FDIC v. Municipality of Ponce, Civ. No. 87-1071 (JP).
| Decision Date | 28 February 1989 |
| Docket Number | Civ. No. 87-1071 (JP). |
| Citation | 708 F. Supp. 464 |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. MUNICIPALITY OF PONCE, represented by its Mayor, Hon. Jose S. Dapena Thompson, and Paulo Da Cuhna, Defendants. |
| Court | U.S. District Court — District of Puerto Rico |
Enrique Banuchi, González, Bennazar & Colorado, Hato Rey, P.R., for plaintiff.
Guillermo de Guzmán Vendrell, San Juan, P.R., Richard A. Lee, Hato Rey, P.R., for defendants.
This is an action brought by the Federal Deposit Insurance Corporation (FDIC), in its corporate capacity, as successor of the Girod Trust Company (Girod), to collect on a loan guarantee executed by defendant Municipality of Ponce. The Municipality has moved for summary judgment on the grounds that the guarantee was made without legal authority and is void.
On July 12, 1983, two agreements were executed by Girod Trust Company, Codfish Corporation, and the Municipality of Ponce, the first entitled "Loan Agreement" and the second "Open End Credit," whereby Girod lent to Codfish $500,000.00 and $750,000.00 respectively. Both instruments were signed by Erasto Rodríguez, on behalf of the Municipality, as guarantor.
Codfish's "ship of rich lading wreck'd on the narrow seas;"1 it defaulted on the loans and eventually filed for bankruptcy. In the meantime, it was "2. Girod's daughter ran off with its ducats, and it was declared insolvent and turned over to the FDIC as receiver. The loans at issue in this case were then sold to the FDIC in its corporate capacity.
Prior to the execution of the loan guarantees, the Municipal Assembly of Ponce had passed two ordinances in an effort to improve the city's stagnant economy. The first, Ordinance No. 31 (series 1982-83), approved on September 24, 1982, authorized the creation of the "Ponce Capital Development Fund" and an "Office of Economic Development," subsidiary entities of the Municipality without any separate legal capacity. The Fund was to be operated as a distinct account by an Administrator and funded by certain federal programs and by loans obtained by the Municipality for the purpose.3
Later, the Municipal Assembly enacted Ordinance No. 71 (series 1982-83), approved Feb. 18, 1983, which authorized the Mayor to issue loan guarantees to financial institutions, up to the sum of $10 million, whereby the financial institutions would extend loans to Ponce area businesses participating in the city's economic development program. Although the ordinance's first "Whereas" clause makes reference to the Ponce Capital Development Fund, the ordinance fails to state the source of the guarantee funds or to specifically limit them to Fund monies.
On May 12, 1983, Interim Mayor Mario García Granados informed Girod by letter that "the Municipality of Ponce shall guarantee with its own funds, a credit line for One Million Dollars ($1,000,000) which was approved by you to CODFISH Corporation," and on July 12, 1983, the loan guarantee was executed.
At the time the transaction was entered into, the Mayor of Ponce, José G. Tormos Vega, had appointed the Municipal School Director, Erasto Rodríguez, as Acting Mayor. Tormos additionally signed a specific written but undated "Authorization" giving Rodríguez, as Acting Mayor, the authority to represent the Municipality in the transaction at issue. Rodríguez stated in his deposition that Tormos' Secretary told him that Tormos had left instructions for him to be at the offices of Attorney Agustín Díaz García to execute the guarantee, and that Díaz showed him the "Authorization" there. Díaz, counsel for the Municipality, served as the notary for both loan agreements.
Prior to his deposition, Rodríguez stated in an affidavit that he had no recollection of the "Authorization" signed by Tormos, but subsequent thereto he submitted another affidavit confirming his deposition testimony that he had seen the authorization prior to signing the loan guarantee agreements.
Defendant Municipality of Ponce, "sure the Duke will never grant this forfeiture to hold,"4 contends that under the Municipal Law of Puerto Rico, the Municipality had no authority to guarantee the loans; and that, even if such power existed, the Municipal Assembly did not authorize the guarantee at issue here. However, the Court, as the Duke, "cannot deny the course of law; For the commodity that strangers have with us in Venice, if it be denied, Will much impeach the justice of the state."5 We find that the Municipality had the power, and properly exercised it, to guarantee the loans.
Municipal governments in Puerto Rico, as elsewhere, are governments of limited power. They can exercise only those powers conferred by law. P.R. Const. Art. VI § 1; Rubert v. Treasurer, 58 P.R.R. 199, 210 (1941). Any contract entered into in violation of the Municipal law is ultra vires and void. 21 L.P.R.A. § 3451(a). The majority of the powers of municipalities were granted by the legislature in the Organic Act of the Municipalities, Act of June 18, 1980, No. 146, 21 L.P.R.A. § 2001 et seq.
In the 1980 act, municipalities were given "full legislative and administrative powers in any matter of a municipal nature." 21 L.P.R.A. § 2051. They have "all the powers that are necessary and convenient to carry out all the duties pertinent to a local government," Id. § 2054, including the powers "to develop general welfare programs," § 2054(5); and "to exercise the legislative and administrative power in any matter of a municipal nature which is for the benefit of the population and its development and progress." § 2054(16).
The Court is unaware of any judicial decisions concerning the power of Puerto Rico's municipalities pursuant to these sections to guarantee loans, but the Secretary of Justice of Puerto Rico has spoken twice on the matter.
In his opinion of May 26, 1983, in response to a question about the legal validity of, specifically, the Ponce Capital Development Fund, the Secretary of Justice held that a municipality has the power "to grant or to guarantee loans with public funds to private entities which comply and contribute with the execution of the `public purpose of promoting employment and spurring private economic activity in sectors of physical and economic decay of the City of Ponce.'"
In both this opinion and an earlier one, Op.Sec.Just. No. 1976-3, which held under prior law that loan guarantees for the purpose of assisting citizens to purchase houses were not authorized, it was not the broad grant of authority which raised doubts—both opinions apparently concede the grant of sufficient power—but the limitation in Article VI § 9 of the Puerto Rico Constitution that "Public property and funds shall only be disposed of for public purposes, for the support and operation of state institutions, and pursuant to law." The 1976 opinion held that guaranteeing loans to private individuals to construct housing did not constitute a sufficiently public purpose, while the 1983 opinion held that guaranteeing loans to business enterprises that would ease Ponce's economic plight was a public purpose.
This Court agrees with the opinion of the Secretary of Justice both that the powers granted are broad enough to encompass loan guarantees to encourage municipal economic development and that the guarantees to private parties do not contravene P.R. Const. Art. VI § 9.
As to the public purpose, the Supreme Court of Puerto Rico, the ultimate interpreter of the Commonwealth Constitution, stated that "it is possible to appropriate public funds for semipublic or even private institutions that carry out an acknowledged public function." Puerto Rican Socialist Party (PSP) v. Commonwealth, 107 D.P. R. 590, 600 (1978). The provision of property and funding to private enterprises for the purpose of industrial development has long been considered a public purpose in Puerto Rico. See, e.g. Commonwealth v. Fajardo Sugar Co., 79 P.R.R. 303, 311-13 (1956). In fact, much of the economic development program in Puerto Rico has been based on publicly backed loans and loan guarantees. See, e.g. 23 L.P.R.A. § 273-77 (Industrial Development Co.); Id. § 251e(o) (Commercial Development Co.); Id. § 263d (Fund for Securing Loans to Eligible Businesses). To hold that the Municipality's guarantee of the loan was not for a public purpose and was in violation of the Puerto Rico constitution would be to throw out decades of economic progress...
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Federal Deposit Ins. Corp. v. Municipality of Ponce
...at issue here. The FDIC opposed the motion and the district court agreeing with the FDIC, denied the motion. In its Opinion of February 28, 1989, 708 F.Supp. 464, the district court stated that the Municipality had the power, and properly guaranteed the loans at issue. As a result of this o......