District Court for the District of Puerto Rico Upholds Constitutionality of Appointment Method of the Oversight Board Under PROMESA

The District Court for the District of Puerto Rico recently denied a hedge fund’s motion to dismiss a Puerto Rico Title III bankruptcy case.  The motion to dismiss was based solely on alleging a constitutional defect with Puerto Rico’s Oversight Board, an argument rejected by the district court.

The Oversight Board, created by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), is responsible for developing methods for Puerto Rico “to achieve fiscal responsibility and access to the capital markets.”  Among other things, the Oversight Board brings “bankruptcy-type proceedings” on behalf of Puerto Rico in federal court.  The Oversight Board is an entity within the Puerto Rico government and is outside of the control of Puerto Rico’s Governor or Legislature.

Seven voting members make up the Oversight Board, all of whom are appointed by the President.  One of the seven members “may be selected in the President’s sole discretion.”  Six of the members “’should be selected’ from specific candidates provided by congressional leaders”; Senate confirmation is not required unless the President selects one of the six members from outside this list.  Seven members appointed without Senate confirmation currently make up the current Oversight Board.

The hedge fund argued that this appointment method violates the Appointments Clause of Article II of the Constitution, which “prescribes the method of appointment for ‘Officers of the United States,’ whose appointments are not otherwise provided for in the Constitution.”  This argument hinges on classifying the Oversight Board members as “Officers of the United States.”

The court rejected the hedge fund’s classification of the members as “Officers of the United States” and ruled that “the Oversight Board is a territorial entity and its members are territorial officers.”  The court distinguished Article III “Constitutional” courts from territorial courts.  Territorial courts “derive their power from Congress’ ability to create courts under the Territories Clause of the U.S. Constitution and are vested with jurisdiction by Congress.”  Therefore, the court explained, the structure and jurisdiction of territorial courts “need not comport with those prescribed by the Constitution for courts exercising the ‘judicial power of the United States’ pursuant to Article III.”   Because Congress created the Oversight Board by invoking authority under the Territories Clause, the court held that the appointment method “is consistent with the exercise of plenary congressional power under that Clause, and . . . neither Presidential nomination nor Senate confirmation of the appointees to the Oversight Board is necessary as a constitutional matter . . . .”

This decision to uphold Congress’ discretion to “empower[] the President with the ability to both appoint and remove members form the Oversight Board” is in spite of past instances of Congress requiring Senate confirmation of certain territorial offices.  The court emphasized: “The President’s role in the selection process does not change the fundamental nature of the Oversight Board, which is a territorial entity. Nor does the manner of selection constitute an improper delegation of power or encroachment on the President’s general appointment authority, because Congress used its Article VI powers and did not attempt to allow the President to appoint the Board as a federal entity within the Executive Branch.”

The case is In re: The Financial Oversight and Management Board for Puerto Rico, Case No. 17-03283-LTS (D.P.R.).