Citibank Global Markets, Inc. v. Rodriguez Santana

• Decision Date: 17 July 2009
• Docket Number: No. 08-1533.,No. 08-1739.,08-1533.,08-1739.
• Citation: 573 F.3d 17
• Court: U.S. Court of Appeals — First Circuit
• Parties: CITIBANK GLOBAL MARKETS, INC. d/b/a Smith Barney, Plaintiff, Appellee/Cross-Appellant, v. Luis RODRÍGUEZ SANTANA, Executor of the Estate of Luis Fernández Ramírez; Eli Díaz Rodríguez, Executor of the Estate of Luis Fernández Ramírez; Alfer Realty & Development Corp.; Central Plaza Corp.; Commonwealth Promoters, Inc.; Ogima Investments Corp., Defendants/Third-Party Plaintiffs-Appellants/Cross-Appellees, v. Jane Doe-Hernandez; Conjugal Partnership Doe-Hernandez; Juan Carlos Hernandez, Third-Party Defendants-Appellees.

573 F.3d 17

CITIBANK GLOBAL MARKETS, INC. d/b/a Smith Barney, Plaintiff, Appellee/Cross-Appellant, v. Luis RODRÍGUEZ SANTANA, Executor of the Estate of Luis Fernández Ramírez; Eli Díaz Rodríguez, Executor of the Estate of Luis Fernández Ramírez; Alfer Realty & Development Corp.; Central Plaza Corp.; Commonwealth Promoters, Inc.; Ogima Investments Corp., Defendants/Third-Party Plaintiffs-Appellants/Cross-Appellees, v. Jane Doe-Hernandez; Conjugal Partnership Doe-Hernandez; Juan Carlos Hernandez, Third-Party Defendants-Appellees.

No. 08-1533.

No. 08-1739.

United States Court of Appeals, First Circuit.

Heard May 6, 2009.

Decided July 17, 2009.

Rubén T. Nigaglioni, with whom Nigaglioni & Ferraiuoli Law Offices, PSC, was on brief, for defendant, third-party plaintiffs and appellants/cross-appellees.

Néstor M. Méndez Gómez, with whom Janitza M. García-Marrero and Pietrantoni Mendez & Alvarez LLP, were on brief, for plaintiff-appellee/cross-appellant.

Before LIPEZ, HANSEN,^* and HOWARD, Circuit Judges.

HOWARD, Circuit Judge.

In this appeal from the dismissal of a counterclaim, the appellants ask us to either set aside or reform a settlement agreement between two sophisticated parties because the circumstances of the negotiation carry a whiff of unseemliness, and there has been a suggestion of fraud. Considering all of the facts and circumstances surrounding the negotiation, we conclude that the settlement agreement is binding under Puerto Rico law, and we detect no fraud or absence of disclosure that justify unraveling or disturbing the agreement.

For its part, the victor below—Smith Barney—sought attorneys' fees under the Puerto Rico Rules of Civil Procedure and requested, pursuant to federal securities laws, findings regarding the parties' compliance with Rule 11. Concluding that it would be inconsistent with Puerto Rico law to assess fees for pressing a non-frivolous claim, and also that where the record is clear we need not remand for Rule 11 findings, we deny Smith Barney's cross appeal.

I. Facts

Sometime in early 2002,¹ Luis Fernandez Ramirez, an attorney, opened numerous brokerage accounts on behalf of himself and several closely-held corporations (referred to herein collectively as "Fernandez, et al.") with CitiBank Global Markets d/b/a Smith Barney.² Soon thereafter, Fernandez, et al. became dissatisfied with the brokerage commissions levied on their accounts, and as a result, threatened to move their considerable portfolios elsewhere. Not wanting to lose this business, in June 2003 Smith Barney agreed to a lower commission rate and to credit the difference between the higher commission rate charged to those accounts and seven-eighths of that commission rate. Moreover, Smith Barney proposed an even lower commission rate of ten cents per share for all future transactions. An even lower rate of three cents per share was proffered (and agreed upon) two months later, in August 2003.

It turned out that Smith Barney failed to honor any of these commitments, and actually charged the accounts brokerage commission charges in excess of its normal, published rates. In late 2005 or early 2006, senior managers in Smith Barney's Puerto Rico Office informed Fernandez of certain "irregularities" in the accounts that, according to Smith Barney, resulted in approximately $950,000 in commission overcharges across all of the accounts. Smith Barney offered to pay this amount in order to settle Fernandez's claims of commission overcharges and release it from further liability. Not content to rely on the verbal representations of senior officers at Smith Barney Puerto Rico, Fernandez repeatedly requested the calculations supporting this amount. Although Smith Barney initially resisted providing these calculations, it eventually relented.

On the morning of Friday, February 17, 2006, Smith Barney sent Fernandez the calculations supporting its proposed settlement amount. These calculations involved all eight accounts at issue and were voluminous, totaling forty-four legal-sized pages. Later that day, after Fernandez received the calculations, a representative of Smith Barney arrived with the settlement documents and a notary public in the hope of consummating a settlement with respect to the brokerage commissions.

Fernandez, who only hours earlier had received the working papers from which the settlement figures were derived, requested several changes to the settlement agreement, and then without reviewing the calculations he had so ardently requested, signed the settlement agreement.³ Among other provisions, Fernandez agreed

[to] release[], forever discharge[] ... and hold Smith Barney harmless ... from any and all actions, causes of action, complaints, charges, claims, liabilities, demands, damages, and costs of any kind ... whether matured or unmatured, fixed or contingent, known or unknown ... against Smith Barney from the beginning of the world to the date of this agreement by reason, including but not limited to [the securities accounts of Fernandez and the appellants].

In addition to this release, Fernandez further agreed that he "determined that this settlement is fair and reasonable under all the circumstances," that "this determination has been based solely upon his independent judgment," and that in reaching this conclusion he "had adequate opportunity to discuss and assess the merits of all his claims or potential claims with an attorney of his choice." In addition, Fernandez also agreed that he "cooperated in the drafting and preparation" of the settlement agreement.

A Smith Barney representative executed the agreement on the same day. Over the ensuing weekend, Fernandez reviewed the calculations Smith Barney had provided and realized that the settlement was not calculated on the basis of the lower commission rates of ten cents and three cents per share that were agreed upon in mid-2003. As a result of these and other alleged defects, on Tuesday, February 21 (Monday was a holiday), Fernandez sought to hold the settlement "in abeyance," in the hope of securing richer terms or rescinding the whole agreement.

Smith Barney, however, took the position that the settlement agreement was binding, and was unwilling to revisit the amount of compensation paid to Fernandez.⁴ On April 12, 2006, Smith Barney tendered checks to Fernandez totaling $947,128.71. Approximately two weeks later, Smith Barney sent Fernandez an executed copy of the settlement agreement that Fernandez had previously requested.

On June 27, 2006, Smith Barney filed a complaint in federal district court seeking, inter alia, a declaration that the settlement agreement was valid, an injunction prohibitng Fernandez, et al. from seeking arbitration, an order for specific performance of the agreement, and damages of $200,000 for appellants' alleged breach of the settlement agreement.

For his part, Fernandez (and his companies) filed a counterclaim asserting various theories under federal and Puerto Rico law. Fernandez later sought leave to amend the counterclaim, which was granted in April, 2007. The amended counterclaim alleged mail and wire fraud, as well as illegal appropriation in violation of the civil provisions of RICO, breach of fiduciary duty and breach of contract in violation of Puerto Rico law, breach of Puerto Rico's Act Against Organized Crime and Money Laundering, P.R. Laws Ann. tit 25, §§ 971 et seq., and for the first time, a claim of securities fraud, alleging violations of section 10b of the Securities Exchange Act, 15 U.S.C. § 77j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

In October, 2007, the district court granted Smith Barney's motion to dismiss the counterclaim. The district court grounded its decision primarily on the basis that the settlement agreement was valid and binding on the parties, and in the process, rejected the counterclaim brought by Fernandez et al. challenging the validity of the settlement agreement. Having found that the settlement agreement was valid and binding, see P.R. Laws Ann. tit. 31, § 4828, the district court concluded that with respect to these parties, the agreement had the same effect as res judicata, and therefore Fernandez, et al. could not pursue their counterclaim. See P.R. Laws Ann. tit. 31, § 4827. As a result, the district court did not consider Smith Barney's alternative defenses, including inter alia, defenses based on limitations, failure to plead scienter properly, and failure to meet the heightened pleading requirements of Rule 9 of the Federal Rules of Civil Procedure.

After the district court dismissed the counterclaim, Smith Barney sought attorneys' fees on an equitable theory, which the district court apparently interpreted to be a request for fees pursuant to the Puerto Rico Rules of Civil Procedure, based on Fernandez's alleged obstinate and vexatious challenges to the validity of the settlement agreement and because his pursuit of the counterclaim obstinately and frivolously extended the proceedings.⁵ See P.R. R. Civ. P. 44.1(d); see also P.R. Tel. Co., Inc. v. U.S. Phone Mfg. Corp., 427 F.3d 21, 33 (1st Cir.2005). In addition, Smith Barney sought attorneys' fees as a sanction for the defendants' alleged violation of Rule 11, pursuant to the standards for such sanctions under the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4(c), which requires district courts to make specific findings regarding compliance with Rule 11(b), mandates sanctions where a violation is found, and creates a presumption in favor of awarding attorneys' fees and costs for violations of Rule 11.

The district court denied Smith Barney's motion for attorneys' fees and entered final judgment. The parties' appeal and cross-appeal timely followed.

II. Fernandez's Appeal

We review the district court's decision to grant the motion to dismiss de novo, Gray, 544 F.3d at 324, and like the district court, we accept as true all of the appellants' well-pleaded facts and draw all reasonable...