Caribbean Mushroom Co., Inc. v. Government Development Bank for Puerto Rico

• Decision Date: 08 November 1996
• Docket Number: No. 96-1279,96-1279
• Citation: 102 F.3d 1307
• Parties: CARIBBEAN MUSHROOM CO., INC., Plaintiff, Appellee, v. The GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO and Puerto Rico Development Fund, Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1307

102 F.3d 1307

CARIBBEAN MUSHROOM CO., INC., Plaintiff, Appellee, v. The GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO and Puerto Rico Development Fund, Defendants, Appellants.

No. 96-1279.

United States Court of Appeals First Circuit.

Heard Nov. 8, 1996.

Decided Dec. 23, 1996.

John W. Dougherty, Clifton Heights, PA, with whom Peter J. Satz, Rio Piedras, PR, was on brief, for defendants-appellants.

Heidi L. Rodriguez, San Juan, PR, with whom Jorge I. Peirats, Hato Rey, PR, and Maria de Los Angeles Trigo, San Juan, PR, was on brief, for plaintiff-appellee.

Before COFFIN and CAMPBELL, Senior Circuit Judges, and DiCLERICO, ^* District Judge.

COFFIN, Senior Circuit Judge.

Plaintiff-appellee Caribbean Mushroom Company, Inc. seeks damages for the breach of an agreement to provide it with a $100,000 loan. The issue before us is whether the company waited too long to bring its action. The agreement allegedly was breached in January 1978. The lawsuit was filed nearly fifteen years later, in January 1993. The district court concluded that the action was subject to a three-year statute of limitations, and therefore granted summary judgment for the defendants. Our review of the relevant statutes and caselaw persuades us that a fifteen-year limitations period applies, and, consequently, that the complaint was timely filed. We therefore reverse.

I. Background

The facts underlying this appeal are few, and undisputed. In November 1977, defendant Puerto Rico Development Fund ("PRDF") sent plaintiff Caribbean Mushroom Co., Inc. ("Caribbean") a commitment letter in which it agreed to loan Caribbean $100,000, subject to specific terms and conditions. ¹ On or about January 10, 1978, PRDF informed Caribbean that it would not loan the money. Caribbean brought this diversity action on January 7, 1993, alleging that PRDF's refusal to make the loan constituted a breach of contract. It claimed $4.5 million in damages.

PRDF filed a motion for summary judgment alleging, inter alia, that Caribbean's claim was time barred. It contended that the applicable statute of limitations was the three-year period provided in Article 946 of the Puerto Rico Commerce Code, P.R. Laws Ann. tit. 10, App. I, § 1908. Caribbean argued in response that the action was governed by Article 1864 of the Civil Code of Puerto Rico, P.R. Laws Ann. tit. 31, § 5294, which sets a fifteen-year limitations period for actions for which there is no specific term set. Because Caribbean's lawsuit was filed just short of fifteen years after the alleged breach, it is viable only if the longer period applies.

The district court sided with PRDF. It concluded that the disputed transaction fell under the Commerce Code and its three-year limitations provision for actions arising out of commercial instruments because it involved an agreement to loan money to a merchant for a commercial purpose. The court rejected plaintiff's contention that the fifteen-year provision should apply because the claim involved a breach of contract and not enforcement of the terms of a commercial loan. In doing so, the court invoked First Circuit precedent holding that " 'litigants cannot circumvent a specific provision of the Puerto Rico Code by characterizing their claims generally as a "breach of contract" in order to obtain the benefit of a longer statute of limitations period,' " Caribbean Mushroom Co. v. Government Dev. Bank for Puerto Rico, 906 F.Supp. 70, 74 (D.P.R.1995) (quoting Jorge Rivera Surillo & Co. v. Falconer Glass Indus., 37 F.3d 25, 28 (1st Cir.1994)). The court's determination on the limitations question led it to grant summary judgment for defendants.

On appeal, Caribbean argues that the district court misconstrued the scope of Article 946, which contains the three-year deadline, and erroneously invoked the Rivera Surillo line of cases barring litigants from broadly classifying their claims as contractual breaches to avoid more particular, and shorter, limitations provisions. Caribbean contends that it has not artificially re-characterized its lawsuit to fall under Article 1864, but that the fifteen-year period applies because no other limitations provision fits.

Although the district court's resort to the three-year limitations period attracts us as a practical matter, we have concluded that it is not supportable as a matter of law. We explain our reasoning in the following section.

II. Discussion

The statute of limitations for actions arising under Puerto Rico's Commerce Code may be set either specifically by a provision of that Code or, under Article 940 of the Commerce Code, P.R. Laws Ann. tit. 10, App. I, § 1902, by an appropriate provision of the Civil Code. ² Ramallo Bros. Printing v. Ramis, 93 JTS 84, P.R. Offic. Trans. slip op. at 2 (May 25, 1993) ("[T]he Commerce Code does not have systematic and complete regulations; it only visualizes certain cases of prescription, and those lacking a particular term are remitted to the rules of civil law."); Mortensen & Lange v. San Juan Mercantile Corp., 19 P.R. Offic. Trans. 372, 378 (1987); Portilla v. Banco Popular, 75 P.R.R. 94, 120 (1953). ³ Defendants assert, and the district court agreed, that Article 946 of the Commerce Code specifically governs this action. That provision reads in its entirety as follows:

Actions arising from drafts shall extinguish three years after maturity, whether such drafts have been protested or not.

A similar rule shall be applied to commercial bills of exchange and promissory notes, checks, stubs and other instruments of draft or exchange and to coupons and amounts for the redemption of obligations issued in accordance with this Code.

P.R. Laws Ann. tit. 10, App. I, § 1908. Plaintiffs maintain that the applicable term is the Civil Code's fifteen-year "catch-all" provision, which governs when "no special term of prescription is fixed," P.R. Laws Ann. tit. 31, § 5294 ("Article 1864").

It is undisputed that Article 946 (setting a three-year term) does not on its face govern here because no promissory note or other commercial instrument was issued by defendants to Caribbean. The district court's view, urged on appeal by defendants, is that the three-year limitation nonetheless applies because the agreement at issue essentially was equivalent to those transactions explicitly covered by the provision. Indeed, Caribbean observed in its response to defendants' motion for summary judgment that caselaw has extended Article 946's reach "past actions on instruments per se to suits on loans not reflected in instruments but which nevertheless have a 'commercial' basis."

On appeal, Caribbean drops this broad depiction of Article 946's scope, and now argues that the three-year provision is confined to actions based on commercial instruments. ⁴ Contrary to defendants' assertions, this is not a new argument that should be cast aside because it was not offered below. Rather, it is a narrowing of Caribbean's earlier position. While Caribbean no longer acknowledges that Article 946 can extend beyond its literal terms, it consistently has argued that this case is outside the statute's range. Its position below was that, even if Article 946 can be construed flexibly to cover suits on loans, it does not govern this case because the transaction sued upon was not a loan agreement, but a contract in which defendant promised to make a loan. ⁵ Because no provision of the Commerce Code sets a limitation period for commercial contract actions, Caribbean maintained--and continues to maintain--that the Civil Code's fifteen-year provision applies.

The threshold question, then, is whether Article 946 governs the dispute underlying this case. Despite Caribbean's representation to the district court that Article 946 has been construed flexibly, we have found no case applying the three-year limitations period to an action arising from a commercial agreement that does not involve an instrument such as a promissory note. ⁶ The primary cases cited by defendants focus on the preliminary question of whether the loan sued upon is commercial. In each case, a note had been issued, and a finding that the underlying transaction was commercial therefore would mean that that case would fall within Article 946's literal language. See, e.g., FDIC v. Consolidated Mortgage, 805 F.2d 14, 17-18 (1st Cir.1986) (holding that loan agreement and notes were commercial, and thus subject to three-year period); FDIC v. Cardona, 723 F.2d 132, 133-36 (1st Cir.1983) (alternative holding: non-commercial promissory notes at issue, and so fifteen-year period applies); FDIC v. Francisco Inv. Corp., 638 F.Supp. 1216, 1217-18 (D.P.R.1986) (promissory notes not commercial; fifteen-year period applies); Mediterranean Inv. Corp. v. Rodriguez, 575 F.Supp. 268, 268-69 (D.P.R.1983) (same).

Additionally, this Circuit recently gave a limited reading to Article 946 in rejecting its applicability in a commercial case involving a guaranty. We observed that the provision applies to negotiable instruments, and "[t]he promise before us ... is plainly not a negotiable instrument," Georgia Pacific Corp. v. Pablo Eguia & Sons, Inc., 15 F.3d 8, 10 (1st Cir.1994) (emphasis in original). Indeed, we quoted in Georgia Pacific the following passage from a treatise describing the corresponding provision in the Spanish Code of Commerce:

"But a distinction must be made as regards the aim of prescription. The three-year prescription bars actions arising from negotiable instruments, but not actions arising from the fundamental juridical relations which the contracting parties have sought to identify with the actions on negotiable instruments. If a loan is guaranteed by a negotiable instrument, the actions derived from the relations arising from the latter shall prescribe, but the right of action arising from the mutual contract shall remain intact and shall survive for its entire term."

Id. (citing 5 R. Gay de Montella, Codigo de Comercio Espanol Comentado 503-504 ...