UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 91-1602
METCALF & EDDY, INC.,
Plaintiff, Appellee,
v.
PUERTO RICO AQUEDUCT AND SEWER AUTHORITY,
Defendant, Appellant.
ON REMAND FROM THE SUPREME COURT
OF THE UNITED STATES
Before
Breyer, Chief Judge,
Aldrich, Senior Circuit Judge,
and Selya, Circuit Judge.
Perry M. Rosen, Paige E. Reffe, Thomas D. Roth, Cutler &
Stanfield, Arturo Trias, Hector Melendez Cano, and Trias, Acevedo
& Otero on supplemental brief for appellant.
Peter W. Sipkins, Dorsey & Whitney, Jay A. Garcia-Gregory,
and Fiddler, Gonzalez & Rodriguez on supplemental brief for
appellee.
May 3, 1993
SELYA, Circuit Judge. Notwithstanding that trial is
SELYA, Circuit Judge.
still some distance away, this diversity case alights on our
doorstep for the second time. The appellate roundelay began when
Metcalf & Eddy, Inc. (M&E) sued the Puerto Rico Aqueduct and
Sewer Authority (PRASA) for damages in Puerto Rico's federal
district court. In the course of pretrial proceedings, the court
denied PRASA the benefit of Eleventh Amendment immunity. The
disappointed defendant essayed an interlocutory appeal.
Following circuit precedent, see Libby v. Marshall, 833 F.2d 402
(1st Cir. 1987), we dismissed the appeal for want of
jurisdiction. M&E v. PRASA, 945 F.2d 10, 14 (1st Cir. 1991).
The Supreme Court granted certiorari and, resolving an existing
split in the circuits, determined that pretrial orders granting
or denying Eleventh Amendment immunity were immediately
appealable. PRASA v. M&E, 113 S. Ct. 684, 689 (1993).
PRASA's appeal returns to us on remand from the Supreme
Court. This time around, we must address the merits of the
ruling below. After reviewing supplemental briefs and
considering PRASA's overall relationship with the central
government of Puerto Rico, we affirm the district court's denial
of Eleventh Amendment immunity.
I.
Setting the Stage
Puerto Rico's legislature created PRASA over forty
years ago in order to provide safe drinking water for inhabitants
and to manage wastewater treatment. See P.R. Laws Ann. tit. 22,
2
141-168 (1987 & Supp. 1989). PRASA's stewardship has not been
without blemish. The incident that sparked this suit occurred in
1985, when the United States Environmental Protection Agency
(EPA) brought an enforcement action pursuant to the Clean Water
Act, 33 U.S.C. 1251-1376 (1988), seeking to provoke a
substantial modernization of PRASA's wastewater treatment
facilities.
In due course, PRASA and EPA signed a consent order
limning the changes necessary to bring PRASA's treatment system
into compliance. Toward that end, PRASA hired M&E, a
Massachusetts-based engineering firm with professed expertise in
wastewater management, to oversee the refurbishment. M&E's
duties included contracting for design and construction services
on PRASA's behalf, procuring necessary equipment, and supervising
work on the project. M&E was to be remunerated on a time-plus-
expense basis, invoiced as accrued. Bills were due and payable
within thirty days of presentment.
Over time, project expenditures mushroomed well beyond
budget. As costs mounted, PRASA grew increasingly inhospitable
to M&E's invoices. The denouement occurred when PRASA, amidst
charges of skulduggery, suspended all payments to M&E and
demanded a complete audit. M&E consented to the audit, but did
not acquiesce in the cessation of payments. The audit dragged on
and PRASA accumulated a huge stockpile of M&E invoices. Its
financial plight ingravescent, M&E sued before the audit had run
its course to force payment of the arrearage (roughly
3
$52,000,000).
Confronted by defendant's motion to dismiss, the
district court determined as a matter of law that PRASA did not
enjoy Eleventh Amendment immunity. In so holding, the court
stressed that PRASA possessed the "ability to raise funds for
payment of its contractual obligations" and, thus, its
obligations "do not affect the Commonwealth's funds." PRASA
appeals this decision as a legal rather than a factual matter.
Although there may sometimes be genuine issues of material fact
sufficient to preclude brevis disposition in Eleventh Amendment
litigation, there are none here. Agreeing with PRASA that the
issue in this case is one of law, we afford plenary review to the
district court's denial of immunity. See Dedham Water Co. v.
Cumberland Farms Dairy, Inc., 972 F.2d 453, 457 (1st Cir. 1992);
New England Legal Found. v. Massachusetts Port Auth., 883 F.2d
157, 167 (1st Cir. 1989).
II.
Analysis
A.
The Eleventh Amendment: An Overview
In Chisholm v. Georgia, 2 U.S. (2 Dall.) 419 (1793),
the Supreme Court held that the federal courts had jurisdiction
to hear a South Carolina citizen's suit against the State of
Georgia. This result, popularly perceived as a threat to state
autonomy in a newly minted federal system, produced an
overwhelmingly negative reaction. See Edelman v. Jordan, 415
4
U.S. 651, 662 (1974). Ratification of the Eleventh Amendment
followed apace.1
On its face, the amendment appeared to introduce a
fairly simple proposition into our constitutional jurisprudence.
Nevertheless, driven by the pressure of pragmatic necessity,
judicial sketching of the amendment's scope and requirements has
displayed a creative bent. Under the gloss supplied by this
abstract impressionistic flair, the federal courts now read the
Eleventh Amendment, notwithstanding its plain language, to
prohibit them from hearing most suits brought against a state by
citizens of that or any other state.2 See De Leon Lopez v.
Corporacion Insular de Seguros, 931 F.2d 116, 121 (1st Cir. 1991)
(collecting cases); see also Edelman, 415 U.S. at 662-63.
Withal, there are apertures in the Eleventh Amendment's
protective swaddling. If a case falls within one of these gaps,
the Eleventh Amendment will not bar maintenance of the suit in a
federal court. See Ramirez v. Puerto Rico Fire Serv., 715 F.2d
694, 697, (1st Cir. 1983) (explaining that the Eleventh Amendment
1The Amendment reads:
The Judicial power of the United States
shall not be construed to extend to any suit
in law or equity, commenced or prosecuted
against one of the United States by Citizens
of another State, or by Citizens or Subjects
of any Foreign State.
U.S. Const. amend. XI.
2There is, of course, an exception for prospective
injunctive relief. See, e.g., Ramirez v. Puerto Rico Fire Serv.,
715 F.2d 694, 697 (1st Cir. 1983).
5
"bars federal court lawsuits by private parties insofar as they
attempt to impose liabilities necessarily payable from public
coffers, unless the state has consented to suit or unless the
protective cloak of the amendment has been doffed by waiver or
stripped away by congressional fiat"). Specifically, the
amendment's raiment unravels if any one of four circumstances
eventuates: a state may randomly consent to suit in a federal
forum, see, e.g., Paul N. Howard Co. v. PRASA, 744 F.2d 880, 886
(1st Cir. 1984), cert. denied, 469 U.S. 1191 (1985); a state may
waive its own immunity by statute or the like, see, e.g.,
Edelman, 415 U.S. at 673; Congress may sometimes abrogate state
immunity (so long as it speaks clearly and acts in furtherance of
particular powers), see, e.g., Fitzpatrick v. Bitzer, 427 U.S.
445, 451-54 (1976); or under certain circumstances other
constitutional imperatives may take precedence over the Eleventh
Amendment's federal-court bar, see Pennhurst State Sch. & Hosp.
v. Halderman, 465 U.S. 89, 99 (1984) (involving Fourteenth
Amendment); Bitzer, 427 U.S. at 456 (same).
Here, M&E does not argue that PRASA consented to be
sued, that Puerto Rico waived PRASA's immunity, that Congress
abrogated PRASA's immunity, or that some other provision of the
federal Constitution has usurped the field. Hence, this suit
skirts the gaps. Rather, it is a "pure" Eleventh Amendment case
in which this court must focus on whether PRASA enters the
6
Eleventh Amendment's sphere at all.3
B.
The Test
The mere imprimatur of state authority is insufficient
to inoculate an agency or institution against federal court
jurisdiction. A "slice of state power," without more, will not
sate the Eleventh Amendment. Lake Country Estates, Inc. v. Tahoe
Regional Planning Agency, 440 U.S. 391, 401 (1979). By the same
token and for much the same reasons political subdivisions of
a state, such as municipalities and counties, do not lie within
the Eleventh Amendment's reach. See, e.g., Owen v. City of
Independence, 445 U.S. 622, 650 (1980); Moor v. County of
Alameda, 411 U.S. 693, 717-721 (1973). Only the state itself and
"arms" of the state receive immunity. See PRASA v. M&E, 113 S.
Ct. at 689; Alabama v. Pugh, 438 U.S. 781, 782 (1978); see
generally De Leon Lopez, 931 F.2d at 121 (discussing coverage of
Eleventh Amendment). Because PRASA is not an organic part of the
central government of Puerto Rico, we must investigate whether it
is sufficiently a part of the central government to be considered
an arm of the state. Framed in this way, the question poses an
3We have consistently treated Puerto Rico as if it were a
state for Eleventh Amendment purposes. See, e.g., De Leon Lopez,
931 F.2d at 121; Fred v. Roque, 916 F.2d 37, 38 (1st Cir. 1990);
Paul N. Howard Co., 744 F.2d at 886; Ramirez, 715 F.2d at 697.
Although M&E invites us to revisit this position, we decline the
invitation. In a multi-panel circuit, newly constituted panels,
generally speaking, are bound by prior panel decisions on point.
See United States v. Gomez-Villamizar, 981 F.2d 621, 623 n.9 (1st
Cir. 1992); Jusino v. Zayas, 875 F.2d 986, 993 (1st Cir. 1989).
So it is here.
7
essentially functional inquiry, not easily amenable to bright-
line answers or mechanical solutions.
The Eleventh Amendment's primary concern is to minimize
federal courts' involvement in disbursal of the state fisc. It
follows that "when the action is in essence one for the recovery
of money from the state, the state is the real, substantial party
in interest and is entitled to invoke its sovereign immunity from
suit . . . ." Ford Motor Co. v. Department of Treasury, 323 U.S.
459, 464 (1945); see also Lake Country Estates, 440 U.S. at 400-
01 (identifying the desire to protect state treasuries as a
driving force behind adoption of the Eleventh Amendment); Dugan
v. Rank, 372 U.S. 609, 620 (1963) (recognizing "that a suit is
against the sovereign `if the judgment sought would expend itself
on the public treasury or domain'") (citation omitted); Ainsworth
Aristocrat Int'l Pty. Ltd. v. Tourism Co., 818 F.2d 1034, 1037
(1st Cir. 1987) (similar). Generally, if a state has a legal
obligation to satisfy judgments against an institution out of
public coffers, the institution is protected from federal
adjudication by the Eleventh Amendment. See Quern v. Jordan, 440
U.S. 332, 337 (1979); Reyes v. Supervisor of DEA, 834 F.2d 1093,
1097-98 (1st Cir. 1987).
Because it is not always limpid whether, or to what
extent, the state treasury must stand behind the judgment debts
of a particular institution, we have identified seven related
areas as prospects for further inquiry. These areas, each of
which can be mined for information that might clarify the
8
institution's structure and function, include: (1) whether the
agency has the funding power to enable it to satisfy judgments
without direct state participation or guarantees; (2) whether the
agency's function is governmental or proprietary; (3) whether the
agency is separately incorporated; (4) whether the state exerts
control over the agency, and if so, to what extent; (5) whether
the agency has the power to sue, be sued, and enter contracts in
its own name and right; (6) whether the agency's property is
subject to state taxation; and (7) whether the state has
immunized itself from responsibility for the agency's acts or
omissions. See Ainsworth Aristocrat, 818 F.2d at 1037
(collecting cases from other circuits recounting the same or
similar factors). The list is not an all-inclusive compendium,
for other areas of inquiry may prove fruitful in particular
circumstances. It is, however, clear that all the pertinent
factors have a common orientation: the more tightly the agency
and the state are entangled, the more probable it becomes that
the agency shares the state's Eleventh Amendment immunity.
C.
Applying the Test
In Paul N. Howard Co., supra, we adjudicated a similar
dispute involving PRASA's renitency to make payments due under a
construction contract. 744 F.2d at 881-84. The plaintiff
prevailed in the district court. On appeal, PRASA advanced for
the first time an added defense premised on Eleventh Amendment
immunity. Although we suggested rather strongly that PRASA might
9
"not qualify for immunity under the Eleventh Amendment," id. at
886, we did not conclusively resolve the issue because PRASA had
purposefully availed itself of the federal forum and had thereby
lost whatever entitlement to Eleventh Amendment immunity it might
have possessed with respect to that particular suit. See id.
The case before us today requires that we return to, and resolve,
the question deferred in Howard.4 Faithful to the explication
of legal principles set out above, see supra Part II(B), we first
examine PRASA's access to the public fisc and thereafter
scrutinize how the associated factors are arrayed in this
particular situation.
1. Access to the Commonwealth's Treasury. On the
1. Access to the Commonwealth's Treasury.
principal issue PRASA's access to the Commonwealth's treasury
the die is quickly cast. Puerto Rico's legislature made it
readily evident that PRASA
shall have no power at any time or in any
manner to pledge the credit or taxing power
of the Commonwealth of Puerto Rico or any of
its other political subdivisions. The bonds
and other obligations issued by the Authority
shall not be a debt of the Commonwealth of
Puerto Rico nor of any of its municipalities
nor of its other political subdivisions and
neither the Commonwealth of Puerto Rico nor
any such municipalities nor its other
political subdivisions shall be liable
thereon, nor shall such bonds or other
obligations be paid out of any funds other
4In this quest, we give no weight to the Howard court's
comments concerning PRASA's immunity, for we recognize that, as
dictum, the comments are not binding. That is not to say,
however, that Eleventh Amendment issues must always be resolved
de novo. Where the agency's activity and its relation to the
state remain essentially the same, prior circuit precedent will
be controlling.
10
than those of the Authority.
P.R. Laws Ann. tit. 22, 144. The statute erects a wall between
the agency's appetite and the public fisc. The existence of this
statutory barrier presages the result we must reach: PRASA is
not an arm of the state for Eleventh Amendment purposes.5
PRASA argues that, notwithstanding the Commonwealth's
disavowal of its liabilities, the Commonwealth's significant
financial support of PRASA's activities constitutes the sort of
access to public funds that triggers Eleventh Amendment
protection. We do not agree. Although the central government
subsidizes the agency to some extent, PRASA relies mostly on user
fees and bonds to support its operations. The government does
not give PRASA a blank check or an indeterminant carte blanche
allowing it to draw on the public treasury as it thinks
necessary. Thus, control of the money flow from tax dollars is
unilateral; if the Commonwealth chooses not to open the faucet,
the agency must go thirsty or else, by resort to its own devices,
procure the funds needed to stay liquid.
We think PRASA's situation is not unlike that of a
typical political subdivision. Such an entity often receives
part of its budget from the state and raises the rest
independently. Despite this dual funding, such entities do not
5The statutory barrier is especially important in this case,
for Puerto Rico's legislature has demonstrated that, when it
wishes to do so, it knows exactly how to pledge the
Commonwealth's resources in security for PRASA's debts. See P.R.
Laws Ann. tit. 22, 168 (explicitly agreeing to reimburse the
Farmers Home Administration if PRASA should default on two
particular loans).
11
automatically (or even usually) come within the zone of
protection demarcated by the Eleventh Amendment. Thus, in Mt.
Healthy City Sch. Dist. Bd. of Educ. v. Doyle, 429 U.S. 274
(1977), the Supreme Court denied Eleventh Amendment sanctuary to
a school board despite the "significant amount of money" it
received from the state. Id. at 280; accord Fitchik v. New
Jersey Transit Rail Operations, Inc., 873 F.2d 655, 660 (3d Cir.)
(denying immunity to a regional rail authority despite state
funding while noting "that an entity derives some of its income
from the state does not mean that it is entitled to partake of
the state's immunity"), cert. denied, 110 S. Ct. 148 (1989); see
also Blake v. Kline, 612 F.2d 718, 723 (3d Cir. 1979)
(recognizing that "the nature of the state's obligation to
contribute may be more important than the size of the
contribution"), cert. denied, 447 U.S. 921 (1980). The case at
bar is cut from much the same cloth.
We hold, therefore, that a state agency cannot claim
Eleventh Amendment immunity solely on the basis that judgments
against it may absorb unrestricted funds donated by the state
and, in that way, redound indirectly to the depletion of the
state's treasury. It follows that PRASA's assertion of Eleventh
Amendment immunity in this case is severely flawed.
2. Other Factors. Although PRASA's inability to draw
2. Other Factors.
on the public fisc cripples its immunity defense, we turn to the
other factors mentioned in the case law in order that our
investigation may be complete. In the circumstances at hand,
12
these factors, taken as an aggregate, corroborate the view that
PRASA does not dwell within the Eleventh Amendment's shelter.
To be sure, the two pans of the scale are not
completely out of balance. PRASA to some extent wields the
state's power; after all, the enabling legislation describes
PRASA's mission to provide water and sewer services as fulfilling
"an essential government function." P.R. Laws Ann. tit. 22,
142. Additionally, neither PRASA nor its revenue bonds are
taxable, see id. 155; PRASA enjoys the power of eminent domain,
see id. 144(e); and the Governor of Puerto Rico appoints five
of PRASA's seven board members, see id. 143.
PRASA places particular emphasis on the fact that its
water and sewage functions are governmental rather than
proprietary and insists that this circumstance renders it an arm
of the state.6 But the nature of PRASA's function is only one
6In arguing this point, PRASA leans heavily on our decision
in Puerto Rico Ports Auth. v. M/V Manhattan Prince, 897 F.2d 1,
12 (1st Cir. 1990). This reliance is mislaid. In Manhattan
Prince, the Ports Authority was acting only as the licensor of
harbor pilots for whom it provided no training and over whom it
exercised no assignment power. The Authority derived no revenue
from the licensing function. Moreover, the legislature had
explicitly made Authority members' misfeasance of the kind
alleged in Manhattan Prince attributable only to the
Commonwealth. See P.R. Laws Ann. tit. 23, 2303(b) (1987).
PRASA's situation is much different; it charges for its services,
controls its total operations, and answers for its own bevues.
Thus, a more apt Ports Authority analogy is found in Royal
Caribbean Corp. v. Puerto Rico Ports Auth., 973 F.2d 8 (1st Cir.
1992). That case involved not licensing, but operation of the
ports. See id. at 9. Because the Ports Authority charged user
fees that supported the costs of its port operations and was
relatively free of central government control, we ruled that it
did not enjoy Eleventh Amendment immunity with respect to its
management of the ports. Id. at 12.
13
part of the equation, and, standing alone, it is insufficient to
bring PRASA behind the Eleventh Amendment's shield. Educational
services, for example, are, like water treatment, a traditional
governmental function. Education, however, has an even longer,
stronger governmental history than water treatment, and as
attendance requirements attest, a more entrenched place in state
government. Yet, despite these more evocative characteristics,
school boards are not immune from suits in federal court. See
Mt. Healthy, 429 U.S. at 280-81 (holding that school board is not
entitled to assert Eleventh Amendment immunity).
On the other side of the scale, a heftier array of
indicators suggests that PRASA is distinct from Puerto Rico's
central government. PRASA has the power to raise funds through
user fees (which, significantly, the Commonwealth, as a water-
and-sewer user, must pay with respect to its own operations).
See P.R. Laws Ann. tit. 22, 158. PRASA also has the right to
raise funds by issuing revenue bonds independently of the central
government. See id. 152. The power and opportunity to
generate a revenue stream and thereby finance an agency's
operations is an important attribute of the agency's separate
identity. Cf. Hernandez-Tirado v. Artau, 874 F.2d 866, 872 (1st
We recognize the seeming anomaly in a single agency
being held to possess Eleventh Amendment immunity for some
functions but not for others. However, the two cases cited above
turned on the nature of the function involved in each instance,
presumably because, in light of the Authority's portfolio of
diverse operations, the question of access to the Commonwealth's
treasury was fuliginous. The case before us is free from this
strain of uncertainty.
14
Cir. 1989) (finding agency to be an arm of the Commonwealth
because the central government had the sole power to raise money
for the agency). Moreover, bondholders must look only to PRASA
for recompense in the event of default. See P.R. Laws Ann. tit.
22, 152(I). Then, too, PRASA is separately incorporated as "an
autonomous government instrumentality." Id. 142. It may sue,
be sued, and enter contracts without the Commonwealth's
particular permission. See id. 144(c), (d). Its funds are
kept entirely separate from the funds of the central government
and are totally controlled by its own board. Last, but surely
not least, the Commonwealth has explicitly insulated itself from
any financial responsibility with respect to PRASA's general debt
and ordinary bonded indebtedness.7 See id. 144.
One more item deserves mention. Whether an agency is
an arm of the state vel non is a matter of federal, not local,
law. See Blake, 612 F.2d at 722. Nevertheless, it is notable
that the district court's view of PRASA as a separate political
subdivision rather than as a part of the central government
comports with that of Puerto Rico's highest tribunal. The Puerto
Rico Supreme Court has consistently concluded that PRASA is not
an alter ego of the central government. The court observed over
7PRASA argues that because its generated revenues (bond
monies and user fees) are "pledged" to current debts and
projects, it will have no money to pay a judgment and any
judgment creditor must, therefore, look to the Commonwealth.
This is specious reasoning. If M&E prevails in this suit, it,
like unsecured judgment creditors from time immemorial, would
bear the risk that it might find few assets available to satisfy
the judgment.
15
forty years ago that the legislature intended PRASA to "be as
amenable to judicial process as any private enterprise would be
under like circumstances . . . ." Arraiza v. Reyes, 70 P.R.R.
583, 587 (1949). More recently, the court reiterated that PRASA
has a "personality separate and apart from that of the
government," and does not have the "sovereign immunity
traditionally enjoyed by the State." Canchani v. C.R.U.V., 105
P.R. Dec. 352, 489 n.2, 490 (1976); see also A.A.A. v. Union
Empleados A.A.A., 105 P.R. Dec. 605, 628 (1976) (stating that
PRASA is "unquestionably framed as a private enterprise or
business and in fact operates as such"). While not dispositive,
consistent decisions of a state's highest court construing an
agency's or institution's relationship with the central
government are important guideposts in a reasoned attempt to
locate the agency's or institution's place within the scheme of
things. See Ainsworth Aristocrat, 818 F.2d at 1037.
3. Assessing the Balance. The upshot is that PRASA
3. Assessing the Balance.
lacks eligibility for Eleventh Amendment immunity on several
levels. First, and most fundamentally, PRASA's inability to tap
the Commonwealth treasury or pledge the Commonwealth's credit
leaves it unable to exercise the power of the purse. On this
basis, PRASA is ill-deserving of Eleventh Amendment protection.
Even putting aside PRASA's fiscal separation from the
central government, we find that the sum total of the secondary
factors preponderates against immunity. While PRASA indisputably
operates with some quantum of state authority, as do many other
16
public utilities, it is readily apparent that Puerto Rico's
legislature chose to structure an arm's-length relationship
between PRASA and the central government. To implement this
relationship, the legislature gave PRASA the power to raise
funds, enter contracts, conceive strategy, and to make its own
operational decisions. As a consequence of the legislative
design, the central government does business with PRASA in the
same manner as with other vendors: it pays for the services it
receives and does not extend any credit or generic funding
guarantees. When all the relevant factors are weighed, the
indicia of separateness countervail the indicia of togetherness.
III.
Conclusion
We need go no further. The profound impact of PRASA's
inability to reach the Commonwealth's treasury, and our
calibrating measurement of the secondary factors, dictate that
PRASA's assertion of immunity must fail. Consequently, we today
confirm the suspicions adumbrated in Howard, 744 F.2d at 886: in
its current incarnation, the Puerto Rico Aqueduct and Sewer
Authority is not safeguarded from federal court jurisdiction by
the Eleventh Amendment. Therefore, the district court's denial
of PRASA's motion to dismiss must be
Affirmed.
17