Puerto Rico’s Financial Oversight and Management Board: The Supreme Court’s Analysis and What It Means for Congress

Puerto Rico’s Financial Oversight and Management Board: The Supreme Court’s Analysis and What It Means for Congress

Legal Sidebari

Puerto Rico’s Financial Oversight and
Management Board: The Supreme Court’s
Analysis and What It Means for Congress
November 23, 2020
The Supreme Court’s recent decision in Financial Oversight & Management Board for Puerto Rico v.
Aurelius Investment, LLC (Aurelius), in which the Court rejected an Appointments Clause challenge to
Puerto Rico’s Financial Oversight and Management Board’s (Board) composition, is significant to
Congress for several reasons. First, it allows Puerto Rico’s debt adjustment proceedings under Title III of
the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to proceed. More
generally, Aurelius reinforces Congress’s authority to create offices that do not require Senate
confirmation if the individuals filling those offices perform primarily local duties in the Territories (e.g.,
American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands), or the
District of Columbia. This Sidebar analyzes the Court’s ruling and its potential import.
Background on PROMESA
Puerto Rico and many of its instrumentalities have experienced significant difficulties paying their debts.
Under Chapter 9 of the Federal Bankruptcy Code, a “municipality” —defined as a “political subdivision
or public agency or instrumentality of a State”—can sometimes obtain relief from debts it cannot repay by
filing for bankruptcy. But the Bankruptcy Code excludes Puerto Rico from the definition of “State” for
Chapter 9 eligibility purposes. (The Bankruptcy Code thus differs from its predecessor, the Bankruptcy
Act, which included “the Territories” in its definition of “State.”) Puerto Rico tried to surmount this
obstacle by passing its own statute in 2014 to create a bankruptcy-like debt restructuring procedure for its
public utilities. The Supreme Court ruled in 2016, however, that federal law preempted that statute,
leaving Puerto Rico with no valid avenue for debt relief.
Congress responded in 2016 by invoking the Territorial Clause of Article IV of the U.S. Constitution (also
known as the Territories Clause)—which empowers Congress to “make all needful Rules and Regulations
respecting the Territory or other Property belonging to the United States”—to enact PROMESA and
establish the Board. PROMESA grants the Board various powers and responsibilities “to provide a
method for” Puerto Rico “to achieve fiscal responsibility and access to the capital markets.” Title III of
PROMESA also created a process by which certain U.S. Territories and their instrumentalities may adjust
Congressional Research Service
https://crsreports.congress.gov
LSB10555
CRS Legal Sidebar
Prepared for Members and
Committees of Congress

Congressional Research Service
2
their debts. Subject to various prerequisites, the Board may begin a Title III debt adjustment proceeding
for the Commonwealth of Puerto Rico or one of its instrumentalities by filing a petition with the U.S.
District Court for the District of Puerto Rico. The Board serves as the debtor’s representative in that
proceeding, and enjoys the exclusive authority to file a “plan of adjustment” that proposes to modify the
territory’s or instrumentality’s debts and obligations. If that plan of adjustment satisfies various statutory
requirements, the court may “confirm” it, which generally means that those modifications bind the debtor
and its creditors. To date, the Board has filed Title III cases not only for the Commonwealth of Puerto
Rico, but also for several of its instrumentalities, including the Puerto Rico Electric Power Authority. The
court presiding over the Title III proceedings has confirmed a plan of adjustment in one of those cases,
which is presently on appeal.
Under PROMESA, the Board qualifies as “an entity within the territorial government.” Except for the
Governor of Puerto Rico or her designee—who serves as a nonvoting, ex officio Board member—
PROMESA specifies that the U.S. President shall appoint the Board’s seven voting members. PROMESA
does not, however, require the Senate to confirm those members before they take office, so long as the
President selects six of those seven members from lists submitted by specified Members of Congress.
Aurelius, the Appointments Clause, and the Territorial Clause
The Constitution’s Appointments Clause empowers the President to nominate principal “Officers of the
United States,” but only “by and with the Advice and Consent of the Senate”—that is, subject to Senate
confirmation. The Appointments Clause also authorizes Congress to “vest the Appointment of . . . inferior
Officers” in “the President alone,” without Senate confirmation. While the Appointments Clause
prescribes the method of appointment for federal officers, it does not govern the selection of “mere
employees,” who do not exercise “significant authority pursuant to the laws of the United States.”
Aurelius required the Court to consider how the Appointments Clause interacts with the Territorial Clause.
In Aurelius, several creditors facing a potential adjustment of their debts under Title III and a Puerto
Rican labor organization argued that the Board’s composition violated the Appointments Clause because
its members were not Senate-confirmed. They contended that the Board’s alleged constitutional
infirmities made it unlawful for the Board to file the debt adjustment cases or otherwise exercise its
putative powers under PROMESA.
The district court rejected the challengers’ arguments. It reasoned that Congress created the Board as an
Article IV territorial government body rather than a federal entity, making the Board members territorial
officers instead of “Officers of the United States” subject to the Appointments Clause. On appeal, the U.S.
Court of Appeals for the First Circuit (First Circuit) disagreed, holding that the Board members qualified
as principal “Officers of the United States” who required Senate confirmation. To “reduce the disruption”
that dismissing the pending Title III cases and invalidating all of the Board’s prior actions would cause,
however, the First Circuit applied a principle called the de facto officer doctrine—which, in limited
circumstances, can validate certain actions taken by officials whose appointments were deficient—to
uphold the actions the Board took prior to the First Circuit’s decision. The Supreme Court granted
certiorari to consider challenges to both aspects of the First Circuit’s decision: (1) the applicability of the
Appointments Clause to officers in the Territories, and (2) the use of the de facto officer doctrine.
The Court, in an opinion written by Justice Breyer and joined by six other Justices, reversed the First
Circuit’s judgment. After surveying the Constitution’s structure, text, and history, the Court first
explained that “the Appointments Clause restricts the appointment of all officers of the United States,
including those who carry out their powers and duties in or in relation to Puerto Rico.” The Court then
determined that the Board members were not officers of the United States, but were instead officers of
Puerto Rico to whom the Appointments Clause did not apply. To support its conclusion, the Court
emphasized:

Congressional Research Service
3
 PROMESA defined the Board as “an entity within the territorial government,” not “a
department, agency, establishment, or instrumentality of the Federal Government”;
 By statute, Puerto Rico’s government—not the federal government—paid the Board’s
expenses;
 The Board’s investigatory powers—such as the ability to administer oaths, issue
subpoenas, and take evidence—were “backed by Puerto Rican, not federal, law”;
 The Board’s fiscal and budgetary responsibilities concerned “the finances of the
Commonwealth, not of the United States”; and
 The Board served as the representative of Puerto Rico and its instrumentalities in the Title
III debt adjustment proceedings—not the representative of the United States.
Accordingly, the Court concluded that the Appointments Clause did not apply to the Board’s voting
members because the Board’s duties were primarily local, not primarily federal in nature. Because these
appointments did not violate the Constitution, the Court did not proceed to address the de facto officer
doctrine.
Considerations for Congress
Aurelius may be of interest to Congress for several reasons. For one, the Supreme Court’s ruling means
that the Appointments Clause does not render the ongoing Title III proceedings or the Board’s past
restructuring efforts constitutionally infirm, and Puerto Rico’s attempts to adjust its debts under
PROMESA may therefore proceed. Relatedly, the Board may continue exercising its other powers and
duties under PROMESA so long as those powers and duties concern matters primarily local in nature.
The Appointment of Territorial Officers
Aurelius also reinforces Congress’s authority to establish offices to perform primarily local duties in
Puerto Rico and other U.S. Territories without mandating Senate advice and consent, even if exercising
those primarily local duties may at times have nationwide consequences. To the extent that Article IV also
authorizes Congress to create local offices for the District of Columbia, Aurelius likewise affirms
Congress’s power to forgo Senate advice and consent when the officials filling those offices perform
primarily local duties.
At the same time, Aurelius leaves several questions open. The Court’s opinion does not exhaustively
demarcate “local” versus “federal” duties, or explain how courts should apply that test when an officer
performs both. For that reason, Justice Clarence Thomas, in an opinion concurring in the judgment,
criticized the “primarily local” test as too “amorphous.” Future cases may provide further guidance. Until
then, Congress can reduce the risk that the creation of any particular territorial office falls on the
unconstitutional side of the line either by requiring presidential nomination and Senate confirmation or by
excluding duties that appear federal in nature.
Aurelius also raised a related question regarding the appointment of territorial officers. Though concurring
in the judgment, Justice Sonia Sotomayor wrote separately to discuss whether Puerto Rico’s adoption of
its (congressionally approved) constitution in the early 1950s might change the analysis of federal officer
appointments there. In her view, by ratifying Puerto Rico’s constitution, “Congress explicitly left the
authority to choose Puerto Rico’s governmental officers to the people of Puerto Rico.” According to
Justice Sotomayor, that action could constitute a “voluntary concession by the Federal Government,”
giving Puerto Rico “the exclusive right to establish [its] own territorial officers.” Noting that Puerto Rico
does not have a role in selecting the Board’s voting members, Justice Sotomayor questioned whether
Board members could truly be considered territorial officers. Nonetheless, she agreed with the majority
that the parties had not properly presented this question, so the Court did not consider it.

Congressional Research Service
4
To the extent this challenge may find traction in future litigation, Congress may consider whether
Territories with a degree of home rule should be given formal roles in the appointment of territorial
officers. Alternatively, Congress could explicitly amend PROMESA or enact similar legislation to
indicate it has not conceded its ability to appoint territorial officers other than those contemplated by the
relevant home rule statutes and related provisions. Such a statement might be challenged in litigation, but
could eventually lead to further clarification in a legal area that remains unsettled.
The Insular Cases
Finally, Congress could address unresolved issues related to the Insular Cases. The Aurelius Court
described this line of Territorial Clause cases from the turn of the 20th century as “much-criticized,” but
“whatever their continued validity,” declined to consider whether they should be formally overruled. (One
party had claimed that these cases implicitly undergirded the argument that the Appointments Clause did
not apply to territorial officers.) The Insular Cases stand generally for the proposition that residents of the
“unincorporated” Territories (i.e., those Territories not clearly on the pathway to U.S. statehood) are not
entitled to the full range of constitutional protections enjoyed by residents of U.S. states. For example,
Downes v. Bidwell held in 1901 that Puerto Rico was not part of the United States for certain
constitutional purposes, and could thus be taxed differently. Much of the criticism leveled at the Insular
Cases and their progeny has been based on assertions of “racially motivated biases” and “colonial
governance theories” that critics claim have led to “second-class treatment” of territorial inhabitants.
However, some modern commentators point to instances where some Territories have “reclaimed” the
Insular Cases to serve as “bulwarks for cultural preservation,” and there is disagreement among territorial
inhabitants themselves on whether the Constitution should apply fully in those locations.
Although Congress cannot change the Supreme Court’s constitutional interpretations, it could elect not to
exercise the power affirmed by the Insular Cases. For example, Congress could alter or eliminate specific
legislative provisions that treat the Territories differently. For example, 42 U.S.C. § 1382c(e) excludes
residents of Puerto Rico and other Territories from Supplemental Social Security benefits eligibility;
federal law caps the Territories’ Medicaid funding; and 42 U.S.C. § 1308 limits other types of federal
financial assistance for Territories. Recently, plaintiffs have successfully challenged some of these
distinctions on equal protection grounds in federal court, although those cases have not reached the
Supreme Court. Several bills in the 116th Congress, such as H.R. 947 and S. 3029, aim to eliminate some
of these differences.

Author Information

Mainon A. Schwartz
Kevin M. Lewis
Legislative Attorney
Legislative Attorney

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of

Congressional Research Service
5
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.

LSB10555 · VERSION 1 · NEW