Several justices of the U.S. Supreme Court expressed skepticism Tuesday that the Financial Oversight and Management Board for Puerto Rico is a primarily local body not subject confirmation by the U.S. Senate, a key consideration in how the court might rule in a case questioning the Oversight Board's legitimacy.
At stake is a lawsuit begun by Aurelius Investment and other hedge funds that want the high court to invalidate all of the Oversight Board’s actions.
The Oversight Board argues that Congress had the authority to establish the board as a primarily local body under Article IV of the Constitution, which empowers Congress to admit new states and administer the territories.
If a majority of the justices find the Oversight Board created by Congress has a primarily federal role, it could do what the hedge funds want or at least what an appellate court ordered, which is to require U.S. Senate confirmation of a new board.
That latter option could allow for the Oversight Board's work to date to remain intact.
Donald Verrilli, the attorney and former solicitor general who represented the Oversight Board in Tuesday’s oral arguments, said the hedge funds basically want a do-over in the hope of getting a better deal in a different debt restructuring.
“Every dollar that goes into their pocket is a dollar that gets taken away from the people of Puerto Rico,” Verrilli told reporters outside the courthouse afterward. “So that ultimately is what this is all about.”
The attorney who represented the hedge funds, former Solicitor General Theodore Olson, argued that the Oversight Board was established by Congress to address a national economic crisis.
“And if they look at the statute, it’s a national problem,” Olson told The Bond Buyer outside the courthouse. “But, we’ll see. Those are the hard issues in the case.’’
Olson declined to predict a ruling, but observed that the justices “were all very well prepared.”
“They know the briefs,” he said. “They know the issues. All we hope for is a good decision.”
Justice Sonia Sotomayor was the most outspoken justice who appeared to support the argument that the Oversight Board’s duties are primarily federal, comparing its role to that of a U.S. attorney with jurisdiction over the commonwealth.
“The issue is where do you draw a line between what's a federal officer and what's a territorial officer,” said Sotomayor. “And the issue has to be that when Congress chooses, it's Congress's choice. If the territory chooses, if it elects a governor, if it elects legislature, if it elects its own attorney general, that those are officers that Puerto Rico have selected. But, if the federal government is making the selection and imposing it on a territory, it has to be a federal officer.”
Justice Brett Kavanaugh also noted that up until the 1950s “territorial officers had to be appointed by the president with the advice and consent of the Senate.”
Justice Elena Kagan suggested that rather than referring to historical cases that are all over the map, it might be better to “use a kind of functional test and say are these people doing the sorts of things that would be done by state officials in states, or are they doing the sorts of things that would be done by federal officials.”
Verrilli said a functional analysis will find the Oversight Board plays a local role.
“And what the Board is actually charged with doing is acting in the shoes of the government of Puerto Rico and the restructuring proceedings and acting as an independent entity insulated from political pressure within the budgeting proceedings, but — but constrained by statute to act on behalf of, in the interest of, for the territory,” Verrilli said.
Principal Deputy Solicitor General Jeffrey Wall also highlighted the Oversight Board’s local role.
“The board budgets and restructures debt only for Puerto Rico,” he told the justices. "It acts in the territory under a territory-specific statute.”
It was unclear Tuesday whether a majority of the high court is willing to uphold a decision by the First Circuit of the U.S. Court of Appeals that found President Barack Obama’s appointment of the seven-member board violated the separation of powers provision in the Appointments Clause of the Constitution.
Justice Samuel Alito broke through the constitutional arguments by asking, “Mr. Olson, are you and your client here just to defend the integrity of the Constitution, or would one be excessively cynical to think that something else is involved here involving money? And, if so, what is it? What did the board do that hurt your client?”
Olson acknowledged, “Well, there's — there's over $100 billion of indebtedness being adjudicated in various procedures.”
The justices did not indicate whether they would agree with the appellate court to let stand the previous actions of the board under the de facto officer doctrine until a new board is confirmed by the Senate.
