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In re Financial Oversight and Management Board For Puerto Rico

United States Court of Appeals, First Circuit

December 18, 2019

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 [**]

          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.

          Before Howard, Chief Judge, Torruella and Kayatta, Circuit Judges.

          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 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 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 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 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 ...


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