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Aurelius v. Puerto Rican Control Board (and "What Possibly Could be the Logic Behind Puerto Rico Being in the First Circuit?")

posted by Mitu Gulati

Last Monday, December 3, the First Circuit heard an oral argument that I have been looking forward to for ages.  The case involves an infamously aggressive hedge fund making an audacious challenge to the constitutionality of the Puerto Rican Control Board—an argument that is framed (hilariously, I think) as rescuing the Puerto Rican people from tyranny.  The events that followed did not disappoint in terms of drama. 

Though complex to answer, question in the case is easily put: Did the process by which the Puerto Rican Control Board was put in place violate the Appointments Clause of the US constitution? 

The lawyering was superb, which was not surprising, given that two legendary former SGs, Ted Olson and Don Verrilli, were at the lectern. But the First Circuit judges were ready and raring to go, and it barely took a minute before they launched into tough questions.  Judge Juan Torruella was especially on target; he knows the intricacies of the history and case law relating to Puerto Rico’s status better than almost anyone else and it was a treat to listen to his exchanges with the superstar lawyers.  (There were other lawyers making arguments as well, but the First Circuit panel was primarily interested in the Olson-Verrilli positions.)The audio file is available here, and is well worth a listen.

Before the arguments began, I was inclined to think that the First Circuit would take the safe route by affirming the district court and rejecting Aurelius’ challenge.  After all, this seems to be a case destined for the Supreme Court.  But after hearing the oral argument, I no longer think that. I’m predicting instead a reversal of the trial court (FWIW, my co-author, Joseph Blocher, with whom I’ve written about Puerto Rico’s Right of Accession, is not so sure after listening to the same oral argument and he is much better at predicting case outcomes than I am).  The judges seem to think that there was probably a violation of the Appointments clause, but that they would be have to be careful in crafting their ruling so as to cabin any possible negative consequences for Puerto Rico and its debt restructuring process. (For other discussions of the oral argument, along with predictions about how the case is likely to come out, see on this, making predictions, see here (article in Bond Buyer) and here (post on the PuertoRicoControlBoardWatch blog)).

Below, I’ll set out my oversimplified view of the primary arguments on either side.  But before going there, I couldn’t help but wondering why it is that Puerto Rico is in the First Circuit, with the Puerto Rican lawyers having to all trek up to Boston to make their arguments.  Is there some special relationship with the states that make up the First Circuit to Puerto Rico such that the judges from there have a nuanced understanding of Puerto Rico’s bizarre place within the US constitutional structure? Given that Puerto Rico already has no senators to push for judges with special expertise in, and concern for, the people of the Commonwealth, it seems to add insult to injury to force the cases from Puerto Rico to go on appeal to a set of appellate court judges in the north east of the mainland who will likely have little connection to the island (with rare exceptions such as Judge Torruella). I’ve been thinking about this lately because of a conference my colleague, Marin Levy, hosted last week where one of the very interesting papers was about “Are Federal Courts National Courts?” At the conference, the general sentiment in the room of was that there is some value to having federal judges with some specialized local knowledge of the issues.  Really, though? Do the judges from the states that comprise the First Circuit have specialized local knowledge about Puerto Rico? 

I've digressed. Back to the basics of the Aurelius oral argument.

The constitution says that principal officers of the federal government have to go through a specific appointments process (“advice and consent of the Senate”). The President nominates them and then the Senate confirms—the “advice and consent” stuff.  The argument, as one might guess, is over who counts as a principal officer.  Aurelius says that the members of the Puerto Rican Control Board are such officers, and that the current board is therefore unconstitutional because they were not appointed using the constitutionally mandated process.  Why go to bat on such a strange issue of constitutional law? Presumably because the current board is being too tough on Aurelius and it is hoping to fare better under a Donald Trump-appointed board. 

The threshold question, to my mind, is why the federal government is appointing any sort of special board to manage Puerto Rico’s fiscal affairs. After all, wouldn’t taking care of local fiscal affairs usually be a matter for the Puerto Rican government and its elected officials? If this were a state, that would indeed be the case – and the state would use the federal bankruptcy mechanism that all states are entitled to use for their municipalities.  And for some years, Puerto Rico was also entitled  to use the same scheme. 

But in 1984, Congress decided that it did not want Puerto Rico to have that same entitlement as the states, and took away its power to use the bankruptcy mechanism available to the states and their municipalities.  No one seems to know exactly why this carve out was made – the legislative history is missing -- but one guess is that Congress did not trust the Puerto Rican government with doing its own bankruptcy workout in the same way it trusted the states. 

Fast forward to Puerto Rico’s current massive debt crisis (over $100 billion in obligations it is unable to pay) and Congress has appointed a Control Board to run Puerto Rico’s fiscal situation and, in effect, supervise and direct the local government’s behavior (including the debt restructuring) because there is a strong federal interest in making sure this situation gets resolved quickly and efficiently and in a way that does not impact the reputation of the US as a debtor.  Bottom line: The best answer to why this Control Board was appointed by Congress and not by the local government – assuming that there is some underlying logic -- seems to be the federal government not trusting the local Puerto Rican government to tackle its own financial affairs. Add to this the enormous power that the Control Board has, and its members look pretty important – maybe like “principal officers”?

Turns out though that the case is nowhere near as easy.  The primary counter argument seems to be that if the Control Board members are principal officers because they are running Puerto Rico, then so is the Governor (and a variety of other top local officials).  And surely, given that no one is suggesting that Governor et al are unconstitutional because they did not go through the process specified in the Appointments clause, the Appointments clause must not apply to Puerto Rico (and other territories).  Put differently, the argument is that ruling that the Puerto Rican Control Board is unconstitutional would cause the entire democratic governance structure for the various territories to be called into question and that produce a parade of horribles.

As a result of the foregoing set up, the bulk of the discussion at the oral argument was about what various Congresses in the 19th and 20th centuries  might have thought the requirement of the Appointments clause was and whether these prior Congresses thought that the constitution (that provision, at least) might not apply to a distant territory such as Puerto Rico. I confess that I found this puzzling, perhaps because I don’t understand constitutional arguments. Isn’t the clearest evidence of what Congress thought, in the case of an explicit and clear provision, what the provision says?  If some prior Congresses mistakenly thought they didn’t have to comply with the provision or, at some point in history, decided it didn’t feel like complying, who cares.  Still a violation, so long as the provision is still applicable.

This is a big case and I’m guessing that the opinion will come out soon.   And then on to the Supreme Court.  I wonder what will happen to the Puerto Rican bond prices if the First Circuit reverses the trial court. That, potentially, will give us further insight into what exactly the Aurelius game is in challenging the Control Board’s constitutionality—I don’t buy that they are paying Olson’s team tens of millions of dollars to fight against tyranny.  And while we are on that topic, who is paying the bill for Verrilli’s team to fight this bizarro case? (hopefully Donald Trump and not the already impoverished Puerto Rican taxpayers).


Why Puerto Rico is in the 1st Circuit:

I was told when I clerked on the 3rd Circuit that the USVI are in the 3rd Circuit because of some historical ferry connection from Philly. I don't buy that. There was surely also a connection from Florida ports. I suspect the answer relates to who was chairing the relevant Congressional committees at the time. It looks like a plain patronage move to me.

That's fascinating. I also remember hearing these ferry/port stories about the 1st Circuit and Puerto Rico. Indeed, last week at a conference, one of the participants told a story about William Howard Taft -- when asked -- saying that Puerto Ricans liked to vacation in Boston (surely, he was being sarcastic)). I wonder whether litigants from the USVI and PR have some kind of equal protection or due process claim for being placed at a disadvantage in terms of being made to take cases to a tribunal that has little familiarity with the ground realities (assuming that is the logic for why we have a degree of local judges in the federal courts).

Pub. L. 63-241, 83 Stat. 203 (1915) states that decisions of the US District Court located in Puerto Rico would be reviewed by the Court of Appeals for the First Circuit. The bill’s Senate Report states “Porto Rico is attached to the first circuit, because is less business pending there than in any other circuit court of appeals and because there are established lines of communication between Porto Rico and our North Atlantic seaports.” 52 Cong. Rec. 435 (1914). The “lines of communication” phase is just a code name for the US economic and financial interests that ruled in PR.

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