WARDLAW, Circuit Judge:
Does a municipality's bankruptcy plan of adjustment automatically discharge a judgment against individual officers for excessive force by operation of a California statute generally requiring public entities to defend and indemnify their employees for actions within the scope of their employment?
Like many a city in the wake of the 2007-08 financial crisis, the city of Vallejo, California found itself burdened by mounting debts as its tax base shrank. In 2008, Vallejo responded by petitioning for Chapter 9 bankruptcy, a form of relief available only to municipalities. Some two years after the bankruptcy court confirmed Vallejo's debt-adjustment plan, a federal jury found that two police officers employed by Vallejo used constitutionally excessive force when they arrested Jason Eugene Deocampo. In accordance with the verdict, the district court entered a judgment for money damages against the officers in their personal capacities, and awarded Deocampo his attorney's fees.
Under California law, Vallejo is generally obligated to indemnify its employees for claims against them arising from their employment. We hold that where, as here, the plan confirmed by the bankruptcy court did not expressly encompass claims or judgments against the city's employees, the indemnification statutes do not subject such claims or judgments to adjustment by operation of law nor by the fact of the public employment itself. We affirm the district court's denial of the officers' Rule 60 motion for relief from judgment, and agree with the district court that neither the judgment nor attorney's fee award was discharged by Vallejo's bankruptcy proceedings.
On March 28, 2003, at approximately 8:00 p.m., Deocampo, Jesus Sebastian Grant, and Jaquezs Tyree Berry (collectively, "Plaintiffs") suffered a violent encounter with police officers employed by Vallejo. According to Plaintiffs, this encounter began when Officers Jason Potts and Jeremy Patzer stopped Berry on the street. With no justification, they kicked and slammed him to the ground, causing him to hit his head on a wooden fence. Deocampo and Grant approached the officers, asked why they were attacking Berry, and informed them that their actions were wrong. Officer Potts told them to go
On March 30, 2006, Plaintiffs filed this action against Vallejo, Vallejo's chief of police, the Officers, and Patzer. Plaintiffs asserted excessive-force and other constitutional claims against the Officers and Patzer under 42 U.S.C. § 1983; Monell claims against Vallejo and its chief of police, see Monell v. New York City Dep't of Soc. Servs., 436 U.S. 658, 98 S.Ct. 2018, 56 L.Ed.2d 611 (1978); and various state-law causes of action. On July 24, 2007, the parties stipulated to the dismissal with prejudice of Plaintiffs' Monell claims and of Vallejo and its chief of police as defendants.
Subsequently, on May 23, 2008, Vallejo filed for Chapter 9 bankruptcy. This was, at the time, one of the largest municipal bankruptcies in history, and California's largest since Orange County filed for bankruptcy in 1994. See Alison Vekshin & Michael B. Marois, Bankrupt Vallejo, California, Approves Restructuring, Bloomberg (Dec. 1, 2010).
According to the City of Vallejo, a number of converging forces rendered the city insolvent and necessitated its bankruptcy filing. Vallejo derived most of its revenues from property taxes, sales taxes, assessments, and fees. See In re City of Vallejo, No. 08-26813-A-9, 2008 WL 4180008, at *2 (Bankr. E.D. Cal. Sept. 5, 2008), aff'd, 408 B.R. 280 (9th Cir. BAP 2009). "Recent adverse economic conditions" caused Vallejo's revenues to decrease. Id. These conditions included not only those predictably associated with the financial crisis, but such contingencies as the closure of a Wal-Mart that had been a large source of sales tax revenue; the loss of shared revenue from a Six Flags/Marine World after Vallejo's ownership interest in the amusement park was bought out; and the unexpected retirement of several police officers and firefighters, who became entitled to millions of dollars in unbudgeted retiree payouts. Id. at *2, *5.
Vallejo implemented austerity measures, including cutting funds to its senior center, library, parks, symphony, and convention and visitors bureau; using vehicles and equipment well beyond their expected lives; and reducing employee rolls by 87 full-time positions. Id. at *3. Nevertheless, Vallejo's "ability to provide minimal levels of service to its residents and provide for their basic health and safety" was seriously threatened. Id. at *5. Pension obligations and benefits due under collective bargaining agreements with several unions could not easily be adjusted. Id. at *3. California laws made it difficult for Vallejo to raise taxes or borrow funds. As the Bankruptcy Appellate Panel noted, "Proposition 13 capped property tax rates to 1% of full cash value. Proposition 218 limited Vallejo's ability to raise any other taxes without a majority vote. Article XVI, section 18 of the California Constitution also
Vallejo was not alone among cities severely affected by the 2007-08 financial crisis. 2008 and the years since have witnessed a small but impactful resurgence in municipal bankruptcy filings. While most have been commenced by special-purpose districts, such as hospital, utility, or sanitation authorities, several cities have filed for Chapter 9 protection, including San Bernardino, California; Stockton, California; Hillview, Kentucky; and Detroit, Michigan. See Bankrupt Cities, Municipalities List and Map, Governing (last updated Aug. 21, 2015).
Scholars have criticized the very concept of municipal bankruptcy as it is codified by Chapter 9 for a variety of reasons, including that it harms creditors and makes future lending unattractive, and that it hamstrings more flexible state-law solutions. See Omer Kimhi, Chapter 9 of the Bankruptcy Code: A Solution in Search of a Problem, 27 Yale J. Reg. 351, 384-85 (2010) (advancing the former argument); Michael W. McConnell & Randal C. Picker, When Cities Go Broke: A Conceptual Introduction to Municipal Bankruptcy, 60 U. Chi. L. Rev. 425, 494-95 (1993) (advancing the latter). Yet experts have warned that the surge in municipal bankruptcies that began during the financial crisis may not be over. See, e.g., William C. Dudley, President & Chief Exec. Officer, Fed. Reserve Bank of N.Y., Opening Remarks for the Chapter 9 and Alternatives for Distressed Municipalities and States Workshop (Apr. 14, 2015),
Our case law construing Chapter 9 is scant, and this appeal confronts us with a novel legal issue, of the kind that often surfaces when changing social and economic conditions awaken dormant statutes. But Chapter 9 has awakened, and we do not presume further disputes over its interpretive and practical complexities will remain long at rest.
On May 30, 2008, one week after Vallejo's initial bankruptcy filing, Defendants filed a notice stating that this action was automatically stayed pursuant to 11 U.S.C. § 362. The district court — perhaps recognizing the oddity that Vallejo's bankruptcy could automatically stay an action in which Vallejo was no longer a party, and neither the plaintiffs nor the defendants were debtors — ordered the "non-bankrupt parties [to] show cause why this action should not be stayed in its entirety...." In response, the parties stipulated in writing that Vallejo's bankruptcy filing triggered an automatic stay "pursuant to 11 U.S.C. Section 362," though they did not elaborate as to why. On August 5, 2008, the district
About a week after his case was stayed, Deocampo filed a proof of claim in Vallejo's pending bankruptcy proceedings. This stated that the amount of his claim was $300,000, and the basis for the claim was "Personal Injury."
Subsequently, Vallejo filed a Second Amended Plan for the Adjustment of Debts ("Plan") with the bankruptcy court. Vallejo anticipated that, under that Plan, litigation claimants would recover approximately 20 to 30 percent of the value of any claims below $500,000. On August 4, 2011, the bankruptcy court entered an order confirming the Plan, which became binding on all creditors on November 1, 2011.
The district court lifted the stay on Plaintiffs' case on August 24, 2012. Following a 13-day trial, the jury returned a special verdict in favor of Deocampo. The jury found that the Officers had unreasonably seized Deocampo by using excessive force against him during the course of the arrest. It awarded Deocampo $50,000 in compensatory damages. On August 23, 2013, the district court entered judgment in accordance with the jury verdict.
The Officers then moved for relief from judgment pursuant to Federal Rule of Civil Procedure 60(b). They contended the judgment and fee award (collectively, the "Judgment") were effectively claims against Vallejo that were subject to adjustment under the Plan. The district court denied the Rule 60(b) motion, reasoning that, because Deocampo sought and obtained relief against the Officers in only their personal, rather than official, capacities, the Judgment was not discharged by
We have jurisdiction under 28 U.S.C. § 1291. We review for an abuse of discretion the district court's decision to deny a Rule 60(b) motion, and review de novo any questions of law underlying the decision to deny the motion. Lal v. California, 610 F.3d 518, 523 (9th Cir. 2010).
The Constitution empowers Congress to establish "uniform Laws on the subject of Bankruptcies throughout the United States." U.S. Const. art. I, § 8, cl. 4. Congress first entered the field of municipal bankruptcy in the 1930s, when, confronted by the Great Depression, it enacted the precursor to Chapter 9. See Puerto Rico v. Franklin Cal. Tax-Free Trust, ___ U.S. ___, 136 S.Ct. 1938, 1944, 195 L.Ed.2d 298 (2016). In the late 1970s, also a time of economic hardship for local governments, Congress enacted the most recent major overhaul to Chapter 9. See generally Kimhi, supra, at 366-69. The House Report observed that "the term `bankruptcy' in its strict sense is really a misnomer for a [C]hapter 9 case." H.R. Rep. No. 95-595, at 263 (1977). Thus, although the "general policy underlying" Chapter 9 is to give the municipal debtor "a breathing spell from debt collection efforts in order that it can work out a repayment plan with its creditors," the municipal debtor,
When a Chapter 9 debtor's plan has been confirmed by the bankruptcy court, and certain other procedural requirements have been fulfilled, see 11 U.S.C. § 943(b), the debtor is generally discharged from debts that have not been "excepted from discharge by the plan or order confirming the plan."
11 U.S.C. §§ 524(a)(1)-(2), 901.
The Officers do not contend that Vallejo's bankruptcy discharge wiped out the Judgment against them entirely. Rather, it is their position that the claim for which Deocampo filed proof in Vallejo's bankruptcy proceedings was subject to the Plan's adjustment schedule, reducing the claim's value to 20 to 30 percent of the Judgment. The Officers contend that, to the extent the Judgment purports to create an obligation distinct from that adjusted claim, the confirmation of the Plan discharged and rendered this obligation void. See 11 U.S.C. §§ 524(a)(1)-(2), 944(b)-(c).
Of course, it was Vallejo, not the Officers, that declared bankruptcy and adjusted its debts, and the Judgment was entered against the Officers solely in their personal capacities. The Officers argue, however, that the Judgment was brought within the ambit of the Plan by the California Government Code, which broadly requires public entities like Vallejo to indemnify their employees in litigation arising from the employees' performance of official duties. The Officers rely principally upon Section 825 of the Government Code, which in relevant part provides:
Cal. Gov't Code § 825(a).
Section 825 requires the public entity to indemnify its employee for compensatory damages awarded under 42 U.S.C. § 1983 and attorney's fees the employee is ordered to pay under 42 U.S.C. § 1988. See Williams v. Horvath, 16 Cal.3d 834, 129 Cal.Rptr. 453, 548 P.2d 1125, 1132-34 (1976) (en banc). Other California Government Code provisions require the public entity to provide for its employee's defense against an indemnifiable action upon the employee's request, and authorize the employee to compel his or her employer to make any required defense or indemnification
The Officers advance two related arguments why Vallejo's statutory indemnification obligations subjected the Judgment to adjustment under the Plan. First, they argue that, by operation of law, the Judgment is Vallejo's liability rather than their own. Second, the Officers argue that, even if the Judgment is deemed one against them personally rather than Vallejo, there is "such identity" between Vallejo and themselves that adjustment of the Judgment "fall[s] within the language or intent of the Plan." We address these arguments in turn.
The Officers argue that the California indemnification provisions rendered the Judgment a personal liability of Vallejo. We disagree.
It is a basic precept of Section 1983 litigation that a judgment against a government official in his personal capacity leads to the imposition of liability "against the individual defendant, rather than against the entity that employs him." Kentucky v. Graham, 473 U.S. 159, 167-68, 105 S.Ct. 3099, 87 L.Ed.2d 114 (1985). Thus, "an award of damages against an official in his personal capacity can be executed only against the official's personal assets." Id. at 166, 105 S.Ct. 3099.
We have held that, for purposes of the Eleventh Amendment, the indemnification obligation imposed by California Government Code Section 825 does not render a personal-capacity suit against a state employee one against the state, and so sovereign immunity does not extend to the employee. Demery v. Kupperman, 735 F.2d 1139, 1147 (9th Cir. 1984); see also Ashker v. Cal. Dep't of Corr., 112 F.3d 392, 395 (9th Cir. 1997); cf. Ronwin v. Shapiro, 657 F.2d 1071, 1074-75 (9th Cir. 1981). Rather, the statute creates a "purely intramural arrangement between a state and its officers," because if a plaintiff "prevails on the merits, the court will not be ordering the state to do anything; it will only be ordering the official to pay damages. If the state official desires indemnification under the state statute, he must bring suit in a state court." Demery, 735 F.2d at 1147-48.
We find the Demery line of cases persuasive with respect to the matter at hand. It is true that these cases addressed disputes over the scope of sovereign immunity rather than bankruptcy discharge. However, the Officers' contention that the reach of these cases must be cabined to sovereign immunity is belied by the thoughtful and generally applicable approach with which these cases analyze the attribution of liability between public entities and their officers. This approach is equally applicable here. The Judgment embodies the jury's determination, by a preponderance of the evidence, that the Officers, acting in their personal capacities, seriously injured Deocampo while acting under the color of state law, as well as a concomitant Section 1988 fee award that Congress has seen fit to authorize for injuries of this nature. Deocampo is entitled to enforce the Judgment against the Officers personally, but he has no right to enforce it directly against Vallejo or its property. Graham, 473 U.S. at 166, 105 S.Ct. 3099. Vallejo may be obligated by statute to indemnify the Officers for the amount of the Judgment, but this "purely intramural arrangement" does not alter the fact that the Judgment itself is binding on the Officers
Therefore, we hold that California's indemnification statutes do not render a judgment or concomitant fee award against an indemnifiable municipal employee a liability of the municipal employer for purposes of adjusting or discharging the debts of a Chapter 9 debtor. The Judgment is the Officers' personal liability, not Vallejo's.
Alternatively, the Officers argue that, even if the Judgment is not Vallejo's debt by operation of law, the indemnity statutes create such identity between Vallejo's interests and their own that the Judgment is actually against the debtor and is thus subject to the Plan.
Other Circuits have held that a debtor's Chapter 11 bankruptcy plan may operate to discharge the debts of certain non-debtor third parties, provided the bankruptcy court has "accepted and confirmed [this discharge] as an integral part of reorganization." In re A.H. Robins Co., 880 F.2d 694, 702 (4th Cir. 1989) (quoting Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5th Cir. 1987)). We have rejected this construction of the Bankruptcy Code. While the bankruptcy court has broad powers to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title," 11 U.S.C. § 105(a), it cannot confirm a plan that does not comply with applicable Code provisions. 11 U.S.C. § 1129(a)(1). In general, 11 U.S.C. § 524(e) provides that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." Thus, we have "repeatedly held, without exception," that, in a Chapter 11 proceeding, "§ 524(e) precludes bankruptcy courts from discharging the liabilities of non-debtors." In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995) (citations omitted).
However, as the Officers point out, Chapter 9, unlike Chapter 11, does not incorporate Section 524(e). 11 U.S.C. § 901. As such, the rationale relied upon by Lowenschuss does not apply in Chapter 9 proceedings. We have not previously addressed the question of whether, in a proceeding to which Section 524(e) does not apply, Section 105 authorizes a bankruptcy court to confirm a plan that effects the adjustment or discharge of the debts of non-debtor third parties. We need not, and do not, answer this question here. Because the Plan does not, by its terms, purport to effect the third-party discharge advocated by the Officers, we do not opine on the power of the bankruptcy court to confirm a hypothetical plan that does so.
The Plan makes no express reference to indemnification or the discharge of claims against Vallejo employees. In asserting that the Plan nevertheless contemplated the discharge of such claims, the Officers rely upon open-ended, boilerplate language. The Plan provides that, following its effective date, all "Claims" are fully discharged, "whether against the City or any of its properties, assets or interests in property." The Plan defines "Claim" to mean "a claim against the City or the property of the City within the meaning of section 101(5) of the Bankruptcy Code."
The Officers confuse the breadth of the Bankruptcy Code's definition of "claim" with the breadth of the discharge or adjustment effected by a particular plan, including one that recites the statutory definition.
The Plan does not expressly release any debtor but Vallejo. The bankruptcy court's
On appeal, the Officers and various law enforcement association amici make a third, policy-oriented argument that denying the Officers relief from judgment would have dire consequences. They are concerned that a ruling in favor of Deocampo will inject uncertainty into the scope of indemnity coverage, demoralize officers, and dissuade them from zealously performing their duties, or deter them from even becoming police officers. These concerns are misplaced. The Officers will not be required to pay the Judgment out of their own pockets. Our conclusion that the Judgment is against the Officers personally, and not Vallejo, does not relieve Vallejo of its obligation to indemnify the Officers under California law. Although the Officers did not file proofs of claim in the bankruptcy proceedings, and Vallejo did not list them as creditors, it was not necessary for them to have done so to preserve their right to statutory indemnification.
Critically, under California law, the event giving rise to the Officers' claim for indemnification is Vallejo's provision of a defense for the Officers, not the alleged injury inflicted by the Officers or the plaintiffs' filing of a lawsuit. See Rivas v. City of Kerman, 10 Cal.App.4th 1110, 13 Cal.Rptr.2d 147, 150 (1992), as modified (Nov. 23, 1992) (construing Cal. Gov't Code § 825). Here, Vallejo undertook the Officers' defense on July 18, 2013, after the confirmation of the Plan.
All of the practical consequences of our decision fall upon Vallejo rather than the Officers. The Officers acknowledge as much in their briefing, which is replete with concerns about "the complete subversion of the goals of bankruptcy reorganization," and unsecured judgment creditors cutting ahead of others more senior in priority in a plan of adjustment. While we do not speculate why the Officers are so solicitous of these matters despite lacking any skin in the bankruptcy game, we note that, though Vallejo has not been a party to this action since 2007, Vallejo furnished the Officers' defense, and Vallejo's City Attorney, among others, continues to represent them on appeal. Like the misplaced concern with the demoralization of law enforcement,
Even if Chapter 9 clears a path for some municipal debtor to discharge or adjust the judgment debts of its indemnified employees in bankruptcy, Vallejo is not that debtor, and the Plan is not that path. The Officers are not entitled to relief from judgment, and the district court properly denied their Rule 60(b) motion.