Vazquez-Garced v. Financial Oversight & Management Board for Puerto Rico, No. 18-2154 (1st Cir. 2019)
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In this interlocutory appeal involving the judgment of the district court sustaining Financial Oversight and Management Board for Puerto Rico's newly enacted bar on "reprogramming" the First Circuit affirmed the judgment of the district court dismissing the reprogramming suspension provision challenges, holding that the district court correctly found that the reprogramming provisions in the 2019-2020 fiscal plan and budget were entirely valid as consistent with the Puerto Rico Oversight, Management, and Economic Security Act (PROMESA).
Under PROMESA the Board developed and certified a fiscal plan and budget for the Commonwealth for the fiscal year 2019-2020. The Governor and Puerto Rico Fiscal Agency and Financial Advisory Authority filed a complaint seeking a declaration striking challenged provisions, including the provision barring reprogramming, i.e., spending during the 2019-2020 fiscal year money that had been authorized but not actually spent in a prior fiscal year. The district court sustained the bar on reprogramming. The First Circuit affirmed, holding that the Board possessed the authority to unilaterally impose the reprogramming bar.
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United States Court of Appeals For the First Circuit No. 18-2154 IN RE: THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative for the Commonwealth of Puerto Rico; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative for the Puerto Rico Highways and Transportation Authority, Debtors. HON. WANDA VÁZQUEZ-GARCED (in her official capacity);* THE PUERTO RICO FISCAL AGENCY AND FINANCIAL ADVISORY AUTHORITY, Plaintiffs, Appellants, v. THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; JOSÉ B. CARRIÓN, III; ANDREW G. BIGGS; CARLOS M. GARCÍA; ARTHUR J. GONZÁLEZ; JOSÉ R. GONZÁLEZ; ANA J. MATOSANTOS; DAVID A. SKEEL, JR.; NATALIE A. JARESKO, Defendants, Appellees, OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Intervenor, Appellee. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Laura Taylor Swain, U.S. District Judge**] * Pursuant to Fed. R. App. 43(c)(2), Hon. Wanda Vázquez-Garced is substituted for former Governor Ricardo Rosselló Nevares. ** Of the designation. Southern District of New York, sitting by Before Howard, Chief Judge, Torruella and Kayatta, Circuit Judges. Peter Friedman, with whom John J. Rapisardi, Elizabeth L. McKeen, O'Melveny & Myers LLP, Luis C. Marini-Biaggi, Carolina Velaz-Rivero, and Marini Pietrantoni Muñiz LLC were on brief, for appellants. Timothy W. Mungovan, with whom John E. Roberts, Guy Brenner, Martin J. Bienenstock, Stephen L. Ratner, Mark D. Harris, Kevin J. Perra, and Proskauer Rose LLP were on brief, for defendants, appellees. December 18, 2019 KAYATTA, Circuit Judge. The Puerto Rico Oversight, Management, and Economic Security Act ("PROMESA") established a board known as the Financial Oversight and Management Board for Puerto Rico ("the Board").1 Under PROMESA sections 201 and 202 ("Sections 201 and 202"),2 the Board developed and certified both a fiscal plan for the Commonwealth and a Commonwealth budget for fiscal year 2019-2020. Several provisions of both the fiscal plan and the budget elicited objections from the Governor of Puerto Rico, who, together with the Puerto Rico Fiscal Agency and Financial Advisory Authority (a Commonwealth entity), filed a complaint against the Board in the United States District Court for the District of Puerto Rico, seeking a declaration striking those provisions. One of the provisions to which the Governor objected barred "reprogramming": i.e., spending during the 2019-2020 fiscal year money that had been authorized but not actually spent in a prior fiscal year. Governor argued In challenging the bar on reprogramming, the that because the Board had unsuccessfully recommended that the Governor agree to such a bar, the Board could not thereafter adopt the bar as binding over the Governor's objection. In ruling on 1 48 U.S.C. § 2121. 2 48 U.S.C. §§ 2141–2142. the Board's - 3 - motion to dismiss the complaint for failure to state a claim, the district court sustained the bar on reprogramming, deciding as a matter of law that the Board did not surrender its powers to act unilaterally regarding a policy proposal by first seeking agreement from the Governor and that, in any event, the Board's "certification of a budget under PROMESA precludes reprogramming authorized expenditures from prior years." of previously- In re Fin. Oversight & Mgmt. Bd. for P.R., No. 18-ap-080, at 5-6 (D.P.R. Oct. 9, 2018) (order certifying certain aspects for interlocutory appeal). The district court did not dismiss the complaint as it applied to subjects other recommendations than and the to Board's bar ability to reprogramming. impose It rejected nevertheless certified for immediate appeal its dismissal of paragraphs 78 and 79 of Count I Count II. of the Complaint and paragraphs 88 and 91 of By the time of oral argument on appeal, the parties' positions more precisely limited the scope of appeal to the legal rulings upon which the district court relied in rejecting the Governor's challenge to the reprogramming bar. We accept jurisdiction over this interlocutory appeal pursuant to PROMESA section 306(e)(3), which, among other things, authorizes "an immediate appeal" when it "may materially advance the progress of the case or proceeding in which the appeal is taken." 48 U.S.C. § 2166(e)(3)(A)(iii). The potential use by the Government of so-called reprogrammed funds is apparently a subject - 4 - of continuing dispute, and its resolution now will likely assist the district court in assessing other existing and future disputes regarding the relationship between the Board and the Governor. I. We review a dismissal for failure to state a claim de novo. Cardigan Mountain Sch. v. N.H. Ins. Co., 787 F.3d 82, 84 (1st Cir. 2015). The reviewing court "accept[s] as true all well- pled facts alleged in the complaint and draw[s] all reasonable inferences in [the plaintiff's] favor." Evergreen Partnering Grp., Inc. v. Pactiv Corp., 720 F.3d 33, 36 (1st Cir. 2013). A Rule 12(b)(6) motion fails if the complaint contains "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A. The Governor's argument on this appeal rests in the first instance on the Governor's ("Section 205")3 works. submit at any time view of how PROMESA section 205 Subsection 205(a) allows the Board to "recommendations to the Governor or the Legislature on actions the territorial government may take to ensure compliance with the Fiscal Plan, or to otherwise promote the financial stability, economic growth, management responsibility, and service delivery efficiency of the territorial 3 48 U.S.C. § 2145. - 5 - government." The rest of Section 205 contains no limitations on the nature or substance of the recommendations that the Board may make. list Subsections (a)(1)–(10) instead provide a non-exclusive of ten subject recommendations. matters about which the Board may make Subsection 205(b) then requires the Governor or the legislature, as the case may be, to accept or reject such recommendations and to provide explanations for rejecting any recommendations that the territorial government otherwise could have agreed to. The Governor contends that the Board had previously recommended under subsection 205(a) a prohibition on spending reprogrammed funds, among other things, and that the Governor rejected that recommendation. Therefore, the Governor reasons, the Board could not turn around and unilaterally adopt the rejected recommendation as a binding policy in the certified fiscal plan or budget. This reasoning is puzzling to say the least. There is no language at all in Section 205 suggesting that, by first seeking the Governor's agreement on a matter, the Board somehow loses whatever ability it otherwise had to act unilaterally on the matter. allowing The Governor points, instead, to subsection 201(b)(1)(K), the Board to "adopt appropriate developing and submitting a fiscal plan. recommendations" in Again, though, we see nothing in this language that precludes the Board from adopting a - 6 - rejected recommendation if it otherwise has the power to adopt the recommended action on its own. Nor do we agree with the Governor's contention that we should draw a salient negative inference from the fact that an early version of the draft bill that became PROMESA gave the Board broader power than it now has. See S. 2381, 114th Cong. (2015); House Discussion Draft, 114th Cong. (Mar. 29, 2016). The Board's argument here limits its asserted authority to the law as enacted, making no claim to any broader powers considered but not enacted by Congress. We also reject the Governor's claim that the Board's reading of the statute renders Section 205 a "dead letter." There are certainly policies and actions that can be adopted and pursued only with the Governor's approval. And even with respect to matters on which the Board needs no consent, Section 205 serves as a reminder that PROMESA favors collaboration when possible. PROMESA encourages the Board to engage in an iterative exchange with the Governor in developing a fiscal plan and budget. Indeed, subsections 201(c), (d)(2), and (e)(2) call for the Governor to prepare the first draft of a fiscal plan, while nevertheless reserving to the Board the ultimate power to "develop and submit" a fiscal plan, which is then deemed approved by the Governor.4 4 Section 202 contains similar provisions for budgets. - 7 - To rule that the Board loses its power to act unilaterally on a matter by first seeking the Governor's agreement would be to discourage the Board from first seeking common ground and listening to the Governor's reaction before finally deciding to act. Nothing to which the Governor points persuades us to construe the statute in such a manner. In short, even assuming that the Board first sought the Governor's agreement to adopt a policy (here a ban on reprogramming),5 the Board in doing so certainly lost no power that it otherwise might have had to include that policy in the fiscal plan (or budget).6 B. As the foregoing makes clear, any evidence that the Board recommended that the Governor adopt a ban on certain reprogramming can make no difference to the outcome of this appeal. The relevant question, instead, is whether the Board in the first instance possessed the authority to impose unilaterally such a ban. As to that question, the Governor contends that the Board lacks such authority for three reasons: (1) PROMESA section 204(c) 5 It appears doubtful from the record before us that the Board ever actually recommended that the Governor agree to any bar on action concerning reprogramming. 6 The Governor does not seem to have disclosed exactly what funds its office proposes to use for what purposes. - 8 - ("Section 204")7 implicitly rejects the notion of a categorical bar to reprogramming because it allows the territorial government to, in the Governor's words, "seek reprogramming at any time," albeit subject to the Board's approval; (2) the reprogramming suspension statutes provisions and are Article III, contrary to section 18 existing Puerto Rico of Puerto Rico the Constitution; and (3) the reprogramming suspension provisions are impermissible "substantive budget resolutions." These arguments all miss the mark. As the district court explained, PROMESA prohibits the Governor from spending any funds that are not budgeted regardless of whether the recommendation had been adopted. We quote the district court's cogent explanation: It beggars reason, and would run contrary to the reliability and transparency mandates of PROMESA, to suppose that a budget for a fiscal year could be designed to do anything less than comprehend all projected revenues and financial resources, and all expenditures, for the fiscal year. Since a certified budget is in full effect as of the first day of the covered period, means and sources of government spending are necessarily rendered unavailable if they are not provided for within the budget. A prior year authorization for spending that is not covered by the budget is inconsistent with PROMESA's declaration that the Oversight Board-certified budget for the fiscal year is in full force and effect, and is therefore preempted by that statutory provision by force of Section 4 of PROMESA. Accordingly, the Fiscal Plan language regarding suspension of authority to approve off-budget reprogramming may well be 7 48 U.S.C. § 2144. - 9 - superfluous, and in any event merely has the same effect as PROMESA's explicit provisions. The exclusive scope of a certified budget also makes pellucid the reason that Section 204(c)'s reprogramming provision speaks only to the then-current fiscal year -- the budget does not make any other resources available for reprogramming. In re Fin. Oversight & Mgmt. Bd. for P.R., 330 F. Supp. 3d 685, 704 (D.P.R. 2018) (emphasis added). In short, the district court concluded that PROMESA subsection 202(e)(4)(C) itself precludes the territorial government from reprogramming funds from prior fiscal years except to the extent such reprogrammed expenditures are authorized in a subsequent budget approved by the Board, and any Puerto Rico law to the contrary is preempted by virtue of PROMESA section 4. See 48 U.S.C. § 2103 ("The provisions of this chapter shall prevail over any general or specific provisions of territory law, State law, or regulation that is inconsistent with this chapter."). Simply put, if a certified budget is to have "full force and effect," subsection 202(e)(3)(C), there can be no spending from sources not listed in territorial laws say. adopted by the Board that budget, regardless of any Here, it is undisputed that the budget does not authorize whatever expenditures that the Governor apparently has in mind. that what subsection 204(c)(1) allows the Governor to unknown The fact "request" a reprogramming of "any amounts provided in a certified Budget" - 10 - simply confirms that the final reprogramming rests with the Board. choice whether to allow In re Fin. Oversight & Mgmt. Bd. for P.R., 330 F. Supp. 3d at 704 (emphasis in original) (quoting 48 U.S.C. § 2144(c)).8 And because the Governor cannot reprogram funds, at least without the Board's express permission, it is irrelevant whether the proposals are "substantive budget resolutions." We therefore agree with the district court that the reprogramming provisions in the fiscal plan and budget are at worst superfluous and are, in any event, entirely valid as consistent with PROMESA, so the Governor's arguments fail. II. For court's the dismissal foregoing of the reasons, we reprogramming affirm the suspension district provision challenges, and we remand for further proceedings. 8 We do not address the possibility that the Board may amend a budget to make provision for use of unspent funds that the Board identifies. - 11 -
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