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.