Supreme Court considers legitimacy of Puerto Rico Oversight Board

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The U.S. Supreme Court hears oral arguments next Tuesday on the legitimacy of the debt restructuring being imposed on Puerto Rico by a Financial Oversight and Management Board whose members were not confirmed by the U.S. Senate.

The U.S. Chamber of Commerce and American Civil Liberties Union are among the parties that have filed friend of the court briefs.

A high court ruling in the case could have a far-reaching impact on capital markets as well as on the separation of powers between the executive and legislative branches. The court's decision could even invalidate the work of the Oversight Board.

And the wild card part of this case is whether the justices decide to take an expansive look back on early 20th century decisions known as the Insular Cases and rule on the constitutional rights of U.S. citizens living in territories outside the 50 states.

The appeal comes from the Oversight Board, which lost an appellate court lawsuit filed by the hedge fund Aurelius Investment and other hedge funds as well a labor union representing utility workers.

The First Circuit of the U.S. Court of Appeals ruled that the appointment of members of the Oversight Board violated the separation of powers contained in the Appointments Clause of the U.S. Constitution because President Barack Obama’s appointees were not first confirmed by the U.S. Senate.

The Oversight Board was created by Congress under the 2016 Puerto Rico Oversight, Management, and Economic Stability Act to address the commonwealth’s debt crisis.

The federal government’s brief said Congress acted because “Puerto Rico faced the most debilitating fiscal emergency in its history” with the commonwealth and its instrumentalities loaded with “around $71.5 billion in outstanding debt, more than the whole annual output of the island’s economy.”

“Their credit ratings had been downgraded to junk, leaving them unable to borrow money on the bond markets,” the government said. “Nor could they get debt relief through the federal bankruptcy code.”

It was because of this “financial catastrophe” and “humanitarian crisis for the more than three million U.S. citizens living in Puerto Rico” that Congress acted.

But the Oversight Board and the federal government argue that the Appointments Clause does not apply in this case under Article IV of the Constitution, which empowers Congress to admit new states and administer the territories.

So the question for the court is whether some parts of the Constitution, such as the Appointments Clause, don’t apply to territories.

The utility workers union, Unión de Trabajadores de la Industria Eléctrica y Riego Inc. (UTIER), represents employees of the Puerto Rico Electric Power Authority (PREPA), who say in their court filing they have been “extremely harmed” by the “profound austerity measures” imposed by the Oversight Board on their salaries, bonuses, pension and health plans.

“The Oversight Board has rushed to finalize as many actions as possible, all while holding an unconstitutional appointment, thus, having no authority to act,” UTIER said in its filing.

The appellate court, however, allowed the Oversight Board’s previous actions to stand under the so-called de facto officer doctrine as long as a new board was promptly nominated by the president and confirmed by the Senate.

President Donald Trump has renominated all of the Oversight Board’s members since that ruling, but the Senate has not voted on confirmation.

The U.S. Chamber of Commerce argues in its friend of the court brief that the de facto officer doctrine should not be allowed to paper over constitutional errors.

“Never before has the court endorsed use of the de facto officer doctrine to excuse structural constitutional errors that go to the core of preserving political accountability and protecting individual liberty,” the chamber’s brief said.

The chamber requests that the case be remanded to the lower courts “unless and until the constitutional violation has been cured.”

The ACLU and its sister chapter in Puerto Rico have asked the high court to not use the so-called Insular cases to decide whether the members of the Oversight Board required Senate confirmation under the Appointments Clause.

The Insular Cases from the early 20th century said residents of territories had only some of the protections of the U.S. Constitution.

Those rulings distinguish between incorporated territories destined for eventual statehood such as Alaska and unincorporated territories that were not.

“The Insular Cases, which impose a second-class constitutional status on all who live in so-called ‘unincorporated’ territories, explicitly rest on outdated racist assumptions about the inferiority of ‘alien races,’ and depart in unprincipled ways from the fundamental constitutional tenet of limited government,” the ACLU said.

Those Supreme Court decisions came under Chief Justice Melville Fuller, who also led the 1896 majority decision in Plessy v. Ferguson that established the “separate but equal doctrine” of racial segregation.

“Obviously Plessy was overturned by Brown v. Board of Education 58 years later,” said Rafael Cox Alomar, a professor of law at the University of the District of Columbia, who is one of four constitutional scholars who filed a friend of the court brief.

Cox Alomar said the law professors are asking the high court to either not use the Insular cases in deciding the case or that they be overruled.

“They are the consequence of a racist approach,” he told The Bond Buyer. “We are saying the Constitution fully applies to Puerto Rico.”

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