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Aurelius Investment, LLC v. Commonwealth of Puerto Rico

United States Court of Appeals, First Circuit

February 15, 2019



          Theodore B. Olson, with whom Matthew D. McGill, Helgi C. Walker, Lucas C. Townsend, Lochlan F. Shelfer, Jeremy M. Christiansen, and Gibson, Dunn & Crutcher LLP were on brief, for appellants Aurelius Investment, LLC and Assured Guaranty Corporation.

          Rolando Emmanuelli-Jiménez, with whom Jessica E. Méndez-Colberg, Yasmín Colón-Colón, and Bufete Emmanuelli, C.S.P. were on brief, for appellant UTIER.

          Donald B. Verrilli, Jr., with whom Ginger D. Anders, Chad I. Golder, Sarah G. Boyce, Rachel G. Miller-Ziegler, Munger, Tolles & Olson LLP, Martin J. Bienenstock, Stephen L. Ratner, Timothy W. Mungovan, Mark D. Harris, Chantel L. Febus, Proskauer Rose LLP, Hermann D. Bauer, Ubaldo M. Fernández, and O'Neill & Borges LLC were on brief, for appellee The Financial Oversight and Management Board for Puerto Rico.

          Walter Dellinger, Peter Friedman, John J. Rapisardi, William J. Sushon, and O'Melveny & Myers LLP on brief, for The Puerto Rico Fiscal Agency and Financial Advisory Authority.

          Jeffrey B. Wall, with whom Laura E. Myron, Attorney, Appellate Staff, Civil Division, U.S. Department of Justice, Joseph H. Hunt, Assistant Attorney General, Thomas G. Ward, Deputy Assistant Attorney General, Mark R. Freeman, Michael S. Raab, and Michael Shih, Attorneys, Appellate Staff, Civil Division, were on brief, for appellee the United States.

          José A. Hernández-Mayoral, with whom Rafael Hernández-Colón, and Héctor Ferrer-Ríos, were on brief, as amicus curiae, for the Popular Democratic Party of Puerto Rico and its President.

          Jorge Martínez-Luciano, with whom Emil Rodríguez-Escudero, M.L. & R.E. Law Firm, Aníbal Acevedo-Vilá and Law Office Aníbal Acevedo-Vilá were on brief, as amici curiae.

          Luc A. Despins and Paul Hastings LLP on brief, for The Official Committee of Unsecured Creditors of All Puerto Rico Title III Debtors.

          Ian Heath Gershengorn, Lindsay C. Harrison, William K. Dreher, Catherine Steege, Melissa Root, Robert Gordon, Richard Levin, A.J. Bennazar-Zequeira, and Bennazar, García, & Milián, C.S.P. on brief, for The Official Committee of Retired Employees of the Commonwealth of Puerto Rico.

          Charles J. Cooper, Michael W. Kirk, Howard C. Nielson, Jr., John D. Ohlendorf, Haley N. Proctor, Cooper & Kirk, PLLC, Rafael Escalera, Carlos R. Rivera-Ortiz, Sylvia M. Arizmendi-López de Victoria, and Reichard & Escalera on brief, for Creditors-Appellees the Cofina Senior Bondholders' Coalition.

          Manuel A. Rodríguez-Banchs, and Matthew S. Blumin, on brief, for appellee American Federal of State, County & Municipal Employees.

          Before Torruella, Thompson, and Kayatta, Circuit Judges.


         The matter before us arises from the restructuring of Puerto Rico's public debt under the 2016 Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). This time, however, we are not tasked with delving into the intricacies of bankruptcy proceedings. Instead, we are required to square off with a single question of constitutional magnitude: whether members of the Financial Oversight and Management Board created by PROMESA ("Board Members") are "Officers of the United States" subject to the U.S. Constitution's Appointments Clause. Title III of PROMESA authorizes the Board to initiate debt adjustment proceedings on behalf of the Puerto Rico government, and the Board exercised this authority in May 2017. Appellants seek to dismiss the Title III proceedings, claiming the Board lacked authority to initiate them given that the Board Members were allegedly appointed in contravention of the Appointments Clause.

         Before we can determine whether the Board Members are subject to the Appointments Clause, we must first consider two antecedent questions that need be answered in sequence, with the answer to each deciding whether we proceed to the next item of inquiry. The first question is whether, as decided by the district court and claimed by appellees, the Territorial Clause displaces the Appointments Clause in an unincorporated territory such as Puerto Rico. If the answer to this first question is "no," our second area of discussion turns to determining whether the Board Members are "Officers of the United States," as only officers of the federal government fall under the purview of the Appointments Clause. If the answer to this second question is "yes," we must then determine whether the Board Members are "principal" or "inferior" United States officers, as that classification will dictate how they must be appointed pursuant to the Appointments Clause. But before we enter fully into these matters, it is appropriate that we take notice of the developments that led to the present appeal.


         The centerpieces of the present appeals are two provisions of the Constitution of the United States. The first is Article II, Section 2, Clause 2, commonly referred to as the "Appointments Clause," which establishes that:

[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 second is Article IV, Section 3, Clause 2, or the "Territorial Clause," providing Congress with the "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.

         A. Puerto Rico's Financial Crisis

         The interaction between these two clauses comes into focus because of events resulting from the serious economic downfall that has ailed the Commonwealth of Puerto Rico since the turn of the 21st Century, see Center for Puerto Rican Studies, Puerto Rico in Crisis Timeline, Hunter College (2017), tions/Puerto-Rico-Crisis-Timeline-2017.pdf; see generally Juan R. Torruella, Why Puerto Rico Does Not Need Further Experimentation with Its Future: A Reply to the Notion of "Territorial Federalism", 131 Harv. L. Rev. F. 65 (2018), and its Governor's declaration in the summer of 2015 that the Commonwealth was unable to meet its estimated $72 billion public debt obligation, see Michael Corkery & Mary Williams Walsh, Puerto Rico's Governor Says Island's Debts Are "Not Payable", N.Y. Times (June 28, 2015), https://www.nytimes .com/2015/06/29/business/dealbook/puerto-ricos-governor-says-islands-debts-are-not-payable.html. This obligation developed, in substantial part, from the triple tax-exempt bonds issued and sold to a large variety of individual and institutional investors, not only in Puerto Rico but also throughout the United States.[1]Given the unprecedented expansiveness of the default in terms of total debt, the number of creditors affected, and the creditors' geographic diversity, it became self-evident that the Commonwealth's insolvency necessitated a national response from Congress. Puerto Rico's default was of particular detriment to the municipal bond market where Commonwealth bonds are traded and upon which state and local governments across the United States rely to finance many of their capital projects. See Nat'l Assoc. of Bond Lawyers, Tax-Exempt Bonds: Their Importance to the National Economy and to State and Local Governments 5 (Sept. 2012),

         From 1938 until 1984, Puerto Rico was able, like all other U.S. jurisdictions, to seek the protection of Chapter 9 of the U.S. Bankruptcy Code when its municipal instrumentalities ran into financial difficulties. See Franklin Cal. Tax-Free Trust v. Puerto Rico, 805 F.3d 322, 345-50 (1st Cir. 2015) (Torruella, J., concurring). But without any known or documented explanation, in 1984, Congress extirpated from the Bankruptcy Code the availability of this relief for the Island. Id. at 350. In an attempt to seek self-help, and amidst the Commonwealth's deepening financial crisis, the Puerto Rico Legislature passed its own municipal bankruptcy legislation in 2014. See Puerto Rico Public Corporation Debt Enforcement and Recovery Act of 2014, 2014 P.R. Laws Act No. 71; see generally Lorraine S. McGowen, Puerto Rico Adopts a Debt Recovery Act for Its Public Corporations, 10 Pratt's J. Bankr. L. 453 (2014). The Commonwealth's self-help journey, however, was cut short by the Supreme Court in Puerto Rico v. Franklin Cal. Tax-Free Tr., 136 S.Ct. 1938 (2016), which invalidated the Puerto Rico bankruptcy statute. Coincidentally, the Supreme Court decided Franklin Cal. on June 13, 2016 -- seven days before the following congressional intervention into this sequence of luckless events.

         B. Congress Enacts PROMESA

         On June 30, 2016, Congress's next incursion into Puerto Rico's economic fortunes took place in the form of Public Law 114-187, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), [2] 48 U.S.C. § 2101 et seq., which Congress found necessary to deal with Puerto Rico's "fiscal emergency" and to help mitigate the Island's "severe economic decline." See id. § 2194(m)(1). Congress identified the Territorial Clause as the source of its authority to enact this law. See id. § 2121(b)(2).

To implement PROMESA, Congress created the Financial Oversight and Management Board of Puerto Rico (the "Board"). Congress charged the Board with providing independent supervision and control over Puerto Rico's financial affairs and helping the Island "achieve fiscal responsibility and access to the capital markets." Id. § 2121(a). In so proceeding, Congress stipulated that the Board was "an entity [created] within the territorial government" of Puerto Rico, id. § 2121(c)(1), which "shall not be considered to be a department, agency, establishment, or instrumentality of the Federal Government," id. § 2121(c)(2), and that it was to be funded entirely from Commonwealth resources, id. § 2127.[3]

         Although PROMESA places the Board "within" the Puerto Rico territorial government, Section 108 of PROMESA, which is labeled "Autonomy of Oversight Board," id. § 2128, precludes the Puerto Rico Governor and Legislature from exercising any power or authority over the so-called "territorial entity" that PROMESA creates. Instead, it subordinates the Puerto Rico territorial government to the Board, as it unambiguously pronounces that:

(a) . . . Neither the Governor nor the Legislature may --
(1) exercise any control, supervision, oversight, or review over the . . . Board or its activities; or
(2)enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this chapter, as determined by the . . . Board.

Id. § 2128(a).

         PROMESA also provides additional authority and powers to the Board with similarly unfettered discretion. For example, Section 101(d)(1)(A) grants the Board, "in its sole discretion at such time as the . . . Board determines to be appropriate," the designation of "any territorial instrumentality as a covered territorial instrumentality that is subject to the requirements of [PROMESA]." Id. § 2121(d)(1)(A). Under Section 101(d)(1)(B), the Board, "in its sole discretion," may require the Governor of Puerto Rico to submit "such budgets and monthly or quarterly reports regarding a covered territorial instrumentality as the . . . Board determines to be necessary . . ." Id. § 2121(d)(1)(B). Pursuant to Section 101(d)(1)(C), the Board is allowed, "in its sole discretion," to require separate budgets and reports for covered territorial instrumentalities apart from the Commonwealth's budget, and to require the Governor to develop said separate documents. Id. § 2121(d)(1)(C). Per Section 101(d)(1)(D), the "Board may require, in its sole discretion," that the Governor "include a covered territorial instrumentality in the applicable Territory Fiscal Plan." Id. § 2121(d)(1)(D). Further, as provided in Section 101(d)(1)(E), the Board may, "in its sole discretion," designate "a covered territorial instrumentality to be the subject of [a separate] Instrumentality Fiscal Plan." Id. § 2121(d)(1)(E). Finally, Section 101(d)(2)(A) bestows upon the Board, again "in its sole discretion, at such time as the . . . Board determines to be appropriate," the authority to "exclude any territorial instrumentality from the requirements of [PROMESA]." Id. § 2121(d)(2)(A).

         PROMESA also requires the Board to have an office in Puerto Rico and elsewhere as it deems necessary, and that at any time the United States may provide the Board with use of federal facilities and equipment on a reimbursable or non-reimbursable basis. Id. § 2122. Additionally, Section 103(c) waives the application of Puerto Rico procurement laws to the Board, id. § 2123(c), while Section 104(c) authorizes the Board to acquire information directly from both the federal and Puerto Rico governments without the usual bureaucratic hurdles, id. § 2124(c). Moreover, the Board's power to issue and enforce compliance with subpoenas is to be carried out in accordance with Puerto Rico law. Id. § 2124(f).[4] Finally, PROMESA directs the Board to ensure that any laws prohibiting public employees from striking or engaging in lockouts be strictly enforced. Id. § 2124(h).

         We thus come to PROMESA's Title III, the central provision of this statute, which creates a special bankruptcy regime allowing the territories and their instrumentalities to adjust their debt. Id. §§ 2161-77. This new bankruptcy safe haven applies to territories more broadly than Chapter 9 applies to states because it covers not just the subordinate instrumentalities of the territory, but also the territory itself. Id. § 2162.

         An important provision of PROMESA's bankruptcy regime is that the Board serves as the sole representative of Puerto Rico's government in Title III debtor-related proceedings, id. § 2175(b), and that the Board is empowered to "take any action necessary on behalf of the debtor" -- whether the Commonwealth government or any of its instrumentalities -- "to prosecute the case of the debtor," id. § 2175(a).

         C. Appointment of Members to PROMESA's Board

         PROMESA establishes that the "Board shall consist of seven members appointed by the President," who must comply with federal conflict of interest statutes. Id. § 2121(e)(1)(A).[5] The Board's membership is divided into six categories, labelled A through F, with one member for Categories A, B, D, E, and F, and two members for Category C. Id. § 2121(e)(1)(B).[6] The Governor of Puerto Rico, or his designee, also serves on the Board, but in an ex officio, non-voting capacity. Id. § 2121(e)(3). The Board's duration is for an indefinite period, at a minimum four years and likely more, given the certifications that Section 209 of PROMESA requires.[7]

         Pursuant to Section 101(f) of PROMESA, individuals are eligible for appointment to the Board only if they:

(1) ha[ve] knowledge and expertise in finance, municipal bond markets, management, law, or the organization or operation of business or government; and
(2)prior to appointment, [they are] not an officer, elected official, or employee of the territorial government, a candidate for elected office of the territorial government, or a former elected official of the territorial government.

Id. § 2121(f). In addition, there are certain primary residency or primary business place requirements that must be met by some of the Board Members. Id. § 2121(e)(2)(B)(i), (D) (requiring that the Category A Board Member "maintain a primary residence in the territory or have a primary place of business in the territory").

         Of particular importance to our task at hand is Section 101(e)(2)(A), which outlines the procedure for ...

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