Judge Laura Taylor Swain’s Ruling on PROMESA Board Challenge Could Have Consequences

The Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, established a Financial Oversight and Management Board (FOMB) for Puerto Rico. The law specified that “The purpose of the board is to provide a method for a covered territory to achieve fiscal responsibility and access to the capital markets. The board must be created as an entity within the territorial government for which it is established and must not be considered to be a part of the federal government.”

The law also states that “The territorial government may not exercise control over the board or enact, implement, or enforce any legislation, policy, or rule that would impair the purposes of this bill.” The bill is required to “work with the territorial government to promote compliance,” but the board generally has the last word, though the bill also specifies that the board can’t hinder the territorial government in following federal laws.

The board has the power to restructure Puerto Rico’s debt, but only after the following events have taken place:

• the entity has made good-faith efforts to reach a consensual restructuring with creditors;
• the entity has adopted procedures necessary to deliver timely audited financial statements, and made public draft financial statements and other information sufficient for any interested person to make an informed decision with respect to a possible restructuring;
• a fiscal plan certified by the board is in place; and
• either no order approving a qualifying modification has been entered into or an order has been entered into and the entity is unable to make its debt payments notwithstanding the modification.

The “entity” referenced here could be the Island itself, the power authority (PREPA), or any other relevant element.

FOMB legal challenge

The board has been controversial from the beginning. Aurelius Capital Management, a hedge fund which is one of Puerto Rico’s creditors, filed a motion to prevent any restructuring of Puerto Rico’s debt in August of 2017. Their argument was that the members of the board should be confirmed by the Senate, under the Appointments Clause of the Constitution.

The Appointments Clause says that “all other officers of the United States” shall be appointed by the President of the United States with the approval of the Senate. Congress can appoint other kinds of officials. Since the FOMB “must not be considered to be a part of the federal government,” this doesn’t apply. This was the decision of U.S. District Judge Laura Taylor Swain last week.

Aurelius had filed a motion pointing out relevant Supreme Court decisions. Governor Rossello and the FOMB filed objections. Judge Taylor Swain ruled in favor of the board.

Future effects?

This decision was expected. However, some commenters are suggesting that the decision could have long-term consequences.

The court responded to Aurelius’s claim by saying that “the Appointments Clause does not constitute a “fundamental” constitutional provision and, as such, it does not apply to Puerto Rico.”

The court also referenced the Territory Clause, which gives Congress complete power over the territories of the United States. The decision included many previous cases in which courts repeated this assertion in different ways, for example saying that “A [territory] has no government but that of the United States, except in so far as the United States may permit.”

“In summary, Congress has plenary power under the Territories Clause to establish governmental institutions for territories that are not only distinct from federal government entities but include features that would not comport with the requirements of the Constitution if they pertained to the governance of the United States,” Judge Taylor Swain concluded. “It has exercised this power with respect to Puerto Rico over the course of nearly 120 years.”

The Control Board Watch blog suggests that this ruling and the territorial government’s responses bring up again the question of Puerto Rico’s sovereignty — and close the question with clarity. While the author lists some other cases that might reopen the question once again, this ruling reinforces the fact that Congress, and not Puerto Rico’s territorial government, has the power.

El Nuevo Dia brought up the Sanchez Valle case, quoting scholars who see Taylor Swain’s decision as reaffirmation of the powerlessness of Puerto Rico. The decision, said one expert, “should outrage those of us who live here, ” but is still quite clear. Congress has the final say.

John Muddlaw said that “Puerto Rico’s colonial relationship is sustained once again.” He suggests that this will make it hard for “commonwealth” supporters to continue “the hoax of the commonwealth.”