U.S.I. Properties Corp. v. M.D. Const. Co., Inc.

• Decision Date: 09 June 1988
• Docket Number: No. 87-1721,87-1721
• Citation: 860 F.2d 1
• Parties: U.S.I. PROPERTIES CORP., Plaintiff, Appellee, v. M.D. CONSTRUCTION COMPANY, INC., et al., Defendants, Appellees. Appeal of COMPANIA DE DESARROLLO COOPERATIVO, Defendant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1

860 F.2d 1

U.S.I. PROPERTIES CORP., Plaintiff, Appellee, v. M.D. CONSTRUCTION COMPANY, INC., et al., Defendants, Appellees.

Appeal of COMPANIA DE DESARROLLO COOPERATIVO, Defendant.

No. 87-1721.

United States Court of Appeals, First Circuit.

Heard June 9, 1988.

Decided Oct. 25, 1988.

Rehearing and Rehearing En Banc Denied Nov. 30,1988.

Marcos Ramirez Lavandero with whom Dennis Simonpietri Monefeldt, Hato Rey, P.R., Salvador Tio, Rio Piedras, P.R., Gretchen Coll Marti and Ramirez & Ramirez, Hato Rey, P.R., were on brief for defendant, appellant.

Ruben T. Nigaglioni with whom Maria Soledad Pineiro and Ledesma, Palou & Miranda, Hato Rey, P.R., were on brief for plaintiff, appellee U.S.I. Properties Corp.

Harry E. Woods with whom Geoffrey M. Woods, Gerardo Mariani and Woods & Woods, Hato Rey, P.R., were on brief for defendant, appellee M.D. Const. Co., Inc.

Before CAMPBELL, Chief Judge, TORRUELLA and SELYA, Circuit Judges.

TORRUELLA, Circuit Judge.

This appeal follows a five and a half week jury trial that resulted in a $12.5 million verdict for plaintiff USI Properties Corp. and for codefendant MD Construction Inc. Appellant, defendant Compania de Desarrollo Cooperativo, raises a number of issues of very diverse nature and complexity. Having reviewed carefully the unnecessarily ponderous briefs and record, we affirm.

Background

The basic event underlying this complex case is the signing of multiparty agreements on October 17, 1978 ("1978 agreements"). The parties were USI Properties Corp. ("USI"), a Delaware corporation, Compania de Desarrollo Cooperativo ("CDC") a public corporation of the Commonwealth of Puerto Rico, MD Construction, Inc. ("MD"), which is incorporated under the laws of Puerto Rico, April Industries Inc. ("April"), Government Development Bank for Puerto Rico, and the Royal Bank of Canada. April, a Delaware publicly owned corporation, is the sole owner of Futura Development Co. of Puerto Rico, itself the sole owner of MD.

The terms of the agreement were as follows: USI sold a parcel of land to MD where MD would construct a housing project called Ciudad Cristiana. The purchase price was $1,224,230, with a downpayment of $5,000. USI retained a mortgage on the land payable at the completion of the project, which, with interest, was worth approximately $1.6 million. April entered into the agreement as guarantor of MD.

A second agreement on the same date bound MD and CDC as follows: MD would build 700 housing units on the land purchased from USI and CDC would sell the houses to individual buyers. The Royal Bank of Canada provided CDC a revolving line of credit of $4.5 million to provide the interim financing for the project. The Bank commitment was secured by a $5 million note from MD, and by a first mortgage on the land sold by USI. In order for the Bank to obtain a first mortgage on the land, USI agreed to subordinate its lien to the Bank's lien.

CDC agreed to notify USI of any breach committed by MD or any variations in performance by CDC. In early 1982, however, after completion and delivery of 480 units, CDC stopped financing the project, for reasons the parties still dispute. Once the flow of funds from CDC stopped, MD could not proceed with the project, and thus defaulted in its payment obligations to USI.

CDC sued MD in the Puerto Rico superior court in October 1983. Also in October, USI sued MD and CDC in federal court.

On October 26, 1983, one day before USI filed its complaint, USI, MD and April entered into an agreement ("1983 agreement") which included the following items:

1. MD conceded owing USI $1,585,000;

2. USI would sue MD and CDC in federal court;

3. USI would not execute against MD on the note or on any judgment until 30 months after the agreement;

4. MD and April assigned to USI any judgment or settlement resulting from federal or state actions or from any out of court settlement resulting from actions by or against CDC;

5. USI would sue April in the Superior Court of Puerto Rico only after 90 days from the date of the agreement;

6. MD and April would not raise defenses against USI nor assert any claim whatsoever against USI other than that the only party responsible for the failure of the project was CDC.

USI sued MD and CDC in federal court in October 1983. MD filed a crossclaim against CDC, which in turn filed a crossclaim against MD and a counterclaim against USI. Trial commenced on May 15, 1987 and lasted over five weeks. The jury returned a verdict in favor of USI, against CDC, for $1.2 million, and for MD on its crossclaim against CDC for $11.4 million.

One of CDC's main defenses was that the land used to develop the Ciudad Cristiana project was contaminated with mercury. Both the Secretary of the Department of Health and the head of the Environmental Quality Board testified about the reasons for their determination that the area had to be evacuated. Following this determination, the government had evacuated the area in 1985. The Ciudad Cristiana "scandal" resulted in extensive hearings in the Puerto Rico legislature.

The remaining facts will be provided as they become relevant to the issues on appeal.

Discussion

Appellant CDC raises a veritable barrage of issues. Given their diverse nature and complexity, we will discuss them sequentially as presented by CDC.

1. Jurisdiction: Realignment of Parties

CDC argues that USI and MD should be realigned as parties, based on the 1983 agreements, and relying on Indianapolis v. Chase National Bank, 314 U.S. 63, 62 S.Ct. 15, 86 L.Ed. 47 (1941). Such a finding would divest the federal courts of diversity jurisdiction. The issue boils down to the import of the 1983 agreements on the controversy at hand. CDC argues that the dominating controversy in this case is who is liable for breach of contract with regard to the Ciudad Cristiana agreements. Therefore, since both USI and MD agree that CDC should be liable, USI and MD are on the same side of the controversy and should be realigned as plaintiffs. If USI and MD were both plaintiffs, then there would be Puerto Rico corporations on both sides of the case--MD as a plaintiff and CDC as defendant--thus defeating diversity jurisdiction.

Our task is to determine "the primary and controlling matter in dispute," Indianapolis, 314 U.S. at 72, 62 S.Ct. at 18, and then determine whether any actual collision in interests remains. In other words, are USI and MD "partners in litigation"? Id. at 74, 62 S.Ct. at 19. The reasons for such an argument are worthy. The 1983 agreement made USI and MD partners in litigation insofar they both alleged that CDC was the party ultimately responsible for the breach. Furthermore, MD agreed not to raise any defenses against USI.

Unfortunately for CDC, one key issue remained in controversy, namely, who would pay for the breach. Indeed, MD conceded its debt to USI, but that did not equate to payment at that time, since MD consistently has held that CDC is the party responsible for the failure of the whole project. MD assigned to USI all amounts to be recovered in the action against CDC, but even assignment of amounts recoverable did not abate MD's risk.

The district court found there was a genuine conflict between the parties at the time USI filed its complaint. The court found that the 1983 agreements "all boil down to the fact that MD would eventually transfer or assign to USI litigation proceeds in the amount of its debt from any judgment awarded MD against CDC." Opinion and Order, No. 83-2647, slip op. at 11 (D.P.R. June 29, 1987). The court further stated:

The plaintiff and MD, although having common strategies against CDC, indeed had different interests. USI's interest is to, in its day, execute against MD and, eventually, annul CDC's first-ranking mortgage or to recover directly from [MD]. MD's interest is to recover its own damages and to pay USI. Realignment is not called for under these circumstances. City of Dawson v. Columbia Ave. Saving Fund, 197 U.S. 178 [25 S.Ct. 420, 49 L.Ed. 713] (1905); Dolch v. United California Bank, 702 F.2d 178 (9th Cir.1983) (in an estate's context); Hopkins Erecting Co. v. Brianwood [Briarwood] Apartments, 517 F.Supp. 243 (E.D.Ky.1981) (in a removal context). Accordingly, we find that jurisdiction under 28 U.S.C. Sec. 1332 lies.

Id. at 14.

We agree. Looking at the pleadings, and at the background of this action, we find that the court below correctly found diversity jurisdiction. This is a close case in an area where the applicable law is not especially enlightening. However, the court's findings are clearly supported by the record and reflect appropriate application of Indianapolis and progeny. MD's concession of liability meant the unavoidable realization that it would pay--yet to be determined, however, was the most crucial detail of whether payment would be out of its own funds or out of monies recovered from CDC. There remained a real conflict of interests between the parties. ¹ See 3A J. Moore, J. Lucas, G. Grotheer, Moore's Federal Practice p 19.03, 19-52 (2d ed. 1987).

2. Jurisdiction: Collusion

CDC's next line of attack, again pegged to the 1983 agreements, is based on 28 U.S.C. Sec. 1359, which states that "[a] district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court." Under this statute, courts must determine whether any party has been artificially brought into or left out of an action in order to invoke the jurisdiction of the federal court.

The district court, relying on Kramer v. Caribbean Mills, 394 U.S. 823, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1969), found that arguing collusion did not assist CDC much because it is not on account of the 1983 agreement that USI is a plaintiff in this case. This case stems from the multilateral agreements that would have led to the construction of the Ciudad Cristiana project. USI is not a party...