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Puerto Rico’s future is now in the hands of the US Supreme Court

Ephrat Livni
A Puerto Rican protests near the convention center when the Financial Oversight and Management board met last year.

Today, the US Supreme Court is hearing oral arguments in a case that will affect the financial future of more than 3 million Puerto Ricans, international investors, and bond markets.

The matter stems from a 2016 law passed by the US Congress called Promesa, which is Spanish for “promise” and an acronym for the Puerto Rico Oversight, Management, and Economic Stability Act. The legislation established a seven-member financial management and oversight board with broad powers to restructure debt and initiate infrastructure projects in the wake of the island’s 2015 financial crisis.

Puerto Ricans aren’t all sold on Promesa’s promise, however. Their own laws are subsumed by the mandate given to the federally-appointed board. “No law can be enacted in Puerto Rico without the Oversight Board’s approval,” a Puerto Rican electricity workers union (UTIER) complains in its brief.

In 2017, when the board began proceedings in a federal court in Puerto Rico to restructure the territory’s debt, there was a challenge to the way its members were appointed. The challenge came from UTIER, the power workers’ union, and Aurelius Investment, a hedge fund with interests in distressed Puerto Rico bonds. They argued that members of the federal oversight board weren’t approved by the US president with the advice and consent of the Senate as required by the Constitution. Instead, president Barack Obama had been pressured by Republican congressional leaders to agree to an expedited process, which would be fine in other contexts, but not when the board members have as much authority over Puerto Rico as they do.

The US Court of Appeals for the First Circuit agreed that the board members have significant authority and so are “Officers of the United States” who must be nominated by the president and confirmed by the Senate. But the ruling didn’t advance the complainants’ cause.

Not only did the union and Aurelius want the board members’ appointments invalidated, they also asked that the board’s every act be nullified. In other words, they wanted a do-over on the promises of Promesa.

The appeals court refused. The “de facto officer doctrine” legitimizes acts by an officer whose appointment has been subsequently invalidated for practical reasons. The First Circuit court used this concept to maintain the status quo, leaving the boards’ actions and deals intact. The court was disinclined to stall the boards’ work given the many people relying on the board’s decisions, the delay to debt restructuring that would surely ensue if its work was undone, and the lingering effects of Hurricane Maria on Puerto Rico.

The hedge fund and the union argue that the de facto officer doctrine cannot be applied to constitutional violations and petitioned the Supreme Court for review. Meanwhile the government, the board, and a committee of unsecured creditors challenged the finding that board members’ appointment process was constitutionally flawed and also appealed.

Today, the high court justices will hear 80 minutes of argument from four attorneys on all the claims. They probably won’t rule on the matter for many months. But when it finally comes, their decision will determine whether Puerto Rico has indeed been hijacked by a “junta fiscal federal,” as some Puerto Ricans contend, and whether its acts remain valid regardless.

 

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