IN RE: the FINANCIAL OVERSIGHT AND MANAGEMENT BOARD FOR PUERTO RICO (2025)

PROMESA Title III

Memorandum Order Granting In Part and Denying In Part the Urgent Motion for Stay Pending Appeal or, in the Alternative, an Extension of the Deadline to Comply with the Court's September 30, 2025 Opinion and Order Granting in Part the Motion of Jonathan Hernandez Zorrilla and Yadira Carrasquillo Gonzalez for Relief from the Title III Plan Injunction

Before the Court is Urgent Motion for Stay Pending Appeal or, in the Alternative, an Extension of the Deadline to Comply with the Court's September 30, 2025 Opinion and Order Granting in Part the Motion of Jonathan Hernandez Zorrilla and Yadira Carrasquillo Gonzalez for Relief from the Title III Plan Injunction (Docket Entry No. 30053 in Case No. 17-3283) (the “Stay Motion”), filed by the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”). The Stay Motion concerns the Opinion and Order Granting in Part the Motion of Jonathan Hernández Zorrilla and Yadira Carrasquillo González for Relief from the Title III Plan Injunction (Docket Entry No. 30001 in Case No. 17-3283) (the “Opinion and Order”). The Stay Motion requests entry of an order (i) recognizing that the Court's instruction to issue certain notices is automatically stayed by section 106(c) of PROMESA,² (ii) issuing a stay pending appeal of the Opinion and Order, or, in the alternative, (iii) extending the Opinion and Order's deadline to issue notices.

The Court has considered all of the arguments and submissions made in connection with the Stay Motion. For the following reasons, and as more specifically set forth in the Conclusion section of this Memorandum Order, the Stay Motion is granted solely to the extent that it requests a stay pending appeal of the deadlines specified in the Conclusion section of the Opinion and Order. The Stay Motion is denied to the extent that it requests a stay pending appeal of any other aspect of the Opinion and Order.

Background

The relevant factual background is set forth in the Court's Opinion and Order. See In re Fin. Oversight & Mgmt. Bd. for P.R., ––– F. Supp. 3d ––––, –––– – ––––, No. 17-BK-3283-LTS, 2025 WL 2785549, at *2-6 (D.P.R. Sept. 30, 2025). On October 11, 2025, the Oversight Board filed the Stay Motion. Jonathan Hernández Zorrilla and Yadira Carrasquillo González (“Plaintiffs”) filed a response on October 16, 2025. (Docket Entry No. 30094 in Case No. 17-3283.) The Oversight Board filed a reply on October 20, 2025. (Docket Entry No. 30107 in Case No. 17-3283.)

Discussion

In light of certain of the issues raised by the Oversight Board in the Stay Motion, the Court will stay the deadlines set forth in paragraphs 3 and 4 of the Conclusion of the Opinion and Order. Those paragraphs direct the Oversight Board (i) to provide notice of the issuance of the Opinion and Order in certain proceedings, (ii) to file an informative motion identifying for the Court the proceedings in which such notices have been filed, and (iii) to show cause why similar notices should not be filed with respect to the plans of adjustment for COFINA and HTA. The stay of those deadlines pending appeal moots the first and third requests for relief in the Stay Motion. The rest of this Memorandum Order will address the request for a stay pending appeal of the Court's determination that the Commonwealth Plan does not bar the prosecution of Plaintiffs’ claims against the Individual Defendants in their personal capacities.

In reviewing an application for a stay pending appeal, a court must consider the following four factors:

(1) [W]hether the stay applicant has made a strong showing that [it] is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies.

Bos. Parent Coal. for Acad. Excellence Corp. v. Sch. Comm. of City of Bos., 996 F.3d 37, 44 (1st Cir. 2021) (quoting Nken v. Holder, 556 U.S. 418, 434, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009)). “The party requesting a stay bears the burden of showing that the circumstances justify an exercise of [the court's] discretion.” Nken, 556 U.S. at 433-34, 129 S.Ct. 1749. The first two of the applicable factors are the “most critical.” Id. at 434-35, 129 S.Ct. 1749. However, “ ‘[t]he sine qua non [of the stay pending appeal standard] is whether the [movants] are likely to succeed on the merits.’ ” Acevedo-García v. Vera-Monroig, 296 F.3d 13, 16 (1st Cir. 2002) (quoting Weaver v. Henderson, 984 F.2d 11, 12 (1st Cir. 1993)).

1. Whether the Oversight Board Is Likely to Succeed on Appeal

The Oversight Board contends that the appeal of the Opinion and Order (the “Appeal”) presents a “serious legal question[ ].” (Mot. ¶ 26 (quoting Providence J. Co. v. FBI, 595 F.2d 889, 890 (1st Cir. 1979)).) The Court disagrees. Generally speaking, the Stay Motion does not purport to identify errors in the rationale underlying Opinion and Order, but instead reiterates arguments that the Court directly addressed in the Opinion and Order. The Court does not view the questions raised in the Stay Motion to be “serious and difficult questions of law in an area where the law is somewhat unclear.” United States v. Reynoso, 778 F. Supp. 3d 433, 437 (D.P.R. 2025) (quoting Exxon Corp. v. Esso Worker's Union, Inc., 963 F. Supp. 58, 60 (D. Mass. 1997)).³

The Stay Motion principally offers three arguments in support of the Oversight Board's position that the Commonwealth Plan contains an extraordinary sub rosa release of claims against employees and officials in their personal capacities. (Stay Mot. ¶¶ 26-27.) The Oversight Board relies on section 92.3 of the Commonwealth Plan, paragraph 56(b) of the Confirmation Order, and the First Circuit's decision in Víctor J. Salgado & Associates v. Cestero-Lopategui, 34 F.4th 49 (1st Cir. 2022), to support its position.

Looking first at the text of the Commonwealth Plan and the Confirmation Order, the Oversight Board principally grounds its interpretation of the Discharge Provisions in two phrases in the Commonwealth Plan and Confirmation Order. (Stay Mot. ¶¶ 26-27.) These are (i) the prohibition in the Commonwealth Plan and the Confirmation Order against “commencing or continuing, directly or indirectly, ․ any action on any such Claim ․ that is discharged pursuant to the Plan” (Commonwealth Plan § 92.3 (emphasis added); see also Conf. Ord. ¶ 59 (substantially the same language)), and (ii) the Confirmation Order's statement that entities may not assert “Claims against the Debtors and Reorganized Debtors, and each of their respective employees, officials, Assets, property, rights, remedies, Claims, or Causes of Action of any nature whatsoever.” (Conf. Ord. ¶ 56(b) (emphasis added).)

Even viewed in the light most favorable to the Oversight Board, neither of these provisions unambiguously provide that a discharge or injunction applies both to claims against employees in their official capacities (which both the Court and the Oversight Board agree that they do) and claims against employees in their individual capacities (which is the issue underlying the Appeal). At most, these provisions present an ambiguity. However, the terms of a plan must be interpreted in context and in relation to other relevant provisions,⁴ and the Confirmation Order requires that the Commonwealth Plan and the Confirmation Order “be construed in a manner consistent with each other so as to effect the purpose of each.” (Conf. Ord. ¶ 84.) The Oversight Board has not at any point identified any relevant contextual term or fact that would have led the Court or interested parties to understand the novel and extraordinary effect that the Oversight Board contends the Discharge Provisions have on claimants’ rights against non-debtors. See Opinion and Order, ––– F.Supp.3d at –––– n.10, ––––, 2025 WL 2785549, at *7 n.10, 10. The Oversight Board has not asserted that creditors received notice of a provision effecting permanent release of their personal capacity claims against employees when they voted on the Plan. See Barraford, 778 F.3d at 265 (declining to afford “unusual and significant meaning” to plan provision where debtors “never gave anything that might be described as fair notice”). No provision of the Commonwealth Plan, the FFCL, or the Confirmation Order states an intention to permanently release claims against non-Debtors like the Individual Defendants in their personal capacities.

Directly to the contrary, the FFCL—which is incorporated by reference into the Confirmation Order and which adopts the relevant language verbatim from findings of fact and conclusions of law proposed by the Oversight Board—states that “the Plan does not release any claims of a creditor of the Debtors, in its capacity as such, against a party that is not a Debtor.” Opinion and Order, ––– F.Supp.3d at ––––, 2025 WL 2785549, at *7 (quoting FFCL ¶ 238 (emphasis added)). Because the Individual Defendants are not Debtors, paragraph 238 is plainly incompatible with the view that section 92.3 of the Plan or paragraph 56(b) of the Confirmation Order provides the Individual Defendants with a release of their personal liabilities. See id. at ––––, 2025 WL 2785549, at *7, 10 n.11. There is no material difference between a non-consensual release and a discharge of such claims. Harrington v. Purdue Pharma L.P., 603 U.S. 204, 223, 144 S.Ct. 2071, 219 L.Ed.2d 721 (2024).

Other terms of the Commonwealth Plan also make clear that, consistent with section 524(a) of the Bankruptcy Code, the Discharge and the Discharge Inunction only operate against the personal liabilities of the Commonwealth Plan Debtors rather than the distinct personal liabilities of the Individual Defendants. See Opinion and Order, ––– F.Supp.3d at ––––, 2025 WL 2785549, at *7. The Discharge provision of the Commonwealth Plan applies only to “Claims or Causes of Action against the Debtors and Reorganized Debtors.” (Commonwealth Plan § 92.2(a).) The Discharge Injunction provision (which is substantially mirrored in paragraph 59 of the Confirmation Order) applies to actions (including “indirect[ ]” actions) “on any such Claim or other debt or liability that is discharged pursuant to the Plan” (Commonwealth Plan § 92.3), expressly cabining the reach of the Discharge Injunction to the Commonwealth Plan Debtor-specific scope of the Discharge. See Opinion and Order, ––– F.Supp.3d at ––––, 2025 WL 2785549, at *7. The single reference to “employees” in section 56(b) of the Confirmation Order should not be read to override and expand the clear terms of the Commonwealth Plan in the absence of other indicia supporting the Oversight Board's interpretation.⁵ The Opinion and Order presents the only interpretation of the Discharge Provisions that harmonizes the Commonwealth Plan, the Confirmation Order, and the FFCL.

Nor has the Oversight Board ever addressed the substantial practical and due process problems raised by its position. It contends that Plaintiffs’ claims against the Individual Defendants should be treated as discharged due to the theoretical possibility that the Commonwealth might indemnify the Individual Defendants, without regard for whether indemnification is authorized by Law 9, and before the factual determinations have been made that would permit or preclude indemnification. See Opinion and Order, ––– F.Supp.3d at –––– – ––––, 2025 WL 2785549, at *8-9. By seeking to halt the District Court Action at this stage, the Oversight Board would have the Court give the Individual Defendants the benefit of a discharge of their individual liabilities even if they never receive (or even seek) indemnification from the Commonwealth. Indeed, with such a declaration of discharge there would be no need for them to seek indemnification. Plaintiffs would be deprived of any recourse because the right to indemnification is a right held by the Individual Defendants, not Plaintiffs. Id. There is no reason why the Commonwealth's ability to establish an indemnification relationship with the Individual Defendants should be determinative of Plaintiffs’ rights. Id.⁶

The Court also sees no merit in the Oversight Board's expansive interpretation of the First Circuit's decision in Víctor J. Salgado & Associates v. Cestero-Lopategui, 34 F.4th 49 (1st Cir. 2022). As explained in the Opinion and Order, Víctor J. Salgado concerns entirely separate sections of the Bankruptcy Code that are applicable during a different stage of a restructuring proceeding to achieve distinct purposes. See Opinion and Order, ––– F.Supp.3d at ––––, ––––, 2025 WL 2785549, at *9, 11 (quoting, inter alia, Víctor J. Salgado, 34 F.4th at 61 n.16 (Thompson, J., concurring)). The Opinion and Order discussed three decisions in which courts have directly addressed the question of whether a plan's discharge may be construed to encompass claims against debtors’ indemnitees, and all three forcefully rejected that position.⁷ Opinion and Order, ––– F.Supp.3d at –––– – ––––, 2025 WL 2785549, at *9-10. Even if the Oversight Board is correct that Víctor J. Salgado “formulated” a new test for determining the scope of plan discharge provisions that are permissible in the First Circuit (Stay Mot. ¶ 30), that decision was issued more than seven months after creditors voted on the Commonwealth Plan and nearly four months after the Court confirmed the Commonwealth Plan. There is therefore no way that the Court or interested parties could have viewed the Discharge Provisions of the Commonwealth Plan through that lens when they were making key decisions leading to confirmation.

Finally, the contention that Víctor J. Salgado formulated a test that courts must consider in determining whether claims are “indirect” claims against a debtor (Stay Mot. ¶ 30) is untenable because robust existing bodies of case law have already addressed that issue. In the context of governmental indemnification of individual employees and officers, authority in this Circuit and from the Supreme Court has dealt with the question of when a debt is so closely related to a government's treasury that it should be treated as the government's debt, and it has long been held that government indemnification does not transform claims against individuals in their personal capacity into claims against their governmental employers. Opinion and Order, ––– F.Supp.3d at ––––, 2025 WL 2785549, at *8 (citing, inter alia, Guerro v. Mulhearn, 498 F.2d 1249, 1256 (1st Cir. 1974) & Lewis v. Clarke, 581 U.S. 155, 164-67, 137 S.Ct. 1285, 197 L.Ed.2d 631 (2017)). And specifically in the bankruptcy context, before the Supreme Court recognized in Purdue Pharma that the Bankruptcy Code generally prohibits the non-consensual discharge of “indirect suits” against employees who are entitled to indemnification by a debtor, Purdue Pharma, 603 U.S. at 235-37, 144 S.Ct. 2071 (Kavanaugh, J., dissenting),⁸ the jurisdictions that permitted such releases universally required that proponents disclose them and demonstrate their necessity to the debtor's reorganization.⁹ The Oversight Board did not do so during the confirmation process for the Commonwealth Plan, and there is is no basis to retroactively apply a third-party release. Opinion and Order, ––– F.Supp.3d at ––––, 2025 WL 2785549, at *10. The mere inclusion of the word “indirectly” in a plan cannot achieve that outcome. See id. at –––– n.10, 2025 WL 2785549, at *7 n.10, 22-23.

For all of these reasons, the Court does not perceive a “better than negligible” likelihood that the Appeal will succeed on the merits. Common Cause R.I. v. Gorbea, 970 F.3d 11, 14 (1st Cir. 2020) (quoting Nken, 556 U.S. at 434, 129 S.Ct. 1749).

2. Whether the Oversight Board Has Established Irreparable Injury

With respect to the irreparable injury prong, the Oversight Board contends that the notices required by the Opinion and Order “will trigger the reactivation of scores of dormant lawsuits involving claims for substantial monetary damages,” thereby forcing the Commonwealth to expend unrecoverable defense costs. (Stay Mot. ¶ 33.)

To begin with, the expenditure of litigation costs, “even substantial and unrecoupable cost[s],” generally does not constitute irreparable injury. In re Justs. of Sup. Ct. of P.R., 695 F.2d 17, 20 (1st Cir. 1982) (quoting Renegotiation Bd. v. Bannercraft Clothing Co., 415 U.S. 1, 24, 94 S.Ct. 1028, 39 L.Ed.2d 123 (1974)); see Tejidos de Coamo, Inc. v. Int'l Ladies’ Garment Workers’ Union, 22 F.3d 8, 14 (1st Cir. 1994). Additionally, the Court is staying its instruction to provide notice of the Opinion and Order to other courts, mitigating any likelihood of a deluge of such cases considerably. To the extent that particular proceedings against Commonwealth employees proceed while the Appeal is pending, the courts overseeing those cases have inherent authority to manage their dockets to ensure that the cases proceed in an orderly and efficient fashion.

Accordingly, there appears to be little, if any, risk of irreparable injury.

3. Whether Granting the Stay Will Substantially Injure Other Interested Parties and Where the Public Interest Lies

Although the Oversight Board contends that a stay would cause “no meaningful injury” to Plaintiffs (Stay Mot. ¶¶ 34, 37), the Stay Motion represents that there are “potentially hundreds” of proceedings that have been stayed. (Stay Mot. ¶ 1.) Those stays are based on the broad interpretation of the Discharge Provisions that the Court rejected in the Opinion and Order. The claimants in those proceedings should not be deprived any longer of their rights to prosecute their claims, and the public interest supports the vindication of personal liability claims against the employees and officials who allegedly injured them.

The Court acknowledges that the Oversight Board has represented that it will seek to expedite the Appeal, and that the primary legal issue in the Appeal (the “Law 9 Issue”) may be resolved in certain other pending appeals. (See Stay Mot. ¶ 35 (citing Ortiz-Resto v. Rivera-Schatz, Case No. 21-1232 (1st Cir.) and Besosa-Noceda v. Capo-Rivera, Case No. 16-2117 (1st Cir.)).) By helping ensure that the Law 9 Issue is resolved as soon as possible, those considerations could mitigate, but do not eliminate, the impact of a stay pending appeal. However, the Appeal itself is in the earliest stages, and it is not assured that decisions in the other pending appeals will actually address the Law 9 Issue. A review of the dockets for those proceedings shows that the Law 9 Issue is not the only issue presented in those appeals; it is therefore plausible that those proceedings will be resolved on other bases without addressing the Law 9 Issue. Accordingly, while the Court anticipates that the Law 9 Issue will be resolved as promptly as possible, it will necessarily take time for that to happen. In the meantime, the Individual Plaintiffs (and other parties with similar claims) should not be precluded from prosecuting their claims.

This factor supports denial of a stay pending appeal.

Conclusion

The Stay Motion is granted solely to the extent that it requests a stay pending appeal of the deadlines, set forth in paragraphs 3 and 4 of the Conclusion section of the Opinion and Order, to (i) file notices in other proceedings concerning the issuance of the Opinion and Order, (ii) file an informative motion in this Court concerning those notices, and (iii) show cause concerning the applicability of the Opinion and Order to the Title III cases of COFINA and HTA. The Stay Motion is denied in all other respects.

This Order resolves Docket Entry No. 30053 in Case No. 17-3283.

SO ORDERED.

FOOTNOTES

2.   Capitalized terms used but not defined herein have the meaning given to them in the Opinion and Order.

3.   Notably, even though the Appeal presents issues of law that are reviewed by the Court of Appeals de novo, the First Circuit generally accords deference to a district court's interpretation of its own orders. See Fin. Oversight & Mgmt. Bd. for P.R. v. Amerinational Cmty. Servs., LLC (In re P.R. Pub. Fin. Corp.), 109 F.4th 37, 50 (1st Cir. 2024).

4.   See Barraford v. T & N Ltd., 778 F.3d 258, 263 (1st Cir. 2015) (“A plan ․ is subject to the general rules of contract construction and interpretation.”); Autoridad de Carreteras y Transportacion v. TransCore Atl., Inc., 387 F. Supp. 3d 163, 167 (D.P.R. 2017) (“When a contract contains several sections or clauses, they ‘should be interpreted in relation to one another, giving to those that are doubtful the meaning which may appear from the consideration of all of them together.’ ” (quoting 31 L.P.R.A. § 3475)).

5.   Other language in the Confirmation Order is also consistent with the Court's view of the Discharge Provisions. The discharge provision of the Confirmation Order does not mention claims against employees. (Conf. Ord. ¶ 56(a).) The injunctive provision of the Confirmation Order does not refer to “employees” or to paragraph 56(b) of the Confirmation Order; it implements the Discharge in the Commonwealth Plan, which does not use the term “employees.” (See Conf. Ord. ¶ 59 (“Injunction on Claims” provision enjoining holders of “Claims ․ discharged ․ pursuant to section 92.2 of the Plan”).)While the first sentence of paragraph 56(b) refers to claims against “employees,” the second sentence of that paragraph refers back to the first sentence and describes the effect of the Confirmation Order—stating that it constitutes a judicial determination and discharge of claims against the Commonwealth Plan Debtors—without any reference to discharging claims against employees. (See Conf. Ord. ¶ 56(b) (“In accordance with the foregoing, except as expressly provided in the Plan or herein, this Confirmation Order shall constitute a judicial determination, as of the Effective Date, of the discharge and release of all such Claims, Causes of Action or debt of or against the Debtors and the Reorganized Debtors pursuant to sections 524 and 944 of the Bankruptcy Code ․ and such discharge shall void and extinguish any judgment obtained against the Debtors or Reorganized Debtors and their respective Assets, and property ․” (emphasis added)).)Arguably, these provisions do not definitively foreclose the Oversight Board's expansive view of the first sentence of paragraph 56(b). However, if the Oversight Board were correct that it requested and the Court granted broad third-party releases of employees’ personal liabilities in connection with the Commonwealth Plan, the Court would expect that extraordinary relief to be reflected clearly in relevant provisions of the Plan, Confirmation Order, and FFCL, rather than referenced ambiguously in one sentence of one provision of the Confirmation Order.

6.   Like the debtors’ position in Purdue Pharma, the Oversight Board's position would permit indemnified (or potentially indemnified) individual employees to achieve the benefits of a bankruptcy discharge even though they have not themselves filed for bankruptcy and even though the claims against them may not be eligible for discharge in a bankruptcy case. See 11 U.S.C. § 523(a)(6) (prohibiting discharge of individual debtors for claims arising out of “willful and malicious injury”); Purdue Pharma, 603 U.S. at 222, 144 S.Ct. 2071 (“[T]he Sacklers seek to pay less than the [bankruptcy] code ordinarily requires and receive more than it normally permits.”).

7.   The same conclusion was reached in three decisions in the Eastern District of California prior to the Ninth Circuit's decision in Deocampo v. Potts, 836 F.3d 1134 (9th Cir. 2016). See Deocampo v. Potts, No. Civ. 2:06-1283 WBS, 2014 WL 2118193, at *2 (E.D. Cal. May 21, 2014) (citing and adopting the holdings of two prior cases).

8.   By implication, the Oversight Board's position appears to be that the Court was correct to not apply the holding of Purdue Pharma retroactively to prohibit non-consensual third-party releases, cf. Opinion and Order, ––– F.Supp.3d at –––– n.11, 2025 WL 2785549, at *10 n.11, but that the Court should have applied the rationale of Víctor J. Salgado retroactively to permit such releases.

9.   See Deocampo, 836 F.3d at 1144 (“The Circuits that have permitted Chapter 11 plans to release non-debtors have required that the release be express, and that it be supported by specific factual findings.” (quotation marks omitted)); In re City of Detroit, 524 B.R. 147, 266-67 (Bankr. E.D. Mich. 2014) (denying request for third-party release of officers in their individual capacities in the absence of “evidence suggesting that the additional protection of a third-party release for these officers is necessary to the City's efficient and effective functioning, to its revitalization, or to the success of its plan”).

LAURA TAYLOR SWAIN, United States District Judge