Fin. Oversight & Mgmt. Bd. for P.R. v. Vásquez Garced (In re Fin. Oversight & Mgmt. Bd. for P.R.)

• Decision Date: 22 August 2019
• Docket Number: Adv. Proc. No. 19-00393-LTS in Case No. 17-3283 (LTS),Case No. 17-3283 (LTS) (Jointly Administered)
• Citation: 403 F.Supp.3d 1
• Parties: IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of the Commonwealth of Puerto Rico, et al., Debtors. The Financial Oversight and Management Board for Puerto Rico, Plaintiff, v. Hon. Wanda Vásquez Garced and the Puerto Rico Fiscal Agency and Financial Advisory Authority, Defendants.
• Court: U.S. District Court — District of Puerto Rico

403 F.Supp.3d 1

IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO, as representative of the Commonwealth of Puerto Rico, et al., Debtors.¹

The Financial Oversight and Management Board for Puerto Rico, Plaintiff,

v.Hon. Wanda Vásquez Garced and the Puerto Rico Fiscal Agency and Financial Advisory Authority, Defendants.

Case No. 17-3283 (LTS) (Jointly Administered)

Adv. Proc. No. 19-00393-LTS in Case No. 17-3283 (LTS)

United States District Court, D. Puerto Rico.

Signed August 22, 2019

O'NEILL & BORGES LLC, By: Hermann D. Bauer, 250 Muñoz Rivera Avenue, Suite 800, San Juan, P.R. 00918-1813, PROSKAUER ROSE LLP, By: Martin J. Bienenstock, Stephen L. Ratner, Timothy W. Mungovan, Hadassa R. Waxman, Eleven Times Square, New York, N.Y. 10036, and, Guy Brenner, 1001 Pennsylvania Ave., NW, Suite 600 South Washington, DC 20004, Attorneys for Plaintiff the Financial Oversight and Management Board for Puerto Rico, in its own right and as representative of the Commonwealth of Puerto Rico

MARINI PIETRANTONI MUÑIZ LLC, By: Luis C. Marini-Biaggi, Carolina Velaz-Rivero, 250 Ponce de León Ave., Suite 900, San Juan, Puerto Rico 00918, O'MELVENY & MYERS LLP, By: John J. Rapisardi, William J. Sushon, 7 Times Square, New York, New York 10036, and, Peter Friedman, 1625 Eye Street, NW, Washington, D.C. 20006, and, Elizabeth L. McKeen, 610 Newport Center Drive, 17th Floor, Newport Beach, California 92660, Attorneys for Defendants Governor Vásquez Garced and the Puerto Rico Fiscal Agency and Financial Advisory Authority

OPINION AND ORDER DENYING DEFENDANTS' MOTION TO DISMISS THE COMPLAINT

LAURA TAYLOR SWAIN, United States District Judge

The question of whether and to what extent the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board") can take action to challenge or constrain the ability of other officials of the Commonwealth of Puerto Rico (the "Commonwealth") to implement and enforce fiscal policy decisions that are arguably contrary to a certified fiscal plan or otherwise inconsistent with the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA") is again before the Court. In May of this year, Puerto Rico's legislature passed, and the former governor signed, a statute that seeks to address the financial distress of Puerto Rico's municipalities by eliminating their obligation, upon which Puerto Rico's current certified fiscal plan is premised, to reimburse the Commonwealth for the cost of current pension payments to their retired former employees. The Commonwealth has also enacted additional measures providing for spending outside of the fiscal plan. The Oversight Board commenced this adversary proceeding seeking to nullify these measures and enjoin their ongoing implementation.

Now before the Court is the Defendants' Motion to Dismiss Plaintiff's Complaint Dated July 3, 2019 Under Fed. R. Civ. P. Rules 12(b)(1) and 12(b)(6) (Docket Entry No. 17 in Adversary Proceeding No. 19-00393, the "Motion"),² filed by then-Governor Ricardo Antonio Rosselló Nevares (the "Governor"³ ), acting in his official capacity, and the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF" and, collectively with the Governor, the "Defendants"). The Court heard argument on the Motion on August 15, 2019, and has considered carefully all of the arguments and submissions made in connection with the Motion.⁴ The Court has subject matter jurisdiction of this action pursuant to 48 U.S.C. § 2166. For the following reasons, the Court finds that the Oversight Board has stated viable claims under PROMESA, and the motion to dismiss the Oversight Board's adversary complaint is denied.

I. BACKGROUND

Except as otherwise indicated, the following recitation of facts is drawn from The Financial Oversight and Management Board for Puerto Rico's Verified Complaint for Declaratory and Injunctive Relief Against the Governor of Puerto Rico and the Puerto Rico Fiscal Agency and Financial Advisory Authority (Docket Entry No. 1, the "Complaint"), filed on July 3, 2019, by the Oversight Board, for itself and as representative of the Commonwealth.

On June 30, 2016, to address the ongoing fiscal emergency in Puerto Rico created in part by a "combination of severe economic decline, and, at times, accumulated operating deficits, lack of financial transparency, management inefficiencies, and excessive borrowing," the United States Congress passed, and the President signed into law, PROMESA.⁵ 48 U.S.C.A. § 2194(m)(1) (West 2017). PROMESA created the Oversight Board as "an entity within the territorial government" of Puerto Rico and tasked the Oversight Board with developing "a method for [Puerto Rico] to achieve fiscal responsibility and access to the capital markets." 48 U.S.C.A. §§ 2121(a), (c)(1) (West 2017). In aid of that purpose, PROMESA empowers the Oversight Board to, among other things, certify the fiscal plans and budgets of the Commonwealth and its instrumentalities, override Commonwealth executive and legislative actions that are inconsistent with certified fiscal plans and budgets, review new legislative acts, and commence a bankruptcy-type proceeding in federal court on behalf of the Commonwealth or its instrumentalities. Id. §§ 2141–2152, 2175(a). On May 3, 2017, the Oversight Board commenced a debt adjustment proceeding on behalf of the Commonwealth by filing a petition in this Court under Title III of PROMESA.⁶ (See Docket Entry No. 1 in Case No. 17-03283.)

A. PayGo

On March 13, 2017, the Oversight Board certified a fiscal plan that incorporated several pension reforms, including the adoption of a "Pay as you Go" ("PayGo") system. (Compl. ¶ 35.) Under PayGo, the Commonwealth and other subject employers, including municipalities, pay pension and other retirement benefits as they come due to retirees, rather than pre-fund those benefits through an investment trust. (Id. )

On August 23, 2017, the Legislature of the Commonwealth (the "Legislature") passed Act 106-2017, titled the "Act to Guarantee the Payment of Pension Benefits to our Retirees and to Establish a New Defined Contribution Plan for Public Employees" ("Act 106," Compl. Ex. 11). (Compl. ¶ 36.) Act 106 recognized the Commonwealth's unprecedented fiscal and social crisis, acknowledged the "serious fiscal emergency" faced by the Commonwealth's public retirement systems, and directed the Commonwealth to pay all pension costs. (Id. ) Act 106 required municipalities, public corporations, and other public employer entities to fund pension obligations for their own retired employees through monthly payments to the Commonwealth in the amount of benefits paid to each of their respective retirees (the "PayGo Fee"), and recognized that the Commonwealth would assume the obligation of municipalities, public corporations, and other covered employers to pay their share of pension costs if such entities failed to fulfill their funding obligations. (Id. ¶ 37.)

On May 9, 2019, the Oversight Board certified the most recent fiscal plan for the Commonwealth (the "2019 Fiscal Plan," Compl. Ex. 3), which acknowledges the more than $50 billion in pension liabilities owed by the Commonwealth and its instrumentalities, and which specifically includes comprehensive pension reform as a necessary fiscal measure. (Compl. ¶ 39.) The 2019 Fiscal Plan further assumes that the allocation of financial responsibilities set forth in Act 106, including the Commonwealth's receipt of PayGo Fees from municipalities, will remain in effect. (Id. ) The assumptions, projections, and analysis contained in the 2019 Fiscal Plan cover a five-year period. (See Compl. Ex. 3.)

B. Law 29

On May 13, 2019, the Legislature passed Act 29, titled the "Law to Reduce the Administrative Burdens of Municipalities" ("Law 29," Compl. Ex. 2). The stated purpose of Law 29 is to reduce the "administrative burden of municipalities in relation to payments made [by municipalities] in respect of the health plan of the Government of Puerto Rico and the [PayGo] system." (Law 29 at Art. 2.) On May 17, 2019, the Oversight Board advised the Governor, the President of the Senate of Puerto Rico, and the Speaker of the House of Representatives of Puerto Rico that the potential fiscal impact of Law 29 would be approximately $311 million for fiscal year 2020, and $1.7 billion through fiscal year 2024. (Compl. ¶ 40.) Based on these estimates, the Oversight Board further advised that Law 29 is "not compliant with the [2019 Fiscal Plan], which includes municipalities' full payment of their obligations to [the Puerto Rico Health Insurance Administration ("ASES") ] and PayGo." (Id. )

On May 17, 2019, the Governor signed Senate Bill 1258, thereby enacting Law 29. (Id. ¶ 41.) Law 29 expressly eliminates the obligation of municipalities to contribute to ASES and PayGo, providing that the Municipal Income Collection System ("CRIM," by its Spanish acronym) "shall withhold ... fifty percent (50%) of the amount that municipalities would have the obligation to disburse to ASES, based on the amount invoiced for fiscal year 2015-2016, and up to ninety percent (90%) of the amount that municipalities would have to pay for [PayGo], based on the amount invoiced for fiscal year 2017-2018, to be distributed to municipalities." (Law 29 at Stmt. of Purpose.)

Section 204(a) of PROMESA, codified at 48 U.S.C. § 2144(a), requires the Governor to submit new laws to the Oversight Board with documentation, prepared by a government entity with budget and financial management expertise, comprising (a) a "formal estimate" of the expenditure and revenue impact of the new legislation, and (b) a certification as to whether the new legislation is significantly inconsistent with the governing fiscal plan. On June 3, 2019, the Governor, AAFAF, and the Puerto Rico Office of Management and Budget submitted a copy of Law 29 and an accompanying "Compliance Certificate of New Joint Resolution Pursuant to 48 U.S.C. § 2144 [ (a) ](2)(B)" (the "Certificate," Compl. Ex....