Opinion ID: 542852
Heading Depth: 4
Heading Rank: 1

Heading: Validity of the Ordinances and the Delegation of Authority

Text: 15 On appeal, appellants' main contention is that the district court erred in determining that the Mayor had authority to execute the guarantees at issue, and that such authority was derived from Ordinance No. 71. It argues that the district court examined Ordinance No. 71 in a vacuum, and that, by so doing, failed to consider the entire picture, which included Ordinances 23 and 31. It contends that, when the ordinances are examined as a whole, they clearly provide that the Development Program was not to be funded from the regular budget, but, instead, from a separately created fund. In the alternative, appellants argue that before committing public municipal funds the Mayor needed special Municipal Assembly approval. We find that the district court properly analyzed the issue, and even went further by considering these ordinances in the context and in relation to the Organic Act of the Municipalities. 21 L.P.R.A. Sec. 2001 et seq. 2 16 The district court concluded that the Ponce Development Capital Fund Ordinances were enacted pursuant to the general and specific powers entrusted by the Organic Act of the Municipalities. It also found that, although Ordinance No. 71 refers to a special fund, it does not require a separate budget. Instead, Ordinance 71 clearly allows guarantees to be made on the general credit of the Municipality. The Ordinance reads, in pertinent part: 17 ARTICLE I: The mayor of Ponce is authorized to issue guarantees to approve financial institutions in order to create a pool of funds in the amount of $110,000,000 to be known as the Economic Development Loan Program (EDLP); approved financial institutions participating in the EDLP Program will extend loans to Ponce area businesses participating in the City's Economic Development Program which loans shall be guaranteed by the City from 80% to 100%. (emphasis added). 18 Thus, the district court held and we agree, that the Assembly, in enacting Ordinance 71, entrusted the Mayor with the authority to issue loan guarantees. 19 The district court further found that a municipal government is one of limited powers, and that it can only exercise those powers conferred by law. P.R. Const. art. VI, Sec. 1; Rubert v. Treasurer, 58 P.R.R. 199, 210 (1941). The Puerto Rican legislature has made it clear that municipalities are entitled to full legislative and administrative powers in any matter of municipal nature, 21 L.P.R.A. Sec. 2051, including all the powers that are necessary and convenient to carry out all the duties pertinent to a local government, 21 L.P.R.A. Sec. 2054, all powers required to develop general welfare programs, 21 L.P.R.A. Sec. 2054(5) and to exercise the legislative and administrative power in any matter of a municipal nature which is for the benefit of the population and its development and progress. 21 L.P.R.A. Sec. 2054(16). We find that the district court properly found that the law authorized the Municipal Assembly to enact the ordinances at issue here.2. The validity of the loan guarantees 20 Appellants further aver that the guarantees are ultra vires and void, because they are contracts and at the time of their execution, no special allocation had been made in the municipal budget to satisfy the obligations created by them. San Miguel v. Municipality of Caguas, 72 P.R.R. 366 (1951); Gonzalez v. Municipality of Las Piedras, 61 P.R.R. 357 (1942). 21 The district court determined that San Miguel and Gonzalez were inapplicable, because a loan guarantee is not a contract and thus, unlike a contract, does not have a foreseeable time for payment. As such, it more closely resembles a tort payment. District Court Opinion at 3 (May 16, 1989). Although we arrive at the same conclusion as did the district court, we take a different route in reading this conclusion. 22 A loan guarantee or a contract of guarantee is a secondary obligation to a preexisting obligation in which the duty to pay arises when the primary obligation is not satisfied. See Wong v. Key Finance Corporation, 266 F.Supp. 149 (D.P.R.1967). As such, loan guarantees are contracts that are considered contingent liabilities. 3 23 By definition, a contingent liability is uncertain and is often highly unlikely to become an actual liability. See Matter of Xonics Photochemical v. Appeal of Mitsui and Co., 841 F.2d 198 (7th Cir.1988). Even if there is no uncertainty as to the amount owed by the guarantor, payment depends upon whether the contingency materializes, see Matter of Xonics Photochemical, 841 F.2d at 200, and to this effect, loan guarantees in fact resemble tort payments in that payments are subject to the event of their occurrence. 24 Moreover, contrary to appellants' contentions, after the original decision in the San Miguel 4 case was published, on reconsideration the Supreme Court of Puerto Rico established that the contract in question would not be rendered void because funds were not allocated for it. It determined that in order to be able to collect on this contract, what was relevant was not whether funds were available at the time of payment or whether the contract was specially budgeted, but instead, whether any funds 5 were available in the municipal budget, for this purpose, at the time of the signing. San Miguel, 72 P.R.R. at 378-79. 25 In view of this decision as well as the fact that the Organic Act, 21 L.P.R.A. Sec. 3151(b)(2)(C), specifically provides for the budgeting of adverse final judgments, we conclude that as a contingent liability a loan guarantee, like an outstanding lawsuit, falls within this special budget for adverse final judgments. As a result of said budget requirement, we find it proper to conclude that a finding under the San Miguel doctrine, as to whether the funds at issue were available is not necessary. 3. Federal Estoppel 26 On appeal, appellants argue that knowledge of all statutory requirements, such as the availability of funds, is imputed on those who enter into contracts with municipal governments. As such, it claims that Mayor Tormos and his acting mayors, by ignoring certain statutory requirements, illegally exceeded their authority. They further contend that Girod had knowledge of this scheme or misrepresentation, and thus, this knowledge is extended to the FDIC, for which reason it cannot collect from the Municipality. Finally, it submits that the laws of Puerto Rico provide that municipal taxpayers should not be held liable for the ill conceived actions and plans of their leaders. The FDIC avers that the issue at bar is estopped by federal common law. We agree. 27 The federal estoppel claim hinges upon two factors: whether federal law is controlling, and if so, whether the FDIC can claim estoppel. First, we must reiterate that under the circumstances of this case federal law applies. FDIC v. de Jesus Velez, 678 F.2d 371 (1st Cir.1982). Section 1819 of the FDIC Act reads in pertinent part: 28 [T]he corporation shall become a body corporate and as such shall have the power ... to sue and be sued ... [and] [a]ll suits of a civil nature at common law or in equity to which the Corporation shall be a party shall be deemed to arise under the laws of the United States. (emphasis added). 29 12 U.S.C. Sec. 1819(a) & (b)(2)(A). Moreover, this court has held that the arising under clause, besides providing for jurisdiction, also serves as a reminder that the court should turn to federal common law for guidance. Santoni v. Federal Deposit Ins. Corp., 677 F.2d 174, 178 (1st Cir.1982); see also Federal Deposit Insurance Corp. v. Blue Rock Shopping Center, 766 F.2d 744, 747 (3d Cir.1985). 30 Exemptions to the application of federal law may occur when the FDIC is acting as a receiver, where only the rights of obligors, depositors, creditors and stockholders are involved, or when the federal question is not raised by the parties. By contrast, in the instant case, the FDIC is acting in its corporate capacity, not as a receiver, and the federal issue was raised. Federal law consequently applies. See, e.g., FDIC v. de Jesus Velez, 678 F.2d at 373-74. 31 Second, and more importantly, it is well settled that federal law embodies a policy of protecting the FDIC from misrepresentations and secret agreements which might result in incorrectly assessing the value of holdings for institutions which it acquires in its corporate capacity. Langley v. FDIC, 484 U.S. 86, 108 S.Ct. 396, 98 L.Ed.2d 340 (1987); D'Oench, Duhme v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942); FDIC v. P.L.M. Int'l, Inc., 834 F.2d 248, 252 (1st Cir.1987). 32 The federal common law estoppel doctrine expounded in D'Oench, Duhme, and recently reiterated in Langley, provides that when a party who has lent himself to a scheme or arrangement whereby the banking authority has been misled, that scheme or arrangement would not be the basis for a defense against the FDIC. Langley, 484 U.S. at 92, 108 S.Ct. at 402. 33 Appellants essentially argue, that the guarantees are void and that there was no misrepresentation since the arrangement was conditioned on the existence of funds in the Municipality's budget and Girod knew about it. The record before us does not support this allegation. The Municipality never presented evidence substantiating this allegation either when it requested summary judgment or when it opposed the FDIC's petition for summary judgment. 34 Even if this case were to be remanded for a finding as to whether there was a lack of funds at the time of the signing or whether Girod had actual knowledge of the misrepresentation, issues which were not raised below, the result reached would be the same. The Municipality would be estopped from claiming the nullity of the guarantees. It would be estopped because both the Municipal Assembly and the Mayor, by enacting the ordinances and by signing the guarantees without having available funds, lent themselves to the type of misrepresentations which might result in incorrectly assessing the value of bank holdings for institutions which it insures, FDIC v. P.L.M. Int'l, Inc., 834 F.2d at 252, hence, we find the FDIC was misled. This court has held that the estoppel doctrine applies even where there was no intent to defraud, rather, the rule prohibits all 'secret agreement[s]' which enable the parties to undermine the federal policy of protecting the FDIC from fraudulent arrangements. FDIC v. P.L.M. Int'l, Inc., 834 F.2d at 253 (quoting D'Oench Duhme, 315 U.S. at 447, 62 S.Ct. 676). 35 Finally, the Municipality seeks to avoid these results by averring that an affirmance would allow mayors to have unbridled power to bind municipalities at the expense of their taxpayers. On appeal, this court's role is limited to a determination of whether the district court properly applied the law. We find it did, and thus we need go no further. Furthermore, by affirming this decision, we do not grant mayors any more power than that which was provided by the electorate, the Municipal Assembly, and the ordinances enacted. It has been held, and we reiterate now under the circumstance of this case and this specific argument, that [f]or protection against abuses by legislature [or politicians] the people must resort to the polls, not the courts. Munn v. Illinois, 94 U.S. 113, 134, 24 L.Ed. 77 (1876).