Opinion ID: 202647
Heading Depth: 2
Heading Rank: 1

Heading: First Prong: Alleged Deprivation of Constitutional Right

Text: 66 Here we ask whether the facts, [t]aken in the light most favorable to the party asserting the injury . . . show the officer's conduct violated a constitutional right[.] Saucier v. Katz, 533 U.S. 194, 201, 121 S.Ct. 2151, 150 L.Ed.2d 272 (2001). As we have noted, [t]he first prong inquiry at this 12(b)(6) stage is unlikely to be very specific, given that federal civil practice is based on notice pleading, where great specificity is not required, and that there is no heightened pleading requirement for civil rights cases. Riverdale Mills Corp. v. Pimpare, 392 F.3d 55, 61 (1st Cir.2004) (citations omitted). The JUA argues that Flores Galarza took its private property without compensation in violation of the Fifth and Fourteenth Amendments, by physically appropriating the insurance premiums, the interest lost as a result of the withholding of those premiums, the Overstated Reserve Funds, and the Out-of-Pocket Funds. This alleged violation of its constitutionally protected property rights, the JUA argues, is thus sufficient to satisfy the first prong of the qualified immunity analysis. Flores Galarza argues that the JUA fails to allege a taking of its property in satisfaction of the first prong of the qualified immunity analysis for two reasons: first, the JUA is a state-created entity, which, like the state itself, lacks the capacity to allege a taking under § 1983; and second, the complaint does not allege the elements of a successful takings claim. 67
68 Flores Galarza's argument that the JUA, as a state-created entity, simply does not enjoy constitutional rights and thus is wholly incapable of setting forth a violation of constitutionally protected property rights, is his standing challenge recast in qualified immunity terms. We have already rejected this standing argument. The JUA has the capacity to allege an unconstitutional taking of its property.
69 The Takings Clause of the Fifth Amendment provides that private property [shall not] be taken for public use, without just compensation. U.S. Const. amend. V. Takings claims involve a two-step inquiry. To make a cognizable claim of a taking in violation of the Fifth Amendment, the plaintiffs must first show that they possess a recognized property interest which may be protected by the Fifth Amendment. The plaintiffs must point to credible sources for their claimed property interest . . . `such as state law-rules or understandings that secure certain benefits and that support claims of entitlement to those benefits.' Wash. Legal Found. v. Mass. Bar Found., 993 F.2d 962, 973 (1st Cir.1993) (quoting Bd. of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972)); see also Parella v. Ret. Bd. of R.I. Employees' Ret. Sys., 173 F.3d 46, 58 (1st Cir.1999) ([P]laintiffs must first establish an independent property right before they can argue that the state has taken that right without just compensation.). 70 Assuming that the plaintiff can establish a constitutionally protected property interest, the plaintiff must next show that the challenged action cause[d] an illegal taking of th[at] interest[]. Wash. Legal Found., 993 F.2d at 974. The Supreme Court has recognized two types of takings: physical takings and regulatory takings. See Brown v. Legal Found. of Wash., 538 U.S. 216, 233, 123 S.Ct. 1406, 155 L.Ed.2d 376 (2003). As already noted, the JUA asserts a physical taking, and we therefore confine our analysis to that strand of takings law. 29 71 A physical taking occurs either when there is a condemnation or a physical appropriation of property. Philip Morris, Inc. v. Reilly, 312 F.3d 24, 33 (1st Cir.2002) (en banc). Physical takings challenges involve[] the straightforward application of per se rules, which means that [w]hen the government physically takes possession of an interest in property for some public purpose, it has a categorical duty to compensate the former owner. Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg'l Planning Agency, 535 U.S. 302, 322, 122 S.Ct. 1465, 152 L.Ed.2d 517 (2002); see also Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537, 125 S.Ct. 2074, 161 L.Ed.2d 876 (2005) (The paradigmatic taking requiring just compensation is a direct government appropriation or physical invasion of private property.). Temporary [physical] takings . . . are not different in kind from permanent takings, for which the Constitution clearly requires compensation. First English Evangelical Lutheran Church v. County of L.A., 482 U.S. 304, 318, 107 S.Ct. 2378, 96 L.Ed.2d 250 (1987) (quotation marks omitted). 72 For purposes of satisfying the first prong of the qualified immunity analysis, the JUA need not prove the taking of a constitutionally protected property interest; it need only allege such a taking. See Saucier, 533 U.S. at 201, 121 S.Ct. 2151 (stating that the first prong of the qualified immunity analysis is satisfied where a constitutional right would have been violated were the allegations established); Mihos v. Swift, 358 F.3d 91, 98 (1st Cir. 2004) (For a plaintiff to overcome a qualified immunity defense, he must show that his allegations, if true, establish a constitutional violation....). In accordance with our two-step approach to takings claims, the JUA must first allege a constitutionally protected property right to the funds in dispute. The JUA argues that, pursuant to Law 253 and the 2002 Amendment, [t]he premiums collected and withheld by [Flores Galarza], the interest derived from the withheld premiums, and the Overstated Reserve Funds and Out-of-Pocket Funds—are the private property of the [JUA]. Second, the JUA must allege a taking of that property. The JUA argues that Flores Galarza's appropriation of the funds in dispute is equivalent to a permanent physical occupation and a per se taking for which just compensation must be paid. 73 Flores Galarza, on the other hand, argues that the JUA's takings claim fails both prongs of the takings analysis. According to Flores Galarza, the JUA cannot establish that it has a recognizable property interest in any of the funds in dispute or that Flores Galarza's appropriation of these funds constitutes a taking. 74 Taking all facts in the light most favorable to the party asserting the injury, as we must at this threshold stage of the qualified immunity analysis, Saucier, 533 U.S. at 201, 121 S.Ct. 2151, we find that the JUA alleges the taking of a constitutionally protected property interest in most, but not all, of the funds in dispute under Law 253 and the 2002 Amendment.
75
76 The JUA argues that the premiums collected and withheld by the [Secretary] are the private property of the [JUA] under the plain language of Law 253. According to the JUA, although the premiums pass through Flores Galarza's hands before reaching the JUA, the premiums are never funds of the Commonwealth. To the contrary, the JUA argues, given that the JUA's responsibility for the compulsory insurance comes into effect at the time the premiums are paid to the Secretary of the Treasury, the premium has to belong to the [JUA] at that time. Flores Galarza, the JUA argues, is thus merely a fiduciary who holds the premiums for the benefit of the JUA, as demonstrated by the 2002 Amendment's reference to the Secretary of the Treasury's collection service performed in favor of the [JUA]. P.R. Laws Ann. tit. 26, § 8055(c). Flores Galarza, on the other hand, contends that Law 253 does not entitle JUA to ownership of the collected premiums until they are transferred to it by [Flores Galarza]. Therefore, Flores Galarza argues, because Law 253 does not state when the Secretary must transfer the insurance premiums to the JUA, his retention of the $173 million in premiums was not a withholding of private property—it was merely a temporary retention or delay in the transfer of funds which did not yet belong to the JUA. 77 In our view, Law 253 supports the JUA's claim of a property right to that portion of the insurance premiums not owed to privately insured motorists or their insurers (Earned Premiums 30 ). Law 253 created the JUA for [t]he main purpose of ... provid[ing] the compulsory liability insurance to the applicants for said insurance that have been rejected by private insurers. Id. § 8055(b). As an insurer, the JUA is entitled to the Earned Premiums. Law 253 gives the JUA the power to hold property, and provides that the JUA shall receive premiums from the Secretary and that the Secretary shall transfer these premiums to the JUA. While the Secretary collects the insurance premiums and holds them for some unspecified amount of time before relinquishing them to the JUA, the Secretary is not an insurer—he is merely the custodian of these funds. As a custodian, the Secretary has no entitlement to the premiums, and his woefully undeveloped argument that the premiums do not vest in the JUA until the Secretary transfers them does not convince us otherwise. Cf. Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 162, 101 S.Ct. 446, 66 L.Ed.2d 358 (1980) ([T]he State's having mandated the accrual of interest does not mean the State or its designate is entitled to assume ownership of the interest.). The JUA has successfully alleged an entitlement to the Earned Premiums under Law 253, and therefore a property interest in those funds. See id. at 161, 101 S.Ct. 446 (recognizing interest earned on private funds as property entitled to protection under Fifth Amendment); see also Brown, 538 U.S. at 235, 123 S.Ct. 1406; Phillips v. Wash. Legal Found., 524 U.S. 156, 170-72, 118 S.Ct. 1925, 141 L.Ed.2d 174 (1998). 78 We thus proceed to the second step of the takings analysis (i.e., whether the property was taken). The JUA argues that Flores Galarza's withholding of the Earned Premiums constituted a permanent physical occupation and a per se taking for which just compensation must be paid. Specifically, the JUA contends that Flores Galarza physically took, albeit temporarily, $173 million of its insurance premiums, before transferring a large portion of those premiums to the JUA pursuant to the 2002 Settlement. The JUA's assertion of a property right in the Earned Premiums, together with its allegation of a physical appropriation of those funds, is sufficient to allege the taking of a constitutionally protected property interest in those premiums under the first prong of the qualified immunity analysis. See Webb's, 449 U.S. at 164-65, 101 S.Ct. 446 (holding that taking of interest earned on private funds was a taking). 79
80 While the JUA's alleged property right to the Earned Premiums is supported by Law 253, the same cannot be said for the JUA's alleged property right to the duplicate premiums paid by those already covered by privately obtained insurance policies (Duplicate Premiums). These premiums, Flores Galarza argues, constitute a double payment for the same insurance, and, therefore, do not belong to the JUA, but rather belong to privately insured motorists or their insurers who are entitled to reimbursement. We agree. 81 Based on the law in effect at the time the premiums were withheld, the JUA was obliged to return the Duplicate Premiums to those requesting reimbursement. If no claim was made to these premiums after seven years, that money would lapse to the general fund of the Commonwealth Treasury. See P.R. Laws Ann. tit. 26, §§ 2603, 2606-2607. Thus, even if no one claimed the Duplicate Premiums within the requisite seven years, these funds became the property of the Commonwealth—not the JUA. Just as the Secretary is a custodian of the Earned Premiums for the benefit of the JUA, the JUA is a custodian of the Duplicate Premiums for the benefit of either those entitled to reimbursement or, if the premiums go unclaimed, the Commonwealth. 82 The 2002 Amendment, which requires the JUA to transfer the Duplicate Premiums to the Secretary after just two years, explicitly recognizes the JUA's lack of a property right to the Duplicate Premiums. The Statement of Motives section of the 2002 Amendment states that 83 during the existence of the Association, certain funds have been accumulated that do not belong to it . . . [which] results from the fact that a great number of [privately insured] consumers ... pay the corresponding [compulsory liability insurance] premium . . . when they obtain the motor vehicle license for the first time or when they renew it, but they do not request the Association to reimburse the money as is their right. 84 (Emphasis added.) 85 Although claiming a right to all of the insurance premiums, the JUA concedes that a portion of the premiums collected by the Secretary (i.e., the Duplicate Premiums placed in the Reserve) may belong to third parties: either motor vehicle owners with private insurance or private insurers who reimbursed their insureds. The JUA consequently admits that a large portion of the $73 million Reserve is the property of others. Given the lack of support for the JUA's claimed property right to the Duplicate Premiums, the JUA fails to allege a taking of this portion of the premiums under the first prong of the qualified immunity analysis. 86
87 Our determination that the JUA has not alleged a property interest in the Duplicate Premiums does not extend to the remainder of the Reserve Fund—the Overstated Reserve Funds—which consists of the cushion set aside by the JUA to ensure that the Reserve was large enough to meet all of the requests for reimbursement by insureds who purchased private insurance. As noted earlier, the $73 million Reserve held back by the Commonwealth allegedly contained approximately $10 million in excess funds—money that, as it turned out, was not needed for reimbursement because fewer individuals than estimated had purchased their own policies, which meant, in turn, that less of the Reserve than anticipated constituted Duplicate Premiums. 88 According to the JUA, since the [Overstated Reserve Funds] came from the [JUA] and do not, in fact, belong to others, they should have been accounted for as income for the [JUA]. Flores Galarza contends that since these funds are merely portions of the Reserve, which, in turn, is merely an accounting tool for allocating the Duplicate Premiums, the JUA has no proprietary interest[] in the[se] moneys. 89 The Statement of Motives section of the 2002 Amendment, which was in place prior to Flores Galarza's appropriation of the Overstated Reserve Funds in November 2002, explicitly provides that the $73 million Reserve consists of funds that do not belong to it [the JUA] as the result of the double payment of insurance premiums by some drivers. The 2002 Amendment therefore requires the JUA to immediately transfer to the Secretary the funds known in its annual statement as `Funds Retained by the Insurer Belonging to Others'— that is, the $73 million Reserve—and to continue doing so every two years. There is, however, no carve-out for the cushion portion of the Reserve that consists of Overstated Funds. In fact, the 2002 Amendment provides that the Reserve funds transferred to the Secretary necessarily include any reserve excess, and that this reserve excess may be used as resources in the General Fund. P.R. Laws Ann. tit. 26, § 8055(l). 90 The JUA argues, in essence, that to the extent the Amendment directs the transfer of the Overstated Reserve Funds to the Commonwealth, the provision effects a taking of the JUA's property. Under Law 253, the JUA is obliged to insure drivers who might otherwise be uninsurable; the premiums for that insurance are initially collected by the Secretary. The JUA argues that all of those collected funds, other than the Duplicate Premiums, constitute the Earned Premiums and thus belong to it. Indeed, the Insurance Commissioner's adjustment of the Reserve percentage in 2001 to more accurately reflect the percentage of traditionally insured vehicle owners indicates the Commonwealth's recognition that the JUA is entitled to any funds above the amount representing Duplicate Premiums. Notably, the Amendment identifies the funds to be transferred to the Commonwealth every two years as funds Belonging to Others. Presumably, any such funds that do not belong to others belong to the JUA. We therefore conclude that the JUA has alleged the taking of a constitutionally protected property interest in the Overstated Reserve Funds.
91 When Flores Galarza stopped transferring insurance premiums to the JUA in 2000 in order to meet the cash-flow needs of the Commonwealth, the JUA had to reimburse privately insured drivers and their insurers out of its own pocket. While the JUA presumably recouped some of its costs pursuant to the 2002 Settlement, the JUA alleges that there was still $13.6 million outstanding—an amount which the JUA argues should have been set off against the $73 million retained by Flores Galarza. The JUA alleges that the $13.6 million in Out-of-Pocket Funds used to reimburse insurance premiums from January to September 2002[is] the private property of the [JUA]. 92 The parties do not dispute that the Out-of-Pocket funds used by the JUA to reimburse third parties belonged to the JUA. Accordingly, the JUA alleges a property right in the Out-of-Pocket Funds. Turning to the second step of the takings analysis, the JUA alleges that Flores Galarza physically appropriated $13.6 million in Out-of-Pocket Funds from the JUA by retaining the full $73 million in Reserve funds. At this stage of the qualified immunity analysis, the JUA's assertion of a property right to the Out-of-Pocket Funds, together with its allegation of a physical invasion of those funds, is sufficient to allege the taking of a constitutionally protected property interest in those funds.
93 Our determination that the JUA alleges a property right to the Earned Premiums, the Overstated Reserve Funds and the Out-of-Pocket Funds compels a similar conclusion with respect to the interest lost as a result of the withholding of those monies. In Phillips, the Supreme Court held that interest income generated by client funds in IOLTA accounts was the private property of the client under the common law rule that interest follows principal. 524 U.S. at 165-72, 118 S.Ct. 1925; see also Webb's, 449 U.S. at 162, 101 S.Ct. 446 (The usual and general rule is that any interest ... follows the principal and is to be allocated to those who are ultimately to be the owners of that principal.). The fact that the Secretary is authorized to hold the Earned Premiums for some time before turning them over to the JUA is of no consequence. See Webb's, 449 U.S. at 162, 101 S.Ct. 446 (That lack of immediate right ... does not automatically bar a claimant ultimately determined to be entitled to all or a share of the fund from claiming a proper share of the interest, the fruit of the fund's use, that is realized in the interim.). By alleging a property right in the Earned Premiums, the Overstated Reserve Funds and the Out-of-Pocket Funds, the JUA also has alleged a property right in the resulting lost interest. 31 94 Turning to the second step of the takings analysis with respect to interest, the JUA alleges that by temporarily withholding the Earned Premiums, Flores Galarza physically took $14.2 million in interest generated by them. See Parella, 173 F.3d at 59 n. 10 (stating that in order to demonstrate a taking of interest, plaintiffs have the burden of proving that they had a constitutional right both to the principal (i.e., withheld benefits) and to the interest on that principal). The JUA's assertion of a property right in the interest generated by the Earned Premiums, together with its allegation of a physical taking of that interest, is sufficient to allege the unconstitutional taking of that interest under the first prong of the qualified immunity analysis. See Brown, 538 U.S. at 235, 123 S.Ct. 1406; Webb's, 449 U.S. at 164-65, 101 S.Ct. 446. 32 95
96 The JUA has successfully alleged that Flores Galarza committed a constitutional violation by taking its Earned Premiums, Overstated Reserve Funds, Out-of-Pocket Funds, and the interest generated thereon. The JUA has failed to allege a taking of the Duplicate Premiums or the interest generated thereon. Therefore, as we turn to the second prong of the qualified immunity analysis (i.e., whether the impermissibility of the taking was clearly established at the time of the violation), we exclude from our analysis the Duplicate Premiums and the related interest. 97