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In re Financial Oversight and Management Board for Puerto Rico

United States Court of Appeals, First Circuit

February 22, 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; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO ELECTRIC POWER AUTHORITY (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO SALES TAX FINANCING CORPORATION, a/k/a Cofina; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO, Debtors.
v.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; JOSE B. CARRION, III; ANDREW G. BIGGS; CARLOS M. GARCIA; ARTHUR J. GONZALEZ; JOSE R. GONZALEZ; ANA J. MATOSANTOS; DAVID A. SKEEL, JR.; NATALIE A. JARESKO, Defendants, Appellees, CARLOS MÉNDEZ-NÚÑEZ, in his official capacity and on behalf of the House of Representatives of Puerto Rico, Plaintiff, Appellant, THOMAS RIVERA-SCHATZ, in his official capacity and on behalf of the Senate of Puerto Rico, Plaintiff, COMMONWEALTH OF PUERTO RICO; PUERTO RICO SALES TAX FINANCING CORPORATION, a/k/a Cofina; PUERTO RICO HIGHWAYS AND TRANSPORTATION AUTHORITY; EMPLOYEES RETIREMENT SYSTEM OF THEGOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO; PUERTO RICO ELECTRIC POWER AUTHORITY (PREPA), Debtors, Appellees. 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; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO ELECTRIC POWER AUTHORITY (PREPA); THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE PUERTO RICO SALES TAX FINANCING CORPORATION, a/k/a Cofina; THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, AS REPRESENTATIVE FOR THE EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO, Debtors. THOMAS RIVERA-SCHATZ, in his official capacity and on behalf of the Senate of Puerto Rico, Plaintiff, Appellant, CARLOS MÉNDEZ-NÚÑEZ, in his official capacity and on behalf of the House of Representatives of Puerto Rico, Plaintiff,
v.
THE FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO; JOSE B. CARRION, III; ANDREW G. BIGGS; CARLOS M. GARCIA; ARTHUR J. GONZALEZ; JOSE R. GONZALEZ; ANA J. MATOSANTOS; DAVID A. SKEEL, JR.; NATALIE A. JARESKO, Defendants, Appellees, COMMONWEALTH OF PUERTO RICO; PUERTO RICO SALES TAX FINANCING CORPORATION, a/k/a Cofina; PUERTO RICO HIGHWAYS AND TRANSPORTATION AUTHORITY; EMPLOYEES RETIREMENT SYSTEM OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO; PUERTO RICO ELECTRIC POWER AUTHORITY (PREPA), Debtors, Appellees.

          APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Laura Taylor Swain, [*] U.S. District Judge]

          Claudio Aliff-Ortiz, with whom Eliezer Aldarondo-Ortiz, Sheila Torres-Delgado, David Rodríguez-Burns, and Aldarondo & López Bras ALB, were on brief for Thomas Rivera-Schatz.

          Timothy W. Mungovan, with whom John E. Roberts, Guy Brenner, Martin J. Bienenstock, Steven L. Ratner, Mark D. Harris, Kevin J. Perra, and Proskauer Rose LLP, were on brief, for the Financial Oversight and Management Board for Puerto Rico; Jose B. Carrion, III; Andrew G. Biggs; Carlos M. Garcia; Arthur J. Gonzalez; Jose R. Gonzalez; Ana J. Matosantos; David A. Skeel, Jr.; Natalie A. Jaresko.

          Before Lynch, Circuit Judge, Souter, [**] Associate Justice, and Stahl, Circuit Judge. Israel Roldán-González for Carlos Méndez-Núñez.

          LYNCH, CIRCUIT JUDGE.

         These appeals raise several questions about the authority, under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), of the Financial Oversight and Management Board for Puerto Rico to develop and certify Fiscal Plans and Territory Budgets for the Commonwealth. 48 U.S.C. §§ 2141-2142. In particular, this case is about the 2019 Fiscal Plan and Territory Budget.

         The plaintiffs, the Speaker of Puerto Rico's House of Representatives, Carlos Méndez-Núñez, and the President of its Senate, Thomas Rivera-Schatz, in their official capacities and on behalf of the Legislative Assembly, sued the Board, its members, and its executive director after the Board developed and certified a Fiscal Plan and a Territory Budget for Fiscal Year 2019. The complaint alleged that the Board had made several erroneous certification decisions and had exceeded its power under PROMESA during the Fiscal Plan and Territory Budget development and certification processes. It sought declaratory and injunctive relief. The district court dismissed the complaint, in part for lack of subject matter jurisdiction and in part for failure to state a claim. See Rivera-Schatz v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 327 F.Supp.3d 364 (D.P.R. 2018). We affirm the dismissal on the same grounds.

         I.

         We describe the statutory context and the relevant events surrounding the 2019 Fiscal Plan and Territory Budget.[1]

         A. PROMESA's Basic Structure

         Finding Puerto Rico to be amid a "fiscal emergency," Congress enacted PROMESA in 2016. See Pub. L. No. 114-187 § 405(m)(1), 130 Stat. 549, 591 (2016); see also Aurelius Inv., LLC v. Commonwealth of P.R., Nos. 18-1671, 18-1746, 18-1787, 2019 WL 642328, at *1-2 (1st Cir. Feb. 15, 2019) (recounting the origins of the emergency and the responses before PROMESA). PROMESA created mechanisms for restructuring the debts of U.S. territories and for overseeing reforms of their fiscal and economic policies. See 48 U.S.C. § 2121(a) (stating this purpose). The Board, established "as an entity within the territorial government" of Puerto Rico, id. § 2121(c)(1), was empowered by PROMESA to, among other things, develop, approve, and certify Fiscal Plans and Territory Budgets, id. §§ 2141-2142, negotiate with the Commonwealth's creditors, id. § 2146, and, under Title III, to commence a bankruptcy-type proceeding on behalf of the Commonwealth, id. § 2175; see generally Aurelius Inv., 2019 WL 642328, at *2-3, *11-12 (outlining key powers granted to the Board).

         Congress enacted PROMESA under its Article IV "Power to dispose of and make all needful Rules and Regulations respecting the Territory . . . belonging to the United States." U.S. Const. art. IV § 3, cl. 2; see 48 U.S.C. § 2121(b)(2). Puerto Rico became a U.S. territory in 1898, see Treaty of Paris, art. 9, Dec. 10, 1898, 30 Stat. 1759, and is governed by a popularly elected Governor and Legislative Assembly under a constitution adopted by Puerto Rico and approved by Congress under the Territorial Clause, see Act of July 3, 1952, Pub. L. No. 447, ch. 567, 66 Stat. 327; see also Puerto Rico v. Sanchez Valle, 136 S.Ct. 1863, 1875 (2016) (recognizing the congressional role in authorizing Puerto Rico's "constitution-making process" and in approving the resulting Constitution).

         PROMESA explicitly reserves "the power of [Puerto Rico] to control, by legislation or otherwise, the territory," except as that power is limited by Titles I and II of PROMESA. 48 U.S.C. § 2163. In addition to that exception, PROMESA's provisions preempt any inconsistent "general or specific provisions of territory law," including provisions of Puerto Rico's Constitution. See id. § 2103; see also United States v. Maldonado-Burgos, 844 F.3d 339, 346 (1st Cir. 2016) (citing United States v. Quinones, 758 F.2d 40 (1st Cir. 1985) and then citing United States v. Acosta-Martinez, 252 F.3d 13, 18 (1st Cir. 2001)) ("[A] provision of the Puerto Rico Constitution cannot prevail where it conflicts with applicable federal law.").

         We have previously had occasion to interpret aspects of PROMESA's Title III. See Fin. Oversight & Mgmt. Bd. for P.R. v. Ad Hoc Grp. of PREPA Bondholders (In re Fin. Oversight & Mgmt. Bd. for P.R.), 899 F.3d 13, 18 (1st Cir. 2018); Peaje Invs. LLC v. García-Padilla, 845 F.3d 505, 511 (1st Cir. 2017); Lex Claims, LLC v. Fin. Oversight & Mgmt. Bd., 853 F.3d 548, 552 (1st Cir. 2017); see also Altair Glob. Credit Opportunities Fund, LLC v. The Emps. Ret. Sys. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 914 F.3d 694, 707 (1st Cir. 2019) (noting PROMESA's enactment). Recently, in Aurelius Investment, LLC v. Commonwealth of Puerto Rico, 2019 WL 642328, at *1, this court considered the constitutionality of PROMESA's procedure for appointing Board members, see 48 U.S.C. § 2121(e). Aurelius' holding that this procedure violates the Appointments Clause, U.S. Const. art. II, § 2, cl. 2, has no effect on the "otherwise valid actions of the Board prior to the issuance of [Aurelius'] mandate," and so does not impact the outcome of these appeals, Aurelius Inv., 2019 WL 642328, at *17.

         At issue here are events that occurred in 2018 and questions of first impression about Title II's provisions related to Fiscal Plans and Territory Budgets. 48 U.S.C. §§ 2141-2142. We explain those provisions in greater detail below.

         B. 2019 Fiscal Plan

         Congress intended for Fiscal Plans to provide roadmaps for Puerto Rico "to achieve fiscal responsibility and access to the capital markets." Id. § 2141(b)(1). PROMESA § 201 grants the Board exclusive authority to review, approve, and certify these Plans.[2] See id. § 2141(c)-(e); cf. Aurelius Inv., 2019 WL 642328, at *12 (describing these and related powers and characterizing them as "significant"). That section also outlines a yearly process, involving only the Governor and the Board, for development of Fiscal Plans. See generally 48 U.S.C. § 2141. The Legislative Assembly has a formal role in economic planning and budgeting under PROMESA, but that role is limited to the Territory Budget development process. See id. § 2142(d).

         1. Initial Development

         PROMESA's prescribed process for "[d]evelopment, review, approval, and certification of Fiscal Plans" occurs on a schedule set by the Board, id. § 2141(c); see id. § 2141(a), and begins with the submission of a proposed Fiscal Plan by the Governor, see id. § 2141(c) ("The Governor shall submit to the Oversight Board any proposed Fiscal Plan . . . ."). For 2019, the Governor sent several versions of his proposed Fiscal Plan to the Board between January and April 2018.

         The Board reviewed each of these proposals, as required by § 201(c)(3), which states that "[t]he Oversight Board shall review any proposed Fiscal Plan to determine whether it satisfies the requirements set forth in subsection (b)." Id. § 2141(c)(3). Contained in subsection (b) are over a dozen specific requirements. Those include "provid[ing] for the elimination of structural deficits" and "for the investments necessary to promote economic growth." Id. § 2141(b)(1)(A)-(N).[3]

         Here, the Board rejected each of the Governor's proposed 2019 Fiscal Plans as not satisfying § 201(b)'s requirements.[4] The Board returned two of the Governor's proposals to him, as required by § 201(c)(3)(B), with "a notice of violation that includes recommendations for revisions to the applicable Fiscal Plan; and . . . an opportunity to correct the violation." Id. § 2141(c)(3)(B). At the time the Board rejected the Governor's final, April 2018, proposal, the deadline for certifying a 2019 Fiscal Plan had passed. Under such circumstances (that is, when "the Governor fails to submit to the Oversight Board a Fiscal Plan that the Oversight Board determines in its sole discretion satisfies the requirements . . . by the time specified"), PROMESA § 201(d)(2) provides that "the Oversight Board shall develop and submit to the Governor and the Legislature a Fiscal Plan that satisfies the requirements." Id. § 2141(d)(2).

         2. April 19, 2018 Fiscal Plan

         On April 19, 2018, the Board accordingly certified a 2019 Fiscal Plan that it had developed. That Fiscal Plan was automatically "deemed approved by the Governor" under § 201(e)(2). See id. § 2141(e)(2) ("If the Oversight Board develops a Fiscal Plan under subsection (d)(2), such Fiscal Plan shall be deemed approved by the Governor . . . .").

         The April Fiscal Plan incorporated many aspects of the Governor's proposed Fiscal Plan. It also included a labor reform package not proposed by the Governor. This was one among a set of "comprehensive structural reforms to the economy of Puerto Rico" set forth in the Plan. These comprehensive reforms, to Puerto Rico's labor laws, business regulations, and infrastructure (among other areas), were designed by the Board to "revers[e] the negative trend [of economic] growth over the last 10 years and enabl[e] the Island to become a vibrant and productive economy going forward."

         "[I]ncreasing labor force participation may be the single most important reform for long-term economic well-being in Puerto Rico," the April Plan stated. It identified three "labor market reforms" intended "[t]o reduce the cost to hire and encourage job creation, including movement of informal jobs to the formal economy." The three "initiatives to change labor conditions" were: a shift to at-will employment; a "[r]eduction of mandated paid leave, including sick leave and vacation pay;" and an end to "mandated Christmas bonuses." The called-for adoption of at-will employment required the repeal of Puerto Rico's Law No. 80 of May 30, 1976, P.R. Laws Ann. tit 29 §§ 185a-185m, which bars termination of many private-sector employees without cause.

         As to this first reform, the Plan noted that "49 out of 50 U.S. states are employment at-will jurisdictions, giving employers the flexibility to dismiss an employee without having to first prove just cause." It acknowledged that "some employees benefit from Puerto Rico's lack of at-will employment" but credited evidence that for-cause employment "makes it more costly and risky not only to dismiss, but also to hire, an employee." "For example," the Plan summarized, "studies have found that laws preventing unfair dismissal caused reductions in employment, particularly in labor-intensive industries." It concluded that switching to at-will employment "will lower the cost and risk of hiring in Puerto Rico."

         The Plan quantified the impact of the labor reform package on the Commonwealth's annual budget surplus over thirty years. It projected that, with the adoption of at-will employment, Puerto Rico would have a $39 billion cumulative surplus over that period, compared with a $2 billion cumulative surplus without the enactment of at-will employment.

         The April Fiscal Plan also cut the operating budget of the Puerto Rican Legislative Assembly. These "reductions for the Legislative Assembly" were "informed by benchmarking against other full-time legislatures" in the United States, the Plan explained. The Puerto Rican Legislative Assembly's expenditure in Fiscal Year 2018 was about 300% greater than the (population-weighted) national average of full-time U.S. legislatures, according to an analysis by the Board of publicly available data.[5] The Plan stated that these reductions would achieve "reinvestment savings" of between $23.6 and $25 million per year for the next five years.

         3. May 30, 2018 Fiscal Plan

         The Governor and the Board continued negotiating about the labor reform package and other matters after the April Fiscal Plan had been certified. Eventually, the Board agreed to certify a revised Fiscal Plan that it had developed. It did so on May 30, 2018. Two aspects of the Board's May Fiscal Plan are relevant to these appeals.

         First, the May Fiscal Plan provided for a shift to at-will employment. Specifically:

The Legislature shall introduce and the Governor shall sign a bill that repeals Act No. 80 . . . on or before June 27, 2018, which shall become effective on or before January 1, 2019. . . . The Bill shall state that, for the avoidance of doubt, an employee hired for an indefinite period of time does not have a cause of action against their employer merely for the employer's termination of the employment relation.

         That is, the government of Puerto Rico would repeal Law 80 and clarify that employment is at will.

         Second, the cut to the Legislative Assembly's budget was removed from the May version of the Fiscal Plan. In addition, cuts to the budget of the judiciary included in the April Fiscal Plan were "reduced by half each year" in the May version, a change that increased the court system's budget by up to $23 million per year over what had been budgeted in the April version. According to a statement of understanding between the Governor and the Board, these operating budgets were to "be revisited annually," and these funding levels were made contingent on Puerto Rico's "compliance with the then-applicable fiscal plan." That is, the May Fiscal Plan stated that the allocations for the Legislative Assembly and the judiciary

are pursuant to Puerto Rico becoming an employment at-will jurisdiction by repealing Law 80 of May 30, 1976 on or before June 27, 2018 . . . . If the repeal does not occur, none of these changes and alterations [to the Legislative Assembly's and the judiciary's budgets] shall be implemented.

         The Legislative Assembly did not repeal Law 80. Instead, the day the Board certified the May Fiscal Plan, May 30, Puerto Rico's Senate passed Senate Bill 1011, which made at-will employment the rule for employees hired after the date of the bill's ...


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