Assured Guaranty Corp. v. Garcia-Padilla

• Decision Date: 04 October 2016
• Docket Number: Civil No. 16-1095 (FAB),Civil No. 16-1037 (FAB)
• Citation: 214 F.Supp.3d 117
• Parties: ASSURED GUARANTY CORP., et al., Plaintiffs, v. Alejandro GARCIA-PADILLA, et al., Defendants. Financial Guaranty Insurance Co., Plaintiff, v. Alejandro Garcia-Padilla, et al., Defendants.
• Court: U.S. District Court — District of Puerto Rico

214 F.Supp.3d 117

ASSURED GUARANTY CORP., et al., Plaintiffs,

v.Alejandro GARCIA-PADILLA, et al., Defendants.

Financial Guaranty Insurance Co., Plaintiff,

v.Alejandro Garcia-Padilla, et al., Defendants.

Civil No. 16-1037 (FAB)

Civil No. 16-1095 (FAB)

United States District Court, D. Puerto Rico.

Signed October 4, 2016

Ellen M. Halstead, Howard R. Hawkins, Jr., Lary Stromfeld, Cadwalader, Wickersham & Taft LLP, Atara Miller, Evan R. Fleck, Grant R. Mainland, Michael L. Hirschfeld, Dennis F. Dunne, Milbank, Tweed, Hadley & McCoy LLP, New York, NY, Mark C. Ellenberg, Cadwalader, Wickersham & Taft LLP, Washington, DC, Heriberto J. Burgos-Perez, Diana Perez-Seda, Ricardo F. Casellas, Casellas, Alcover & Burgos PSC, Roberto A. Camara-Fuertes, Ferraiuoli, LLC, San Juan, PR, for Plaintiffs.

Salvador Antonetti-Zequeira, Jose L. Ramirez-Coll, Antonetti Montalvo & Ramirez-Coll, Ivonne Cruz-Serrano, Maymi Rivera LLC, San Juan, PR, Giselle Lopez-Soler, Guaynabo, PR, for Defendants.

OPINION AND ORDER

BESOSA, District Judge.

Plaintiffs,¹ New York based insurance companies, brought suit against defendants, government officials of the Commonwealth of Puerto Rico, seeking a declaratory order that two executive orders ("OEs") by Puerto Rico Governor Alejandro Garcia-Padilla ("Governor Garcia-Padilla") violate the Takings, Due Process, and Contracts Clauses² of the United States Constitution. (Civ. Nos. 16–1037, Docket No. 1 at pp. 32-36; 16-1095, Docket No. 1 at pp. 46-51.) Plaintiffs also seek an injunction against government officials enforcing the executive orders. (Civ. Nos. 16–1037, Docket No. 1 at pp. 33-36; 16-1095, Docket No. 1 at pp. 47-51.) Defendants³ move to dismiss plaintiffs claims arguing that, as Commonwealth government officials sued in their official capacities, they are entitled to Eleventh Amendment immunity pursuant to the doctrine established in Pennhurst State School & Hospital v. Halderman , 465 U.S. 89, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984). (Civ. Nos. 16–1037, Docket No. 25 at pp. 5, 7–21;⁴ 16-1095, Docket No. 37 at pp. 29–46.) Plaintiffs in Civil Case Number 16-1095 also bring federal preemption claims, (Docket No. 1 at pp. 21–29), which defendants move to dismiss, (Docket No. 37 at pp. 23–33).

Before the Court are defendants' motions to dismiss,⁵ (Civ. Nos. 16–1037, Docket Nos. 25, 30; 16–1095, Docket Nos. 37, 41), plaintiffs' oppositions (Civ. Nos. 16–1037, Docket Nos. 34, 35; 16–1095, Docket Nos. 46, 47), and defendants' replies, (Civ. Nos. 16–1037, Docket Nos. 42, 44; 16–1095, Docket Nos. 58, 62). For the reasons set forth below, the Court DENIES defendants' motion to dismiss, (Civ. No. 16–1037, Docket No. 25), DENIES IN PART and GRANTS IN PART defendants' motions to dismiss, (Civ. No. 16–1095, Docket No. 37) and DENIES defendant Acosta's motion to dismiss, (Civ. Nos. 16–1037, Docket No. 30; 16–1095, Docket No. 41.)

BACKGROUND

I. Puerto Rico Debt Prioritization

The Constitution of the Commonwealth of Puerto Rico requires a balanced annual budget, P.R. Const. Art. VI § 7, and carries responsibilities to fund public debt payments and ordinary operating expenses from year-to-year, Id. § 6. If the budget is unbalanced—appropriations exceed total estimated resources—the Commonwealth government must raise taxes sufficient to cover the difference. Id. § 7.

In cases of an unbalanced budget, the Commonwealth Constitution establishes a priority system detailing in what order appropriations will be paid. P.R. Const. Art. VI § 8. First priority is assigned to "interest on the public debt and amortization thereof." Id.

Subsequent priorities are established by Puerto Rico law, the Management and Budget Office Organic Act ("OMB Act"), P.R. Laws Ann. tit. 23 § 104(c). The OMB Act reiterates that "payment of interest and amortizations corresponding to the public debt" is the first priority. Id. § 104(c)(1). The second priority includes obligations from legal contracts, eminent domain court judgments, and "binding obligations to safeguard the credit, reputation and good name of the Government of the Commonwealth of Puerto Rico." Id. § 104(c)(2). Third, payment is to be made to "appropriations for regular expenses" including public health, security, education, welfare programs, retirement systems, and other public services. Id. § 104(c)(3). Finally, fourth and fifth priority are given to capital works and improvements depending on their stage of completion. Id. § 104(c)(4) -(5).

In addition to being laid out in the OMB Act, this priority structure is included in each of the statutes pursuant to which the Authority Bonds were issued, in disclosure documents issued by the Authorities and used to offer the bonds, and in offering documents for the Commonwealth's public debt. See P.R. Laws Ann. tit. 13 § 31751(a)(1)(C); P.R. Laws Ann. tit. 9 §§ 2021, 5681 ; P.R. Laws Ann. tit. 13 § 2271v ; P.R. Laws Ann. tit. 3 § 1914 ; Civ. Nos. 16–1037, Docket No. 1 at pp. 18-20; 16-1095, Docket No. 1 at pp. 31-32.

II. Issuance of Bonds

Several public corporations in Puerto Rico are authorized to contract and issue bonds. Pursuant to the Puerto Rico Highway and Transportation Act, P.R. Laws Ann. 9 § 2004(1) the Puerto Rico Highways and Transit Authority ("PRTHA") has $4.4-4.6 billion in outstanding bonds issued to fund the construction of highways and transportation systems. (Civ. Nos. 16–1037, Docket No. 1 at p. 8; 16-1095, Docket No. 1 at p. 10.) Pursuant to the Puerto Rico Convention Center District Act, P.R. Laws Ann. tit. 23 § 6412(h), the Puerto Rico Convention Center District Authority ("PRCCDA") has issued approximately $420-436 million in outstanding bonds pursuant to a Trust Agreement. (Civ. Nos. 16–1037, Docket No. 1 at p. 10; 16-1095, Docket No. 1 at p. 12.) Pursuant to the Puerto Rico Infrastructure Financing Act, P.R. Laws Ann. tit. 3 § 1906(1), the Puerto Rico Infrastructure Financing Authority ("PRIFA") has issued tax revenue bonds with approximately $1.6 billion outstanding. (Civ. Nos. 16–1037, Docket No. 1 at p. 11; 16-1095, Docket No. 1 at p. 12.)

Pursuant to the Commonwealth Constitution, bondholders may sue to enforce the Management and Budget Office ("OMB") priority structure for repayment of bonds. P.R. Const. Art. VI § 2. Additionally, the Commonwealth pledged that it would not limit or restrict the Authorities' rights or powers until all issued bonds and interest are paid. (Civ. Nos. 16–1037, Docket No. 1 at pp. 9-12; 16-1095, Docket No. 1 at pp. 10-13.)

III. Pledged Funds

These bonds are secured by taxes and tax liens. The PRHTA funds are secured by "the proceeds of any tax or other funds which may be made available to the Authority by the Commonwealth." P.R. Laws Ann. tit. 9 § 2004(1). The PRCCDA bonds are secured by a lien on a hotel occupancy tax. (Civ. Nos. 16–1037, Docket No. 1 at p. 10; 16-1095, Docket No. 1 at p. 11.) A portion of a federal excise tax on rum secures the PRIFA bonds. (Civ. No. 16–1037, Docket No. 1 at p. 12; 16-1095, Docket No. 1 at p. 13.)

The funds from these taxes and tax liens may be used to pay the public debt if no other Commonwealth resources are available. (Civ. Nos. 16–1037, Docket No. 1 at p. 20; 16-1095, Docket No. 1 at p. 33 (quoting Commonwealth of Puerto Rico, Financial Information and Operating Data Report (Nov. 6, 2015)).

IV. The Governor's Executive Orders

On November 30, 2015, the Commonwealth Governor Alejandro Garcia Padilla ("Governor Garcia-Padilla") issued an executive order, OE-2015-046, in which he announced that a situation existed in which Puerto Rico "d[id] not have sufficient resources to meet the payment of public debt and, at the same time, maintain essential services of health, safety, education and public welfare." (Civ. No. 16–1095, Docket No. 31–1 at p. 6.) He therefore "retained assigned revenue" (i.e. "clawed back" previously allocated funds) from Commonwealth agencies including the PRHTA and the Tourism Company on behalf of the Convention Center and instructed the Treasury Department to use those funds to service the public debt. (Civ. No. 16–1095, Docket No. 31–1 at pp. 7-8.) On December 8, 2015, Governor Garcia-Padilla issued a second executive order, OE-2015-049. (Civ. No. 16–1095, Docket No. 31–2 at p. 7.) In OE-2015-049, Governor Garcia-Padilla delegated specified budgetary administration powers to the Director of the OMB. Id. OE-2015-049 instructed that the OMB Director was to "be guided by the priority rules for budgetary adjustments established under the powers specified in Article 4, subsection (c) of the OMB Act, with the purpose of maintaining essential services and to ensure the sound operation of the Government of the Commonwealth of Puerto Rico." Id. OE-2015-049 also instructed a previously created Working Group for the Fiscal and Economic Restoration of Puerto Rico ("Working Group") to create guidelines (the "Guidelines") "to manage the cash flow ... for the [then-] current fiscal year." Id. Finally, it instructed governmental agency heads "to prioritize spending in their entities according to the budgetary priorities and adjustments established by the Director of the OMB and the [Working Group] guidelines." Id. at p. 8.

V. The Working Group Guidelines

On December 17, 2015, Deputy Secretary of the Treasury Juan Flores-Galarza issued Circular Letter No. 1300–15–16 to all government departments "with funds under the custody of the Treasury Department." (Civ. No. 16–1095, Docket No. 31–3 at p. 7.) The Circular Letter references OE-2015-46's clawback of funds. Id. The Circular then establishes payment priority guidelines pursuant to OE-2015-049. Id. at pp. 7–8. The Guidelines' structure largely mirrors that of the OMB Act—keeping public debt as first priority, court judgments as second, and essential services as third—but, the second priority omits contractual obligations and "binding obligations to safeguard the credit, reputation and good name of the Government of the Commonwealth of Puerto Rico."Compare id. at pp. 7–8 with P.R. Laws Ann. tit. 23 § 104(c)....