Vazquez-Garced v. FOMB

• Court: Court of Appeals for the First Circuit
• Decided: December 18, 2019
• Docket: 18-2154P
• Status: Published

Opinion

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 -