Automatic Stay Applies to ‘Ordinary Course’ Litigation in Puerto Rico, Circuit Holds

Reversing the district court, the First Circuit held that the automatic stay applies broadly to “ordinary course” litigation under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.). The March 21 opinion also contains significant First Circuit jurisprudence on the “finality” of orders regarding the automatic stay.

The Medicaid Reimbursement Litigation

Puerto Rico has been in litigation with health care providers since 2003 regarding Medicaid reimbursement. Years ago, the district court in Puerto Rico appointed a special master and entered an injunction requiring reimbursement under a formula developed by the master. Periodically, the master and the district court revisit the formula.

In April 2017, about one month before Puerto Rico initiated debt-adjustment proceedings under PROMESA, the special master issued a report proposing changes in the reimbursement formula. One month into PROMESA, a district judge in Puerto Rico (but not the district judge presiding over the PROMESA proceedings) adopted the master’s report. The providers appealed.

The circuit court in substance remanded the appeal to the district court to determine whether the automatic stay under PROMESA applied to the proceedings regarding the Medicaid reimbursement formula. In July 2018, Chief District Judge Gustavo A. Gelpí concluded that the automatic stay did not apply. In several opinions reported in this column, Judge Gelpí has been more prone to rule that the automatic stay does not apply to ordinary course litigation.

Puerto Rico appealed the district court’s order finding that the stay did not apply. In a 36-page opinion, Circuit Judge David J. Barron reversed. Judge Barron was a clerk for Justice John Paul Stevens and a professor at Harvard Law School.

The First Circuit’s Stay Analysis

Naturally, Judge Barron began with the automatic stay in Section 362 of the Bankruptcy Code, incorporated by Section 301(c) of PROMESA. With little ado, he saw no “indication that the automatic stay is not fully applicable here.” If the court were to confine its analysis to Sections 362 and 301(c), he said “it would be clear that the automatic stay does apply.”

The providers, however, contended that several provisions in PROMESA made the automatic stay inapplicable. Judge Barron analyzed those provisions one by one.

Judge Barron began with Section 304(h) of PROMESA, entitled “Public Safety,” which provides that PROMESA “may not be construed to permit the discharge of obligations arising under Federal policy or regulatory laws, including laws relating to . . . public health or safety . . . . This includes compliance with obligations, requirements under consent decrees or judicial orders . . . .”

Seemingly a show-stopper, Judge Barron quickly concluded that Section 304(h) did not apply. Section 304(h), he said, “only bars the ‘discharge’ — not the ‘stay’— of ‘compliance obligations.’” Discharge “is not at issue here,” he said, “only a stay is.”

Judge Barron added an important caveat. If the federal government were enforcing Medicaid laws, the “enforcement action would be excepted from the automatic stay. See 11 U.S.C. § 362(b)(4).”

Judge Barron turned to Section 204(d)(1) of PROMESA, entitled, “Implementation of Federal Programs.” The section says, “In taking actions under [PROMESA], the Oversight Board shall not exercise applicable authorities to impede territorial actions to — (1) comply with a court-issued consent decree or injunction . . . with respect to Federal programs.”

Again, Section 204(d)(1) seemed like a show-stopper — until Judge Barron focused on the statutory language and observed that imposing the automatic stay was not an “action” by the Oversight Board, because “the stay follows automatically, without the Board taking any action.”

Ultimately, Judge Barron dealt with Section 7 of PROMESA, which reads, “Except as otherwise provided in [PROMESA], nothing in this chapter shall be construed as . . . relieving a territorial government . . . from compliance with Federal laws or requirements . . . protecting the health . . . of persons in such territory.”

Giving “effect to all of the words in the statute,” Judge Barron held that the automatic stay in PROMESA falls under the “Except as otherwise” phrase, thus making Section 7 inapplicable to the case at bar.

Appellate Jurisdiction

Was an order finding the automatic stay to be inapplicable a final order bestowing appellate jurisdiction under 28 U.S.C. § 1291? Judge Barron said the First Circuit has not ruled on the question.

All circuits have held that granting relief from the automatic stay is a final order. The circuits to address the issue, Judge Barron said, have held that orders regarding the applicability of the stay are likewise final.

Judge Barron cited a PROMESA decision where the First Circuit held that denial of a motion to modify the stay “is not necessarily a final, appealable order . . . under every circumstance.” If there were “rapidly changing circumstances,” he said that an order denying a modification of the stay might not be final.

Ultimately, Judge Barron decided that the order on appeal was final under the “more flexible” rules in bankruptcy.