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.
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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
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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.
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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
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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.
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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.
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("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.
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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"
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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.
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