761 F.2d 33 (1st Cir. 1985), 84-1372, Futura Development Corp. v. Centex Corp.

Docket Nº:84-1372.
Citation:761 F.2d 33
Party Name:FUTURA DEVELOPMENT CORPORATION, Plaintiff, Appellant, v. CENTEX CORPORATION, et al., Defendants, Appellees.
Case Date:April 30, 1985
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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761 F.2d 33 (1st Cir. 1985)

FUTURA DEVELOPMENT CORPORATION, Plaintiff, Appellant,

v.

CENTEX CORPORATION, et al., Defendants, Appellees.

No. 84-1372.

United States Court of Appeals, First Circuit

April 30, 1985

Heard Feb. 7, 1985.

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[Copyrighted Material Omitted]

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Harry E. Woods, Hato Rey, P.R., with whom Geoffrey M. Woods and Woods & Woods, Hato Rey, P.R., were on brief, for plaintiff, appellant.

Jay A. Garcia-Gregory, Hato Rey, P.R., with whom Francisco De Jesus Schuck, Salvador Antonetti-Zequeira, Maria Del Carmen Taboas, Fiddler, Gonzalez & Rodriguez, Hato Rey, P.R., Marshall Simmons, P.C. and Jenkens & Gilchrist, Dallas, Tex., were on brief, for defendants, appellees.

Before COFFIN, Circuit Judge, WISDOM, [*] Senior Circuit Judge, and BOWNES, Circuit Judge.

BOWNES, Circuit Judge.

Appellant-plaintiff, Futura Development Corporation, claims that Centex Corporation and various of its subsidiaries, officers, and directors defrauded it of payment on a promissory note and seeks to recover its losses via Sec. 10(b) of the Securities Exchange Act of 1934 and its implementing Rule 10(b)(5), 17 C.F.R. Sec. 240.10b-5 (1984); Sec. 17(a) of the Securities Act of 1933; and Puerto Rico law. The district court dismissed Futura's suit, finding that: its fraud claims were barred by the statute of limitations; the promissory note was not a security within the context of the federal securities laws; Sec. 17(a) of the Securities Act of 1933 did not provide a private cause of action; the misrepresentation by Chestnut Corporation, a subsidiary of Centex, if any, was not material; and that Futura could have and should have brought, at least, the commonwealth law fraud claims in its prior commonwealth court action and is now barred by res judicata and collateral estoppel from litigating them in federal court. We affirm the district court's decision on the grounds that the plaintiff's claim does not come within the ambit of the federal securities laws and that the Puerto Rico law claims are barred by res judicata.

I. FACTUAL SETTING

This is a tale in which, at every stage in the action, the plaintiff has proved to be its own worst enemy. The factual origins of this case date back to early 1975 when Futura, a Puerto Rico real estate development company, entered negotiations with Chestnut, a wholly owned subsidiary of

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Centex, to sell a tract of land suitable for the development of residential units in Rio Grande and Canovanas, Puerto Rico. Chestnut originally offered to buy a portion of the land (hereinafter referred to as Section One) consisting of approximately 108.0671 cuerdas (about 100 acres) for $1.3 million, but Futura refused to sell the portion separately because the tract was worth more as a whole than it would have been if subdivided. Thereafter, in April of 1975, Futura and Chestnut entered into a sales agreement of the whole tract for $4,584,713.70. The sale was structured so that Futura received the purchase price in three ways: $1.3 million was paid in cash at the time of the sale; Chestnut assumed a mortgage that Futura had previously taken on the tract for $1.8 million; and Chestnut gave Futura a promissory note for the remaining $1.4 million secured by a mortgage on the property.

A. The Sales Agreement

The note provided that Chestnut would pay the principal plus 9% annual interest in two installments. The first installment of $742,356.85 was payable approximately four years later, on February 1, 1979, and the remaining $742,356.85 was payable the following year on January 31, 1980. The note provided that if Chestnut failed to pay the principal and interest and did not cure the default within thirty days, Futura could accelerate the unpaid balance. The note also provided that Chestnut was relieved of all personal liability on the note and that Futura or any subsequent holder would never institute proceedings or actions to enforce personal liability against Chestnut. Although not collectible in a personal action, the note was secured by a mortgage.

The mortgage agreement, obviously executed with a view towards Chestnut's development and eventual resale of the property, gave Chestnut the right to periodically procure releases of portions of the property from the mortgage. Futura agreed to release Section One (the 108.067 cuerdas Chestnut originally sought to buy separately) without any further payment to Chestnut regardless of whether Chestnut was in default on the promissory note. Chestnut could seek release of the other portions of the property, consisting of five parcels ranging in size from seventeen to twenty-six cuerdas, in a specified order upon payment of approximately $16,825 per cuerda so long as Chestnut was not in default.

In the event of default, the mortgage agreement provided that the property subject to the mortgage could be foreclosed by summary proceedings. To facilitate foreclosure Chestnut waived reappraisal; the mortgage agreement declared that the property would be deemed to be worth the total amount for which the property was mortgaged at the time of foreclosure. The mortgage agreement stated, as the promissory note did, that Chestnut was never to be personally liable for any payment.

Finally, Futura agreed to subordinate its mortgage to a $10 million mortgage and $700,000 mortgage made out in bearer form so that Chestnut could obtain loans for the development and improvement of the property. The Futura-Chestnut mortgage agreement stated that any loan resulting from Chestnut's use of the superior bearer mortgage notes could be used only for development and improvement of the tract. The agreement also provided that if Section One were released Futura's mortgage would become superior to the bearer mortgages on the remainder of the property (hereinafter referred to as Section Two).

B. Default

On February 1, 1979, Chestnut failed to pay the first installment due on the note. According to an affidavit of the Executive Vice-President of Futura, Futura, upon inquiry, was told that Centex and another of its subsidiaries would assume and guarantee payment. Futura was also allegedly told by two Centex codefendant employees that a check was in process. On February 9, 1979, Futura executed a release for Section One and its lien position on the remainder of the property was elevated pursuant to the mortgage agreement. On February

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21, 1979, Chestnut paid off the $1.8 million note and retired the mortgage it had assumed at the time it bought the property from Futura. The upshot of the 1979 reshuffling was that Section One was encumbered by a first lien of $10 million and a second lien of $700,000 (the bearer mortgages). The remainder of the tract was subject to a first mortgage lien of $700,000, a second mortgage lien of $1.4 million (Futura's mortgage) and a third mortgage lien of $10 million.

February 1979 passed and the check that was supposedly in process never arrived. Futura again demanded payment by letter in March 1979 but received no satisfaction. In January 1980 Chestnut defaulted on the second installment of the promissory note due Futura.

C. The Lawsuits

A year and three months after the 1979 default (three months after the 1980 default) Futura filed suit against Chestnut and two unnamed agents of Chestnut in Puerto Rico Superior Court to collect the principal and interest due from Chestnut personally despite the nonliability provision and its promise not to institute court proceedings. In addition, Futura sought to foreclose on the mortgage and to set aside the $700,000 mortgage which was superior to it in rank. 1

After the commonwealth lawsuit commenced, Futura and Chestnut/Centex conducted several suit-related negotiation meetings. During a meeting in October of 1981, Jack McDonald, President of Centex, informed the President of Futura that neither Centex nor Chestnut had ever intended to pay the balance of the purchase price. Futura claims it was at this point that the scales fell from its eyes and it first realized that in order to obtain Section One, Centex had only pretended to want to buy the entire tract. Despite this apparent revelation, Futura continued to press its commonwealth court action which was premised on the validity of the sales contract and mortgage agreement and made no attempts to amend its complaint or alter the focus of the action.

Meanwhile, on March 26, 1982, Futura filed suit in the United States District Court alleging various federal and commonwealth causes of action based on the contention that Chestnut and Centex had defrauded Futura of the unpaid balance of the sales price. On July 10, 1982, Futura cross-moved for summary judgment in the Puerto Rico Superior Court, seeking a determination that Chestnut was personally liable under the contract because personal nonliability provisions were against public policy.

On December 3, 1982, the Puerto Rico Superior Court held that the nonrecourse provisions in the mortgage agreement and promissory note were legally binding and that Futura's remedy was limited to foreclosure on Section Two of the tract. The Superior Court's judgment was affirmed by the Puerto Rico Supreme Court on January 27, 1983.

With the dimming of the lights on its contract action, Futura concentrated its energy on the claim of fraud before the district court.

II. PROCEDURAL CHALLENGES

In ruling on the motion for dismissal, the district court considered affidavits and papers apart from the pleadings and properly treated the motion as one for summary judgment. Fed.R.Civ.P. 12(b). Futura contends, however, that the district court considered Spanish language documents generated in the commonwealth foreclosure action in contravention of Rule 6 of the Local Rules of the Puerto Rico...

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