Late last month, the Federal Circuit issued its opinion in Dinh v. United States, a case we have been monitoring because it attracted an amicus brief. In this case, the Federal Circuit reviewed a dismissal by the Court of Federal Claims of a takings claim. The Court of Federal Claims held that, because congressional action did not explicitly devalue certain bonds or require transferring funds to repay the bonds to the Puerto Rican government, there was no taking. The Federal Circuit, in a panel opinion authored by Judge Stoll and joined by Chief Judge Moore and Judge Gilstrap (sitting by designation from the Eastern District of Texas), affirmed. This is our opinion summary.
Judge Stoll began by providing the relevant background:
Plaintiffs-Appellants filed a class-action lawsuit against the United States in the United States Court of Federal Claims (“Claims Court”) alleging that the United States effected a taking under the Fifth Amendment when it enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”).
Plaintiffs-Appellants own bonds issued by the Puerto Rico Sales Tax Financing Corporation, the Corporación del Fondo de Interés Apremiante (“COFINA”). They allege that they “lost a significant portion of the principal and interest” of their bonds because COFINA restructured its debts pursuant to PROMESA’s debt restructuring provision. In plain terms, Plaintiffs-Appellants point to the differential between what they would have received had COFINA not restructured its debts and the amount they actually received as the property allegedly taken by the United States.
Puerto Rico created COFINA in 2006 in response to a fiscal crisis. Puerto Rico had consistently spent more than it received in taxes and other revenues, borrowing to cover the difference. Eventually, Puerto Rico neared the limits on sovereign debt permitted under its Constitution, which strained its ability to access credit markets. Puerto Rico created COFINA as a public corporation, independent from the Puerto Rican Government, to issue secured bonds (“COFINA bonds”) to raise funds for the Commonwealth. When COFINA bonds come due, bondholders are repaid principal and interest out of a dedicated fund—the Dedicated Sales Tax Fund (“DSTF”)—which is funded by a sales and use tax (“SUT”) imposed by Puerto Rico. COFINA, not Puerto Rico, has complete ownership and control of this fund. By May 2017, COFINA had issued over $17 billion in COFINA bonds.
Puerto Rico’s financial crisis continued to worsen, but Puerto Rico and its instrumentalities could not access the federal municipal bankruptcy process because Congress excluded Puerto Rico from being a debtor under Chapter 9 of the Bankruptcy Code, under which municipalities restructure their debts. Congress enacted PROMESA to create “a system for overseeing Puerto Rico’s finances, while also enabling the Commonwealth to gain bankruptcy protections similar to those available under the [Bankruptcy] Code” to address the “fiscal emergency” in the Commonwealth. In furtherance of this purpose, PROMESA established a seven-member Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) “to provide a method for a covered territory to achieve fiscal responsibility and access to the capital markets.”
Subchapter III of PROMESA permits the adjustment of debts through the Title III restructuring process. So-called Title III proceedings generally mirror federal bankruptcy court proceedings and permit a party to petition a federal court to compel the creation and enforcement of a plan of adjustment. Under PROMESA, the Oversight Board represents Puerto Rico in Title III cases.
The Oversight Board has “sole discretion” to “designate any territorial instrumentality as a covered territorial instrumentality that is subject to the requirements of this chapter.” PROMESA explicitly emphasizes the autonomy of the Oversight Board—stating that “[n]either the Governor nor the Legislature may . . . exercise any control, supervision, oversight, or review over the Oversight Board or its activities; or . . . enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this chapter, as determined by the Oversight Board.” PROMESA’s delineation of the Oversight Board’s duties related to issuing a restructuring certification also emphasizes the Oversight Board’s autonomy.
Within a few months of PROMESA’s enactment, the Oversight Board designated COFINA as a covered instrumentality subject to the requirements of PROMESA and eligible to qualify as a debtor under Title III. The following overview of the Title III proceeding underlying this action provides necessary background for understanding the issues on appeal.
At the outset, COFINA bondholders and the Commonwealth disputed who had superior rights in the SUT revenues deposited in the DSTF used to repay principal and interest on COFINA bonds as they became due. The Oversight Board determined that the best path to resolving the dispute was to file Title III petitions for both COFINA and the Commonwealth to afford the parties “additional time and breathing room to seek to resolve the impasse under the supervision of the Title III Court.” After filing the respective Title III cases, “[t]he Oversight Board analyzed various options for resolving the dispute and determined that the best path forward was to . . . appoint independent Oversight Board agents to serve separately as the respective representatives of the Commonwealth and COFINA in the Commonwealth- COFINA Dispute.” The parties eventually reached an agreement resolving the dispute based on arm’s-length negotiations between the appointed agents, which allocated the disputed SUT revenues as follows: 53.65% to COFINA, and 46.35% to the Commonwealth. The Oversight Board then applied this framework in formulating COFINA’s plan of adjustment. The Title III court confirmed the adjustment plan, and it was implemented.
Plaintiffs-Appellants then brought suit on behalf of a class of COFINA bondholders, alleging that Congress took their interests in COFINA bonds when it enacted PROMESA. The Government moved to dismiss the Complaint, arguing that the Claims Court lacked subject matter jurisdiction and that Plaintiffs failed to state a claim. The Claims Court rejected the Government’s argument that PROMESA displaced Tucker Act jurisdiction.
The panel first addressed “the Government’s contention that the Claims Court erred in concluding it possessed subject matter jurisdiction to hear this case.” Judge Stoll explained that “the Tucker Act grants the Claims Court jurisdiction to render judgment upon certain claims against the United States founded on the Fifth Amendment of the Constitution as a money-mandating source ‘absent a clearly expressed congressional intention to the contrary.'” The panel held “the Claims Court correctly determined it had jurisdiction” because they saw “no . . . expressed intention to withdraw Tucker Act jurisdiction.”
Next, the panel considered “Plaintiffs-Appellants’ argument that” the court “should reverse the Claims Court’s dismissal because the Complaint adequately alleged a Government-authorized taking effected by PROMESA.” Judge Stoll explained that the panel “agree[d] with the Claims Court that providing Puerto Rico with additional tools to manage its economic security, as PROMESA does, does not equate to ‘the government instigat[ing] action by a third party.'” She explained that the “Oversight Board has discretion to determine whether . . . proceedings are warranted, and it is also vested with other powers to further its purpose, such as its ability to require budgets and reports on a monthly or quarterly basis from territorial instrumentalities.” Ultimately the panel “agree[d] with the Claims Court that the United States lacks the requisite amount of coercive control over the Oversight Board’s actions to create liability under the Fifth Amendment.”
Finally, the panel addressed “Plaintiffs-Appellants’ contention that the Claims Court abused its discretion by declining to allow them to amend their Complaint.” As explained by Judge Stoll, the panel concluded “Plaintiffs-Appellants’ argument on appeal is conclusory and fails to explain how they would amend their complaint to establish government action.” Thus, the panel held “that the Claims Court did not abuse its discretion in declining to allow amendment.”