Court Opinion

ID: 4465505
Source: CourtListenerOpinion
Date Created: 2019-12-18 21:00:35.779767+00
Date Added: 2024-06-11T14:53:36.725290
License: Public Domain

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      Southern   District    of   New   York,   sitting   by
designation.
                             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.       In challenging the bar on reprogramming, the

Governor     argued    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   the   Board's    motion      to   dismiss   the

1   48 U.S.C. § 2121.
2   48 U.S.C. §§ 2141–2142.

                                      - 3 -
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       of   previously-

authorized expenditures from prior years."                    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    than     the     Board's       ability   to    impose   rejected

recommendations      and    to      bar   reprogramming.            It   nevertheless

certified for immediate appeal its dismissal of paragraphs 78 and

79   of   Count I    of   the    Complaint        and   paragraphs 88     and   91    of

Count II.    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   view    of   how    PROMESA   section 205

("Section 205")3 works.           Subsection 205(a) allows the Board to

submit    at    any   time    "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.        Subsections (a)(1)–(10) instead provide a non-exclusive

list    of    ten   subject    matters      about   which    the    Board    may    make

recommendations.          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.      The Governor points, instead, to subsection 201(b)(1)(K),

allowing      the   Board     to   "adopt    appropriate     recommendations"        in

developing and submitting a fiscal plan.                    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          To

4   Section 202 contains similar provisions for budgets.

                                  - 7 -
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     provisions   are   contrary   to   existing   Puerto   Rico

statutes     and   Article III,    section 18     of   the   Puerto   Rico

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   that    budget,      regardless       of   what   any

territorial laws say.         Here, it is undisputed that the budget

adopted   by    the   Board   does     not    authorize       whatever    unknown

expenditures that the Governor apparently has in mind.                   The fact

that   subsection 204(c)(1)     allows       the   Governor    to    "request"   a

reprogramming of "any amounts provided in a certified Budget"

                                     - 10 -
simply    confirms     that    the    final   choice     whether      to   allow

reprogramming rests with the Board.           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   the   foregoing      reasons,   we    affirm   the    district

court's   dismissal     of    the    reprogramming     suspension     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 -