Opinion ID: 203140
Heading Depth: 2
Heading Rank: 3

Heading: Counts Two Through Four: Fraud and Unconscionability

Text: After its summary dismissal of Count One, the district court went on to dismiss the remaining three claims without providing prior notice to the parties. The district court explained: Though Count [One] is titled and focuses on seeking a declaratory judgment from the Court due to lack of consideration, [PREPA] also draws from its other counts, namely its fraud and fraud in the inducement counts, to support its arguments. Consequently, the Court here evaluates whether summary judgment is appropriate for each of Plaintiff's claims. Puerto Rico Electric Power Auth. v. Action Refund, 472 F.Supp.2d 133, 135 n. 1 (D.P.R.2006) ( PREPA I ). It is without question that district courts, in appropriate circumstances, are entitled to enter summary judgment sua sponte. See Celotex Corp. v. Catrett, 477 U.S. 317, 326, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); accord Berkovitz v. Home Box Office, Inc., 89 F.3d 24, 29 (1st Cir.1996). In an effort to limit the unfairness lurking in this approach, Sánchez v. Triple-S Mgmt. Corp., 492 F.3d 1, 7 (1st Cir.2007), we have required two conditions prior to the district court's exercise of such a right: First, the discovery process must be sufficiently advanced that the parties have enjoyed a reasonable opportunity to glean the material facts. Second, the district court must provide the targeted party appropriate notice and a chance to present its evidence on the essential elements of the claim or defense. Id. (quoting Berkovitz, 89 F.3d at 29). There is no dispute that the first Berkovitz requirement is satisfied: the parties had completed discovery and had even filed pretrial memoranda when the district court ruled on the defendants' motion for summary judgment as to Count One. The district court, however, failed to give any notice of its intention to enter summary judgment on the other three counts of the complaint. We have previously observed that a failure to provide adequate notice is not necessarily reversible error requiring a remand to the district court. See Vives v. Fajardo, 472 F.3d 19, 22 (1st Cir.2007) (finding that lack of notice was not reversible error where appealing party could not demonstrate prejudice) (citing Ward v. Utah, 398 F.3d 1239, 1245-46 (10th Cir. 2005); Bridgeway Corp. v. Citibank, 201 F.3d 134, 139-40 (2d Cir.2000); Yashon v. Gregory, 737 F.2d 547, 552 (6th Cir.1984)); see also O'Hara v. Gen. Motors Corp., 508 F.3d 753, 763-64 (5th Cir.2007) (applying a harmless error exception to the notice requirement); Gibson v. Mayor & Council of the City of Wilmington, 355 F.3d 215, 219 (3d Cir.2004) (recognizing a narrow exception to the notice requirement where the record is fully developed, the issue is purely legal, and there is no prejudice to the parties). Evidence that the appealing party was procedurally prejudiced as a result of the failure to provide notice before sua sponte dismissal requires reversal. If, however, the appellant cannot demonstrate such prejudiceby establishing that it was unable to present evidence in support of its position as a result of the unfair surprise the failure to provide notice is harmless error and a remand would be futile. [6] See Vives, 472, F.3d at 22. Our inquiry is focused on whether PREPA was procedurally prejudiced by the lack of notice. In the summary judgment order, the district court explained the appropriateness of summary judgment for all of the counts in the complaint because PREPA drew from those other counts to support its arguments. PREPA I, 472 F.Supp.2d at 135 n. 1. Specifically, PREPA presented arguments and supporting evidence in support of its fraud claims in its opposition to the defendants' motion for summary judgment on the declaratory judgment count. Even on appeal, PREPA fuses the counts together and alleges that the district court improperly granted summary judgment on Count One because the defendants acted fraudulently. [7] The procedural posture of this case is further complicated by subsequent orders by the district court. Following the court's dismissal of the complaint, the defendants moved for summary judgment on their counterclaim. As part of its opposition to the motion, PREPA argued that the court's sua sponte summary dismissal of its entire complaint, without proper notice, was contrary to Rule 56 and a violation of due process. In response, on March 15, 2007, the district court ordered PREPA to file an opposition to the summary disposition of the claims within ten days. On March 29, 2007, PREPA filed a motion to set aside judgment in which it asserted that genuine issues of material fact preclude the entry of summary judgment on all counts. PREPA's motion to set aside judgment provides us with a unique opportunity to review what, if any, additional information PREPA was prevented from presenting to the court as a result of the lack of notice. [8] A comparison between PREPA's filings on November 22 (opposition to summary judgment) and March 29 (motion to set aside judgment) reveals indistinguishable arguments regarding numerous allegedly fraudulent misrepresentations by Wallin, accompanied by several exhibits and deposition excerpts in support of those allegations. PREPA points to no additional material evidence that it would otherwise have presented to the court had it been given notice that the court was considering its fraud and fraudulent inducement claims. Therefore, with respect to Counts Two and Three (fraudulent inducement and fraud, respectively), PREPA is unable to demonstrate procedural prejudice as a result of the lack of notice. PREPA also fails to show prejudice with respect to Count Four, unconscionability. According to both the complaint and PREPA's motion to vacate judgment, this count is based on Wallin's allegedly unreasonable coerc[ion of PREPA] into agreeing to the 20% commission fee, based on Wallin's alleged misrepresentations about the length and complexity of the process. The arguments and evidence PREPA would have proffered in support of its arguments are the same as those, submitted to the court in its November opposition filings. As PREPA failed to demonstrate that it was procedurally precluded from providing evidence in support of its fraud claims, PREPA is likewise unable to make the same showing for its unconscionability claim. Any error by the district court in considering PREPA's additional claims on summary judgment was harmless. PREPA placed those claims at issue by raising them in its November reply brief to the defendants' motion for summary judgment, to which they attached numerous exhibits. When given the opportunity to demonstrate prejudice for the sua sponte dismissal, PREPA reasserted the same arguments and failed to identify evidence which it was precluded from presenting in support of its claims. Under these unique circumstances, PREPA was afforded an adequate opportunity to present the evidence in support of its claim.
On summary disposition, we take the facts as they appear in the record and draw inferences in favor of the non-moving party. Ortiz-Piñero v. Rivera-Arroyo, 84 F.3d 7, 11 (1st Cir.1996). Under Puerto Rico law, the party alleging fraud has the burden of demonstrating: (1) a false representation by the defendant; (2) the plaintiffs reasonable and foreseeable reliance thereon; (3) injury to the plaintiff as a result of the reliance; and (4) an intent to defraud. See Microsoft Corp. v. Computer Warehouse, 83 F.Supp.2d 256, 262 (D.P.R.2000); see also 31 L.P.R.A. § 3408. The applicable Puerto Rico contract law regarding fraud has a strong underlying presumption in favor of good faith and honesty; the party alleging fraud has the burden of presenting evidence which is strong, clear, unchallengeable, convincing, and conclusive, since a mere preponderance of the evidence is not sufficient to establish the existence of fraud in [Puerto Rico]. Prado Álvarez v. R.J. Reynolds Tobacco Co., 313 F.Supp.2d 61, 77 (D.P.R.2004) (quoting F.C. Imports, Inc. v. First Nat'l Bank of Boston, N.A., 816 F.Supp. 78, 87 (D.P.R.1993)), aff'd, 405 F.3d 36 (1st Cir.2005). In Counts Two and Three, PREPA alleges that Wallin, on behalf of Action Refund, made various misrepresentations regarding the necessity of retaining Action Refund's services. In its filings, PREPA elaborates on those allegations: (1) Wallin fraudulently represented that the process was complex and tedious despite knowing that it involved only a one-page verification document; and (2) `Wallin failed to notify PREPA of their prior, business relationship. [9] After review of the record, we conclude that PREPA cannot present strong and unchallenged evidence which establishes the existence of fraud. On the contrary, the evidence demonstrates that the allegations of fraudulent misrepresentation are challenged vigorously by the defendants. Moreover, PREPA's fraud claims fail for lack of reasonable reliance. See Wadsworth Inc., Schwarz-Nin, 951 F.Supp. 314, 323 (D.P.R.1996) ([T]he unreasonableness of the plaintiffs reliance may be regarded as sufficient evidence that he did not in fact rely upon the claimed false representation. (citing F.C. Imports, 816 F.Supp. at 87)). Puerto Rico law places little weight on a sophisticated and experienced business party's assertion of unknowing reliance. See Ramírez, Segal & Látimer v. Rigual, 23 P.R. Offic. Trans. 156, 166, 123 D.P.R. 161 (1989) (finding that the parties were savvy businessmen and persons well versed in business and financial matters and concluding that they must have been aware of the possible outcome of the contract's terms); Planned Credit of Puerto Rico, Inc. v. Page, 3 P.R. Offic. Trans. 341, 355 (1975) (looking at the plaintiff's education and business experience in rejecting the claim that he was deceived and induced into the transaction), cited with approval in Wadsworth, 951 F.Supp. at 325. Given the business sophistication of PREPA and the review of the Contract by its own legal department, the publicly available information regarding the claim application process, and PREPA's decision not to add specific contractual terms regarding the amount or type of work expected from Action Refund, any reliance upon the alleged misrepresentation is not reasonable. Furthermore, we reject PREPA's argument that the defendants committed fraud by failing to inform PREPA of Wallin's prior relationship with PREPA. This makes little sense from either a legal or business perspective. Wallin's allegedly prior contentious relationship was not hidden from PREPA; in fact, that relationship had been with PREPA itself. Cf. United States v. Josleyn, 206 F.3d 144, 159 (1st Cir.2000) (explaining that knowledge obtained by an employee in the course of his work and within his scope of authority is imputed to the employer company). To impose a duty on the defendants to disclose information known to PREPA through its employees would effectively fault them for PREPA's own deficiencies in institutional knowledge. Thus, as a matter of law, PREPA fails to meet the standard for fraud under Puerto Rico law. Given the facts of this case, PREPA's fourth claim, unconscionability, is disposed of quickly. Unconscionability is a traditional, equitable remedy which will void an otherwise legally valid contract. See 8 Williston on Contracts, § 18:1 (4th ed.2007). Puerto Rico law recognizes such judicial intervention where a contract exhibits an excessively onerous quality that reaches the point of bad faith, and defeats those rules of collective conduct that must be observed by every honest and loyal conscience. López de Victoria v. Rodríguez, 13 P.R. Offic. Trans. 341, 349, 113 D.P.R. 265 (1982); see also Casera Foods, Inc. v. Puerto Rico, 8 P.R. Offic. Trans. 914, 108 D.P.R. 850 (1979) (applying an equitable remedy when an unforeseeable change of circumstances alters the contract into an objectively unfair one). This is not such a case. PREPA, a billion-dollar utility freely signed the Contract after several weeks of review by its own legal department Cf. Riesett v. W.B. Doner & Co., 293 F.3d 164, 173 (4th Cir. 2002) (The unconscionability doctrine has no application to contracts . . . which were entered into by sophisticated parties who bargained at arms' length.). Therefore, the district court properly concluded that the defendants were entitled to judgment as a matter of law.