Appeals court: PROMESA restructuring doesn’t wipe out certain civil rights lawsuits

By THE STAR STAFF

The U.S. Court of Appeals for the First Circuit ruled late last week that Puerto Rico’s landmark Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) restructuring does not wipe out civil rights lawsuits seeking monetary damages from government officials in their personal capacities.

The ruling marks a significant boundary on the reach of the commonwealth’s Title III Bankruptcy Plan of Adjustment.

The decision, issued June 12 in Hernández Zorilla v. Financial Oversight and Management Board, affirms that the commonwealth’s bankruptcy‑like restructuring cannot be used to shield individual officers from personal liability for alleged misconduct -- even if those suits could indirectly affect the public fiscal condition through defense costs or potential indemnification.

At the center of the dispute were plaintiffs who claimed they were subjected to excessive use of force by the police during a demonstration in San Juan. They sued several officers and officials personally under federal and Puerto Rico constitutional law. After the commonwealth’s Plan of Adjustment was confirmed, the Financial Oversight and Management Board argued that the plan’s discharge and injunction barred those claims.

The First Circuit disagreed.

The appellate panel anchored its ruling in the text of the Plan, the Confirmation Order, and the incorporated Findings of Fact and Conclusions of Law. One provision proved decisive: “The Plan does not provide for non-consensual third-party releases.”

That sentence, the court said, foreclosed the oversight board’s argument. Personal‑capacity claims are claims against non‑debtors, and extinguishing them would amount to the very type of non‑consensual third‑party release the Plan expressly disavowed.

The court emphasized that even if personal‑capacity suits may exert “indirect” fiscal pressure on the commonwealth because Puerto Rico may choose to defend or indemnify officials under Law 9, those practical effects do not transform the claims into debts of the commonwealth itself. As the document explains, “they remain direct claims against non-debtors.”

The oversight board relied heavily on Víctor J. Salgado & Associates v. Cestero-Lopategui, a 2022 First Circuit decision holding that certain personal‑capacity suits could be stayed during PROMESA proceedings because they functionally targeted the commonwealth’s finances.

But the First Circuit drew a sharp distinction between a temporary automatic stay and a permanent discharge.

The stay is a tool to stabilize the restructuring process. A discharge, by contrast, permanently extinguishes liabilities -- and must be grounded in the negotiated text of the Plan. The court refused to “import” the stay’s functional analysis into the discharge context, warning that doing so would erase the Plan’s negotiated limits.

The ruling has immediate consequences for civil rights plaintiffs in Puerto Rico. Personal‑capacity claims against officers and officials, particularly in police-force and protest‑related cases, remain viable despite the commonwealth’s restructuring.