Aurelius Decision Finally Comes Down

On Friday February 15, 2019, the First Circuit finally came down with its decision on the Aurelius-Utier challenge to the Board appointments. As predicted, the Circuit reversed Judge Swain for the fifth straight time. The 55 page decision examined PROMESA carefully, going through the Board’s powers and the Governor and Legislature’s inability to exercise power over the “territorial entity.”The Circuit summarized some of the Board’s arguments which have great importance to the relationship between Congress and Puerto Rico and said at page 18:

The Board further argued that, in any event, the Appointments Clause did not apply even if the individual members were federal officers, because they exercised authority in Puerto Rico, an unincorporated territory where the Territorial Clause endows Congress with plenary powers. This, according to the Board, exempted Congress from complying with the Appointments Clause when legislating in relation to Puerto Rico.

The Circuit further explained what the District Court’s reasoning was, at pages 20-22:

The district court based its ruling on the premise that “the Supreme Court has long held that Congress’s power under [the Territorial Clause] is both ‘general and plenary.'” Such a plenary authority is what, according to the district court, allows Congress to “establish governmental institutions for territories that are not only distinct from federal government entities but include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States.” The district court further pronounced that Congress “has exercised [its plenary] power with respect to Puerto Rico over the course of nearly 120 years, including the delegation to the people of Puerto Rico elements of its . . . Article IV authority by authorizing a significant degree of local self-governance.” . . .

Turning to the relationship between Congress and Puerto Rico, the district court noted that “Congress has long exercised its Article IV plenary power to structure and define governmental entities for the island,” in reference to the litany of congressional acts that have shaped Puerto Rico’s local government since 1898, including the Treaty of Paris of 1898, the Foraker Act of 1900, the Jones-Shafroth Act of 1917, and Public Law 600 of 1950. Furthermore, with regards to PROMESA and its Board, the district court afforded “substantial deference” to “Congress’s determination that it was acting pursuant to its Article IV territorial powers in creating the . . . Board as an entity of the government of Puerto Rico.” The district court then proceeded to consider whether Congress can create an entity that is not inherently federal. It concluded in the affirmative, because finding otherwise would “ignore[] both the plenary nature of congressional power under Article IV and the well-rooted jurisprudence . . . establish[ing] that any powers of self-governance exercised by territorial governments are exercised by virtue of congressional delegation rather than inherent locals sovereignty.” Accordingly, the district court found that the”creation of an entity such as the . . . Board through popular election would not change the . . . Board’s ultimate source of authority from a constitutional perspective.”

Judge Torruella, author of the opinion and a scholar on Puerto Rico’s relationship with the Supreme Court, quickly dispelled these findings at pages 24-25:

However much Article IV may broaden the reach of Congress’s powers over a territory as compared to its power within a state, this case presents no claim that the substance of PROMESA’s numerous rules and regulations exceed that reach. Instead, appellants challenge the way the federal government has chosen the individuals who will implement those rules and regulations. This challenge trains our focus on the power of Congress vis-à-vis the other branches of the federal government. Specifically, the Board claims that Article IV effectively allows Congress to assume what is otherwise a power of the President, and to share within the two bodies of Congress a power only assigned to the Senate.

We reject this notion that Article IV enhances Congress’s capabilities in the intramural competitions established by our divided system of government. First, the Board seems to forget — and the district court failed to recognize and honor — the ancient canon of interpretation that we believe is a helpful guide to disentangle the interface between the Appointments Clause and the Territorial Clause: generalia specialibus non derogant (the “specific governs the general”). . .

The Territorial Clause is one of general application authorizing Congress to engage in rulemaking for the temporary governance of territories. See Reid v. Covert, 354 U.S. 1, 14 (1957) (plurality opinion). But such a general empowerment does not extend to areas where the Constitution explicitly contemplates a particular subject, such as the appointment of federal officers. Nowhere does the Territorial Clause reference the subject matter of federal appointments or the process to effectuate them. On the other hand, federal officer appointment is, of course, the raison d’etre of the Appointments Clause. It cannot be clearer or more unequivocal that the Appointments Clause mandates that it be applied to “all . . . Officers of the United States.” U.S. Const. art II, § 2, cl. 2 (emphasis added).

Judge Torruella, who is an acerbic critic of the Insular cases, made it clear that they did not support the Board at pages 33-34:

Finally, nothing about the “Insular Cases” casts doubt over our foregoing analysis. This discredited lineage of cases, which ushered the unincorporated territories doctrine, hovers like a dark cloud over this case. To our knowledge there is no case even intimating that if Congress acts pursuant to its authority under the Territorial Clause it is excused from conforming with the Appointments Clause, whether this be by virtue of the “Insular Cases” or otherwise. Nor could there be, for it would amount to the emasculation from the Constitution of one of its most important structural pillars. We thus have no trouble in concluding that the Constitution’s structural provisions are not limited by geography and follow the United States into its unincorporated territories.

Judge Torruella also announced the Circuit’s position as to the insular cases and said “[t]he only course, therefore, which we are allowed in light of Reid is to no further expand the reach of the “Insular Cases.”(Page 36, bold added) Is this a harbinger of the Circuit’s treatment to the series of cases by Judge Gelpí on SSI and Medicaid? We can only hope.

There is an interesting finding by the Court at page 38 where it said:

The Board Members’ federal authority includes the power to veto, rescind, or revise Commonwealth laws and regulations that it deems inconsistent with the provisions of PROMESA or the fiscal plans developed pursuant to it. See 48 U.S.C. § 2144 (“Review of activities to ensure compliance with fiscal plan.”).

Although I have insisted that the Board has this power, its members have been very reluctant to put it into effect. Based on this, the Board will be hard pressed to justify allowing the Commonwealth to have thousands of publicity contracts while not paying debt. So the next 90 days will be interesting to see what the Board does and will they cram down anything against the PR Government, the Legislature or the creditors? A new Board could take a different view.  Also relevant to the new adversary proceeding against the Senate seeking information on its bank accounts and which Mr. Rivera Schatz insists it exceeds the Board’s authority. At page 39, it states “Board Members’ investigatory and enforcement powers, as carried out collectively by way of the Board, exceed or are at least equal to those of the judicial officers the Supreme Court found to be ‘Officers of the United States.’” Seems Judge Swain will have little leeway to agree with Mr. Rivera Schatz. As to the role of the Board, Judge Torruella, ever the historian, said at page 40 “[t]he Board Members are, in short, more like Roman proconsuls picked in Rome to enforce Roman law and oversee territorial leaders than they are like the locally selected leaders that Rome allowed to continue exercising some authority.” A quote for the ages.

Judge Torruella also discussed the difference of Board members with PR elected officials and said at page 45:

The Board’s basic point (and the United States’ basic point as well) is this: If we find that the Board Members must be selected by presidential nomination and Senate confirmation, then that would mean that, for example, all elected territorial governors and legislators have been selected in an unconstitutional manner.

We disagree. The elected officials to which the Board and the United States point — even at the highest levels – are not federal officers. They do not “exercise significant authority pursuant to the laws of the United States.” See Lucia, 138 S. Ct. at 2051; Freytag, 501 U.S. at 881; Buckley, 424 U.S. at 126; see also United States v. Germaine, 99 U.S. 508, 511-12 (1878). Rather, they exercise authority pursuant to the laws of the territory. Thus, in Puerto Rico for example, the Governor is elected by the citizens of Puerto Rico, his position and power are products of the Commonwealth’s Constitution, see Puerto Rico Const. art. IV, and he takes an oath similar to that taken by the governor of a state, id.

It is true that the Commonwealth laws are themselves the product of authority Congress has delegated by statute. See Puerto Rico v. Sánchez Valle, 136 S. Ct.1863, 1875 (2016). So the elected Governor’s power ultimately depends on the continuation of a federal grant.But that fact alone does not make the laws of Puerto Rico the laws of the United States, else every claim brought under Puerto Rico’s laws would pose a federal question.(Bold added)

The statement on Governor’s power is telling. In other words, the Governor’s power and the whole apparatus of the PR Government depends on Congress not changing Law 600. Or as the Court in Downes v. Bidwell, 182 U.S. 244, 289-290 (1901) said:

The Constitution has undoubtedly conferred on Congress the right to create such municipal organizations as it may deem best for all the territories of the United States, whether they have been incorporated or not, to give to the inhabitants as respects the local governments such degree of representation as may be conducive to the public wellbeing, to deprive such territory of representative government if it is considered just to do so, and to change such local governments at discretion.

The current governor should read this passage a few times.

Although Utier pushed the issue of invalidity of the Board’s actions, Judge Torruella would have none of it. At pages 52-53 stated:

Here, the Board Members were acting with the color of authority — namely, PROMESA — when, as an entity, they decided to file the Title III petitions on the Commonwealth’s behalf, a power squarely within their lawful toolkit. And there is no indication but that the Board Members acted in good faith in moving to initiate such proceedings. See Leary v. United States, 268 F.2d 623, 627 (9th Cir. 1959). Moreover, the Board Members’ titles to office were never in question until our resolution of this appeal.

Other considerations further counsel for our application of the de facto officer doctrine. We fear that awarding to appellants the full extent of their requested relief will have negative consequences for the many, if not thousands, of innocent third parties who have relied on the Board’s actions until now. In addition, a summary invalidation of everything the Board has done since 2016 will likely introduce further delay into a historic debt restructuring process that was already turned upside down once before by the ravage of the hurricanes that affected Puerto

Rico in September 2017.

This may mean that Utier or maybe Aurelius will seek certiorari from the Supreme Court of the United States. Given that less than 1% of the certioraris requested are granted, it will probably not happen.

Later at page 54, the Court decided:

Finally, our mandate in these appeals shall not issue for 90 days, so as to allow the President and the Senate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause. Cf. Weinberger v. Romero-Barceló, 456 U.S. 305, 312-313 (1982). During the 90-day stay period, the Board may continue to operate as until now.

Judge Torruella summarized the Court’s decision at pages 54-55:

In sum, we hold that the Board Members (other than the ex officio Member) must be, and were not, appointed in compliance with the Appointments Clause. Accordingly, the district court’s conclusion to the contrary is reversed. We direct the district court to enter a declaratory judgment to the effect that PROMESA’s protocol for the appointment of Board Members is unconstitutional and must be severed. We affirm, however, the district court’s denial of appellants’ motions to dismiss the Title III proceedings.

This decision is nothing short of monumental. The whole Board may be changed, although of course President Trump has the choice of re-nominating the same members but will have a tough time getting them through the Senate. This may mean more debt payment, dismissal of the Title III, more intervention with the PR Government. We will have to wait and see what transpires but first I would like to comment on the wild speculation I have seen in both the main stream media and social media.

Judge Torruella’s decision does not mean that PROMESA has to be amended. The opinion states at page 51:

Accordingly, we hold that the present provisions allowing the appointment of Board Members in a manner other than by presidential nomination followed by the Senate’s confirmation are invalid and severable. We do not hold invalid the remainder of the Board membership provisions, including those providing the qualifications for office and for appointment by the President with the advice and consent of the Senate.

Since PROMESA does not NEED to be amended, it is unlikely the Board can secure more powers.  Democrats are leery of the Board’s handling of the PR Government and are reluctant to give it more power. Also, given the contentious nature of Governor Rosselló with President Trump and his campaigning for democratic candidates in Florida, he is unlikely to have much influence on who is appointed.  The Claims Committee of the Board will continue to exist until May 16, 2019, when the 90-day period expires. What will happen to the Board’s objection to 2012 and 2014 GO’s? Not clear but even if the new Board does not want to continue the case, the UCC is likely to want to do so and it probably could pursuant to section 926(a) of the Bankruptcy Code, also adopted in PROMESA.

What can Judge Swain do? Not much. She can continue to act until May 16 but in the back of her head she must realize it all could be for naught. Moreover, she must not be feeling very good since this is the 5th straight time she has been reversed. I am sure she will be sustained in other cases that have been argued before the Circuit but those will have to wait. Finally, the Republican President and Republican Senate will be involved in naming the next Board. Only 51 votes are needed (Republicans have 53) for the new members. In any event, I don’t see a filibuster unless a candidate is someone extreme. We will have to wait and see.