Víctor J. Salgado & Assocs. Inc. v. Cestero-Lopategui
| Decision Date | 12 May 2022 |
| Docket Number | 20-1855 |
| Parties | 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. |
| Court | U.S. Court of Appeals — First Circuit |
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.
Before Lynch, Thompson, and Kayatta, Circuit Judges.
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.
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 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 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 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.
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.
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 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 "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) (quoting 11 U.S.C. §§ 362(a)(1), 922(a)(1) ).
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 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 (); see also H.R. Rep. No. 95-595, at 398 ().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
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