PROMESA Title III Discharge Does Not Extend to Personal-Capacity Claims Against Commonwealth Officials

I. Introduction

Case: Hernández Zorilla v. FOMB (arising within the Commonwealth’s PROMESA Title III proceedings)
Court: U.S. Court of Appeals for the First Circuit
Date: June 12, 2026

This appeal sits at the intersection of Puerto Rico’s PROMESA restructuring and civil-rights litigation against individual government actors. After confirmation of the Commonwealth’s Title III Plan of Adjustment, the Financial Oversight and Management Board (the “Board”) argued that the Plan’s discharge and injunction barred plaintiffs from pursuing damages claims against Commonwealth officers and employees in their personal capacities. The plaintiffs alleged they were subjected to police force at a San Juan demonstration and brought federal and Puerto Rico constitutional claims seeking, among other relief, money damages from individual officials and officers personally.

The core issue was narrow but consequential: does the Commonwealth’s PROMESA plan discharge and enjoin personal-capacity suits against non-debtor individuals merely because those suits may have fiscal spillover effects on the Commonwealth (e.g., defense/indemnification under “Law 9”)?

II. Summary of the Opinion

The First Circuit affirmed the Title III court’s ruling that the Commonwealth Plan’s discharge and injunction do not apply to personal-capacity claims against Commonwealth officers and employees. Even if such suits can operate as “indirect” claims affecting the Commonwealth fisc (for example through discretionary indemnification), they remain direct claims against non-debtors. Discharging them would amount to a non-consensual third-party release—something the Plan expressly disclaimed.

III. Analysis

A. Precedents Cited and Their Role

1. PROMESA framework and Title III context

  • Pierluisi v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 37 F.4th 746 (1st Cir. 2022)
    Cited for PROMESA’s restructuring purposes and the Title III architecture (a “modified version of the municipal bankruptcy code”). It supplies the policy and statutory backdrop but does not resolve the discharge scope question.
  • Fin. Oversight & Mgmt. Bd. for P.R. v. Federacion de Maestros de P.R., Inc. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 32 F.4th 67 (1st Cir. 2022)
    Used primarily for the procedural posture and standards of review (clear error for facts; de novo for legal conclusions). It also contextualizes the Plan confirmation process.

2. Automatic stay versus plan discharge: the Board’s reliance on stay case law

  • Víctor J. Salgado & Associates Inc. v. Cestero-Lopategui, 34 F.4th 49 (1st Cir. 2022)
    The Board’s centerpiece. Salgado construed PROMESA’s incorporation of Bankruptcy Code §§ 362 and 922 to hold that certain personal-capacity suits against Commonwealth officials could be stayed as actions “against an officer” that “seek[] to enforce a claim against the debtor” under § 922, because—practically—the suits targeted the Commonwealth’s fisc (especially given defense/indemnification pressure under Law 9).

    The First Circuit distinguished Salgado as addressing the automatic stay (a temporary pause) rather than the Plan discharge (a permanent extinguishment). The court emphasized that discharge scope is governed by the confirmed Plan/Confirmation Order text, including explicit carve-outs, not by the stay’s functional analysis alone.

3. Third-party releases and the plan’s express limitation

  • Fin. Oversight & Mgmt. Bd. for P.R. v. Cooperativa de Ahorro y Credito Abraham Rosa (In re Fin. Oversight & Mgmt. Bd. for P.R.), 79 F.4th 95 (1st Cir. 2023)
    Critical for defining a “non-consensual third-party release” and giving an example directly analogous to this case: a plan releasing non-debtor directors from creditor claims (often justified by potential indemnification impacts on the estate). The First Circuit used Cooperativa to characterize discharge of personal-capacity claims as exactly the sort of third-party release that the Commonwealth Plan stated it did not provide.

4. Supreme Court constraints on non-consensual third-party releases

  • Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024)
    A major post-Salgado development. Purdue held that bankruptcy courts lack power to extinguish, without consent, claims held by nondebtors against other nondebtors. The First Circuit used Purdue as strong interpretive gravity: absent clear authority, courts should not read plan language to accomplish that “radically different power.” This reinforced reading the Commonwealth Plan as not discharging personal-capacity claims.
  • Epic Sys. Corp. v. Lewis, 584 U.S. 497 (2018)
    Quoted within Purdue for the “radically different power” framing, supporting the notion that third-party claim extinguishment requires unmistakable authorization.

5. Distinguishing “derivative”/estate claims from true third-party claims; and capacity doctrine

  • Lewis v. Clarke, 581 U.S. 155 (2017) and Kentucky v. Graham, 473 U.S. 159 (1985)
    These cases supply the doctrinal clarity that official-capacity suits are effectively against the sovereign, while personal-capacity suits make the individual the real party in interest and impose a judgment against that person—not the government. The First Circuit used this distinction to align “official-capacity” claims with debtor-bound obligations that can be discharged, while treating “personal-capacity” claims as true third-party claims.

6. Appellate deference to a bankruptcy/Title III court’s interpretation of its own confirmation order

  • Brown v. Harrington (In re Brown), 55 F.4th 945 (1st Cir. 2022); Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973 (1st Cir. 1995)
    These support deference to a bankruptcy court interpreting its own confirmation order, even where the issue is “essentially” legal.
  • La Liga de Ciudades de P.R. v. Fin. Oversight & Mgmt. Bd. for P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 110 F.4th 295 (1st Cir. 2024) and Travelers Indem. Co. v. Bailey, 557 U.S. 137 (2009)
    Cited to reinforce that the confirming court is a persuasive (and often substantially deferred-to) authority regarding the meaning and scope of its own order.

7. Weight of Supreme Court “considered dicta”

  • Cuevas v. United States, 778 F.3d 267 (1st Cir. 2015) (quoting McCoy v. Mass. Inst. of Tech., 950 F.2d 13 (1st Cir. 1991))
    Used to justify giving strong effect to the Supreme Court’s “considered dicta” in Purdue when assessing the permissible reach of discharge language.

B. Legal Reasoning

1. The governing texts: Plan, Confirmation Order, and FFCL

The court treated three instruments as controlling the discharge scope: (i) the Commonwealth Plan; (ii) the Confirmation Order; and (iii) the incorporated Findings of Fact and Conclusions of Law (FFCL). Importantly, the Confirmation Order controls in any conflict. The discharge and injunction provisions were broad on their face, but repeatedly limited by the phrase “[e]xcept as expressly provided” in the Plan or Confirmation Order.

The decisive “express provision” was FFCL ¶ 238: “The Plan does not provide for non-consensual third-party releases.” The court treated that as a clear boundary line: discharge cannot be read to eliminate creditors’ claims against non-debtor individuals unless there is a consensual third-party release (which all agreed was absent).

2. Why “indirect claims” analysis did not carry over from stay to discharge

The First Circuit accepted that personal-capacity suits may exert “indirect” fiscal pressure on the Commonwealth (as in Salgado), especially when the Commonwealth provides a defense and may later decide whether to indemnify under Law 9. But it emphasized that:

  • Automatic stay doctrine addresses temporary protection to facilitate restructuring negotiations.
  • Discharge permanently extinguishes liabilities and thus must be anchored in the confirmed Plan’s negotiated text and express limitations.

In other words, a claim can be “indirect” as to the debtor and still remain a “direct” claim against a third party; the categories are not mutually exclusive. Reading discharge to follow stay would collapse negotiated plan boundaries and nullify carve-outs.

3. The “employees/officials” language and the court’s interpretive choice

The Board leaned on the Confirmation Order’s wording that barred assertion of claims against the Debtors “and each of their respective employees [and] officials,” plus the injunction against actions “directly or indirectly.” The First Circuit, deferring to the Title III court’s interpretation of its own Confirmation Order, accepted the explanation that this language prevents end-runs via official-capacity pleading—i.e., suing a government officer as a proxy for suing the Commonwealth—rather than silently creating a broad, non-consensual third-party release for personal-capacity suits.

4. The third-party release problem (and why it controlled)

Using Cooperativa (definition and example) and Purdue (limits on bankruptcy power), the court reasoned that extinguishing personal-capacity claims against non-debtors—simply because they may trigger defense costs or potential indemnification—would be a classic non-consensual third-party release. Because the Plan expressly disavowed such releases, the discharge could not be construed to reach those claims.

C. Impact

1. For PROMESA practice and plan drafting

  • Textual clarity becomes paramount: if stakeholders seek to affect litigation against non-debtor officials, they must do so through clearly authorized and properly consensual mechanisms (if available), not through expansive readings of “indirectly” or “employees/officials” language.
  • Functional fiscal-impact arguments have limits: “pressure on the fisc” may justify a stay (per Salgado) but does not automatically justify discharge.

2. For civil-rights and tort litigation against Puerto Rico officials

  • Plaintiffs may proceed with personal-capacity damages claims notwithstanding the Commonwealth’s plan discharge.
  • The Commonwealth may still face practical financial exposure through defense decisions and potential discretionary indemnification under Law 9, but that exposure does not transform the claims into discharged debts.

3. For bankruptcy jurisprudence beyond Puerto Rico

  • The opinion reflects a post-Purdue tightening: appellate courts are less willing to interpret plan terms to wipe out non-debtor vs. non-debtor claims without unmistakable authorization and consent.
  • It reinforces capacity doctrine as a structural limiter: official-capacity claims track the debtor/sovereign; personal-capacity claims remain third-party claims.

IV. Complex Concepts Simplified

  • Automatic stay (§§ 362, 922): a temporary freeze on certain lawsuits while restructuring proceeds. In PROMESA, § 922 can reach suits against officers if they effectively seek to enforce a claim against the governmental debtor.
  • Discharge and injunction: the permanent elimination of certain claims and a court order barring pursuit of those eliminated claims.
  • Personal-capacity vs. official-capacity suits:
    • Official-capacity: really a suit against the government entity; relief runs against the sovereign.
    • Personal-capacity: the individual is the real party in interest; any money judgment is against the person.
  • Law 9: Puerto Rico’s statute allowing certain officials sued personally to request Commonwealth-provided defense and possible indemnification; indemnification is discretionary and typically assessed after factual findings emerge.
  • Non-consensual third-party release: a plan term that wipes out a claimant’s rights against a non-debtor (e.g., an officer/director) without that claimant’s consent. The Plan here expressly said it did not do that.

V. Conclusion

The First Circuit’s key legal contribution is a bright, text-anchored rule for PROMESA Title III discharge: a Commonwealth plan discharge does not bar personal-capacity claims against non-debtor officials and employees absent a valid (and here, expressly disclaimed) third-party release. Even if such suits exert indirect fiscal pressure and may be stayed during the case under Víctor J. Salgado & Associates Inc. v. Cestero-Lopategui, their permanent extinguishment requires explicit plan authority consistent with the Plan’s own limitations and the Supreme Court’s reasoning in Harrington v. Purdue Pharma L.P..