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Billions of dollars are at stake in Puerto Rico’s US Supreme Court case

Ephrat Livni
Equal Justice Under Law etched on US Supreme Court Building.

The US Supreme Court heard oral arguments today in a case about the constitutionality of appointments to a financial oversight board restructuring Puerto Rico’s debt. At stake in the decision are billions of dollars in deals affecting millions of people on the island and beyond.

Or, as justice Samuel Alito put it this morning, “This is a real case about real things.”

The matter stems from a 2016 law, PROMESA, passed under the Obama administration to help the unincorporated US territory out of a financial crisis. The legislation created a board to oversee Puerto Rico’s debt restructuring, initiate bankruptcy proceedings, and make budget and infrastructure decisions for the island. But board members weren’t appointed by the president with the advice and consent of the Senate, as federal officers must be under the Constitution, and they have broad authority over Puerto Rico’s laws although they weren’t elected.

The members’ appointments were challenged in a federal district court in Puerto Rico, and the case made its way to the First Circuit Court of Appeals. It found the appointment process indeed violated the Constitution. Now, the Supreme Court must decide whether it agrees and, if so, whether all the board’s work should be undone as a result of this constitutional flaw.

Some in Puerto Rico call the federally-appointed board a “junta fiscal federal.” They want the board’s work unwound and Puerto Rico freed from its deals.

That is why Alito today questioned the true intentions of hedge fund Aurelius Investments, a firm with interests in Puerto Rican debt that’s unhappy with some of the board’s moves and one of the parties challenging the constitutionality of the board members’ appointments. Admitting he was being cynical, the justice quipped, “Are you and your client here just defending the Constitution…There’s no money issue here?”

When laughter in the courtroom died down, Theodore Olson, counsel for Aurelius, conceded somberly, “My client is being harmed by the board’s decisions.” He insisted, however, that constitutional issues weren’t secondary to the financial matters at stake.

Unincorporated territory

Indeed, all the parties agree it’s a matter with grave consequences.

The case is also, and importantly, about Puerto Rico’s status as “the last colony in the world,” says corporate attorney Yamil Jaskille, who flew from his home in Puerto Rico to Washington, DC to attend today’s hearing. Because Puerto Rico is an unincorporated US territory, its citizens, while American, don’t enjoy all of the Constitution’s protections. Jaskille hopes that the justices will overturn the legal precedent—a series of early 20th century rulings known as “the Insular Cases“—that justify treating Puerto Ricans as a colonized people and differently under the law from Americans in incorporated states.

Today, Jessica Mendez-Colberg, the attorney for a Puerto Rican electricity workers union challenging the board members’ appointments along with Aurelius Investments, also called for the cases to be overruled, ensuring equal justice for Puerto Ricans. But chief justice John Roberts seemed to rebuff her attempts to engage with the precedent that she called racist, saying he didn’t see it as relevant. So those who are hoping to see a sweeping decision from the Supreme Court with respect to territorial law should probably not hold their breath.

Probably the most that Puerto Ricans who oppose the board can hope for is that the high court will find members were federal officers, not territorial ones, and perhaps that their acts should be invalidated. Many Puerto Ricans initially supported PROMESA and the board, but feelings have since changed, says Joanisabel Gonzalez, a reporter for El Nuevo Dia, Puerto Rico’s most widely read newspaper. She has been covering the controversial law for the last three years.

“The tide has turned against the board. The levels of support aren’t what they were three years ago,” Gonzalez said.

The board’s decisions have resulted in cuts to pension funds, reduced spending on education and public safety, and have usurped the authority of local government, breeding resentment among Puerto Ricans. Gonzalez said that from a local perspective, this case is “the story of the century.”

Federal interests

Technically, the justices will decide whether to uphold a First Circuit Court of Appeals ruling, which found for Aurelius Investments and the union that board members are officers of the United States within the meaning of the Constitution. As such, members had to be appointed by the president and confirmed with the advice and consent of the Senate, which they were not in this case.

The US government and the board, meanwhile, argue that members are merely “territorial officers” operating on behalf of Puerto Rico, with the island’s interests foremost in mind. They are not subject to that constitutional standard for federal officers as a result.

But Aurelius Investments and the union contend that the board isn’t simply looking out for Puerto Rico. It was specifically created to ensure that American interests were also protected. “The insolvency of a territory of the US isn’t a local matter,” Aurelius’ attorney insisted.

Justice Elena Kagan appeared to agree, pointing out that Congress was thinking of the “broad interests of the US” when it passed PROMESA rather than bailing out Puerto Rico financially. “Congress…chose an option that had less financial cost for the American people as a whole. So, you know, why shouldn’t we think that Congress, in enacting this piece of legislation, was not thinking about it through a broad national lens?”

Sonia Sotomayor seemed likewise sold. “It’s…a federal mandate when none of the people of Puerto Rico have voted in any way on any of the directives that [the board] has received,” she said.

De facto officer doctrine

But even if the high court ultimately decides that the board members were federal officers and not territorial ones, the work the entity has done will not necessarily be nullified, which is what Aurelius Investments and others seek because, they say, the board didn’t operate in Puerto Rico’s sole interest or with the input of its elected representatives. They want the deals undone for political and fiscal reasons, in addition to their stated complaints about the constitutional error.

So far, they have yet to win on that point. The First Circuit ruled that under the “de facto officer” doctrine, which leaves in place actions taken by subsequently invalidated appointees, the deals and cases initiated by the board can stand, despite any constitutional defect in members’ appointments because the practical effects of unwinding their work would be too harmful.

The board and the US government are hoping the Supreme Court will find the lower court was wrong about board members being federal officers, but urge the justices to similarly employ the de facto officer doctrine if so.

“We have, you know, nearly 100 adversary proceedings, hundreds of thousands of claims, hundreds of millions of dollars collected, $12 billion in bonds issued…that have been traded on the secondary market like 85,000 times. I mean, I have no idea how one unwinds this,” argued Jeffrey Wall, deputy solicitor general of the Justice Department.

Money really isn’t the biggest issue here, however, or so some Puerto Ricans contend. The case, for them, is about equality under the law for the island’s more than 3 million Americans.

Union attorney Mendez-Colberg urged justices to consider their decision’s significance to her people. She began by reminding them that above the entrance to the Supreme Court are etched the words, “equal justice under the law.” Yet the legal doctrine of territorial incorporation, which gives Puerto Ricans in the unincorporated US fewer constitutional protections, “stretches that tenet to its breaking point,” she said. “The First Circuit decided that my clients suffered a constitutional injury, but still they were left without a remedy. Equal justice under law should mean the same thing here in as in Puerto Rico.”

In the coming months, we’ll discover if the justices agree.

 

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