Power Authority, No. 17-228.

I had no doubt Judge Swain would side with the Board since to do so would mean a stay of the case while appeals ensued or President Trump proceeded with the appointment. What I was not counting on was the Court of Claims deciding the issue in a contrary fashion. This case will be appealed and undoubtedly Aurelius and Utier will ask that the appeal be expedited by the First Circuit. That would allow a judgment by the appellate court before the end of the year and a request of certiorari to the SCOTUS in time for the next term and possibly a decision before June 30, 2019. The fact that there are two different decisions in two different “Circuits” (the Court of Claims is to a certain extent like a Federal District Court and its decisions are appealed to the Federal Circuit) puts further weight on the granting of a certiorari in this case. Since Judge Swain’s decision now makes it necessary for Judge Brendan to determine whether the United States is liable for PROMESA, it puts further stress on the appellate courts to prevent this. I am not saying they will, but is always a consideration to protect the United States from having to pay judgments. Also, if the Claims Court were to find the United States liable, it could repeal PROMESA or at least Title III. So many possible scenarios.

In imitation of the Commonwealth, the Puerto Rico legislature filed a complaint against the Board. Fortunately, for us paying taxes here, the Legislature did not hire a stateside law firm but rather a local one. The complaint is different from the Government’s, which tries to skirt the inevitable clash with PROMESA section 106(e) that divests the district court of jurisdiction to review the Board’s certifications, and goes to questionable arguments such as:

Despite the fact that the Legislative Assembly approved a valid budget, consistent with the Fiscal Plan, due to the Legislative Assembly’s disapproval of the bill repealing Law 80 in the way and manner the FOMB wanted, FOMB refused to certify the Commonwealth’s budget approved by the Legislative Assembly, and retaliated against it by imposing punitive measures in reducing the Legislative Assembly’s operational budget. It’s important to highlight that the Legislative Assembly’s budget was lower than the FOMB’s own approved budget. The FOMB’s retaliation constitutes an impermissible imposition of penalties or sanctions against the Commonwealth and/or its officers or employees, which PROMESA does not allow, and in contravention to Puerto Rico’s sovereignty.

If this were not enough to raise Judge Swain’s brow, the complaint twice invokes Puerto Rico’s sovereignty and requests as remedy, inter alia, the following order:

Declaring that, by forcing the Legislative Assembly to advance its own agenda, and punishing the government by not approving the 2018-2019 Legislative Assembly Budget when its strong-arm tactics failed, the FOMB exceeded its statutory authority under PROMESA;

Declaring that, the 2018-2019 FOMB Budget is null and void, and

Declaring that the 2018-2019 Legislative Assembly Budget duly approved by the Legislative Assembly and signed by the Governor of Puerto Rico shall be reinstated.

Enjoining the defendants from implementing the FOMB’s 2018-2019 Budget;

Ordering the defendants to certify the 2018-2019 Legislative Assembly Budget;

Although the Government’s challenge is unlikely to succeed, this is even more daunting. I do not know under what authority in PROMESA Judge Swain may order the Board to “certify the 2018-2019 Legislative Assembly Budget,” or that the “2018-2019 Legislative Assembly Budget duly approved by the Legislative Assembly and signed by the Governor of Puerto Rico” be reinstated.

On July 12, the Board filed its expected motion to dismiss the Government’s challenge and it came out swinging. After the Zamot defeat and Judge Swain’s denial of the PREPA loan, it seemed the Board was doubting its powers under PROMESA. Not so here. The motion states:

The entire Complaint rests on one legal gambit, namely that every Fiscal Plan and budget provision the Governor finds objectionable is and can only be a “recommendation” under PROMESA § 205, that he alone determines whether to accept them, and the Oversight Board is powerless to enforce them. Notably, to support his view, the Governor cites the “additional view” of Puerto Rico’s nonvoting representative to Congress (Complt. ¶¶ 25-26), rather than citing the statute, and the actual House Report which says the opposite: “The Oversight Board may incorporate any recommendations – even those not adopted by the Legislature or Governor – into the development of Fiscal Plans.”

Predictably, it tells the Court it lacks jurisdiction to entertain the motion:

Despite the Complaint’s repeated protests to the contrary, the Complaint is a challenge to the certified Fiscal Plan and Budget. The Court has recognized that, to be meaningful, PROMESA § 106(e) precludes an exploration into whether the contents of the Fiscal Plan violate PROMESA § 201(b). Pursuant to PROMESA § 106(e), the Court lacks subject matter jurisdiction over challenges to certifications. If the Complaint is not such a challenge, then it is a request for an advisory ruling (unobtainable from this Article III Court) because without eliminating the certifications, the provisions of the Fiscal Plan and Budget do not change.

In a direct dig at the politicians of Puerto Rico challenging its authority, the Board quotes Congressman Duffy:

Congress recognized that “the elected officials in Puerto Rico have known that this issue has been coming for years, and they haven’t been able to get their hands around it, haven’t had the political will to fix the burning problem. So we are going to put into effect an oversight board to actually work with the island government to get its finances and its budgets under control.” Rep. Duffy, CONG. REC. 162:91 (June 9, 2016) p. H3600.

How unsurprising the Board quoted Duffy. The Board kept with the critique of the island’s politicians and reminded the Court of its own rulings on the subject of certifications:

The relief sought in the Complaint boils down to a declaration that Plaintiffs do not need to implement and enforce provisions of the certified Fiscal Plan and Budget, which in the Governor’s view are recommendations within the meaning of PROMESA § 205(a). PROMESA, however, gives the Oversight Board the final word on the contents of the certified Fiscal Plan and Budget. As the Court observed in the CTO Decision, the Oversight Board can certify its own Fiscal Plan and Budget after it follows “an interactive process with the territorial government [which] does not yield a plan or budget that is acceptable to the [Oversight Board].” 583 B.R. at 631.The Court went on to note that if the Oversight Board “develops and certifies its own Fiscal Plan and/or budget under these circumstances, the Commonwealth’s government is deemed to have accepted the [Oversight Board’s] plan or budget.” Id. Giving the Oversight Board this final, determinative authority makes sense, because Congress recognized that, at least in part, Puerto Rico’s fiscal emergency was caused by “the inability of its local politicians to bring order and transparency” to the territorial economy. See H.R. Rep. No. 114-602, at 40 (2016).

Hammering at the Fiscal Plan, the Board states:

To achieve these core tenets of the Fiscal Plan, the Oversight Board must have power to specify how that should be done. That is why PROMESA § 201(b)(1) requires that the Fiscal Plan shall provide a “method” for achieving fiscal responsibility and access to the capital markets, and requires that the Fiscal Plan shall “enable the achievement of fiscal targets,” PROMESA § 201(b)(1)(G) (emphasis added). As Plaintiffs themselves recognized, “Titles I and II give the Oversight Board authority to shape broad fiscal policy by certifying Fiscal Plans and approving budgets that serve as the blueprints for restructuring efforts and reforms necessary to achieve fiscal responsibility.” In the same way a builder cannot omit or ignore key parts of a blueprint without risking the building collapsing, the Governor cannot reject piecemeal aspects of the fiscal plan or deem them “optional” without disrupting the carefully constructed balance of economic and fiscal measures designed to meet PROMESA’s objectives. Therefore, Congress mandated that if the Governor fails to submit a Fiscal Plan “that the Oversight Board determines in its sole discretion satisfies the requirements” of PROMESA § 201(b), the Oversight Board“ shall develop and submit” its own Fiscal Plan, which “shall be deemed approved by the Governor” and then certified. PROMESA §§ 201(d)(2), (e)(2).

Likewise, Congress entrusted the Oversight Board with the obligation and authority, “in its sole discretion,” to approve budgets for the Commonwealth and its instrumentalities “compliant with the applicable Fiscal Plan.” PROMESA § 202(c)(1). As with Fiscal Plans, however, if the Governor and Legislature fail in the first instance to develop and approve a Budget compliant with the Fiscal Plan, PROMESA mandates the Oversight Board to submit its own Budget, which is “deemed to be approved by the Governor and the Legislature,” id. § 202(e)(3)(A), and is “in full force and effect beginning on the first day of the applicable fiscal year.” Id. § 202(e)(3)(C).

Distinguishing Judge Swain’s decision in Zamot, the Board claims:

Plaintiffs contend the Oversight Board is overstepping limits identified by the Court in its decision regarding the PREPA Chief Transformation Officer (“CTO”) by “micromanaging” the Government through its detailed Budget. E.g., Complt. ¶¶ 6-7, citing the CTO Decision. To the contrary, Plaintiffs are undermining what PROMESA and the CTO Decision squarely identified as being duties of the Oversight Board, and are engaging in behavior not at issue in the CTO matter. See CTO Decision, 583 B.R. at 636 (“It is notable here that the [Oversight Board] has not asserted that PREPA is non-compliant with a certified Fiscal Plan or budget.”). Unlike the CTO dispute, the Oversight Board is not attempting to “impose changes in structure or reporting lines” within the Commonwealth. Id. Rather, the Oversight Board is fulfilling its mandate by utilizing its express fiscal plan and budgetary powers under Title II of PROMESA to certify Fiscal Plans and budgets that provide a method for Puerto Rico to achieve fiscal responsibility and access to capital markets.

Going directly to the “recommendations” objected by the Government, the Board pushed its position of being able to force those recommendations:

Pursuant to PROMESA § 201(b)(1)(K), a Fiscal Plan shall “adopt appropriate recommendations submitted by the Oversight Board.” “Appropriate recommendations” are those determined by the Oversight Board as coming within § 201(b) and § 205(a). See PROMESA § 201(b) (“A Fiscal Plan developed under this section shall … provide a method to achieve fiscal responsibility and access to capital markets …”); § 205(a) (recommendations “ensure compliance with the Fiscal Plan, or to otherwise promote the financial stability, economic growth, management responsibility, and service delivery efficiency of the territorial government….”). If the Oversight Board certifies a Fiscal Plan containing such recommendations, in its sole discretion, PROMESA §§ 201(c)(3), and 106(e), it is “deemed approved by the Governor” and is binding. PROMESA § 201(e)(2). If the Oversight Board exercises its discretion to develop a budget, it is “deemed to be approved by the Governor and the Legislature” and “in full force and effect.” PROMESA § 202(e)(3).

The statutory scheme of PROMESA as a whole is incompatible with Plaintiffs’ argument. Courts must construe statutes as a whole, in light of all of their provisions, and giving effect to each part. See, e.g., United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371 (1988) (noting that “[s]tatutory construction . . . is a holistic endeavor’ and that a court should select a ‘meanin[g that] produces a substantive effect that is compatible with the rest of the law”); Kelly v. Robinson, 479 U.S. 36, 43 (1986) (in interpreting a statute, a court “must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy” (internal quotation marks omitted)); La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 370 (1986). Under PROMESA, a Fiscal Plan must “adopt appropriate recommendations submitted by the Oversight Board under section 205(a)” in its Fiscal Plans. PROMESA § 201(b)(1)(K). PROMESA does not say such recommendations shall be adopted only if the Government has already “agreed to adopt” them, as Plaintiffs argue. Complt. ¶ 42. . . For present purposes, PROMESA § 201(b)(1)(G) empowers the Oversight Board to insert into the Fiscal Plan measures to enable achievement of fiscal targets. PROMESA §§ 203 and 204 provide remedies and precautionary measures to achieve Fiscal Plan targets and budget targets. And PROMESA § 108(a)(2) bars the governor from imposing rules or orders impairing or defeating PROMESA. (emphasis supplied)

The Board continued hammering section 201(b)(1)(G):

In an attempt to interpret PROMESA in a manner thwarting the language of § 201(b)(1)(K), which empowers the Oversight Board to adopt appropriate recommendations in the Fiscal Plan, Plaintiffs provide a distorted and incomplete recitation of the legislative history, contending that: “Congress specifically considered – but resoundingly rejected – granting the Oversight Board the broad power to impose its policy preferences over Government objections … [and] discarded these ‘anti-democratic’ provisions, which appear nowhere in PROMESA as enacted.” See Complt. ¶¶ 4, 41.

To the contrary, the actual legislative history confirms Congress knew full well that “recommendations” would potentially become adopted pursuant to certified Fiscal Plans after being rejected by the Commonwealth government, and would be mandatory in that circumstance. In its discussion of PROMESA § 205, the actual House Report, as opposed to its appended “Additional Views,” concludes the “Oversight Board may incorporate any recommendations – even those not adopted by the Legislature or Governor – into the development of Fiscal Plans.” H.R. Rep. 114-602(I) (2016) at 46 (emphasis added). And Senator Menendez noted that § 201(b)(1)(K) “allows the board to ‘adopt appropriate recommendations’ submitted by the Oversight Board under section 205,” so that “in essence, they can adopt the very essence of what they are saying is a recommendation.” Yet another report stated “[t]he Board’s broad powers include: the imposition of legislative or executive recommendations….” Congress clearly intended to do what it did: to pass a bill granting the Oversight Board broad responsibilities and the means to fulfill them in a Fiscal Plan. Other legislative history is in accord. The Governor’s complaint does not quote from the actual legislative history. It quotes from an “additional view” put forward by Puerto Rico’s then nonvoting representative to Congress. . . The Discussion Draft granted the Oversight Board the authority, “by a majority vote of its members” to “take such action concerning the recommendation as it deems appropriate” the moment it was rejected by the Governor. Discussion Draft § 207(c)(1). The Discussion Draft also granted the Oversight Board authority “at any time [to] issue such orders, rules, or regulations as it considers appropriate . . . to the extent that the issuance of such an order, rule, or regulation is within the authority of the Governor or the head of any department or agency of the Government of Puerto Rico.” Discussion Draft § 207(d)(3). This provision granted the Oversight Board power equal to that of the Governor to issue orders, rules, and regulations. It would have allowed the Oversight Board to essentially control entire departments of the government of Puerto Rico. But Discussion Draft section 207(d) was deleted. When section 207(d) was deleted, section 207(c) was inserted into section 201(b)(1)(K) providing Fiscal Plans shall adopt appropriate recommendations. The requirement for a majority of the Oversight Board to approve the recommendation was maintained because PROMESA § 101(h)(2) requires majority approval to certify Fiscal Plans. The “additional view” Plaintiffs cite, provided by Pedro Pierluisi, Puerto Rico’s then nonvoting Congressional representative, also explained that under § 201(b)(1)(K) the governor would have to adopt appropriate recommendations in any Fiscal plan he proposes.

As I said after the Board revealed it was going to certify a new Fiscal Plan back in 2017, it decided it would certify a Fiscal Plan of such nature that would allow it to rule Puerto Rico. And that is what it is telling Judge Swain PROMESA allows. This may not sit well with Judge Swain who may simply say she is without jurisdiction to review the Fiscal Plan or the budget. Moreover, after the decision on the Aurelius challenge, she may go further and side with the Board, especially after last week’s resignations in PREPA. She may even be wondering on the wisdom of her decision on Zamot. Irrespective, last week’s PREPA fiasco looms large in regards to the bigger question: Who should take the decisions in Puerto Rico, the politicians or the Board?

This brings us to another issue; if the Board wins big on these motions and the Government must comply, there will be little, if any cooperation with the Board. On the other hand, if Judge Swain sides with the Government and Legislature, there will be no meaningful role for the Board, which could then dismiss the Title III petitions. Even if they don’t, with politicians calling the shots, it is highly unlikely that a confirmable Plan of Adjustment could be prepared, forcing the dismissal of the Title III. Then what?

In any event, the Government must file its reply by July 17 and will file a motion to dismiss the Legislature’s complaint by July 18. The motions will be discussed in the July 25 Omnibus hearing and I expect Judge Swain to rule from the bench. Without a doubt, this is a crucial ruling.

In other cases, the HTA appeal by Assured Guarantee is moving along and the Board filed its opposition on July 9. This case is being followed closely by the Municipal Bond community and will be of great importance for state financing. Stay tuned.

The Puerto Rico Civil Rights Commission filed a request to file a brief of amicus curiae last week. The brief, signed by the Commissioners, none of whom is admitted in federal court, was chock full of references to International law, United Nations resolutions and other matters totally irrelevant to the Title III. Justice Scalia must be turning in his grave. The brief requests that the Court take a human rights approach to the restructuring of Puerto Rico’s debt. Essentially they want Judge Swain to ignore Title III, US Bankruptcy law and the island’s constitution and put services ahead of debt. Judge Swain dismissed it without prejudice, correctly saying this was not the time and that they should wait until the Plan of Adjustment. Moreover, it is clear that Judge Swain does not like amicus briefs. Another wasteful use of taxpayers’ money.

The Official Retirees Committee was forced to file a motion requesting payment by the Commonwealth. In essence, it says:

The Retiree Committee’s professionals have worked diligently to resolve the issues presented by this Motion without this Court’s intervention over the past several months. They have provided all requested summary information, all certifications, and all declarations. They have even enlisted—at their own expense—the services of Deloitte in Puerto Rico to provide tax and accounting assistance to Hacienda. Despite the Retiree Committee’s professionals’ best efforts, Hacienda has failed to pay amounts that are due under the Interim Compensation Orders.

If the Commonwealth is not paying the official committees, will it pay creditors pursuant to a Plan of Adjustment? Very embarrassing, and gives political support to the Federal Claims court’s reasoning.

In other news, there were a few objections filed as to the Exit plan of the Investigator. Irrespective, the big issue will be when the report comes out on August 15 and which causes of action, if any, the Board will exercise against the banks or others. Also, whether the UCC will attempt to file its own if the Board does not. Let’s see what happens.

Assured objected to the Board’s request for a stay of proceedings on its adversary proceeding challenging the Fiscal Plan pending a decision on appeal. These stays are not common and it is not likely the Court will issue it. It will be simpler for her to simply deny the requested remedy. Seems the Board fears that the actual challenge to the Fiscal Plan may reach the First Circuit and section 106(e) deemed unconstitutional. Let’s see what happens.

The ERS bondholders’ request to be paid has raised objections from the Retirees Committee and other bondholders. Again, this is a challenge that will continue to be brought forward by bondholders. Let’s see what the appellate court eventually decides.

Finally, Caribbean Business reports that not all is well in the COFINA settlement case. Seems that Junior bondholders are not happy with what they will receive. We will know more by August 4 since that is the deadline. If the Government loses its Fiscal Plan challenge, it could decide to play the spoiler. Also, as I have said before, unless the Commonwealth and GO’s accept the COFINA deal, there will be litigation about it. As if Puerto Rico needed more.

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.

Monday Update – July 9, 2018

Welcome to your weekly Title III update for July 9, 2018. This time, a lot has happened in the Title III cases.

Governor Rosselló quickly dispelled any doubts of which budget he would execute and on Thursday morning announced he would sue the Board to delimitate the bounds of the Board’s powers. At 1 pm on Thursday July 5, 2018, the complaint was filed. It states, inter alia:

Over the past several months, the Oversight Board has used the fiscal plan and budget certification processes contemplated by the Puerto Rico Oversight, Management, and Economic Stability Act, 48 U.S.C. §§ 2101-2241 (“PROMESA”), in an attempt to impose its policy preferences on Puerto Rico’s people, micromanage every aspect of budget expenditures, and exercise legislative power the Board does not have, all over the objections of Puerto Rico’s elected Government. The Board’s efforts exceed its lawful powers and should be enjoined by this Court. . .

Specifically, the Oversight Board cannot do what it is attempting to do: impose mandatory workforce reductions, change the roles and responsibilities of certain government officials, criminalize certain acts under Puerto Rico law and otherwise seek to micromanage Puerto Rico’s government.

The Commonwealth cited the Zamot decision as an important precedent preventing the Board from behaving in this fashion and is careful to claim,“the Government is not challenging certification.” This is important since section 106(e) of PROMESA purportedly strips the District Court of jurisdiction to review Board certifications. Let’s see what the Commonwealth actually objects to:

The Oversight Board’s Fiscal Plan includes the following objectionable provisions:

  • Suspension of Reprogramming Authorization for Prior Fiscal Years. The Board Fiscal Plan seeks to suspend the Government’s authorization to seek reprogramming for prior fiscal years, stating that “[a]ny power of OMB, the Fiscal Agency and Financial Advisory Authority (“AAFAF”, by its Spanish acronym) or the Department of the Treasury, including the authorities granted under Act 230- 1974, as amended, known as the “Puerto Rico Government Accounting Act” (“Act 230”), to authorize the reprogramming or extension of appropriations of prior fiscal years is hereby suspended. Notwithstanding this section, the appropriations approved in the budget certified by the Oversight Board may be modified or reprogrammed with the approval of the Oversight Board.” Board Fiscal Plan § 11.2.1.
  • Imposed Government Agency Consolidations. The Board Fiscal Plan attempts to dictate how the Government will organize itself to conduct day-to-day operations, including through the creation of an Office of the Chief Financial Officer and to “right-size” the Government through agency consolidation and reduction and/or elimination of government services. See Board Fiscal Plan § 12. Some, but not all, of these consolidations were agreed to by AAFAF as part of the fiscal plan development process.
  • Automatic Budget Reductions for Future Fiscal Years. The Board Fiscal Plan seeks to impose automatic budget reductions on the Government, stating that, “[i]f, after the third fiscal quarter of any fiscal year there remains unrealized agency efficiency savings for any grouping relative to the projected agency efficiency savings in the New Fiscal Plan for the applicable fiscal year, the Oversight Board will automatically reduce the budget for the corresponding grouping for the following fiscal year in the amount equal to the unrealized agency efficiency savings. In particular, if the Oversight Board determines that there is material underperformance in agency efficiency savings relative to the projections set forth in the New Fiscal Plan, intentional workforce reductions will be necessary to meet the agency efficiency savings targets set forth herein.” Board Fiscal Plan § 12.3.
  • Elimination of Statutorily Mandated Christmas Bonuses. The Board Fiscal Plan sets forth several recommendations affecting government-employee compensation, including: (i) instituting a hiring freeze; (ii) limiting paid holidays to 15 days annually across all public employees; (iii) prohibiting carryover of sick and vacation days between fiscal years; (iv) prohibiting any future liquidation of sick and vacation days; (v) eliminating the Christmas bonuses for all public employees; and (vi) standardizing employee healthcare benefits so that all employees receive $100 worth of benefits per month. See Board Fiscal Plan § 12.4. The Christmas bonuses that the Board Fiscal Plan seeks to eliminate are statutorily mandated under Puerto Rico’s Christmas Bonus Act, Law No. 148 of June 30, 1969 (“Law 148-1969”), as amended by Law 4-2017 and the Fiscal Plan Compliance Act, Law No. 26 of April 29, 2017 (“Law 26-2017”).

As to the Board’s budget resolutions, the Commonwealth stated:

The Budget Resolutions are not simply itemized budgets. Rather, the Oversight Board has used them to dictate substantive policy and effectively make new laws for Puerto Rico, including the following key provisions:

Section 7 of the General Fund Resolution and Special Resolution provide that: “Any power of OMB, AAFAF or the Department of the Treasury, including the authorities granted under Act 230-1974, as amended, known as the “Puerto Rico Government Accounting Act” (“Act 230”), to authorize the reprogramming or extension of appropriations of prior fiscal years is hereby suspended. Notwithstanding this section, the appropriations approved in the budget certified by the Oversight Board may be modified or reprogrammed with the approval of the Oversight Board.” Notably, this language is identical to the language in section 11.2.1 of the Board Fiscal Plan.

Section 10 of the General Fund Resolution provides that: “OMB may withhold from any of the allocations to the agencies of the Executive Branch the amounts necessary to pay for the pay-go contribution, unemployment insurance, or taxes withheld from their employees, when OMB determines that such a withholding is necessary to ensure compliance with these obligations by the agencies concerned. Any such amounts withheld by OMB shall solely be reprogrammed to pay the corresponding outstanding obligations related to pay-go contributions, unemployment insurance, or taxes withheld from employees as allowed in this Section.”

Mandates for Corrective Action. Section 15 of General Fund Resolution and section 14 of the Special Resolution provide that: “If during the fiscal year the government fails to comply with the liquidity and budgetary savings measures required by the New Fiscal Plan for Puerto Rico certified by the Oversight Board, the Government shall take all necessary corrective action, including the measures provided in PROMESA sections 203 and 204.”

Expansion of Board’s Punishment Powers for Budget Non-Compliance. Section 16 of the General Fund Resolution and section 15 of the Special Fund Resolution provide that: “The Secretary of Treasury, the treasurer and Executive Directors of each agency or Public Corporation covered by the New Fiscal Plan for Puerto Rico certified by the Oversight Board, and the Director of the OMB (or their respective successors) shall be responsible for not spending or encumbering during fiscal year 2019 any amount that exceeds the appropriations authorized for such year. This prohibition applies to every appropriation set forth in this Joint Resolution, including appropriations for payroll and related costs. Any violation of this prohibition shall constitute a violation of this Joint Resolution and Act 230.”

Funding of Oversight Board Members’ Favored Projects. The Special Resolution includes a line-item expenditure for the Institute of Puerto Rican Culture in the amount of $437,000 to fund the “operating expenses of the Luis Muñoz Marin Foundation.” Special Resolution § 1(23)(F). On information and belief, this expenditure was inserted on the express instructions of one of the Oversight Board Members. The inclusion of a pet project of an Oversight Board Member is inappropriate micro-managing, serves no discernable purpose, and aims to establish a public policy. None of the foregoing provisions in the Board Fiscal Plan and Budget Resolutions are proper exercises of the Board’s power under PROMESA or permitted by PROMESA itself. Instead, they represent overreach by the Board.

A cursory review of these objections and the request that the provisions be set aside in the complaint show that contrary to its protestations, the Commonwealth wants the court to review the certified Fiscal Plan and the certified budget. Moreover, at page 33, paragraph 78, the Commonwealth states:

To be clear, the Government does not seek a declaration that the Board Fiscal Plan was improperly certified, or that the Board Fiscal Plan suffers from any legal infirmities except to the extent set forth with respect to specific policy recommendations that cannot be imposed by the Board. (emphasis supplied)

On Friday, July 6, the Commonwealth filed a motion requesting a scheduling order from the Court, to wit:

The Court should expedite resolution of this case to address the injury to the Commonwealth and its people occurring every day due to the Board’s attempt to seize day-to-day control of Puerto Rico’s government. As set forth in the proposed order, attached as Exhibit A, Plaintiffs request the Court to shorten the time to respond to the Complaint, with either an answer or motion to dismiss due by July 12, 2018. If the Board files an answer, Plaintiffs will file a motion for summary judgment or judgment on the pleadings by July 16, with Defendants’ response due by July 20 and Plaintiffs’ reply due by July 23. If the Board files a motion to dismiss, Plaintiffs will file a response by July 17, with Defendants’ reply due by July 20. Plaintiffs’ proposed schedule ensures that all briefing will be complete by July 23. Should the Court desire oral argument, Plaintiffs request that it occur during the omnibus hearing on July 25, 2018 (or any day on or before August 3, 2018).

The proposed schedule will ensure the dispute is fully briefed and heard in less than three weeks—a schedule slightly more generous than that which the Court ordered for the CTO Motion that the Board filed on October 26, 2017.

The Board quickly opposed the motion and counter proposed the following:

Although the issues in this dispute are important and should be resolved expeditiously, plaintiffs have proposed an unrealistically short schedule presuming knowledge they do not have of Defendants’ responses and potential counterclaims. Accordingly, Defendants submit the Court should set instead the following expedited schedule, which contains the necessary flexibility to adapt to the different legal and factual defenses and counterclaims Defendants may propound:

July 18, 2018 Defendants shall answer or otherwise respond to the Complaint, listing all defenses and asserting any counterclaims.

July 19, 2018 The parties shall meet and confer on a schedule for the expeditious adjudication of the parties’ claims, including motions on any threshold issues under Fed. R. Civ. P. 12(b), discovery (if any), and motions for judgment on the pleadings, and, summary judgment.

July 20, 2018 The parties shall submit a joint statement setting forth the agreed upon schedule, and where there are differences in proposals, identify plaintiffs’ proposal and defendants’ proposal.

July 25, 2018 The parties shall be prepared to address their scheduling proposals at the omnibus hearing to the extent the Court deems it necessary.

The motion does not end there and gives us a glimpse of the Board’s future averments:

The Complaint seeks to have the Court determine how Congress allocated authority between the Oversight Board and the government of the Commonwealth. To properly present the issue to the Court requires careful and thorough briefing and possibly fact-finding. (footnote 2 omitted)

Second, Defendants’ proposed schedule is appropriately expedited to deal with the serious issues raised in the Complaint, and to be raised in the answer and counterclaim. To the extent a quick resolution is needed, this schedule provides for it. The procedural and substantive issues will be framed within two weeks, and the parties will have an opportunity to set the schedule for an expedited resolution on the merits.

Third, Plaintiffs’ supposed “uncertainty” about which budget is the operative budget (Mot. at 2, 7) is of their own making. PROMESA provides for only fiscal plans and budgets that are certified by the Oversight Board. It does not permit fiscal plans or budgets that are not certified by the Oversight Board. With full knowledge of this elemental fact, the Governor signed an uncertified budget having no force or effect under PROMESA sections 201(e)(2) and 202(e)(3). The moment that the Oversight Board certified the relevant fiscal plan and budget under PROMESA sections 201(e)(2) and 202(e)(3), they were deemed approved by the Governor and Legislature. No signatures are necessary or even relevant. The Governor’s signature on the Legislative Budget has no force and effect and cannot be used by Plaintiffs to justify emergency relief.

Fourth, Defendants take exception to Plaintiffs’ argument that the briefing schedule for the dispute last fall regarding appointment of a chief transformation officer (“CTO”) for PREPA should somehow be the yardstick for the present dispute. Although the CTO issue was significant, it did not raise anything close to the number of substantive and jurisdictional issues raised here.

Fifth, Plaintiffs’ reliance on PROMESA § 106(d) to argue for further expedition (Mot. At 5) is also misplaced. Clearly the intention of § 106(d) is to direct the courts to advance PROMESA matters relative to other non-PROMESA cases on their dockets, not to accelerate PROMESA matters beyond the pace provided for in the applicable bankruptcy rules. Section 106(d) uses the term ‘expedite’ in conjunction with the Court’s disposition of the matter, and not in conjunction with scheduling.

Sixth, Plaintiffs’ proposed schedule leaves no time for Defendants to effectively prepare counterclaims. To frame the issues appropriately, Defendants may seek declaratory judgments, injunctions, and/or related relief. This pleading (and Plaintiffs’ response) will require careful thought, for which Plaintiffs’ schedule provides inadequate time.

Finally, we add that nothing herein is intended to create subject matter jurisdiction (which parties cannot do) or to waive any rights under PROMESA Titles I, II and III. Additionally, Defendants have sought in this submission to address solely the scheduling issue presented to the Court for urgent review, not to rebut various gratuitous arguments about the merits, such as Plaintiffs’ contention (Mot. at 5) that the Oversight Board is attempting “to seize day-to-day control of Puerto Rico’s government.” Such arguments will be addressed at the proper time.

Three things stand out; one, the Board will raise the jurisdictional defense and claim that irrespective of the merits of the Commonwealth’s claims, the Court cannot entertain them. Two, the Board wants to conduct discovery. Footnote 2 of the motion states, “[p]laintiffs contend the issues in this adversary proceeding are “purely legal.” (E.g., Mot. at 6.) The Oversight Board agrees that there are significant legal issues implicated in the Complaint, upon which this dispute may be resolved. But the Complaint contains many disputed factual contentions (e.g., Complt. ¶ 59) that may be disputed and require discovery.” Paragraph 59 of the Commonwealth’s complaint is where it avers that the governor submitted a written statement pursuant to section 205(b)(3) of PROMESA. Third, the Board will file counterclaims, very possibly to test its own interpretation of PROMESA.

I remind my readers of Congressman Bishop’s brief of amicus in the First Circuit. In it he was clear that:

Once a fiscal plan is in place for the Commonwealth or a territorial instrumentality, the entity must comply with it in its official acts. Section 202, 48 U.S.C. § 2142, requires that territorial and instrumentality budgets be consistent with the fiscal plan. Section 204, 48 U.S.C. § 2144, requires that all contracts, rules, regulations, and orders conform to the fiscal plan, and gives the Oversight Board extensive powers to ensure compliance. . . In short, the fiscal plan sets policy for the covered territory or territorial instrumentality at a sufficient level to ensure fiscal responsibility and restore access to capital markets.

I must caution those relying on the Zamot opinion by Judge Swain, that on page 19, she made an important observation; there the Board was not claiming that there was a violation of the Fiscal Plan or of the Budget. Here, the Board will make that claim and invoke section 106(e) of PROMESA.

This unholy mess was created for political reasons. Since the President of the Senate refused to eliminate Law 80, the Board imposed a far stricter budget. Senator Rivera Schatz threatened he would go to Court and if he did, even if he lost, he would be a hero in the minds of many. Governor Rosselló, who wanted the Law 80 deal, calculated that he would not lose anything by challenging the Board. Although, it is obvious to everyone he will probably lose. A pro-statehood administration is defending the powers of the Territorial Commonwealth simply to be able to administer the government as it sees fit. Until this mess with the Board is resolved, there can be no Plan of Adjustment, which further delays the resolution of the Title III, risking dismissal via 11 U.S.C. §930(a)(2). Moreover, if the Board were to lose this challenge, the politicians would be in charge of the Fiscal Plan and hence the Plan of Adjustment, making it near impossible for it to be approved by creditors or even for the Court to cram it down, also resulting in dismissal of the Title III.

Judge Swain ruled late Saturday and granted the Commonwealth’s scheduling motion and ordered oral argument on the merits for the Omnibus hearing of July 25.  This means it is unlikely she will grant the Board any time for discovery on any issue and that she wants to rule on the issues quickly. Let’s see what happens.

On other news, Aurelius filed an informative motion regarding two important SCOTUS cases related to its claims:

Aurelius’s Objection and Motion to Dismiss is premised on the argument that the members of the Financial Oversight and Management Board for Puerto Rico (Board) “are Officers of the United States because they derive their authority from the federal government, are appointed by the federal government, are overseen by the federal government, and exercise significant executive authority under the laws of the United States.” Aurelius Obj. & Mot. to Dismiss at 11; see also, e.g., Aurelius Reply to U.S. 12, Dkt. 2169 (arguing that the Board is a federal entity under the standard articulated in Lebron v. National Railroad Passenger Corp., 513 U.S. 374, 397–98 (1995), because the Board was “established and organized under federal law,” it was “established ‘for the very purpose of pursuing federal governmental objectives,’” Congress can “repeal, alter,  or amend” the statute “at any time,” and the Board’s members are “appointed ‘by the President’”). For this reason, Aurelius has argued, Congress violated the separation of powers and the Appointments Clause by allowing the Board members to be appointed without Senate confirmation and by usurping a substantial portion of the President’s appointment power.

The Opposing Parties and the United States have defended the Board against this challenge chiefly by pointing to the Property Clause of the Constitution, which gives Congress the power to “make all needful Rules and Regulations respecting the Territory or other Property” of the United States. U.S. Const., Art. IV, § 3, cl. 2. For instance, the Board has contended that when Congress exercises its “plenary” power under the Property Clause, it is not “constrained by constitutional separation-of-powers provisions” in general, and “[t]he Appointments Clause” in particular “does not govern Congress’s exercise of its plenary municipal authority under Article IV to create territorial offices and designate the method of appointment.” Board Opp. at 8–9, Dkt. 1622; see also U.S. Br. 12, Dkt. 1929 (“[G]iven Congress’s wide latitude in governing the territories, the Appointments Clause is inapplicable to the appointment of territorial officers like the Oversight Board members.”).

Ortiz v. United States undermines this argument by equating the scope of Congress’s power over the territories with its broad power over the military. Ortiz held that the Supreme Court had appellate jurisdiction over cases arising from the Article I military Court of Appeals for the Armed Forces because that entity is a “court” for purposes of the Supreme Court’s appellate jurisdiction. Ortiz slip op. 5–19. In coming to this conclusion, the Ortiz Court noted that “the Constitution grants Congress broad authority over the territories: to ‘make all needful Rules and Regulations respecting’ those areas.” Id. at 12–13 (quoting U.S. Const., Art. IV, § 3, cl. 2). And the “court-martial system” at issue in Ortiz “stands on much the same footing” as the territories, where Congress has created a system of territorial courts, since it “rests on an expansive constitutional delegation,” namely, the “legislative power ‘[t]o make Rules for the Government and Regulation of the land and naval Forces,’” which is “just like” Congress’s territorial authority. Id. at 10, 11, 14 (quoting U.S. Const., Art. I, § 8, cl. 14). Thus, Congress possesses the same “plenary grant[ ] of power” over “the military” as it does over the “territories.” Id. at 14.

The Ortiz Court’s confirmation that Congress’s control over the territories is equivalent to its power over the military further demonstrates the error of the Opposing Parties’ argument. If the Opposing Parties were correct that plenary congressional authority was exempt from the Constitution’s structural guarantees, including the Appointments Clause, then the Ortiz Court’s holding makes clear that this principle would necessarily also extend to the military. But in fact it is absolutely clear that the Constitution’s structural guarantees do constrain Congress despite its “plenary” power to structure the military. In particular, there is no doubt that “the Appointments Clause applies to military officers,” Weiss v. United States, 510 U.S. 163, 170 (1994), and the Supreme Court has repeatedly emphasized that “military trial and appellate judges are officers of the United States and must be appointed pursuant to the Appointments Clause,” Edmond v. United States, 520 U.S. 651, 654 (1997); see Ryder v. United States, 515 U.S. 177 (1995). Indeed, Ortiz itself involved an Appointments Clause challenge, which the Supreme Court resolved on the merits without any suggestion that the Appointments Clause applies any differently with respect to military judges than it does with respect to other federal officers. Ortiz slip op. 23–25.

The Ortiz decision is thus irreconcilable with the Opposing Parties’ view that Congress is free to legislate in connection with the territories without regard to the Appointments Clause. As with congressional power over the military, Congress is also not immune from the Constitution’s structural guarantees when it legislates pursuant to the Property Clause, which is “just like” the military clause. See Ortiz, slip op. 14. In fact, the Ortiz Court reached this conclusion even though the amicus in that case, in his motion to participate in oral argument (which the Court granted), brought these very proceedings to the Court’s attention. Mot. of Prof. Aditya Bamzai for Leave to Participate in Oral Argument as Amicus Curiae and for Divided Argument at 4–5, Dalmazzi v. United States et al., Nos. 16-967 et al. (U.S. Dec. 14, 2017). The amicus cautioned the Court that “[i]f [it] accept[ed]” “the premise that Congress’s authority to legislate for the court-martial system is coterminous with Congress’s authority to legislate in the territories,” then that “would have dramatic implications,” because the United States is currently arguing here that “Congress’s authority over the territories is plenary and not subject to the complex distribution of powers that regulate the Federal Government.” Id. (quoting U.S. Br. 4). And the amicus reiterated this concern at oral argument, warning that, if the Supreme Court were to hold that military courts are on the same footing as territorial courts, then that would lead to separation-of-powers difficulties, because “the government’s position is that the appointments clause does not apply to the territories.” Transcript of Oral Argument at 34, Ortiz v. United States (2018) (No. 16-1423). But the Supreme Court felt no concern about equating Congress’s power over the military and the territories, thus suggesting that Congress is equally constrained by the separation of powers when it regulates either.

Aurelius references a second case, Lucia v. SEC, which I pointed out in the Monday Update of June 25. Aurelius argued:

Lucia v. SEC, meanwhile, is relevant to Aurelius’s argument that the Board members exercise the “significant authority” (Lucia slip op. 6) that qualifies them as “officers of the United States” subject to the Appointments Clause. In Lucia, the Supreme Court held that, under a straightforward application of Freytag v. Commissioner, 501 U.S. 868 (1991), an SEC ALJ is an inferior officer who must be appointed in conformity with the Appointments Clause. Lucia slip op. 6. The SEC ALJs “have equivalent duties and powers as” the judges at issue in Freytag, and therefore are just as much “officers” as the Freytag judges. Id. at 9.

This is the same argument that Aurelius has made with regard to the Board members. See Obj. & Mot. to Dismiss at 15. Like the SEC ALJs (and the judges at issue in Freytag), the Board “take[s] testimony,” “receive[s] evidence,” issues “subpoenas,” and “administer[s] oaths” to “witnesses” at “hearings.” Compare Lucia slip op. 9 with 48 U.S.C. § 2124(a), (f). Also just like the SEC ALJs, the Board exercises “significant discretion when carrying out” its “important functions,” Lucia slip op. 8, as the Board undeniably is empowered to take numerous actions in its “sole discretion,” see, e.g., 48 U.S.C. §§ 2121(d)(1)(A)–(E); 2141(a); 2142(a); 2146(a).

The Lucia Court also rejected the idea that ALJs are not officers simply because they do not have the authority to punish contempt. Lucia slip op. 10. Instead, the Court held that the power to exclude the wrongdoer from the proceedings was a powerful enough disincentive; the ALJs did not need an “especially muscular means of enforcement” such as “the power to toss malefactors in jail.” Id. Here, the Board’s power to implement its authority and to enforce a federal statute in federal court, see 48 U.S.C. § 2124(f)(2), (k), and its exclusive power to initiate Title III proceedings, id. § 2164(a), and act as the sole representative of, and decision-maker for, the Title III debtor, id. § 2175(b), are more than sufficient to satisfy this test—as demonstrated by Board Member José Carrión’s recent statement urging “the governor to reconsider his” opposition to the Fiscal Plan and stating that the Board is “ready to go to court,” warning that he “[did not] want anyone to be imprisoned,” and that “[w]hat [the Board] would be doing is enforcing a federal law.” See Caribbean Business News Service, Puerto Rico Fiscal Board Member: Too Much Pain with Too Little Promise (Apr. 19, 2018), available at http://caribbeanbusiness.com/puerto-rico-fiscal-board-member-more-pain-will-come.

Finally, the Lucia decision supports Aurelius’s arguments regarding the appropriate remedy for a violation of the Appointments Clause. Some parties have posited that the proper remedy for the Board’s structural infirmities is to accord the Board’s past actions de facto validity. Board Opp. 33–34; see AAFAF Opp., Dkt. 1640, at 32 (arguing that this Court should “declare the Board’s actions to date de facto valid, deny Aurelius’s motion to dismiss, and issue a stay to permit statutory revision or the Board’s reconstitution”); Unsecured Creditors’ Comm. Opp., Dkt. 1631, at 27 (“[T]he Oversight Board’s actions (including the title III cases) should be accorded de facto validity and the  Court should permit this proceeding to continue unimpeded.”). But the Lucia decision confirms that an Appointments Clause violation demands a meaningful remedy. As Aurelius has argued, see Obj. & Mot. to Dismiss at 34–35, a party that raises a timely Appointments Clause challenge is entitled to an appropriate remedy because “Appointments Clause remedies are designed not only to advance [the structural purposes of the Appointments Clause] directly, but also to create ‘[i]ncentive[s] to raise Appointments Clause challenges,’” Lucia slip op. 12 & n.5 (quoting Ryder, 515 U.S. at 183)).

In other news, Altair filed a motion for the lifting of the stay in regards to certain ERS bonds seeking adequate protection. As part of a deal, these bonds were partially paid out of reserves held by the Trustee bank but there will not be enough money for the August payment. In addition, the UCC filed a Motion “outlining the items that, in the Committee’s view, should be addressed at the July 25, 2018 Omnibus Hearing as part of the continuation of the court’s consideration of the Committee’s Renewed Motion Seeking Entry of Order, Under Bankruptcy Rule 2004, Authorizing Discovery With Respect to Certain Causes of Puerto Rico Financial Crisis Beginning On August 15, 2018.” The motion, which is heavily redacted, sets different areas that the Investigator’s report allegedly will not touch. It will interesting to see what Magistrate Judge Dein decides on these issues.

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.

Monday Update – July 2, 2018

Welcome to your weekly Title III update for July 2, 2018.

In a surprise move, Rob Bishop, Chairman of the House Committee on Natural Resources and architect of PROMESA, filed request of leave to file a brief of amicus curiae in the First Circuit in the Ambac Assurance appeal, 18-2118. With the request, Congressman Bishop filed the proposed amicus. Congressman Bishop stated that he “has an interest in ensuring that PROMESA is interpreted by this and other courts consistent with legislative intent.” The petition continues stating:

During the course of that argument [Peaje], Judge Kayatta requested that, “in cases going forward,” parties to proceedings concerning Puerto Rico’s restructuring put PROMESA “in context” and explain both how PROMESA operates and the differences between PROMESA and the Bankruptcy Code. Rep. Bishop possesses special knowledge of PROMESA and its legislative history, which, if allowed to be presented in an amicus curiae brief, is likely to assist the Court in both placing PROMESA “in context” and interpreting PROMESA consistent with legislative intent.

In the brief itself, Congressman Bishop lays out the Committee’s view of PROMESA in clear contrast to the views and actions of the Board, the Puerto Rico Government (Governor and Legislature) and even Judge Swain.

Congress determined that, along with providing access to restructuring support, the Commonwealth’s financial house must be placed in order to remedy the decades of financial mismanagement that led to the present crisis. Congress also required the Commonwealth to deal fairly with its existing creditors and respect their rights, to enable conditions by which Puerto Rico could reach access to credit at reasonable rates of interest in the capital markets. The purpose espoused in Section 101 governs all of PROMESA’s provisions. 48 U.S.C. § 2121(a).

The purpose espoused in Section 101 governs all of PROMESA’s provisions. PROMESA prioritizes consensual resolutions, makes a nonconsensual restructuring available only as a last resort, and provides that creditors’ rights must be protected during negotiations and any restructuring process.

The Brief continues explaining:

[T]he Committee included protections for creditors’ rights before, during and after a Title III case to ensure any nonconsensual restructuring would not be adverse to Puerto Rico’s future access to capital markets. During the pendency of a Title III proceeding, creditors’ rights are protected by key provisions of the bankruptcy code incorporated into Title III in Section 301(a), 48 U.S.C. § 2161(a). Specifically, 11 U.S.C. § 362(d)(1) permits the Title III court to lift the automatic stay to let creditors seek relief if their collateral is not adequately protected. Furthermore, 11 U.S.C. §§ 922 and 928, the “special revenue” provisions of Chapter 9 of the Bankruptcy Code, are intended to ensure that revenue streams pledged to bondholders continue to pay out during a Title III proceeding just as they would during a Chapter 9 bankruptcy by municipal debtors. Title III also contains creditor protections that apply at confirmation of a plan of adjustment, the means by which a debtor exits Title III. A plan of adjustment cannot be confirmed unless it complies with the applicable fiscal plan—which itself must respect lawful priorities and liens, as per Section 201.

This is clearly not what the Board has been doing. Congressman Bishop continued saying:

Testimony at hearings before the Committee in February 2016 reflected a need for Congress to make debt restructuring available for Puerto Rico only alongside a “long-term fiscal and economic authority” capable of addressing “comprehensively all of Puerto Rico’s issues.” The hearings further indicated that any authority created by federal legislation would need to be independent, free from island political influence, and empowered to oversee Puerto Rico’s fiscal and governmental activities, including the authority to enforce structural changes through budgets.

The legislation developed in response to these hearings was designed to instill fiscal discipline, restore legal order, uncover the fiscal data behind the island’s finances, return the island to the capital markets, and prohibit contagion effects into other municipal markets. The Committee agreed to provide Puerto Rico access to restructuring, conditioned by the inclusion of provisions to prioritize consensual negotiations, improve transparency on the island, preempt unilateral debt-related measures, and protect the best interests of creditors. If nonconsensual restructuring were to ultimately prove necessary, the legislation provided that it could occur only under clear federal mandates that would respect creditor interests and enable Puerto Rico’s future access to capital markets.

The theme of a Board free of Puerto Rico political influence and Title III as a last resort continues all through Congressman Bishop’s brief, which also stated:

However, the Committee rejected the notion that free access to bankruptcy would be helpful for the economic future of Puerto Rico. This rejection echoed a similar conclusion throughout Congress, as both the House and the Senate had ignored proposed legislation that would have simply allowed Puerto Rico access to bankruptcy protections under Chapter 9 of the Bankruptcy Code. . . As Mayor Anthony Williams recognized in his testimony before the Committee on April 13, 2016, nonconsensual “debt adjustment powers” were to be made available to the Oversight Board only “as a last resort.” Therefore, PROMESA mandated that bankruptcy proceedings under Title III be available only as a last resort if voluntary negotiations failed.

Again, the theme of bankruptcy as a last resort. Further on the brief:

Although the Oversight Board has steered debtors into Title III proceedings, Title III was created as a last resort, to be used in truly intractable cases after a lengthy negotiation period proved fruitless. To implement this, the Committee imposed several gating requirements on the Oversight Board to prohibit a rush into the Title III restructuring process and to ensure the Oversight Board would consistently and proactively engage with the creditor community. The Committee not only envisioned these gating requirements as substantial hurdles that would be overcome only by “truly unsustainable debt,” but also as mandated items that were intended to encourage dialogue between affected parties, promote transparency in financial data, and return Puerto Rico to the capital markets, before resort could be made to Title III.

Board members were appointed on August 30, 2016 but it was only in November 2016 that it stated that negotiations would start in December, which made no sense since a new government was coming in on January, 2017. Moreover, it was not until April of 2017 that bondholders met with the Board and representatives of the Commonwealth government. Also, not all creditors were included in these negotiations. Since the Commonwealth Title III was commenced in May of 2017, it is highly unlikely there were any good faith negotiations by the Board or the Governor. The brief continues by saying:

Another gating requirement under Section 206 focused on transparency. It mandated that the debtor entity have “adopted procedures necessary to deliver timely audited financial statements” and “made public draft financial statements and other information sufficient for any interested person to make an informed decision with respect to a possible restructuring.” The Committee required this gating mechanism to ensure the Oversight Board, and interested persons, including creditors, had access to enough financial information to “determine whether the entity actually needs restructuring.” The purpose of Section 206(a)(2) was to require the Oversight Board to implement transparency measures sufficient to support dialogue about the fate of an entity before beginning a Title III case.

To this day, the Puerto Rican government has not produced audited, GAAP compliant records of the Commonwealth’s financials, and the Board has taken a blind eye to this requirement that was mandated from Congress.  How then does a restructuring take place?  The Board is hoping everyone looks the other way.

Chairman Bishop brief continues:

Despite the clear intent and design of the gating provisions, the Oversight Board filed Title III cases for four debtors within one month of the expiration of the stay under Section 405, 48 U.S.C. § 2194. The Committee did not intend for the expiration of the stay to prompt the initiation of Title III cases; rather, the automatic stay was included to allow the Oversight Board ample time to establish itself under the statutory framework of PROMESA, and to initiate voluntary negotiations under Title VI. The Board’s haste to begin what was meant as a last resort has sown confusion in the lower court’s interpretation of PROMESA. PROMESA should be read and interpreted with the understanding that the Oversight Board (and the fiscal plans) were intended to operate for an extended period of time prior to any Title III proceedings—if, indeed, such proceedings ever needed to be  filed. (emphasis added)

Congressman Bishop has been very clear, I don’t think I need to add anything. His brief further states:

The Committee envisioned fiscal plans as governing documents that would “require Puerto Rico to balance its budgets, incorporate pro-growth reforms, and ensure legislative acts advance Puerto Rico towards the goal of fiscal responsibility and regaining access to the capital markets.”

Once a fiscal plan is in place for the Commonwealth or a territorial instrumentality, the entity must comply with it in its official acts. Section 202, 48 U.S.C. § 2142, requires that territorial and instrumentality budgets be consistent with the fiscal plan. Section 204, 48 U.S.C. § 2144, requires that all contracts, rules, regulations, and orders conform to the fiscal plan, and gives the Oversight Board extensive powers to ensure compliance. . . In short, the fiscal plan sets policy for the covered territory or territorial instrumentality at a sufficient level to ensure fiscal responsibility and restore access to capital markets. . . Rather, the fiscal plan is a negotiated document with economic and governmental consequences to which all budgets, laws, contracts, rules, regulations, and executive orders must conform for the duration of the Oversight Board’s mandate—in Title III or outside of it.

This is clear rebuke of the Puerto Rico legislature that has resisted many of the needed reforms the Board has advanced. More on this later. Also, Bishop envisions the Fiscal Plan surviving Title III discharge as a way of ensuring that the bad practices from the past are not repeated. Difficult to achieve in Puerto Rico. In addition, Chairman Bishop’s brief sstates something of critical importance regarding the review of the Fiscal Plan:

Accordingly, Congress imposed requirements on the development of the plans in Section 201(b) of PROMESA to further these objectives. The requirements of Section 201(b) are not optional. A fiscal plan “shall” include each of the delineated items. If the Title III court finds the approved fiscal plan fails to comply with the requirements of Section 201(b), then the court should direct the Oversight Board to revise such plan accordingly.

I confess I did a double take when I read this. Section 106(e) of PROMESA states that “[t]here shall be no jurisdiction in any United States district court to review challenges to the Oversight Board’s certification determinations under this Act.” I have long advanced that the Court would review the Fiscal Plan at the Plan of Adjustment stage, as per PROMESA 314(b)(7) and Judge Swain has stated in the Peaje opinion that she would do so.

Here, however, Chairman Bishop is going further and stating that she may order that the Fiscal Plan be changed to conform it to section 201(b)(1). Strong stuff. The Brief continues with the Fiscal Plan and states:

Section 201(b) was modified during the legislative process to ensure the lawful priorities and liens held by creditors would be respected. The initial introduced version of PROMESA, HR 4900, was silent on the hierarchy of creditor rights in respect to fiscal plans. Responding to concerns expressed by Committee members and the creditor community, the Committee wrote in two new provisions in the reintroduced version of PROMESA, H.R. 5278, which required fiscal plans to: 1) prohibit the unlawful transfer of assets, funds, or resources between instrumentalities, and 2) “respect the relative lawful priorities or lawful liens, as may be applicable, in the constitution, other laws, or agreements of a covered territory or covered territorial instrumentality.” These provisions were included to “ensure fiscal plans keep intact the structural hierarchy of prioritized debt.” These additions to Section 201(b), which were included in the final legislation, prevent the Oversight Board from altering or impairing lawful liens and priorities held by creditors when developing fiscal plans. Congress intended for fiscal plans to govern the Commonwealth and its instrumentalities for an extended period of time, and to apply mostly outside of Title III proceedings, so these creditor protections and other Section 201(b) requirements are not limited to Title III cases. (emphasis added)

Altering or impairing lawful liens and priorities held by creditors is all the Board has done in this case in the 2 years since they took their oath. One could argue that their intent is to eliminate creditor rights so that there be no liens and no priorities so it can decide, like a feudal lord with its serfs, who gets what and when. Again, strong stuff and a clear rebuke of the Board’s actions to date.  Surely, creditors will use this brief at the right time.

Next comes a rebuke on the Court’s opinions:

PROMESA incorporates 11 U.S.C. §§ 922 and 928, the “special revenue” provisions from Chapter 9 of the Bankruptcy Code. Because government entities typically cannot mortgage their assets to creditors, they instead offer revenue bonds—liens on ongoing streams of revenues like taxes, tolls, or fees. Several territorial instrumentalities in Puerto Rico, including the Highway & Transportation Authority (HTA) and the Puerto Rico Electric Power Authority (PREPA) have significant outstanding revenue bond debt. This debt is “non-recourse,” meaning that creditors cannot collect from any source other than the pledged revenues. Taken together, the special revenue provisions ensure that creditors’ liens on special revenues streams are not interrupted by the filing of a Title III case, exempting their claims from the automatic stay.

This is a clear rebuke to Judge Swain’s decision that sections 922 and 928 allowed a municipality to pay its bonds if it wanted but did not force it to pay. The muni community was appalled at the decision and some groups filed their own amicus briefs. Personally I believe the Court will reverse Judge Swain’s decision for further evidentiary hearings but this brief could change said decision.

The brief continues stating:

Once a Title III case proceeds to plan confirmation, PROMESA provides additional protections not found in Chapter 9 of the Bankruptcy Code. Upon the introduction of the first draft of PROMESA, the Committee heard testimony that Chapter 9 proceedings throughout the country had failed to respect creditor rights despite Chapter 9’s intent—a failure that had been recognized by at least one member of the Oversight Board. . . Second, Section 314(b)(6) requires that any plan be “in the best interests of creditors,” in light of the recovery creditors could reach through “available remedies under the non-bankruptcy laws and constitution of the territory.” Together these provisions ensure that the Title III process protects creditors’ rights and definitively precludes the confirmation of a plan that would result in an adverse result for creditors and hinder Puerto Rico’s return to the capital markets.

Clearly, the Brief is worried with the Board’s actions against bondholders, the Puerto Rico legislature’s flaunting of the Fiscal Plans and Judge Swain’s decisions. Judge Swain is protected by the Constitution from influence by the political branches, but not the Board or the Puerto Rico Legislature. The timing is clearly meant to influence the First Circuit – although its about 2 years late – so even if the First Circuit does not allow the amicus brief or simply ignores it, Congressman Bishop is the Chairman of the House Natural Resources Committee with jurisdiction over Puerto Rico.  Put another way, the Brief is quite simple, and if denied by the First Circuit, the Chairman could move to codify these points into law by amending PROMESA.

At the local level, the Puerto Rico Legislature ignored the Board’s newly certified Fiscal Plan, which is the Fiscal Plan it certified in April and approved a non-compliant budget.  This will force the Board to certify its own Fiscal Plan. Senate President Thomas Rivera Schatz has vowed to take this challenge to the Courts.

What will happen will depend on the different possible scenarios. Pursuant to section 202(e) of PROMESA, if the Legislature and governor do not provide a compliant budget, the Board may certify its own and send it to the governor. It will then become the Commonwealth’s budget as if it had been approved by the Legislature and signed by the governor. The latter, however, is the one called upon by the Constitution to execute the budget and this leaves Governor Rosselló with a political conundrum. Will he side with the Board and execute their budget, losing face with the Legislature? Will he side with the Legislature and enter into a fight he knows he cannot win? If the governor sides with the Board, will the Legislature go to Court as it has announced to enforce its budget? The first question would be if the Legislature has standing? I think it does based on Arizona State Legislature v. Arizona Independent Redistricting Commission, 576 U.S. __ (2015) if its argument is that the Board’s actions are interfering with its constitutional duties. This only means they can sue, since as I have stated before, section 106(e) of PROMESA deprives the Court of jurisdiction to review the Fiscal Plan. It could, however, argue that the Board’s actions are repugnant to the Federal Constitution, which arguments Judge Swain has rightly decided she can hear. I can’t think of any arguments that would hold water but we will see some effort. When, I do not know and will depend on the Governor’s actions.

Oh, and not to be lost on anyone, the Board claims that failure to enact Law 80 will now result in $25 billion less for bondholders.  Theoretically, that should then negatively affect the Board’s support for the Commonwealth-Cofina Agent’s agreement, if the forecast is actually accurate.

Stay tuned.

Not much happened in the cases but AAFAF requested that Adversary Proceeding 18-0059, Assured Guarantee, Corp. v. Commonwealth, be stayed pending the Ambac appeal. Let’s see what the Court decides.

June 29 was the last date for the Proofs of Claims to be filed and in the afternoon, the Prime Clerk website collapsed. Judge Swain was promptly informed but her answer was to tell filers that they could file in ECF. Problem is that those Prime Clerk users where individuals who could not or did not want to hire an attorney to do the filing. I assume the Board will allow some leeway since many of those who wanted to file, employees and retirees, did not have to file.

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.