Carlos J. Cuevas

Theethelbert canada Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) is the federal legislation that was enacted to provide a special bankruptcy framework for Puerto Rico. 48 U.S.C. §§2101 et seq. An important component of PROMESA is the establishment of a Financial Oversight Board (FOMB) with oversight powers over the financial affairs of the Puerto Rican government and sole authority over the Puerto Rico bankruptcy cases. 48 U.S.C. §§2121(b), 2121(d), and 2124(j)(1). The members of the FOMB are appointed by the President. 48 U.S.C. §2101(e)(2).

In

Aurelius Investment

v. Commonwealth of Puerto Rico

, 2019 WL 642328 (1st Cir. 2019) the U.S. Court of Appeals for the First Circuit held that the appointment of the members of the FOMB (the Board Members) violated the Appointments Clause of the U.S. Constitution. The Board Members are officers of the United States, and therefore they are subject to Senate confirmation. However, the court refused to dismiss the Puerto Rico bankruptcy case. The First Circuit ruled that under the de facto officer doctrine the acts of the FOMB were lawful because the Board Members of the FOMB had acted under color of law and it would be counter-productive to negate the actions of the FOMB because thousands of people have relied upon the acts of the FOMB. The court stayed enforcement of its decision for ninety days to allow the FOMB to function and to permit the Board Members of the FOMB to go through the Senate confirmation process.

Discussion

The Territorial Clause of the U.S. Constitution Does Not Supersede the Appointments Clause of the U.S. Constitution.

The first issue that the court addressed was whether the Territorial Clause of the U.S. Constitution superseded the Appointments Clause of the U.S. Constitution. The Territorial Clause provides Congress with the following authority over the territories of the United States:

power to dispose of and make all needful Rules and Regulations respecting the Territory … belonging to the United States.

U.S. Const. art. IV, §3, cl. 2.

The Appointments Clause states:

The President … shall nominate, and by and with the Advice and Consent of the Senate, shall appoint … all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

U.S. Const. art. II, §2, cl. 2.

The court thought that the resolution of this issue was a straightforward issue of Constitutional interpretation. The Territorial Clause was a general clause in the U.S. Constitution. The Appointments Clause was a specific clause. An important principle of Constitutional interpretation is that the specific governs over the general. The First Circuit stated:

Story continues

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). Thus, we find in answering the first question before us a prime candidate for application of the specialibus canon and for the strict enforcement of the constitutional mandate contained in the Appointments Clause.

Id. at *8.

The court also rejected the argument that the Insular Cases negated the operation of the Appointments Clause in Puerto Rico:

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. (Footnotes omitted).

Id. at 10.

The Members of the FOMB Are Principal Officers of the United States.

The next issue that the First Circuit addressed was whether the Board Members are officers of the United States. The court applied a three-part test to determine whether Board Members are “Officers of the United States” and therefore subject to the Appointments Clause. The three-part test was derived from Supreme Court case law:

(1) the appointee occupies a “continuing” position established by federal law; (2) the appointee “exercises significant authority”; and (3) the significant authority is exercised “pursuant to the laws of the United States.”

Id. at 11.

A Board Member has a “continuing position” under a federal law because PROMESA provides for his or her appointment to an initial term of three years and he or she can thereafter be reappointed and serve until a successor takes office. A Board Member exercises significant authority because the FOMB has sole authority over the Puerto Rico bankruptcy case. The FOMB has the authority to countermand Puerto Rico laws or regulations that are inconsistent with PROMESA. Board Members, moreover, exercised significant authority pursuant to federal law:

Third, the Board Members' authority is exercised “pursuant to the laws of the United States.” The Board Members trace their authority directly and exclusively to a federal law, PROMESA. That federal law provides both their authority and their duties.

Id. at 12.

The court also held that the Board Members are “principal” officers, and thus, must be nominated by the President and confirmed by the Senate. An “inferior” officer is not subject to the Appointments Clause. An “inferior” officer was a government official whose work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate. On the other hand, Board Members are only answerable to and only removable by the President and are not directed or supervised by others who were nominated by the President and confirmed by the Senate.

The Remedy and the Application of the De Facto Officers Doctrine.

The First Circuit was averse to dismissing the Puerto Rico bankruptcy case. The court stated:

Second, we reject appellants' invitation to dismiss the Title III petitions and cast a specter of invalidity over all of the Board's actions until the present day. To the contrary, we find that application of the

de facto

officer doctrine is especially appropriate in this case.

Id. at 16.

The court applied the de facto officer doctrine:

An ancient tool of equity, the

de facto

officer doctrine “confers validity upon acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person's appointment … to office is deficient.”

Id.

The facts warranted the application of the de facto officer doctrine. The Board Members were acting under color of authority. The Board Members acted in good faith. Until the resolution of this appeal there was never any question of the Board Members’ authority under PROMESA.

The First Circuit applied the de facto officer doctrine because of prudential considerations:

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.

Id.

The First Circuit did not invalidate any of the FOMB’s actions. The court stayed the enforcement of its Decision and Order for 90 days to enable the Board Members to be confirmed by the Senate.

Conclusion

The First Circuit reached a legally correct decision that is equitable and pragmatic. The court was cognizant of the potential irreparable damage that its decision could do to Puerto Rico. In essence, the court applied what was the equivalent of the equitable mootness doctrine because after almost two years it declined to unravel the Puerto Rico bankruptcy case. The dismissal of the Puerto Rico bankruptcy case would have resulted in the dissolution of the automatic stay, and unmanageable litigation that could have destroyed Puerto Rico. If the Puerto Rico bankruptcy case had been dismissed, then millions of dollars in professional fees incurred by Puerto Rico could have been wasted. Therefore, the First Circuit reached the correct equitable and legal conclusion.

Carlos J. Cuevas

is a solo practitioner in Yonkers, N.Y., and a research associate at the University of Houston School of Law.

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