Court Opinion

ID: 2965322
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:38:39.340922+00
Date Added: 2024-06-11T15:00:33.645737
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<pre>                  United States Court of Appeals <br>                      For the First Circuit <br> <br>                       ____________________ <br> <br>No. 97-1602 <br> <br>      FUTURA DEVELOPMENT OF PUERTO RICO, INC., ETC., ET AL., <br> <br>                     Plaintiffs - Appellees, <br> <br>                                v. <br> <br>              ESTADO LIBRE ASOCIADO DE PUERTO RICO, <br>           THE COOPERATIVE DEVELOPMENT ADMINISTRATION, <br>               THE COOPERATIVE DEVELOPMENT COMPANY, <br> <br>                     Defendants - Appellants. <br> <br>                       ____________________ <br> <br>No. 97-1603 <br> <br>             FUTURA DEVELOPMENT OF PUERTO RICO, INC., <br> <br>                      Plaintiff - Appellant, <br> <br>                                v. <br> <br>              ESTADO LIBRE ASOCIADO DE PUERTO RICO, <br>           THE COOPERATIVE DEVELOPMENT ADMINISTRATION, <br>               THE COOPERATIVE DEVELOPMENT COMPANY, <br> <br>                     Defendants - Appellees. <br> <br>                       ____________________ <br> <br>          APPEALS FROM THE UNITED STATES DISTRICT COURT <br> <br>                 FOR THE DISTRICT OF PUERTO RICO <br> <br>         [Hon. Salvador E. Casellas, U.S. District Judge] <br> <br>                       ____________________ <br> <br>                              Before <br> <br>                     Torruella, Chief Judge, <br> <br>                Boudin and Stahl, Circuit Judges. <br> <br>                      _____________________

    Jay A. Garca-Gregory, with whom Fiddler, Gonzlez & <br>Rodrguez, Paul B. Smith, Jr. and Smith & Nevares were on brief for <br>appellant Commonwealth of Puerto Rico. <br>    Alan M. Dershowitz, with whom Amy Adelson, Victoria B. Eiger, <br>Nathan Z. Dershowitz, Dershowitz & Eiger, P.C., Geoffrey Woods and <br>Woods & Woods were on brief for appellee/cross appellant Futura <br>Development of Puerto Rico, Inc. <br>    Cherie K. Durand, with whom Law Offices Benjamn Acosta, Jr.was on brief for defendants-appellees. <br> <br> <br>                       ____________________ <br> <br>                          May 6, 1998 <br>                       ____________________

          TORRUELLA, Chief Judge.  In an earlier proceeding, the <br>predecessor of plaintiff Futura Development of Puerto Rico, Inc. <br>("Futura") obtained a judgment against the Cooperative Development <br>Company ("CDC"), a public corporation and instrumentality of the <br>Commonwealth of Puerto Rico, in the amount of $12,266,000.  SeeU.S.I. Properties Corp. v. M.D. Construction Co., 860 F.2d 1 (1st <br>Cir. 1988).  After CDC failed to satisfy the judgment, Futura <br>brought this suit seeking a determination that CDC was an alter ego <br>of the Commonwealth of Puerto Rico, and that, as a de facto party <br>to the earlier litigation, the Commonwealth was liable for the <br>judgment.  On this theory of recovery, Futura was awarded summary <br>judgment.  See Futura Devel. of P.R. v. Puerto Rico, 962 F. Supp. <br>248 (D.P.R. 1997).  Futura also brought six other claims against <br>individual government employees under various causes of action, all <br>of which were dismissed by the district court sua sponte.  See id.  <br>The parties cross-appealed to this court.  We conclude that the <br>district court acted without proper jurisdiction in awarding <br>summary judgment to Futura on its alter ego theory and improperly <br>dismissed the remaining claims against the individual defendants. <br>                            Background <br>          On October 25, 1988, this court affirmed a district court <br>judgment entered pursuant to a jury verdict against CDC for <br>$12,266,000.  See U.S.I., 860 F.2d 1.  The jury found that CDC had <br>unilaterally terminated a construction contract with M.D. <br>Construction, predecessor in interest to Futura, which provided for <br>the building of a low-income housing project called "Ciudad <br>Cristiana."  The jury in that case rejected CDC's cross-claims <br>alleging that the Ciudad Cristiana property was contaminated with <br>mercury.  Jurisdiction in that case was premised entirely upon <br>diversity.  See id.  Now, almost ten years later, this court is <br>faced with the current dispute over satisfaction of that judgment. <br>          CDC is a public corporation that was created by the <br>Puerto Rico Legislative Assembly in order to develop housing <br>cooperatives across Puerto Rico.  See P.R. Laws Ann. Tit. 5,  981 <br>et seq.  A majority of the CDC's budget each year is provided by <br>the Commonwealth.  Since the original litigation, the Commonwealth <br>has engaged in a de facto liquidation of CDC in order to avoid <br>satisfying the sizable judgment pending against it.  Specifically, <br>the Commonwealth has failed to provide for satisfaction of the <br>judgment in CDC's budgets, stripped CDC of its assets, transferred <br>its employees, and replaced CDC in the organizational chart of <br>Commonwealth agencies and public corporations.  During its <br>liquidation, CDC settled debts with some creditors, but not with <br>Futura.  CDC, insolvent and devoid of official responsibility, now <br>exists in name only. <br>          Futura, frustrated by these tactics, brought this suit <br>against the Commonwealth in federal court under the court's <br>enforcement jurisdiction.  Futura argues that the Commonwealth of <br>Puerto Rico is liable for the original judgment because it was a de <br>facto party to the original litigation.  This assertion is <br>supported not only by the generally close relationship between the <br>Commonwealth and the CDC, but specifically by the fact that the <br>Attorney General of Puerto Rico took over the original litigation <br>for CDC.  Furthermore, in its closing argument to the jury in that <br>original litigation, CDC argued that any judgment against it would <br>have to be paid with Puerto Rico tax dollars. <br>          The Commonwealth argues that, even if CDC were its "alter <br>ego," it retains Eleventh Amendment immunity from this suit in <br>federal court.  Despite its active participation in the defense of <br>the original suit and use of the "tax dollars" argument with the <br>jury, the Commonwealth asserts that it did not implicitly waive its <br>immunity.  The district court disagreed, awarding summary judgment <br>in Futura's favor on the first count, and dismissing sua sponteFutura's remaining claims against the individual defendants.  See962 F. Supp. at 257-58.  Because we conclude that the district <br>court acted without proper jurisdiction, we do not reach the <br>questions raised regarding implicit waiver of Eleventh Amendment <br>immunity. <br>                             Analysis <br>I.  Enforcement Jurisdiction <br>          The first question to be resolved in this case is whether <br>the district court properly exercised jurisdiction over Futura's <br>claim against the Commonwealth.  The parties acknowledge that <br>federal question jurisdiction is inapplicable to Futura's alter ego <br>claim, and that the Commonwealth of Puerto Rico is not subject to <br>diversity jurisdiction.  Cf. 28 U.S.C.  1332(d) (Puerto Rico <br>treated as a "state" for purposes of the statute, and therefore not <br>subject to diversity jurisdiction); Nieves v. University of P.R., <br>7 F.3d 270, 272 (1st Cir. 1993).  Futura's primary jurisdictional <br>argument is that federal jurisdiction over the alter ego claim <br>against the Commonwealth of Puerto Rico is premised upon federal <br>enforcement jurisdiction.  However, in actions such as this, where <br>the district court had original jurisdiction founded solely on <br>diversity jurisdiction, extending enforcement jurisdiction over a <br>non-diverse party without sound reasons for doing so may represent <br>an impermissible expansion of federal jurisdiction.  At the same <br>time, it is generally recognized that "without jurisdiction to <br>enforce a judgment entered by a federal court, 'the judicial power <br>would be incomplete and entirely inadequate to the purposes for <br>which it was conferred by the Constitution.'"  Peacock v. Thomas, <br>516 U.S. 349, 356 (1996) (quoting Riggs v. Johnson County, 6 Wall. <br>166, 187 (1868)).  Futura argues that under the doctrine of <br>enforcement jurisdiction, federal courts generally possess <br>jurisdiction over new proceedings in which a federal judgment <br>creditor seeks to impose liability for a judgment on a person or <br>entity not named in the original judgment, even where there is no <br>independent basis for federal jurisdiction.  However, Futura's <br>argument fails in light of recent Supreme Court doctrine. <br>          In Peacock, the Supreme Court explained that it had <br>"never authorized the exercise of [enforcement] jurisdiction in a <br>subsequent lawsuit to impose an obligation to pay an existing <br>federal judgment on a person not already liable for that judgment."  <br>Id. at 357.  In that case, Thomas, the plaintiff, had obtained a <br>large ERISA class action judgment against his former employer, Tru- <br>Tech, Inc.  Instead of paying the judgment, Peacock, an officer and <br>shareholder of Tru-Tech, settled Tru-Tech's debts with other <br>creditors, including himself, and ignored the debt owed to Thomas.  <br>After collection efforts proved unsuccessful, Thomas sued Peacock <br>in federal court using a "veil-piercing" rationale.  Despite the <br>absence of an independent jurisdictional basis for the proceeding, <br>the district and circuit courts agreed to exercise enforcement <br>jurisdiction in piercing the corporate veil.  The Supreme Court <br>reversed, explaining that there was insufficient factual dependence <br>between the claims raised in Thomas' suits to justify the extension <br>of enforcement jurisdiction.  See id. at 354-55.  <br>          Through Peacock, the Court reaffirmed the doctrine that <br>"[i]n a subsequent lawsuit involving claims with no independent <br>basis for jurisdiction, a federal court lacks the threshold <br>jurisdictional power that exists when ancillary claims are asserted <br>in the same proceeding as the claims conferring federal <br>jurisdiction."  Id. at 355 (citing Kokkonen v. Guardian Life Ins. <br>Co., 511 U.S. 375, ___, 114 S. Ct. 1673, 1671 (1994); H.C. Cook Co.v. Beecher, 217 U.S. 497, 498-99 (1910)).  The Court reasoned that, <br>while a proper exercise of enforcement jurisdiction will result in <br>efficiencies which outweigh comity concerns, an exercise of <br>enforcement jurisdiction over a factually independent proceeding <br>has no practical benefit for judicial economy.  See id. at 355-56.  <br>Where a plaintiff plans to use the federal court to examine the <br>defendant's identity and finances, as Thomas did in his veil- <br>piercing claim, the court is asked to delve into a new and separate <br>matter, and an independent basis for jurisdiction is required.  <br>This situation is distinguishable from where a party uses a post- <br>judgment proceeding to challenge or revisit an issue or <br>determination made by the federal court in the original proceeding. <br>          Futura attempts to distinguish Peacock on two grounds.  <br>First, Futura argues that, under Peacock, enforcement jurisdiction <br>will only be refused where the new defendant's liability is <br>premised upon that party's actions which took place after the <br>original judgment was rendered.  According to Futura, the <br>Commonwealth's liability stems from its actions before and duringthe original litigation, so Peacock is inapposite.  This nuanced <br>interpretation misses the rationale of the case. <br>          Peacock holds that enforcement jurisdiction does not <br>exist in a subsequent lawsuit to impose an obligation to pay an <br>existing federal judgment on a new defendant whenever the new <br>proceeding lacks factual dependence upon the old proceeding.  <br>Obviously, subsequent proceedings based upon defendant's actions <br>occurring after the original proceeding will necessarily be <br>factually independent from the primary proceeding.  However, <br>Peacock is broader than that.  Extending enforcement jurisdiction <br>to factually independent subsequent proceedings will not serve the <br>purpose of judicial efficiency whether those proceedings premise <br>liability upon pre- or post-judgment actions.  Peacock does not <br>limit itself, explicitly or implicitly, as Futura argues.  <br>Moreover, Peacock's discussion of other relevant circuit and <br>Supreme Court case law confirms that its holding is as broad as <br>dictated by its logic. <br>          The Peacock Court specifically declared that it had <br>granted certiorari to resolve a split among the various federal <br>courts of appeals.  See id. at 352, comparing Thomas v. Peacock, 39 <br>F.3d 493 (4th Cir. 1994); Argento v. Melrose Park, 838 F.2d 1483 <br>(7th Cir. 1988); Skevofilax v. Quigley, 810 F.2d 378 (3d Cir. 1987) <br>(en banc) and Blackburn Truck Lines, Inc. v. Francis, 723 F.2d 730 <br>(9th Cir. 1984) with Sandlin v. Corporate Interiors Inc., 972 F.2d <br>1212 (10th Cir. 1992) and Berry v. McLemore, 795 F.2d 452 (5th Cir. <br>1986).  In both Sandlin and Berry, the two cases that Peacockultimately supports, the circuit courts refused to exercise <br>enforcement jurisdiction over factually independent subsequent <br>proceedings where the new defendants' liability was premised upon <br>those parties' actions before the original judgments were rendered.  <br>Furthermore, in H.C. Cook Co. v. Beecher, a 1910 case reaffirmed by <br>the Court in Peacock, the Court held that enforcement jurisdiction <br>would be refused to parties attempting to make new defendants <br>answerable for an earlier judgment.  Beecher also involved alleged <br>liability on the part of new defendants based upon those <br>defendants' pre-judgment actions.  See Beecher, 217 U.S. at 498-99; <br>Thomas v. Peacock, 39 F.3d 493, 500-01 (4th Cir. 1994).  The <br>Peacock Court stated that Beecher was binding upon it.  See 516 <br>U.S. at 357-58.  Thus it is clear that Peacock's holding is not <br>limited to subsequent proceedings in which the new defendant's <br>liability is premised upon that party's post-judgment actions.  <br>          Futura's other attempt to distinguish Peacock is futile <br>as well.  Futura claims that since the Commonwealth is the alter <br>ego of CDC, the Commonwealth is not really a "new" defendant.  <br>According to this argument, whereas Peacock was not liable for the <br>primary judgment until after the subsequent hearing, the <br>Commonwealth was liable to Futura from the moment that the jury <br>returned its verdict in the original proceeding.  Thus, the <br>viability of Futura's argument depends entirely upon our ruling <br>that, unlike a generic veil-piercing claim, which represents a <br>substantive rule of liability, an alter ego claim is a mere factual <br>determination that identifies an original judgment debtor. <br>          Although we do not discount the possibility that some <br>other alter ego claims can be so characterized, in this case, the <br>Commonwealth and CDC are undeniably seperate jural entities, and <br>CDC (but not the Commonwealth) was the original judgment debtor.  <br>See P.R. Laws Ann. tit. 5,  981(d) (stating that the Commonwealth <br>is not liable for the debts of CDC).  It is clear, then, that this <br>alter ego claim seeks to do more than simply identify the original <br>judgment debtor.  <br>          It cannot be denied that this case is separate from the <br>original proceeding.  Like the veil-piercing claim in Peacock, an <br>alter ego claim involves an independent theory of liability under <br>equity, complete with new evidence.  See Note, Piercing the <br>Corporate Law Veil: The Alter Ego Doctrine Under Federal Common <br>Law, 95 Harv. L. Rev. 853, 853 n.1 (veil-piercing and alter ego <br>claims are part of the same doctrine).  Although a judgment <br>entered pursuant to such a finding can affect previously existing <br>judgments and other debts, the claim requires a subsequent and <br>distinct inquiry from the court. <br>          To adopt Futura's argument, we would be forced to treat <br>the corporate form of CDC as a complete nullity -- to look through <br>its legal identity to the party standing behind it -- and to do so <br>under the guise of making a factual determination necessary to <br>determine our subject matter jurisdiction over this case.  Cf.United States v. United Mine Workers, 330 U.S. 258, 292 n.5 (1947).  <br>This would be an unwarranted expansion of our jurisdiction.  Alter <br>ego/veil-piercing claims involve a substantive theory for imposing <br>liability upon entities that would, on first blush, not be thought <br>liable for a tort or on a contract.  See, e.g., Resolution Trust <br>Corp. v. Smith, 53 F.3d 72, 79-80 (5th Cir. 1995); Thomas v. <br>Peacock, 39 F.3d 493, 499 (4th Cir. 1994), rev'd on other grounds, <br>116 S. Ct. 862 (1996). <br>          Thus, the Commonwealth is in the same position as the <br>defendants in Beecher and Sandlin, who had also been sued under <br>alter ego rationales.  See Sandlin, 972 F.2d at 1217-1218.  As <br>previously discussed, Peacock supports both cases, wherein the <br>federal courts ultimately refused to extend enforcement <br>jurisdiction.  Thus, insofar as alter ego theories require <br>factually independent proceedings, they will not subvert the rule <br>of Peacock.  This rule is determinative in this case. <br>II.  Supplemental Jurisdiction <br>          In the alternative, Futura argues that its alter ego <br>claim is within the district court's supplemental jurisdiction <br>because that claim is so related to its civil rights claims against <br>the individual defendants, claims over which the court undeniably <br>has original jurisdiction, that it forms part of the same case or <br>controversy.  See 28 U.S.C.  1367.  We do not find this argument <br>persuasive. <br>          Although its alter ego has pre- and post-judgment <br>components, Futura carefully crafted the allegations in its alter <br>ego claim to emphasize the pre-judgment relationship between the <br>Commonwealth and CDC.  It stressed the close ties between CDC and <br>the government that existed before and during the original case.  <br>It did so because its only chance to penetrate Puerto Rico's <br>Eleventh Amendment immunity was to argue that the Commonwealth, <br>through its behavior in the case, waived its immunity.  Futura <br>recognized that, were it to rely upon the Commonwealth's post- <br>judgment liquidation of CDC in its alter ego claim, Puerto Rico <br>would have Eleventh Amendment immunity from the claim that would be <br>virtually unassailable, as no waiver of such immunity can be <br>inferred from the Commonwealth's post-judgment conduct.  Futura's <br>alter ego claim simply cannot be saved by the argument that it <br>forms part of the same case or controversy as the civil rights <br>claims, all of which are premised upon post-judgment conduct.  And <br>even if we were to agree that there existed sufficient relatedness <br>between Futura's claims against the individual defendants and the <br>post-judgment components of Futura's alter ego claim to bring these <br>components within our supplemental jurisdiction, the Eleventh <br>Amendment would, for reasons already explained, render us powerless <br>to grant Futura any relief against the Commonwealth. <br>          In any event, we do not find sufficient relatedness <br>between these claims because there is no common nucleus of <br>operative facts shared by both the civil rights claims and the <br>alter ego claim.  See BIW Deceived v. Local S6, Indus. Union of <br>Marine and Shipbuilding Workers, 132 F.3d 824, 833 (1st Cir. 1997) <br>(federal courts may only assert supplemental jurisdiction under 28 <br>U.S.C.  1367 where the claims arise from the same "nucleus of <br>operative facts"). The claims do not overlap in theory or <br>chronology.  The cases are sufficiently distinct to require an <br>independent jurisdictional basis.  Any holding to the contrary <br>would be inconsistent with the jurisdictional requirements of <br>section 1332, and thus in direct contravention of section 1367. <br>          As the district court observed, the Commonwealth of <br>Puerto Rico "stood behind CDC in filing an action of questionable <br>merit in this Court, and when that backfired and resulted in an <br>adverse judgment of $12.3 million, it sought to preclude collection <br>of the same."  962 F. Supp. at 257.  Indeed the Commonwealth's <br>treatment of M.D. Construction/Futura throughout these proceedings <br>has been despicable, and may result in hesitation by contractors to <br>do business with public corporations funded by Puerto Rico, as well <br>as other dire consequences for its financial reputation. However, <br>federal courts are of limited jurisdiction, and may not weigh the <br>equities of a case until jurisdiction has been established.  SeeHercules, ___ U.S. at ___, 116 S. Ct. at 989.  In this case, Puerto <br>Rico, like any state, enjoys the sovereign privilege not to be sued <br>in federal court under diversity.  Having concluded that neither <br>enforcement nor supplemental jurisdiction exists over this suit, we <br>must turn a blind eye to any perceived injustices delivered at the <br>hands of the Puerto Rican government. <br>III.  Sua Sponte Dismissal of Futura's Other Claims <br>          After awarding summary judgment for Futura on the first <br>cause of action, the district court dismissed the six remaining <br>causes of action Futura had brought against individual defendants.  <br>Although the district court's desire to dispose of these claims is <br>understandable in light of its having provided for the full <br>satisfaction of the original judgment through its award of summary <br>judgment on the first cause of action, the sua sponte dismissal of <br>these remaining claims was premature.  Because we herein vacate the <br>district court's award of partial summary judgment, these remaining <br>claims become even more potentially significant. <br>          This court has held that, in limited circumstances, sua <br>sponte dismissals of complaints under Rule 12(b)(6) of the Federal <br>Rules of Civil Procedure are appropriate.  See Wyatt v. City of <br>Boston, 35 F.3d 13, 14 (1st Cir. 1994).  However, such dismissals <br>are erroneous unless the parties have been afforded notice and an <br>opportunity to amend the complaint or otherwise respond.  See id.; <br>Street v. Fair, 918 F.2d 269, 272 (1st Cir. 1990) (per curiam); <br>Literature, Inc. v. Quinn, 482 F.2d 372, 374 (1st Cir. 1973).  <br>          In this case, Futura's initial complaint contained four <br>causes of action against individual defendants, each a government <br>employee.  The individuals were sued under the Equal Protection <br>Clause, Due Process Clause, and for federal civil rights violations <br>and tortious interference with contractual relationships under <br>Puerto Rico law.  These causes of action were improperly pled in <br>the initial complaint because they contained insufficient factual <br>allegations to establish a causal nexus between the named <br>defendants' conduct and the alleged violations of law.  See 962 F. <br>Supp. at 257.  After receiving various motions to dismiss and a <br>Magistrate's Report and Recommendation that these claims be <br>dismissed, the district court dismissed the claims without <br>prejudice.  Futura then filed an amended complaint, devoting sixty <br>pages exclusively to detailed claims against the individual <br>defendants.  This amended complaint also contained two completely <br>new claims under the Contracts Clause and Puerto Rican tort law.  <br>Without any notice to the parties in this case, the district court <br>dismissed with prejudice all causes of action against the <br>individual defendants.  The district court cursorily concluded that <br>"the amended verified complaint does not . . . cure the defects of <br>the original one [because it] fails to draw a nexus between the <br>individual defendants and the government's scheme to preclude <br>payment of the judgment in his favor."  Id. at 258. <br>           The district court erred in dismissing these claims sua <br>sponte without providing the parties with notice and an opportunity <br>to respond.  See Wyatt, 35 F.3d at 14.  The amended complaint <br>contained new causes of action and more specific allegations of <br>fact.  Futura reasonably believed that its amended complaint <br>addressed the court's initial concerns, and was entitled to address <br>any new or continuing infirmities that the court perceived.  <br>Accordingly, the dismissal of these claims is reversed, and they <br>are remanded for further proceedings. <br>                            Conclusion <br>          For the reasons stated herein, we vacate the district <br>court opinion as to count one of the verified amended complaint and <br>dismiss that count.  We reverse the district court's sua spontedismissal of counts two through seven and remand those claims for <br>further proceedings consistent with this opinion.  Finally, we wish <br>to note again the manifest injustice of the conduct of the <br>government of the Commonwealth of Puerto Rico throughout this <br>affair.  It has cleverly used its sovereignty to shield itself from <br>the fair consequences of its actions, and has been aided by recent <br>Supreme Court doctrine.  Peacock, however, is a relatively new <br>case, and circuit courts are applying it differently.  Cf. Matos v. <br>Richard A. Nellis, Inc., 101 F.3d 1193, 1195 (7th Cir. 1996) <br>(remarking that after Peacock, it is "not altogether clear" in <br>which types of federal litigation an independent ground of <br>jurisdiction is necessary to pierce the corporate veil).  As the <br>doctrine of enforcement jurisdiction evolves, perhaps fewer unjust <br>consequences will flow from it.  This case might be well-served by <br>the Supreme Court's attention. <br>          No costs.</pre>

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