Victor J. Salgado & Associates v. Cestero-Lopategui ( 2022 )

United States Court of Appeals
For the First Circuit
No. 20-1855
VÍCTOR J. SALGADO & ASSOCIATES INC., as 100% Stockholder of
Víctor J. Salgado & Associates, Inc.; VÍCTOR J. SALGADO-MICHEO,
in his capacity and as Stockholder of Víctor J. Salgado &
Associates, Inc.; ANA SALGADO-SALGADO, in her capacity and as
Stockholder of Víctor J. Salgado & Associates, Inc.,
Plaintiffs, Appellees,
v.
RAFAEL CESTERO-LOPATEGUI; JUAN A. MOLDES-RODRÍGUEZ; ALEXANDER
ADAMS; JAVIER RIVERA RÍOS,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Gustavo A. Gelpí, U.S. District Judge]
Before
Lynch, Thompson, and Kayatta,
Circuit Judges.
Carlos Lugol-Fiol, with whom Fernando Figueroa-Santiago,
Solicitor General of Puerto Rico, and Isaías Sánchez-Báez, Former
Solicitor General of Puerto Rico, were on brief, for appellants.
Damian R. LaPlaca for appellees.
May 12, 2022
LYNCH, Circuit Judge. This is an appeal from the denial
of the automatic stay under Title III of the Puerto Rico Oversight,
Management, and Economic Stability Act ("PROMESA"), 48 U.S.C.
§§ 2101-2241,1 sought by Puerto Rico government officials in this
42 U.S.C. § 1983 civil rights action against them. Defendants-
appellants are government officials whose defense has been assumed
by the Commonwealth of Puerto Rico pursuant to P.R. Laws Ann. tit.
32, §§ 3085-3092a, the Commonwealth's legal representation and
indemnification statute commonly referred to as "Law 9."
We reverse the district court's denial of defendants'
motion for entry of the automatic stay under 11 U.S.C. § 922,
incorporated into PROMESA through 48 U.S.C. § 2161(a), and order
entry of the stay.
I.
On September 17, 2019, plaintiffs-appellees (Víctor J.
Salgado & Associates, Inc., Víctor J. Salgado-Micheo, and Ana
Salgado-Salgado), who owned and operated the Integrand Assurance
Company, sued defendants in their personal capacities under
Section 1983 in the United States District Court for the District
1 In 2016, Congress passed PROMESA in response to the
government debt crisis in Puerto Rico. See Union De Trabajadores
De La Industria Eléctrica Y Riego v. FOMB (In re FOMB), 7 F.4th
31, 35 (1st Cir. 2021). "Title III of PROMESA made many sections
of the Bankruptcy Code [including the automatic stay] applicable
in restructuring proceedings for Puerto Rico and its
instrumentalities." Id.- 2 -
of Puerto Rico. Defendants-appellants Rafael Cestero-Lopategui,
Alexander Adams, and Javier Rivera-Ríos are officers or employees
of the Puerto Rico Office of the Insurance Commissioner ("PROIC").
Defendant-appellant Juan A. Moldes-Rodríguez was contracted by
PROIC to perform duties as the rehabilitator, and then liquidator,
of the Integrand Assurance Company.2 Plaintiffs allege that the
government officials violated their First Amendment rights, the
Equal Protection Clause, and the Due Process Clause. Plaintiffs
further allege a civil conspiracy by the officials to deprive them
of their constitutional rights, a failure to prevent wrongful acts,
and violations of Commonwealth statutory law. Plaintiffs request
declaratory relief, injunctive relief "[p]ermanently enjoin[ing]
co-defendants from continuing to use the color of state law to
deny Plaintiffs their Constitutional and legal rights,"
compensatory damages in the amount of $30 million, and additional
punitive damages.
The defendant government officials then petitioned the
Commonwealth Secretary of Justice ("Secretary") for legal
representation under Law 9. See P.R. Laws Ann. tit. 32, §§ 3085-
3092a. The Secretary granted legal representation to each
defendant under Law 9 and has borne the costs of that
2 We refer to all four defendants as government officials.
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representation.3 As to indemnification in the case of a finding
of liability, the Secretary stated, "[s]hould judgment eventually
be handed down against [defendants] and in [their] personal
capacit[ies] or should costs and fees be levied against [them],
[defendants] will have to petition for the benefit of payment of
such judgment."
On November 7, 2019, defendants filed a "Notice of
Automatic Stay of Proceedings Pursuant to Title III of PROMESA" in
the district court. The district court never issued an order
directly on the Notice of Automatic Stay.4
In August 2020, the district court issued four discovery
orders:
• On August 10, a magistrate judge granted plaintiffs'
motion for a scheduling order and to depose defendants.
3 Plaintiffs argue that defendants' petitions for legal
representation did not comply with the Law 9 regulations
promulgated by the Secretary.
This argument has no bearing on the question at issue in
this appeal. Whether or not defendants' petitions complied with
the Law 9 regulations, the Secretary granted legal representation
to each defendant. Law 9 does not grant plaintiffs standing to
challenge the Secretary's application of its own regulations. Cf.
P.R. Laws Ann. tit. 32, § 3087 (permitting a petitioner to seek
judicial review of an adverse decision by the Secretary).
4 On February 21, 2020, a panel of this court issued an
order prudentially staying defendants' qualified-immunity appeal
-- not at issue in this appeal -- under Title III of PROMESA. On
July 9, 2020, this court subsequently entered an order clarifying
that the PROMESA stay applies only to the qualified-immunity appeal
and "[w]e express no view as to whether the PROMESA stay applies
to the district court's proceedings."
- 4 -
The magistrate judge also ordered the production of
documents.
• On August 18, the district court granted plaintiffs'
motion to compel and denied defendants' motion for
reconsideration of the August 10 order, stating that
defendants must comply with the magistrate judge's
August 10 order.
• On August 20, the district court entered an order again
denying defendants' motion for reconsideration and
stated:
The Court stresses the following: This
lawsuit is not against the Commonwealth nor
its instrumentality. It is a civil rights
action against Defendants in their personal
(and not official) capacities. As such,
PROMESA does not stay the litigation. The
fact that the Commonwealth Attorney General
has provided legal representation pursuant
to Law 9, moreover, does not convert the
action into one against the Commonwealth.
Law 9 benefits may be terminated at any
time, even after a verdict of liability.
See Guadalupe Baez v. Pesquera, 269 F. Supp.
3d 1 (D.P.R. 2017). Personal capacity
defendants sued alone cannot invoke PROMESA
as a shield to litigation prompted by civil
Rights violations.
• Also on August 20, the district court issued an order
confirming the discovery schedule and restating that the
August 10 and August 18 orders remain in effect.
On August 18, 2020, defendants filed a notice of
interlocutory appeal from the August 10 and August 18 orders.
After the district court issued its August 20 orders, defendants
filed an amended notice of appeal adding those two orders to their
appeal.
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II.
A. Standard of Review
We review de novo the district court's legal
determinations.5 See Colón-Torres v. Negrón-Fernández, 997 F.3d
63, 68 (1st Cir. 2021). The question in this appeal is a pure
question of law: whether the automatic stay provision in Title
III of PROMESA applies to this action. Thus, our review is
entirely de novo. See id.B. Analysis
Section 301(a) of PROMESA, 48 U.S.C. § 2161(a),
expressly incorporates Section 922 of the Bankruptcy Code -- which
provides for an automatic stay during bankruptcy proceedings to
adjust municipal debt -- into Title III proceedings. Section 922
stays:
the commencement or continuation, including
the issuance or employment of process, of a
judicial, administrative, or other action or
5 We have appellate jurisdiction in this case because the
order of a district court denying the PROMESA Title III automatic
stay is appealable as a final decision pursuant to 28 U.S.C.
§ 1291, or in the alternative, under the collateral order doctrine.
See Mun. of San Juan v. Puerto Rico, 919 F.3d 565, 574 (1st Cir.
2019).
The district court's first August 20 order directly
addressed the Title III automatic stay and held that it did not
apply to this action. The court held that "PROMESA does not stay
the litigation" because "[t]his lawsuit is not against the
Commonwealth nor its instrumentality[,]" and "[t]he fact that the
Commonwealth Attorney General has provided legal representation
pursuant to Law 9, moreover, does not convert the action into one
against the Commonwealth."
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proceeding against an officer or inhabitant of
the debtor that seeks to enforce a claim
against the debtor[.]
11 U.S.C. § 922(a)(1) (emphasis added).
The stay provision most familiar to bankruptcy
practitioners is found in Section 362.6 That stay applies to
proceedings brought directly against the debtor or its property.
11 U.S.C. § 362(a).7 Section 922, by contrast, is an additional
provision, specifically made applicable in municipal bankruptcies
and proceedings under Title III of PROMESA. It provides for a
stay of actions brought against, among others, officials of the
debtor (rather than the debtor or its property) where the actions
6 Section 301(a) of PROMESA also incorporates Section 362
of the Bankruptcy Code, the general stay provision. Section 362
stays:
the commencement or continuation, including
the issuance or employment of process, of a
judicial, administrative, or other action or
proceeding against the debtor that was or
could have been commenced before the
commencement of the case under this title, or
to recover a claim against the debtor that
arose before the commencement of the case
under this title[.]
11 U.S.C. § 362(a)(1).
7 In enacting these various provisions requiring an
automatic stay, Congress intended that the fundamental purpose of
the stay was to provide a "breathing spell" for debtors in
bankruptcy proceedings. In re Jefferson Cnty., 491 B.R. 277, 285
(Bankr. N.D. Ala. 2013); see also In re Lomas Fin. Corp., 117 B.R.
64, 67 (S.D.N.Y. 1990), remanded on other grounds, 932 F.2d 147(2d Cir. 1991); H.R. Rep. No. 95-595, at 340 (1977), reprinted in
1978 U.S.C.C.A.N. 5963, 6296–97.
- 7 -
"seek[] to enforce a claim against the debtor." Id. § 922(a)(1).
Under the Bankruptcy Code, a "claim" is a "right to payment"
whether or not it is "contingent" or "disputed." Id. § 101(5).
Section 922 applies where the action seeks to establish a right to
payment, even if contingent. The difference between Sections 362
and 922 "is the nominal target of the lawsuit or enforcement action
being stayed: Section 362 applies only to suits 'against the
debtor,' while Section 922 also stays actions against 'officer[s]
or inhabitant[s] of the debtor.'" Colón-Torres, 997 F.3d at 69
(alterations in original).
Plaintiffs concededly bring this action against
officials of the Title III debtor. They nevertheless suggest that
because they opted not to sue the debtor directly, one cannot
classify this action as one that "seeks to enforce a claim against
the debtor." But were that so, Section 922 would have little if
any role at all because actions brought directly against the debtor
are already stayed by Section 362. By its very existence,
Section 922 makes clear that for automatic stay purposes, an action
can seek to enforce a claim against a governmental debtor even if
it only does so indirectly.
This case provides an apt example: The complaint seeks
more than $30 million in damages, yet no party suggests that any
defendant is good for any substantial portion of that amount. Any
hope for meaningful recovery necessarily rests on the possibility
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that the Commonwealth will in some manner step into the shoes of
its officials. Moreover, by threatening public officials with
financial ruin for actions they took in the course of their duties,
the lawsuit generates a substantial pressure on the governmental
employer to provide a defense and to indemnify the official.
Plaintiffs protest that the Commonwealth has no
obligation to indemnify. Rather, any such indemnity is contingent
on an exercise of discretion not yet taken. But a "claim" under
Section 922(a)(1) includes "contingent" "right[s] to payment,"
whether "disputed" or "undisputed." 11 U.S.C. § 101(5). Here,
the suit arises from governmental actions taken by defendants.
The Commonwealth has already agreed to cover defense costs. As we
have explained, the sum of the damages requested make clear that
the action does indeed have as one of its targets the
Commonwealth's purse.
Section 922 was enacted to prevent creditors from
artfully pleading around the Section 362 automatic stay by bringing
an action against an officer or inhabitant of a municipality,
rather than the municipality itself. See Colón-Torres, 997 F.3d
at 69 n.5 ("The legislative history of Section 922 evinces
Congress's intent to plug a hole left open by Section 362."); see
also H.R. Rep. No. 95-595, at 398 ("The automatic stay provided
under Section 362 of Title 11 is incomplete for a municipality
because there is the possibility of action by a creditor against
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an officer or inhabitant of the municipality to collect taxes due
[to] the municipality.").8 Through the incorporation of Section
922 into PROMESA, Congress intended these protections to be
extended to the Commonwealth and its officers or inhabitants.9
State and municipality indemnification policies for
officials "further[] the important interest of attracting and
retaining competent officers, board members, and employees."
Monell v. Dep't of Soc. Servs., 436 U.S. 658, 713 n.9 (1978)
(Powell, J., concurring). Such policies permit "agency employees
8 In the analogous Section 362 automatic stay context,
courts have declined to "elevate form over substance" and have
consistently held that plaintiffs may not avoid the Section 362
automatic stay by artfully pleading an action against a non-debtor
defendant where the allegations were actually against the debtor.
In re Jefferson Cnty., 491 B.R. at 286 (collecting cases). In In
re Lomas Financial Corp., the district court agreed with the
bankruptcy court's conclusion that naming the debtor's officers in
the suit was merely a "transparent attempt . . . to end run the
automatic stay," and that the Section 362 stay applied to the
action against the officers based on the indemnification agreement
between the debtor and its officers, the harm to the debtor's
reorganization, and the potential for collateral estoppel. 117
B.R. at 66-68; see also In re Jefferson Cnty., 491 B.R. at 287
("[T]he fact that the Assured Complaint does not actually name the
County as a defendant is simply not controlling. . . . [T]he
County has an indemnification agreement with JPMorgan that could
make it responsible for any recovery Assured wins against
JPMorgan.").
9 Plaintiffs argue that defendant Juan A. Moldes-Rodríguez
is not a public employee entitled to Law 9 benefits. It is not
relevant whether Moldes-Rodríguez is a public employee employed by
PROIC. Moldes-Rodríguez, at a minimum, is an inhabitant of the
Commonwealth, and so the action against him for his performance of
public duties is eligible for the automatic stay. See 11 U.S.C.
§ 922, 48 U.S.C. § 2161(a). As explained above, a "claim" extends
to asserted rights of payments, even if contingent.
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to perform their official duties without fear of personal
liability, whether pursuant to state or federal law, so long as
the conduct is performed during the course of their employment."
Wiehagen v. Borough of N. Braddock, 594 A.2d 303, 306 (Pa. 1991);
see Burgos-Yantin v. Mun. of Juana Diaz, Civil No. 07-1146, 2013
WL 435203, at *2 (D.P.R. Jan. 2, 2013) ("One of the purposes that
Puerto Rico legislators had in mind when Law 9 was passed was to
protect public officials or employees who are sued in federal court
in their personal capacity.").
It is clear that if the Commonwealth had a mandatory
(rather than permissive) indemnification policy, the Section 922
automatic stay would apply. Cf. Colón-Torres, 997 F.3d at 73 &
n.10. In the related Chapter 9 municipal bankruptcy context,
courts have consistently found that mandatory indemnity policies
were dispositive on the automatic stay issue. See id. at 73 n.10;
see also Deocampo v. Potts, 836 F.3d 1134, 1144 n.13 (9th Cir.
2016) (noting that courts have "ruled that an indemnity obligation
triggers the automatic stay provisions of 11 U.S.C. §§ 362(a) &
922"); Williams v. Kenney, No. CIV S-07-0100, 2008 WL 3540408, at
*8 (E.D. Cal. Aug. 12, 2008) (holding that, even when a city is
"no longer a party," an action is "against the debtor" when the
city is "required to indemnify the employee for the amount of the
judgment or settlement"); In re City of Stockton, 484 B.R. 372,
376 (Bankr. E.D. Cal. 2012) (holding that, because the city had
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"undertaken [the individual officials'] defense" and would "be
required to pay the judgment," "the civil action against the
individuals '[sought] to enforce a claim against the debtor' within
the meaning of § 922(a)" (quoting 11 U.S.C. § 922(a)(1))).
Although a mandatory indemnification policy would be
dispositive on this issue, "courts have clarified that absolute
indemnity is not required" for the automatic stay to apply. In re
Jefferson Cnty., 491 B.R. at 289 (collecting cases). We agree
with the view taken by courts in Chapter 9 and Chapter 11
bankruptcy actions that a commitment to indemnity costs is not
required. See, e.g., id. (holding that "the 'possibility' of a
right of indemnification is sufficient"); Robert Plan Corp. v.
Liberty Mut. Ins. Co., No. 09-CV-1930, 2010 WL 1193151, at *4
(E.D.N.Y. Mar. 23, 2010) ("[G]iven the possibility that the
Officers had such an absolute right [of indemnification], the
Bankruptcy Court properly protected the estate by staying the
contempt case"); In re Fiddler's Creek, LLC, No. 10-BK-03846, 2010
WL 6618876, at *5 (Bankr. M.D. Fla. Sept. 15, 2010) (holding that
the existence of "potential" indemnity and contribution claims was
sufficient to implicate the automatic stay); see also In re Am.
Film Techs., Inc., 175 B.R. 847, 851-55 (Bankr. D. Del. 1994)
(holding that a court need not formally determine that a non-
debtor defendant is indemnified by the debtor to apply the
automatic stay).
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We do not need to accept a "possibility" or "potential"
for indemnification test in order to find error in the denial of
the automatic stay in this case. Law 9 provides that a
Commonwealth official sued in his personal capacity for alleged
civil rights violations "may request the Commonwealth of Puerto
Rico to provide him with legal representation, and to subsequently
assume the payment of any judgment that may be entered against his
person." P.R. Laws Ann. tit. 32, § 3085. Upon the official's
request and cooperation, id. § 3086, Law 9 provides:
[t]he Secretary of Justice shall determine in
which cases the Commonwealth shall assume
legal representation and, subsequently, after
considering the findings of the court or which
arise from the evidence presented, he shall
determine whether it is in order to pay the
full judgment imposed on the public officials,
ex-officials, employees or ex-employees
sued[.]
Id. § 3087. Law 9 further provides that its provisions "shall not
cover . . . acts or omissions incurred by an official": "[w]hen
such acts or omissions constitute a crime"; "[w]hen they occur
outside the scope of [an official's] official functions; "[w]hen
inexcusable negligence intervenes"; and "[w]hen a different state
of law has been established jurisprudentially by a final and
binding judgment." Id. § 3088.
In this case, the Secretary has granted legal
representation to defendants under Law 9 and is currently
litigating the case on their behalf. The Secretary has necessarily
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determined that defendants are not disqualified from
representation under P.R. Laws Ann. tit. 32, § 3088. Those
payments for legal representation show that it is far from
speculative that the Commonwealth would indemnify defendants
should any judgment be entered against them. Indeed, a purpose of
the Commonwealth's assumption of defense costs is to reduce the
risk that such a judgment would be entered against it.
Our result is consistent with other PROMESA cases in
which stays have been granted under Section 922.10 See, e.g.,
Peaje Invs., LLC v. FOMB (In re FOMB), 899 F.3d 1, 6 & n.2 (1st
Cir. 2018) (holding that the stay extends to a plaintiff's suit
against both the Commonwealth and its officers in their official
capacities for the diversion of revenue over which the plaintiff
held a lien).
III.
For the reasons stated above, we vacate the district
court's orders requiring discovery to proceed, reverse the
district court's denial of the stay, and order entry of the stay.
10 Our circuit in unpublished opinions has also
prudentially stayed several appeals in § 1983 civil rights cases
based on the Commonwealth's petition to restructure its debts.
See Pabon-Ortega v. Llompart-Zeno, No. 16-1599 (1st Cir. Jan. 24,
2018) ("In view of the petition to restructure its debts filed by
the Commonwealth of Puerto Rico, this appeal is stayed."); Besosa-
Noceda v. Capo-Rivera, No. 16-2117 (1st Cir. Jan. 23, 2018) (same);
Cano-Rodriguez v. De Jesus-Cardona, No. 16-1532 (1st Cir. Nov. 27,
2017) (same).
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-Concurring Opinion Follows-
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THOMPSON, Circuit Judge, concurring in the judgment.
This case presents a difficult matter of first impression. Does
the Commonwealth's agreement to provide representation trigger the
interests served by and the applicability of the PROMESA automatic
stay -- before the Commonwealth has committed to indemnify? This
quandary about the breadth of the stay in these circumstances --
cast against the balancing act of considering the importance of
providing judicial redress for civil rights violations without
thwarting any of PROMESA's critical debt-restructuring goals --
has been percolating for a while.11 In today's case, we resolve
it.
I support the same practical and procedural outcome as
my colleagues: The automatic stay under Title III of PROMESA is
applicable to the underlying 42 U.S.C. § 1983 action brought
against Defendants, who are officials sued in their personal
capacities only and represented by the Commonwealth of Puerto Rico
pursuant to the Commonwealth's representation and indemnification
statute, P.R. Laws Ann. tit. 32, §§ 3085-3092 ("Law 9").
But I would reach this outcome by a different analytical
route. Specifically, I would tether the PROMESA-stay-applies
While we've certainly had occasion to discuss the scope of
11
the relevant PROMESA stay provision in other matters, see Colón-
Torres v. Negrón-Fernández, 997 F.3d 63, 69-70 (1st Cir. 2021)
(collecting some examples and touching on -- but not reaching --
the stay issue we face today), we haven't yet had to reckon
directly with the stay as presented in the case now before us.
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conclusion only to the fact that Law 9 legal representation
benefits have been conferred, leaving out of it the speculative
possibility of an eventual judgment against Defendants that the
Secretary of Justice then eventually, in his or her discretion,
may deem indemnifiable pursuant to Law 9.
So I concur in the ultimate judgment, but write
separately to explain this reasoning.
PROMESA's Automatic Stay
PROMESA's automatic stay "derives from two sections of
the Bankruptcy Code, which are expressly incorporated into the
first section of Title III," id. (citing 48 U.S.C. § 2161):
Section 362, the general stay provision, stays "the commencement
or continuation . . . of a judicial . . . proceeding against the
debtor that was or could have been commenced before the
commencement of the [bankruptcy] case . . . or to recover a claim
against the debtor that arose before the commencement of the
[bankruptcy] case," 11 U.S.C. § 362(a)(1); and Section 922 ("in
addition to the stay provided by section 362") stays "the
commencement or continuation . . . of a judicial, administrative,
or other action or proceeding against an officer or inhabitant of
the debtor that seeks to enforce a claim against the debtor," id.§ 922(a)(1).
As my colleagues in the majority point out, we've
observed that "[t]he difference between the[se] two provisions is
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the nominal target of the lawsuit or enforcement action being
stayed" -- while "Section 362 applies only to suits 'against the
debtor,' . . . Section 922 also stays actions against 'officer[s]
or inhabitant[s] of the debtor.'" Colón-Torres, 997 F.3d at 69
(quoting 11 U.S.C. §§ 362(a)(1), 922(a)(1)). But there's another
important difference: Section 922 applies to claims that arose
both pre-petition and post-petition, see 11 U.S.C. § 922(a)(1),
whereas Section 362 applies to pre-petition claims only, see id.§ 362(a)(1). Here, Defendants argue that the Section 922 automatic
stay is what applies to Plaintiffs' case.12
The Title III Court issued a June 2017 order ruling,
among other things, that pursuant to Section 922, "all persons
. . . are hereby stayed, restrained, and enjoined from commencing
or continuing any judicial, administrative, or other proceeding
against an officer or inhabitant of the Debtors . . . that seeks
to enforce a claim against the Debtors," and that "the protections
of Bankruptcy Code section 922(a)(1) with respect to officers and
12It is not entirely clear whether the alleged conspiracy was
formed before or after the Commonwealth entered Title III
restructuring in May 2017. But based on the factual details
offered in support of the complaint's allegations -- "[a]fter the
huge and unexpected economic losses occurring as a result of
hurricanes Irma and Maria in September 2017, the co-defendants
engaged in a civil conspiracy to deprive Integrand and its
stockholders of rights, privileges and immunities protected by the
U.S. and Puerto Rico constitutions and federal and state laws,"
for example -- it seems all of these retaliatory acts that caused
Plaintiffs harm transpired post-petition.
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inhabitants of the Debtors" also apply to actions against the
Commonwealth's "officers in both their official and personal
capacities." Order Pursuant to PROMESA Section 301(a) and
Bankruptcy Code Sections 105(a), 362(a), 365, and 922 Confirming
(I) Application of the Automatic Stay to Government Officers,
Agents, and Representatives, (II) Stay of Prepetition Lawsuits,
and (III) Application of Contract Protections ¶¶ 4, 5, In re Fin.
Oversight & Mgmt. Bd., No. 17-03283-LTS (D.P.R. June 29, 2017),
ECF No. 543 (hereinafter "Title III Court's Stay Order").
"[I]n the ordinary bankruptcy context, the automatic
stay is a 'fundamental protection' that is meant to offer the
debtor 'breathing room during the period of financial reshuffling'
and 'protect[] the debtor's assets from disorderly, piecemeal
dismemberment outside the bankruptcy proceedings.'" Mun. of San
Juan v. Puerto Rico, 919 F.3d 565, 577 (1st Cir. 2019) (quoting In
re Smith, 910 F.3d 576, 580 (1st Cir. 2018)). As to PROMESA's
automatic stay, the Commonwealth's "fiscal emergency" prompted
Congress to observe explicitly that "[a] comprehensive approach to
fiscal, management, and structural problems [was] necessary," and
a stay is "essential to stabilize the region for the purposes of
resolving" the financial crisis. 48 U.S.C. § 2194(m)(3)-(5). The
automatic stay's purposes, according to Congress, include
providing the Commonwealth "with the resources and the tools it
needs to address an immediate existing and imminent crisis" and
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giving the Commonwealth "a limited period of time during which it
can focus its resources on negotiating a voluntary resolution with
its creditors." Id. § 2194(n)(1), (2). As described in the
"automatic stay" section of PROMESA, the ultimate goal is to
resolve the Commonwealth's "longstanding fiscal governance issues"
so it can "return to economic growth." Id. § 2194(n)(5).
Law 9
"[A]n idiosyncratic Puerto Rico [representation and]
indemnity law," Whitfield v. Mun. Of Fajardo, 564 F.3d 40, 42 (1st
Cir. 2009), Law 9 permits a Commonwealth official (current or
former) sued in his personal capacity for alleged civil rights
violations to ask the Commonwealth "to provide him with legal
representation, and to subsequently assume the payment of any
judgment that may be entered against his person," P.R. Laws Ann.
tit. 32, § 3085.
To secure representation under Law 9, one must first
apply (in writing) to the Secretary of Justice ("the Secretary"),
then offer up good-faith cooperation with any investigation that
follows. See P.R. Laws Ann. tit. 32, § 3086. The Secretary
determines whether the Commonwealth will assume legal
representation. Id. § 3087. If a judgment is ultimately rendered,
the Secretary then "shall determine whether it is in order to pay
the full judgment imposed on the public officials." Id.; see also
Whitfield, 564 F.3d at 43.
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Law 9 explains that its provisions "shall not cover" the
following "acts or omissions incurred by an official": "[w]hen
such acts or omissions constitute a crime"; "[w]hen they occur
outside the scope of [an official's] official functions; "[w]hen
inexcusable neglect intervenes"; "[w]hen a different state of law
has been established jurisprudentially by a final and binding
judgment." P.R. Laws Ann. tit. 32, § 3088. In addition, "the
Commonwealth is not required to pay indemnity when there is a
punitive damages award or judgment." Acevedo-Luis v. Pagán, 478
F.3d 35, 39 (1st Cir. 2007). Indeed, the Secretary retains
discretion in determining whether indemnification will be
provided: In this case, the Secretary's letter granting
representation explained that a grant of indemnification would be
subject to the Secretary's evaluation of proven facts, defense
attorneys' recommendations, the circumstances of the case, and any
evidence or other information the Department of Justice compiles
-- all of this is used to determine entitlement "to the benefit of
payment of judgment."
Analysis13
There is no doubt that the legal issue presented here is
a tricky one, made all the more difficult in view of the competing
13 I pause here to note that I agree with the majority's
conclusion that the district court's order denying the stay's
applicability constituted a final order pursuant to 28 U.S.C.
§ 1291. See Mun. of San Juan, 919 F.3d at 574. Given that the
- 21 -
policy interests of providing judicial redress in the face of
possible civil rights violations and honoring PROMESA's pressing
debt-restructuring objectives.
But I agree with my colleagues in the majority that the
answer is that the stay applies. I just disagree as to the basis
for its application. I would limit it to this: When, as here, a
personal-capacity-only suit is filed against officers or
inhabitants of the Commonwealth, and those defendants are then
granted Law 9 representation benefits by the Commonwealth, the
suit's litigation should be stayed under Title III of PROMESA as
the suit thus functionally and constructively involves an action
or proceeding that will seek to enforce a claim against the debtor
Commonwealth. Such defendants will receive legal representation
from the Commonwealth, meaning the Commonwealth must pay the
lawsuit's defense costs, fees, and other related expenses as a
result. Based on PROMESA's language and the clear policy
underpinning it, that is enough I believe to demonstrate that the
just-described situation is the type of case to which the stay
should automatically apply.
Here's the step-by-step of how I'd get there.
parties spilled quite a bit of ink arguing over jurisdiction, I
would have delved more deeply into their arguments. But, in the
interest of efficiency and because the end result is the same, I
leave it at "I agree we have jurisdiction over this final order."
- 22 -
PROMESA incorporated Section 922, which stays "the
commencement or continuation . . . of a judicial, administrative,
or other action or proceeding against an officer or inhabitant of
the debtor that seeks to enforce a claim against the debtor." 11
U.S.C. § 922(a)(1) (incorporated into PROMESA by 48 U.S.C. § 2161).
And the Title III Court's Stay Order makes it amply clear that all
litigation against the Commonwealth is stayed, and Section 922's
protections with respect to officers and inhabitants of the
Commonwealth apply in all respects to the officers in both their
official and personal capacities with respect to actions whereby
parties pursuing such actions seek to enforce claims against the
Commonwealth.
Section 101(5) of the Bankruptcy Code, as incorporated
in PROMESA, defines "claim," as a
(A) right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of
performance if such breach gives rise to a right to
payment, whether or not such right to an equitable remedy
is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured, or unsecured.
This definition of "claim" "is to be read very broadly and can
include claims that are uncertain and difficult to estimate."
Colonial Sur. Co. v. Weizman, 564 F.3d 526, 529 (1st Cir. 2009)
(citing Maynard v. Elliott, 283 U.S. 273, 275-78 (1931); In re THC
- 23 -
Fin. Corp., 686 F.2d 799, 802-03 (9th Cir. 1982)). Congress
deliberately amended the Code "to permit 'the broadest possible
relief in the bankruptcy court,' . . . and to ensure that
'virtually all obligations to pay money [would] be amenable to
treatment in bankruptcy.'" In re Hemingway Transp., Inc., 954
F.2d 1, 8 (1st Cir. 1992) (first quoting In re Black, 70 B.R. 645,
649 (Bankr. D. Utah 1986); then quoting In re Robinson, 776 F.2d
30, 34 (2d Cir. 1985), rev'd on other grounds, 479 U.S. 36 (1986)).
Then Law 9 pops up. It's clear that a decision by the
Secretary to confer Law 9 representation puts the Commonwealth on
the hook to foot a bill. Indeed, such a decision commits the
Commonwealth to incurring all the costs of litigating the suit it
has agreed to defend, and the defense will be funded by the
Commonwealth's treasury.14
By my lights, such an agreement to pay those Law 9
benefits triggers the interests summed up by Congress when it
enacted PROMESA and incorporated the Code's stay provisions. By
incorporating into Title III the stay provisions of Section 922,
Congress evinced a clear policy preference for deploying the
automatic stay as applicable, all with an eye towards facilitating
the debt-restructuring process the Commonwealth badly needs.
14Yes, Law 9 representation benefits can, under some
circumstances, be revoked. See P.R. Laws Ann. tit. 32, § 3087a.
That does not alter my reasoning, though, since the litigation
benefits have been committed to here and have not been revoked.
- 24 -
Congress hardly hid the ball on the spiraling-financial-crisis-
driven concern that prompted it to fashion PROMESA; truth be told,
that's the whole point of it. The Commonwealth's "fiscal
emergency" is dire, so Congress came up with "[a] comprehensive
approach" to solving the fiscal problems, and the stay was very
much meant to be part of that plan -- "essential," in fact, to
helping resolve the financial crisis. 48 U.S.C. § 2194(m)(3)-(5).
Congress was equipping the Commonwealth with yet another classic
bankruptcy tool for its arsenal while it underwent the critical
debt-restructuring process it needed to fix its fiscal problems
and "return to economic growth." Id. § 2194(n)(5); see also Mun.
of San Juan, 919 F.3d at 577 (emphasizing that an automatic stay
is a "'fundamental protection' that is meant to offer the debtor
'breathing room during the period of financial reshuffling' and
'protect[] the debtor's assets from disorderly, piecemeal
dismemberment outside the bankruptcy proceedings'" (quoting In re
Smith, 910 F.3d at 580)).
By my reading, the stay's applicability isn't just about
whether a party (like Plaintiffs) seeks to enforce a claim against
the Commonwealth; rather, it's about whether the "action or
proceeding" seeks to enforce a claim against the Commonwealth.
See 11 U.S.C. § 922(a)(1) (staying "the commencement or
continuation . . . of a judicial, administrative, or other action
or proceeding against an officer or inhabitant of the debtor that
- 25 -
seeks to enforce a claim against the debtor") (emphases added).
That, as I see it, is what is happening here. Construing Section
101(5)'s "claim" language "very broadly," Weizman, 564 F.3d at
529, a grant of Law 9 benefits necessarily imbues a judicial action
or proceeding with a claim that will seek to draw on the
Commonwealth's fisc in the form of litigation defense expenses,
and the Commonwealth's limited funds are supposed to be protected
and preserved while the bankruptcy proceedings continue, per
PROMESA's just-recapped Congressional imperatives. That
protection is accomplished by staying proceedings that involve
such a claim.
All of this guides me to and buttresses the conclusion
that this proceeding against officers of the Commonwealth, who are
represented by the Commonwealth pursuant to Law 9, functionally
and constructively will seek to enforce a claim against the
Commonwealth, bringing the entire case within the scope of Section
922 and triggering the interests served by and the applicability
of the automatic stay.
There are some additional cases and concepts that guided
my thinking on this. This being a matter of first impression
involving the Commonwealth's unique Law 9 in conjunction with a
one-of-a-kind debt-restructuring statute, there isn't a lot that's
directly on point. But the related (even if distinguishable)
- 26 -
resources I studied still highlight some important considerations
that inform this reasoning.15
Consider Colón-Torres, where this court explained that
an action "will be stayed if it is 'against an officer or
inhabitant of the debtor' and 'seeks to enforce a claim against
the debtor.'" 997 F.3d at 73 (quoting 11 U.S.C. § 922). "It is
hardly evident from that text," the court cautioned, "that an
action against an officer in his individual capacity -- in which
the Commonwealth need not get involved and indeed might choose not
to get involved -- qualifies." Id. (citing Deocampo v. Potts, 836
F.3d 1134, 1138 (9th Cir. 2016) (observing the "oddity" of the
fact that a municipal bankruptcy could, under Section 362, stay an
action when the city wasn't a party to it)).16 But there, unlike
15One of the distinguishing features of some of these cases
is indemnification, which I do not rely upon at all in my analysis.
After I go through this additional helpful authority, I'll explain
why I'm averse to linking today's stay-applies conclusion to
indemnification. Not only do I believe it is unnecessary to do so
-- my approach would spare us the need to do it -- but also getting
into it is problematic and necessitates speculation.
Deocampo, it should be noted, involved some of the themes,
16
policies, and theories discussed here. However, that discussion
came in the context of a very different procedural moment -- a
municipality's bankruptcy plan of adjustment and whether such plan
should discharge a judgment entered after a jury rendered a verdict
in favor of the plaintiff against the municipality's officers in
the excessive-force case against them. 836 F.3d at 1136. The
officers had argued the judgment constituted a claim against the
municipality that was "subject to adjustment under the Plan," id.
at 1140, but the Ninth Circuit concluded that the mandatory
indemnification statute at issue there "[did] not render a judgment
or concomitant fee award against an indemnifiable municipal
employee a liability of the municipal employer for purposes of
- 27 -
here, the Commonwealth had not yet gotten "involved" by bestowing
any Law 9 benefits, so the Colón-Torres situation would've involved
pure speculation across the Law-9 board about what might or might
not happen, meaning the stay's applicability was "hardly evident."
997 F.3d at 73. Here, by contrast, the Commonwealth's involvement
is undisputed: It has committed to paying defense costs.17
adjusting or discharging the debts of a Chapter 9 debtor," id. at
1143 (emphasis added). That is not the situation here. Nothing
in my analysis would have affected the means by which Plaintiffs
could eventually pursue their claims and seek to enforce any
resulting judgment, possible future debt discharges
notwithstanding. Rather, my inquiry has been trained on whether
bankruptcy protection and relief in the form of the automatic stay
is triggered due to the Law 9 benefits conferred. Cf. id. at 1144
n.13 (disagreeing that the discharge plan's definition of claim
encompasses the judgment against the officers and distinguishing
cases where an indemnity obligation triggered an automatic stay
because "the discharge provisions are narrower than the automatic
stay provisions, the broad reach of which furthers their purpose
to freeze the status quo at the time a petition is filed," for
example).
17 Colón-Torres also went on to observe that
the legislative history of § 922, which notes that the
provision accounts for 'the possibility of action by a
creditor against an officer or inhabitant of the
municipality to collect taxes due the municipality,'
H.R. Rep. No. 95-595, at 398 (1977), does not itself
suggest that the stay would apply to an individual
capacity officer suit, given its focus on a very
different type of action: one that targets the
municipality's treasury directly.
997 F.3d at 73. For one thing, actions involving creditors are
certainly quite common -- it's bankruptcy -- but creditor-driven
actions aren't the only possible action that could trigger Section
922, particularly in the PROMESA context. For another, I've
already said the Law 9 benefits in play here have the functional
effect of bootstrapping the Commonwealth's treasury into the case.
So while the pre-PROMESA legislative history of Section 922 perhaps
- 28 -
And then there's In re City of Stockton, Cal., 484 B.R.
372 (Bankr. E.D. Cal. 2012), which both parties squabble over in
terms of its import here. Stockton was a municipal bankruptcy
case involving a request to lift a Section 922 stay on a wrongful-
discharge suit brought against the City of Stockton, California
and two city officers in both their personal and official
capacities. Id. at 375-76. The bankruptcy court concluded there
was no cause to grant relief from the Section 922 stay. Id. at
379. It explained that, "[t]o the extent that there is a judgment
against the individuals, the City, having undertaken their
defense, will be required to pay the judgment." Id. at 376
(citing Cal. Gov't Code §§ 825 & 825.2). "Hence," the court
continued, "the civil action against the individuals 'seeks to
enforce a claim against the debtor' within the meaning
of § 922(a)." Id. (quoting 11 U.S.C. § 922(a)(1)). The Stockton
court emphasized that "[t]he City has also demonstrated that active
prosecution of the civil action will constitute a financial burden
to the City," id. at 378, and more specifically that "the expense
of further litigation against them will deplete the coffers of the
City treasury," id. at 379. Ultimately, this prompted the court's
conclusion that "[t]he § 922(a) stay is designed to stop such
"does not itself suggest" Section 922 would apply to today's case,
for these reasons and the others I've discussed -- and continue to
discuss -- it does apply. Id.
- 29 -
litigation in its tracks." Id. And yes, because it had undertaken
the defense of these various defendants, the City would be
"generally obliged to pay a judgment against them in the civil
action." Id. (citing Cal. Gov't Code § 825).
Plaintiffs maintain Stockton is "inapposite" because the
officials there were sued both in their individual and official
capacities, and, unlike the Commonwealth's Law 9, California's
system involves a "mandatory payment obligation" when it comes to
indemnification. But Defendants say Stockton is spot-on because
the legal defense of the city officials would come at great expense
to the city, and Law 9 and California's statute are actually quite
similar (with the California statute arguably affording some
discretion to the city to refuse to offer representation and
indemnification).
It's true that Stockton is hardly a perfect one-to-one
with our case -- nothing is, that's why it's a matter of first
impression. That said, its distinctions do not prevent me from
viewing Stockton as instructive on a few policy points. Indeed,
bypassing the indemnification pieces and the possible Law-9-esque
discretion California might have when it comes to actually
indemnifying, Stockton's helpfulness lies in the weight it places
on representation having been promised, the financial burden on
the municipality that legal defense represents, and how Section
922 operates "to stop such litigation in its tracks." 484 B.R. at
- 30 -
379. In those ways, Stockton and the policy considerations that
drove it support the approach I would take in the instant matter.
Then consider a bankruptcy and stay concept that came up
quite a bit as I studied the issues in this case: identity of
interest. There are lines of bankruptcy cases explaining that,
sometimes, a stay can be imposed to protect a non-debtor when there
exists a so-called "identity of interest" between a debtor and the
non-debtor such that the debtor, though perhaps not named or
obviously targeted by a suit or other proceeding, is nonetheless
a real defendant and any resulting judgment against the non-debtor
would inevitably affect the debtor directly. See, e.g., A.H.
Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)
(reasoning that a Section 362 stay may stay proceedings against a
non-debtor codefendant when "there is such identity between the
debtor and the third-party defendant that the debtor may be said
to be the real party defendant and that a judgment against the
third-party defendant will in effect be a judgment or finding
against the debtor," like when a non-debtor codefendant "is
entitled to absolute indemnity by the debtor on account of any
judgment that might result against them in the case"); In re
Slabicki, 466 B.R. 572, 580 (B.A.P. 1st Cir. 2012) (similar); In
re N. Star Contracting Corp., 125 B.R. 368, 370-71 (S.D.N.Y. 1991)
(also similar, explaining that "Robins and other courts have
recognized that an identity of interest exists between a debtor
- 31 -
and a third party non-debtor when a right to indemnification
exists," and "[t]hese courts reason that a special circumstance
exists because a judgment against the non-debtor will affect
directly the debtor's assets").
I do not flag these cases because I want to suggest they
should control the outcome here or are factually similar. In fact,
these cases are all quite different from ours in various important
ways, not the least of which is that they predate PROMESA's
enactment and their focus is on mandatory indemnification. See
Colón-Torres, 997 F.3d at 73-74 & n.10 (explaining that no
mandatory obligation to indemnify was at issue, but collecting and
comparing guaranteed indemnification cases).18 However, I draw
attention to them because this "identity of interest" concept and
the policy considerations that animate it are clearly at play in
the case now before us. There is no compulsory, absolute
18"In contrast to Puerto Rico's permissive indemnification
policy, the courts that have considered the issue in otherwise
similar cases to ours have held that other municipalities'
guaranteed indemnification policies were dispositive." Colón-
Torres, 997 F.3d at 73 n.10 (citing Deocampo, 836 F.3d at 1144
n.13 (noting that some courts have "ruled that an indemnity
obligation triggers . . . 11 U.S.C. §§ 362(a) & 922"); Williams v.
Kenney, No. CIV S-07-0100, 2008 WL 3540408, at *8 (E.D. Cal. Aug.
12, 2008) (finding an action is "against the debtor" if a city
must "indemnify the employee for the amount of the judgment or
settlement" -- even when the city is "no longer a party");
Stockton, 484 B.R. at 376 (reasoning that the city had "undertaken
[the individual officials'] defense" and would "be required to pay
the judgment," and therefore "the civil action against the
individuals 's[ought] to enforce a claim against the debtor' within
the meaning of § 922(a)" (quoting 11 U.S.C. § 922(a)(1)))).
- 32 -
indemnification obligation happening here. But a similar "must
pay" dynamic is in the mix because the Commonwealth, under Law 9,
has committed to paying defense costs, and Defendants thus have a
"right" to something that will be funded straight out of the
Commonwealth's treasury. Practically, cast against the reasoning
I've just laid out, that has the same "special circumstance[s]"
effect as promising to pay a judgment since it "will affect
directly the debtor's assets." In re N. Star Contracting Corp.,
125 B.R. at 370-71. Following this reasoning to its logical
conclusion: By virtue of the Law 9 benefits Defendants have been
conferred, some identity of interest exists between the
Commonwealth and Defendants, and that reinforces my determination
that the stay applies on the basis of the legal representation
benefits alone.
The Majority and Indemnification
As I've explained, my approach would obviate the need to
delve into indemnification as the reason for operation of the
automatic stay here. I simply don't think we need to go there.
But my colleagues did, so I'll say a few words specifically about
some snags I perceive in their approach.
For one thing, the majority explains that the difference
between Sections 362 and 922 comes down to the target of the action
-- Section 362 is against a debtor, but Section 922 stays actions
against officers and inhabitants of the debtor. True. But that's
- 33 -
not the only difference. Section 922 applies to claims that arose
both pre-petition and post-petition, see 11 U.S.C. § 922(a)(1),
whereas Section 362 applies to pre-petition claims only, see id.§ 362(a)(1). The timeline here, see supra n.12, necessitates
applicability of Section 922 and Section 922 alone -- regardless
of whether the target of the suit is the debtor (directly or, as
the majority suggests, indirectly) or officials of the debtor.
I'm not convinced it is accurate to say that Section 922's role is
about capturing actions brought against officials of the debtor or
indirect claims against that debtor since actions directly against
the debtor are covered by Section 362. If the complained-of
conduct arose post-petition, as it did here, Section 922's stay is
the only option.
For this reason, I'd stay away from Section 362
altogether as providing any basis for today's reasoning.
Ditto Law 9 indemnification. As I read Law 9, there are
separate processes for applying for Law 9 representation versus
indemnity -- this is clear on the face of the statute and, as a
practical matter, there is a temporal component to it that requires
the processes to be totally distinct (necessarily, legal
representation would be granted before a maybe-indemnifiable
judgment would arise). Thus, and as we've seen, representation
and indemnification do not necessarily go hand-in-hand -- an
individual may be entitled to legal representation under Law 9,
- 34 -
but a grant of representation does not mean the individual
ultimately will be indemnified. See P.R. Laws Ann. tit. 32, § 3085(stating that a Commonwealth employee "may request the
Commonwealth of Puerto Rico . . . to subsequently assume the
payment of any judgment that may be entered against his person");
see also, e.g., Acevedo-Luis, 478 F.3d at 39–40 (approving a lower
court's conclusion that "indemnity under Law 9 is neither required
nor always available"); Estate of Radamés Tejada v. Flores, 596 F.
Supp. 2d 205, 219 (D.P.R. 2009) ("The mere fact that the defendant
is represented by Commonwealth counsel does not mean the government
will satisfy the verdict under Law 9. Law 9 simply provides the
Secretary of Justice discretion to indemnify officials.").
Here, Defendants have so far been granted representation
benefits only. By law, see P.R. Laws Ann. tit. 32, § 3085(explaining that "any judgment that may be entered" might be
subject to indemnification), no indemnification has been promised
yet, nor might it ever come to pass. There are plenty of variables
that could crop up that would lead to a no-indemnity determination
by the Secretary on an eventual judgment. Remember, Law 9 warns
that it "shall not cover" certain "acts or omissions," like "[w]hen
such acts or omissions constitute a crime" or "[w]hen they occur
outside the scope of [a defendant's] official functions." Id.§ 3088. And "the Commonwealth is not required to pay indemnity
when there is a punitive damages award or judgment." Acevedo-
- 35 -
Luis, 478 F.3d at 39. On top of that, the Secretary retains
considerable discretion in determining whether indemnification
will be covered by the Commonwealth. Recall that the Secretary's
letter granting representation made that abundantly clear, warning
that any indemnification petition would be subject to the
Secretary's evaluation of proven facts, defense attorneys'
recommendations, the circumstances of the case, and any evidence
or other information the Department of Justice compiles -- all of
this will be used to determine entitlement to "the benefit of
payment of judgment."
So I disagree with my colleagues when they say "payments
for legal representation show that it is far from speculative that
the Commonwealth would indemnify the defendants should any
judgment be entered against them." As I see it, the processes for
obtaining representation versus indemnification are entirely
distinct, and an ocean of (at this juncture, unknowable) variables
lies between a grant of representation and a grant of
indemnification.
I recognize that Defendants are not the first to maintain
that Law 9 indemnification "most probably" would result in the
wake of an adverse judgment. See, e.g., Colón-Torres, 997 F.3d at
73 (noting the appellant's argument that the Secretary is
"generally empower[ed]" to pay for judgments and it will do exactly
that in the "vast majority" of cases (cleaned up)). That may well
- 36 -
be. But my preference is not to chain today's outcome to the
possibility of future indemnification. It's simply too
speculative and unknowable whether indemnification would actually
follow.
Now, I agree with my colleagues "that if the Commonwealth
had a mandatory (rather than permissive) indemnification policy,
the Section 922 automatic stay would apply." But that's not the
case. And if legal defense costs had not been conferred pursuant
to Law 9, I might feel differently about some of the analysis the
majority stakes out because that important factual distinction
would require a different approach to this matter. And indeed,
that's actually what happened in the cases the majority cites:
Without any other concrete draw on a debtor's treasury serving as
a claim against the debtor, left with nothing else to which they
could anchor the "should a stay apply" analysis, those courts
applied the law to the possibility indemnification would
ultimately result.19 We don't need to play that guessing game
19I'd also point out that the majority, quoting In re
Jefferson County, 491 B.R. 277, 289 (Bankr. N.D. Ala. 2013),
indicates these courts have said "'absolute indemnity is not
required' for the automatic stay to apply." By my reading, though,
that's not it. In re Jefferson County said the Section 362(a)(1)
stay generally was available only to the debtor, but could be
extended to non-bankrupt defendants only if "unusual
circumstances" were present. Id. at 284-85, 288, 289; see also
A.H. Robins Co., Inc., 788 F.2d at 999. So really, what "courts
have clarified" is "that absolute indemnity is not required for
the unusual circumstances exception to apply," not, as the majority
says, for the stay itself to apply. In re Jefferson Cnty., 491
- 37 -
here, which is why I'd approach the matter as I've laid out. And,
truth be told, even the policies underlying the reasoning in those
cases could be read to support my approach -- they rely on the
idea that "adverse economic consequences" to a debtor's estate
would justify application of the stay. See, e.g., Robert Plan
Corp. v. Liberty Mut. Ins. Co., No. 09-CV-1930, 2010 WL 1193151,
at *3 (E.D.N.Y. Mar. 23, 2010). Hefty legal bills would certainly
fit that description.
My final reservation about the majority's tack is its
conclusion that the result it reaches "is consistent with other
B.R. at 289. This triggers the need to discuss what would
constitute "unusual circumstances" such that the stay could be
extended to apply to this case. Id. at 284 (explaining that
unusual circumstances have been found "(1) when an indemnification
or contribution relationship creates an identity of interests
between the debtor and the non-debtor defendant; (2) when the
proceeding imposes a substantial burden of discovery on the debtor;
or (3) when the proceeding would have a potential preclusive effect
that forces the debtor to participate in the proceeding as if the
debtor were a party"). The current analysis misapplies this non-
binding precedent, skipping this step and jumping straight to "the
stay therefore applies." Cf. In re Am. Film Techs., Inc., 175
B.R. 847, 851-55 (Bankr. D. Del. 1994) (cited by the majority for
the proposition that a court need not formally determine that a
non-debtor defendant is indemnified by the debtor to apply the
automatic stay, when the case, as In re Jefferson County described
it, 491 B.R. at 289, explains that "a court need not formally
determine that a non-debtor defendant is indemnified by the debtor
to apply the 'unusual circumstances' exception" (emphasis added));
see also In re Fiddler's Creek, LLC, No. 10-BK-03846, 2010 WL
6618876, at *5 (Bankr. M.D. Fla. Sept. 15, 2010) (same problem as
just described).
Indeed, it's the finding of unusual circumstances that would
warrant application of the (Section 362(a)(1)) stay.
- 38 -
PROMESA cases in which stays have been granted under Section 922."
In indicating as much, the majority first cites Peaje Investments,
LLC v. FOMB, 899 F.3d 1, 6 & n.2 (1st Cir. 2018), but that case
involved a suit against the Commonwealth debtor itself, and it
also named Commonwealth officers in both official and personal
capacities. Not quite what we have in this case. And the majority
also points to our circuit's practice of prudentially staying
appeals in § 1983 cases based on the Commonwealth's petition to
restructure its debt. To me, prudential stays and automatic stays
are horses of completely different colors, so our circuit's
prudential-stay custom doesn't move the needle for me.
Wrap-Up
No matter how you slice it, this difficult case forced
a balance of competing considerations and policies. The result to
Plaintiffs is tinged with some apparent unfairness: Plaintiffs
carefully and permissibly styled their lawsuit as one that was not
being brought against the Commonwealth or any official-capacity
Defendants, and it was not Plaintiffs' decision to involve the
Commonwealth and its treasury by invoking Law 9.20 So yes, at the
20 I am mindful that my colleagues feel differently about
this, i.e., they suggest Plaintiffs clearly meant to involve the
Commonwealth -- no one has said Defendants could cover $30 million
in requested damages, the majority says, and where else could
"[a]ny hope for meaningful [monetary] recovery" come from? In my
view, it's premature to consider this in the "should the stay
apply" calculus. Defendants may well be "good for" a significant
judgment; we simply don't know yet. Litigation of this case is in
- 39 -
outset of the case, I can see why Plaintiffs would assert that the
case "present[ed] no impact on the [Commonwealth's] bankruptcy."
But now, with the Commonwealth having committed to paying Law 9
benefits and thereby bringing the matter within the scope of the
automatic stay for the many reasons I just explained, quite the
opposite is true.21
Conclusion
For these reasons, I concur in the judgment, though I'd
reach the same result by the above-described route.
its infancy (and about to be stayed anyhow), and there is no
telling what an actual damages award (if any) would look like.
Plaintiffs are entitled to fashion their suit and demand for relief
however they like; it doesn't mean they'll be successful.
21 Plaintiffs, in one last attempt to highlight what they
perceive as Law 9's inefficacy, direct our attention to Rivera
Carrasquillo v. Bhatia-Gautier, No. 13-cv-1296, slip op. at 12-23
(D.P.R. Feb. 24, 2022) (Besosa, J.), ECF No. 456, which offers a
compelling history of Law 9's origin and use, cast against the
backdrop of the Commonwealth's high volume of political
discrimination cases and its current financial crisis. Add to
that the difficult spot all of that puts complainants in when it
comes to styling pleadings and seeking (attainable) relief from
the courts. But that interesting discussion does not alter my
reasoning. Nor, in fact, did it control the district court's
decision in Rivera Carrasquillo, which denied a motion to compel
settlement payment by individual defendants who enjoyed Law 9
indemnification benefits. See id. at 30; see also id. ("Law 9 is
a relic from the past, in need of reform or elimination to serve
the current needs of Puerto Rico. The Court is bound, however, by
the law. The law in this action requires the Commonwealth of
Puerto Rico to pay the settlement amounts."). The district court
may very well be correct in its observations. But the law is the
law, and the fact remains that Law 9 benefits were conferred in
this case.
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