Mercado-Boneta v. Administracion del Fondo de Compensacion al Paciete Through Ins. Com'r of Puerto Rico, MERCADO-BONETA

• Decision Date: 01 August 1997
• Docket Number: No. 97-1354,MERCADO-BONETA,97-1354
• Citation: 125 F.3d 9
• Parties: Manuel, et al. Plaintiffs, Coappellants, DR. Elliot M. Fernandez Codefendant, Coappellant v. ADMINISTRACION DEL FONDO DE COMPENSACION AL PACIENTE Through the INSURANCE COMMISSIONER OF PUERTO RICO, Codefendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 9

125 F.3d 9

Manuel MERCADO-BONETA, et al. Plaintiffs, Coappellants, DR.

Elliot M. Fernandez Codefendant, Coappellant v. ADMINISTRACION DEL FONDO DE COMPENSACION AL PACIENTE Through

the INSURANCE COMMISSIONER OF PUERTO RICO,

Codefendant, Appellee.

No. 97-1354.

United States Court of Appeals, First Circuit.

Heard Aug. 1, 1997.

Decided Sept. 10, 1997.

Alberto J. Perez-Hernandez, Guaynabo, PR, with whom Rafael E. Garcia-Rodon, Hato Rey, PR, was on brief, for appellants.

Juan A. Moldes-Rodriguez, Counsel for Administracion del Fondo de Compensacion al Paciente (Patient's Compensation Fund Administration), for appellee.

Before LYNCH, Circuit Judge, and HILL ^* and GIBSON, ^** Senior Circuit Judges.

LYNCH, Circuit Judge.

This case raises questions under the Contract Clause of the United States Constitution concerning a government's power to regulate insurance companies facing insolvency by barring claims asserted after a particular date by insureds. If that power is upheld, then Dr. Fernandez is essentially uninsured on the malpractice claim and it may be that the malpractice plaintiffs will recover nothing regardless of the merits of their claim.

Manuel Mercado-Boneta brought a medical malpractice action against Dr. Elliot Fernandez and Fernandez's insurer, the Patient's Compensation Fund Administration ("PCFA"). Dr. Fernandez also claimed over against PCFA. PCFA moved for dismissal on the grounds that, inter alia, PCFA had been dissolved by an act of the legislature and was no longer liable on Dr. Fernandez's insurance policy. The district court granted the motion. Dr. Fernandez and Mercado-Boneta appeal jointly from that dismissal, arguing that the act of the legislature violates the Contract Clause of the United States Constitution. We find no constitutional violation, and affirm.

I.

During the time of the alleged malpractice, Dr. Fernandez was covered by PCFA under an occurrence policy. ¹ However, PCFA was abolished before Mercado-Boneta filed his claim against Dr. Fernandez. ² The Legislature of the Commonwealth of Puerto Rico abrogated PCFA by Act of Dec. 30, 1986, Act No. 4, 1986 P.R. Laws 869 ("Act No. 4"), stating that PCFA was not adequately fulfilling its intended purpose and was at risk of imminent insolvency. The operations of PCFA were endangered and the insureds and their patients were at risk of not being compensated for their losses. Id. at 871 ("Statement of Motives").

Despite the legislature's dissolution of PCFA, Mercado-Boneta sued PCFA ³ as an insurer of Dr. Fernandez. ⁴ PCFA moved for dismissal on the grounds that it had been dissolved by Act No. 4, that it lacked funds to assume financial responsibility for claims, and that it was immune from suit in Federal Court under the Eleventh Amendment. The district court granted PCFA's motion to dismiss on the first ground alone. The court found that PCFA was legally extinct, and that Act No. 4 did not permit the Insurance Commissioner, as PCFA's legal representative, to honor claims filed against PCFA subsequent to its abolition on December 30, 1986. Because Mercado-Boneta filed his claim against Dr. Fernandez later than December 30, 1986, the Insurance Commissioner was held not responsible to Dr. Fernandez for any liability he incurred as a result of Mercado-Boneta's claim. The court also found that PCFA's successor for certain purposes, the Insurers' Syndicate, was not responsible for any claims filed against PCFA.

Both Mercado-Boneta and Dr. Fernandez moved for reconsideration of the dismissal of PCFA on the grounds that Act No. 4, as interpreted by the district court, violated the Contract Clause of the United States Constitution. The district court held that although Act No. 4 did substantially impair a contractual obligation, the Act was reasonable and necessary to an important public purpose, and thus did not violate the Contract Clause.

II.

A.

As an initial matter, we note that we have jurisdiction to resolve the merits of this case. PCFA has raised this issue on appeal. PCFA argues that because it is an "arm of the state," and because the suit is one potentially involving money damages, the Eleventh Amendment bars a federal court from hearing this claim against it. The parties raised this issue in the district court, but that court did not reach the issue, disposing of the suit against PCFA on other grounds. Whether PCFA is an "arm of the state" for Eleventh Amendment (or, for that matter, Contract Clause) purposes is a difficult question. Because we readily find that Act No. 4 bars suit against PCFA for claims filed after Dec. 30, 1986, and that such a result does not violate the Contract Clause, we pretermit resolution of this jurisdictional issue. See Norton v. Mathews, 427 U.S. 524, 530-32, 96 S.Ct. 2771, 2774-76, 49 L.Ed.2d 672 (1976) (where merits can be readily resolved in favor of the party challenging jurisdiction, resolution of complex jurisdictional issue may be avoided); Birbara v. Locke, 99 F.3d 1233, 1237 (1st Cir.1996).

B.

We review de novo orders allowing a motion to dismiss for failure to state a claim. Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir.1996). It is clear, constitutional issues aside, that Act No. 4 bars the claims of both Dr. Fernandez and Mercado-Boneta. At the time that Mercado-Boneta brought his malpractice claim against Dr. Fernandez, the Legislature of the Commonwealth of Puerto Rico had expressly abolished PCFA by Act No. 4, and replaced it with the Insurers' Syndicate. Act No. 4 at § 3, 1986 P.R. Laws 871, 885. PCFA was no longer legally capable of fulfilling its obligations under the insurance policy. The Act further provided that the Insurance Commissioner of Puerto Rico would oversee the implementation of the newly formed Insurers' Syndicate, "it being understood, that the Syndicate shall not assume financial responsibility for any claims filed against the abolished Patient's Compensation Fund Administration." Id. According to the plain language of this statute, the Insurers' Syndicate was not the successor in interest of PCFA for purposes of assuming PCFA's liabilities, and could not be held liable for claims arising under policies issued by PCFA.

Nor could the Insurance Commissioner be held liable as PCFA's representative for claims filed against PCFA subsequent to the enactment of Act No. 4. Although the Act provides that the Insurance Commissioner shall continue to be responsible for claims and procedures initiated with PCFA on or before the enactment of Act No. 4, it makes no provision for claims filed with PCFA after the enactment of Act No. 4. Id. Act No. 4 exempts PCFA from liability on malpractice claims filed after December 30, 1986, through the Insurers' Syndicate, the Insurance Commissioner, or otherwise.

C.

Mercado-Boneta ⁵ and Dr. Fernandez argue that Act No. 4 nonetheless violates the prohibition in Article 1, § 10, cl. 1 of the United States Constitution, that "[n]o state shall ... pass any ... law impairing the obligation of contracts...." Mercado-Boneta and Fernandez assert that under Dr. Fernandez's occurrence policy with PCFA, PCFA was contractually obligated to reimburse Dr. Fernandez for future claims arising out of negligent acts which occurred during the time the policy was in effect. They argue that because Act No. 4 prevents them from seeking performance from PCFA under the contract, the Act substantially impairs a contractual obligation. They further contend that Act No. 4 is not reasonable and necessary to an important public purpose.

The threshold issue in Contract Clause analysis is "whether the change in state law has 'operated as a substantial impairment of a contractual relationship.' " General Motors Corporation v. Romein, 503 U.S. 181, 186, 112 S.Ct. 1105, 1109, 117 L.Ed.2d 328 (1991) (quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244, 98 S.Ct. 2716, 2722, 57 L.Ed.2d 727 (1978)). This inquiry is broken down into three distinct parts: "whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial." Id. If we find that a law does substantially impair a contractual relationship, we will nevertheless uphold the law if it is "reasonable and necessary to an important public purpose." United States Trust Company of New York v. New Jersey, 431 U.S. 1, 25, 97 S.Ct. 1505, 1519, 52 L.Ed.2d 92 (1976); see also McGrath v. Rhode Island Retirement Board, 88 F.3d 12, 16 (1st Cir.1996) (citing Energy Reserves Group v. Kansas Power & Light, 459 U.S. 400, 411-12, 103 S.Ct. 697, 704-05, 74 L.Ed.2d 569 (1983)). This inquiry is more searching than the rational basis review employed in Due Process or Equal Protection analysis. Although deference is due to the legislature, and weight is given to the legislature's own statement of purposes for the law, a court must undertake its own independent inquiry to determine the reasonableness of the law and the importance of the purpose behind it. As noted in McGrath, "a state must do more than mouth the vocabulary of the public weal in order to reach safe harbor...." 88 F.3d at 16.

Because the parties do not raise the issue on appeal, we assume arguendo that a contract between PCFA and Dr. Fernandez indeed existed. ⁶ The parties also agree that Act No. 4 impairs the contractual relationship between PCFA and Dr. Fernandez, and that that impairment is substantial, under the second and third prongs of the analysis.

As to whether any impairment is substantial, we note that in Contract Clause analysis, the expectations of the parties to the alleged contract play an important role in determining the substantiality of the contractual impairment. Energy Reserves Group v. Kansas Power and Light Co., 459 U.S. 400, 416, 103 S.Ct. 697, 707, 74 L.Ed.2d 569 (the complaining party's reasonable expectations had not been impaired by a statute, and so the statute did not violate the Contract Clause, although it altered the parties'...