The U.S. Department of Justice filed a constitutional defense of the Puerto Rico Oversight, Management, and Economic Stability Act, arguing the law gives the Federal government flexibility in making appointments to handle the territory's debt crisis.

The federal lawyers responded Wednesday to an Aug. 7 filing by hedge fund Aurelius Capital in the Title III bankruptcy case.

Puerto Rico Oversight Board executive director Natalie Jaresko said the board supported the U.S. filing in defense of PROMESA's constitutionality. Bloomberg News

"We welcome the United States Solicitor General's legal arguments in support of PROMESA and the board's constitutionality," said Natalie Jaresko, Puerto Rico Oversight Board executive director in a written statement. "The devastation of Hurricanes Irma and Maria make it even more important to have in place an orderly process for restoring the island's finances, providing oversight and increasing confidence among residents and businesses while upholding equitable treatment for creditors."

While Aurelius didn’t ask for the Title III cases affecting other Puerto Rico public sector entities to be dismissed, the investment fund’s logic, if approved in this case, could be be applied to those cases.

At potential stake are the fates of $74 billion in outstanding public sector debt, $49 billion in pensions, and the control of Puerto Rico’s government and public corporations. In the summer of 2016 then-President Barack Obama signed PROMESA into law to handle the territory's long-declining economy and unsustainable debt.

In the complaint Aurelius said the Title III bankruptcy petition should be dismissed because its filing wasn’t authorized by a validly constituted oversight board. In particular, the firm said that the appointments clause of the U.S. Constitution was breached in appointing the board’s members.

According to the Constitution all “principal officers” of the United States must be appointed by the U.S. president and approved by the U.S. Senate. In its August complaint, Aurelius argued that the board members are “principal officers” of the U.S.

The board’s appointment procedure, like Title III, was established in the Puerto Rico Oversight, Management and Economic Stability Act, signed into law by then-President Barack Obama in the summer of 2016.

In PROMESA the Republican leaders of the Senate and House of Representatives each nominated two people to the board, the Democratic minority leaders of the Senate and House each nominated one person to the board. Obama named someone on his own and approved the other nominations. No Senate hearings were held to approve the nominations.

In the federal lawyers’ filing they said the PROMESA appointments scheme “is not subject to the Appointments Clause because the Oversight Board is a component of the territorial government.” Congress enacted PROMESA under the Territory Clause of Article IV of the constitution which gives Congress “‘broad latitude to develop innovative approaches to territorial governance,’ Puerto Rico v. Sanchez Valle (2016).”

“The Appointments Clause does not govern the appointment of territorial officers, including members of the Oversight Board, because Congress may legislate for the territories ‘in a manner … that would exceed its powers or at least would be very unusual, in the context of national legislation enacted under other powers delegated to it.’ Palmore v. United States (1973),” the federal attorneys argued.

The federal lawyers also argued that historical practice shows that the “Appointments Clause is inapplicable to the appointment of territorial officers.” In 1900 Congress passed the Foraker Act, which said that a locally-elected house of representatives should work alongside a governor and 11-member elected council nominated by the president and confirmed by the U.S. Senate. In 1947 the U.S. government gave Puerto Rico the power to also elect a governor.

The federal lawyers argued that these local elections are not in conformity with the Appointments Clause but have historically been practiced without challenge.

Aurelius had also argued that PROMESA’s appointment mechanism for the Oversight Board also encroached on the U.S. president’s executive authority, violating the Constitution’s separation of powers.

While PROMESA encouraged the president to pick six of the seven board members from those nominated by Congress, according to the act, “he could have requested the recommendatory lists to be supplemented with additional candidates or nominated his own candidates for Senate confirmation under PROMESA’s appointments structure.”

Writing the brief for the federal government were attorneys Rosa Rodriguez-Velez, Thomas Ward, Jennifer Ricketts, Christopher Hall, Jean Lin, and Cesar Lopez-Morales.

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