Federal Ins. Co. v. Banco Popular De Puerto Rico

• Decision Date: 27 April 1983
• Docket Number: 82-1623,Nos. 82-1577,s. 82-1577
• Parties: FEDERAL INSURANCE COMPANY, et al., Plaintiffs, Appellants, v. BANCO POPULAR DE PUERTO RICO, et al., Defendants, Appellees. FEDERAL INSURANCE COMPANY, et al., Plaintiffs, Appellees, v. BANCO POPULAR DE PUERTO RICO, et al., Defendants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 1095

750 F.2d 1095

FEDERAL INSURANCE COMPANY, et al., Plaintiffs, Appellants, v. BANCO POPULAR DE PUERTO RICO, et al., Defendants, Appellees.

FEDERAL INSURANCE COMPANY, et al., Plaintiffs, Appellees, v. BANCO POPULAR DE PUERTO RICO, et al., Defendants, Appellants.

Nos. 82-1577, 82-1623.

United States Court of Appeals, First Circuit.

Argued Feb. 10, 1983.

Decided April 27, 1983.

Michael Maillet, New York City, with whom Jerome Murray, Hendler & Murray, P.C., New York City, Stanley R. Segal, and Ramirez, Segal & Latimer, San Juan, P.R., were on brief, for Federal Ins. Co. and Aetna Ins. Co.

Lawrence Odell, Hato Rey, P.R., with whom Patrick Duffy O'Neill, and Colorado, Martinez, Odell, Calabria & Sierra, Hato Rey, P.R., were on brief, for Banco Popular De Puerto Rico, et al.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

LEVIN H. CAMPBELL, Chief Judge.

This diversity case was heard on cross-appeals from the district court's judgment of $25,454.26 in damages to plaintiffs, Federal Insurance Company and Aetna Insurance Company, for losses suffered by their assignor, International Charter Mortgage Corp. (ICMC), when Banco Credito and Banco Popular credited to an ICMC employee's credit card debt checks he embezzled from ICMC. The district court, holding that both ICMC and the banks acted negligently, found defendants Banco Popular, acting in its own behalf and in its role as successor in interest to Banco Credito, and the Federal Deposit Insurance Corporation (FDIC), acting as receiver for Banco Credito, liable for 25 percent of ICMC's losses. Plaintiffs and defendants appeal from this ruling, each claiming that the other should bear the entire loss. We affirm the district court's judgment.

I.

The facts, for the most part, are undisputed. The record shows that ICMC is a Delaware corporation with its principal place of business in Hato Rey, Puerto Rico. It is engaged in the business of originating, servicing and selling real estate mortgages. Pursuant to that end, it maintained a large number of trust accounts, including one at Banco Popular, a general corporate account at Citibank, and various "warehousing lines," continuously available lines of credit, one of which was provided by Banco Credito.

The embezzlement was perpetrated by Jorge Pagan Lazardi. Between April 14, 1969 and June 29, 1979, Pagan held a number of important financial positions at ICMC, including Assistant Comptroller, Assistant Vice President, and acting head of the accounting department. His duties included preparation of financial statements and supervision of bank reconciliations on corporate accounts. He was an authorized signatory of all ICMC bank accounts.

Between June 23, 1977 and February 26, 1979, Pagan embezzled approximately $400,000, of which $103,454.25 is at issue here. He embezzled the latter sum by drawing fifteen ICMC checks to the order of Banco Credito and fifteen to the order of Banco Popular. He then obtained the required second signature of an ICMC official on the checks, usually by stating that the checks were being used to pay interest on warehouse credit lines. The proffered explanations were not written on the checks themselves, but did appear on vouchers that ICMC kept. After the checks were signed, Pagan wrote his own Bank Americard or Visa number on the back of the checks and mailed them to the respective banks along with his own personal credit card bills. The banks credited Pagan's accounts accordingly, without ever inquiring of ICMC as to Pagan's authority to divert corporate checks to his personal account. Pagan then covered up his actions by making adjustments in the corporate books.

Pagan was dismissed in June 1979 as part of a general staff reduction. In August 1979, after a review of some of the accounts he had been handling, ICMC became suspicious. An external audit was undertaken. In February 1980, after the full extent of the loss was clear, ICMC filed a claim of loss with the plaintiffs, who reimbursed the company fully.

In July 1980 plaintiffs initiated an action against Banco Popular by service of process in New York. An action in New York was commenced against the FDIC in September 1980. On December 30, 1980 plaintiffs initiated the present subrogation action against defendants in the district of Puerto Rico.

On June 2, 1982, after a bench trial, the district court issued a memorandum and order. The court first held that, contrary to defendants' contentions, the action was not barred by the statute of limitations. The court then found that both Banco Popular and Banco Credito were negligent in crediting ICMC checks to Pagan's personal account without inquiring as to his authority, but that ICMC maintained a grossly negligent system of internal controls, enabling Pagan to carry out his scheme. Relying upon section 1802 of the Puerto Rico Civil Code, P.R. Law Ann. tit. 31 Sec. 5141, the court reduced plaintiffs' recovery by 75 percent. All parties appealed.

II.

Before turning to the merits, we discuss defendants' arguments that the action was barred by the statute of limitations. The district court undertook to apply the tort statute of limitations in section 1868 of the Puerto Rico Civil Code, P.R. Laws Ann. tit. 31 Sec. 5298. The statute provides that actions prescribe in one year "from the time the aggrieved person had knowledge thereof." The court interpreted it as granting plaintiffs one year to file the action from the time when ICMC discovered, or with reasonable diligence could have discovered, the embezzlement scheme and the banks' involvement. Finding the ineffectiveness of ICMC's control system irrelevant for purposes of determining when ICMC should have known of its claim against the banks, the court found that the statutory period commenced on November 20, 1979, the date it received an auditing report that provided it with sufficient detail to support a claim against the banks. The court then found that the action, brought in December 1980, was timely because plaintiffs tolled the statute of limitations by serving defendants in New York prior to November 1980.

Plaintiffs challenge the district court's analysis on two grounds. First, they claim that the district court erred by finding that the one-year period commenced running on November 20, 1979. They agree with the district court that the statute should be interpreted to run not only from the date of actual knowledge but from any earlier time when the aggrieved person reasonably should have had knowledge of the cause of action. However, they contend the court departed from its articulated standard by refusing to consider ICMC's poor control system. Had ICMC had a proper control system, defendants argue, it would have uncovered the embezzlement before the last of the cancelled checks were returned to it in March 1979.

There is some force to the above contention. But while we see matters somewhat differently from the district court, we ultimately accept its determination that the statute commenced running on November 20, 1979.

Unlike the statute of limitations for medical malpractice actions ¹, section 1868 does not provide that the action must be brought within one year from the time the injured person reasonably should have known of the injury. No Puerto Rico authorities have been called to our attention interpreting the statute here so as to run from the time the injured person could, with diligence, have discovered the injury or the existence of a claim. Such a construction is not, of course, impossible but neither can we say it is required. It is for the courts of Puerto Rico, not the federal courts, to extend the statutory law of the Commonwealth in uncertain cases. Here the district court found that ICMC first acquired sufficient knowledge of defendants' actions to file a complaint on November 20, 1979. That finding is not clearly erroneous, and as the date would satisfy the literal statutory language, we decline to reverse the lower court's finding.

Defendants' reliance on the discovery rule in other jurisdictions is misplaced. In most common law jurisdictions, the discovery rule emerged as a judge-made exception to the harsh statutory requirement that the action accrued when the wrong was committed regardless of the plaintiffs' knowledge. See Sun 'n Sand, Inc. v. United California Bank, 21 Cal.3d 671, 582 P.2d 920, 148 Cal.Rptr. 329 (1978); 51 Am.Jur.2d Sec. 147 (1970). That such courts have limited their exception so as to cause the period to commence when the defendant should have known about the injury, provides little definitive support for interpreting a civil code, clearly stating that the period commences when the plaintiff had knowledge, any differently than the code's language dictates. ²

Defendants' second argument regarding the statute of limitations is that the district court erred in holding that the service of process in New York tolled the statute. This argument is without merit. Puerto Rico law provides that

Prescription of actions is interrupted by their institution before the courts, by extra-judicial claim of the creditor, and by any act of acknowledgment of the debt by the debtor.

P.R. Laws Ann. tit. 31 Sec. 5303. Under New York law a claim is asserted and jurisdiction acquired upon the service of process. N.Y.Civ.Prac.Law Secs. 304, 203(b). Therefore, the service of process in New York constituted "institution [of the claim] before the courts." Moreover, the New York events were also extrajudicial claims on the creditor. As of September 1980, within one year from the time ICMC learned of its claim against the banks, both of the defendants were aware of the claim against them. Thus the action was not prescribed under Puerto Rico law.

III.

Defendants argue that the district court erred in finding the banks negligent. We disagree.

Under section 1802 of the Puerto Rico Civil Code, P.R. Laws Ann. tit. 31 Sec. 5141

A person who by an act or omission causes damage to...