Futura Development of Puerto Rico, Inc. v. Estado Libre Asociado de Puerto Rico

• Decision Date: 04 December 1997
• Docket Number: Nos. 97-1602,97-1603,s. 97-1602
• Citation: Futura Development of Puerto Rico, Inc. v. Estado Libre Asociado de Puerto Rico, 144 F.3d 7 (1st Cir. 1997)
• Parties: FUTURA DEVELOPMENT OF PUERTO RICO, INC., Etc., et al., Plaintiffs--Appellees, v. ESTADO LIBRE ASOCIADO DE PUERTO RICO, The Cooperative Development Administration, The Cooperative Development Company, Defendants--Appellants. FUTURA DEVELOPMENT OF PUERTO RICO, INC., Plaintiff--Appellant, v. ESTADO LIBRE ASOCIADO DE PUERTO RICO, The Cooperative Development Administration, The Cooperative Development Company, Defendants--Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 7

144 F.3d 7

FUTURA DEVELOPMENT OF PUERTO RICO, INC., Etc., et al.,Plaintiffs--Appellees, v.ESTADO LIBRE ASOCIADO DE PUERTO RICO, The Cooperative

Development Administration, The Cooperative

Development Company, Defendants--Appellants.

FUTURA DEVELOPMENT OF PUERTO RICO, INC., Plaintiff--Appellant, v.ESTADO LIBRE ASOCIADO DE PUERTO RICO, The Cooperative

Development Administration, The Cooperative

Development Company, Defendants--Appellees.

Nos. 97-1602, 97-1603.

United States Court of Appeals First Circuit.

Heard Dec. 4, 1997.

Decided May 6, 1998.

Jay A. Garca-Gregory, with whom Fiddler, Gonzalez & Rodrguez, Paul B. Smith, Jr. and Smith & Nevares were on brief for appellantCommonwealth of Puerto Rico.

Alan M. Dershowitz, with whom Amy Adelson, Victoria B. Eiger, Nathan Z. Dershowitz, Dershowitz & Eiger, P.C., Geoffrey Woods and Woods & Woods were on brief for appellee/cross appellantFutura Development of Puerto Rico, Inc.

Cherie K. Durand, with whom Law Offices Benjamn Acosta, Jr. was on brief for defendants-appellees.

Before TORRUELLA, Chief Judge, BOUDIN and STAHL, Circuit Judges.

TORRUELLA, Chief Judge.

In an earlier proceeding, the predecessor of plaintiffFutura Development of Puerto Rico, Inc.("Futura") obtained a judgment against the Cooperative Development Company("CDC"), a public corporation and instrumentality of the Commonwealth of Puerto Rico, in the amount of $12,266,000.SeeU.S.I. Properties Corp. v. M.D. Construction Co., 860 F.2d 1(1st Cir.1988).After CDC failed to satisfy the judgment, Futura brought this suit seeking a determination that CDC was an alter ego of the Commonwealth of Puerto Rico, and that, as a de facto party to the earlier litigation, the Commonwealth was liable for the judgment.On this theory of recovery, Futura was awarded summary judgment.SeeFutura Devel. of P.R. v. Puerto Rico, 962 F.Supp. 248(D.P.R.1997).Futura also brought six other claims against individual government employees under various causes of action, all of which were dismissed by the district court sua sponte.Seeid.The parties cross-appealed to this court.We conclude that the district court acted without proper jurisdiction in awarding summary judgment to Futura on its alter ego theory and improperly dismissed the remaining claims against the individual defendants.

Background

On October 25, 1988, this court affirmed a district court judgment entered pursuant to a jury verdict against CDC for $12,266,000.SeeU.S.I. Properties Corp. v. M.D. Construction Co., Inc., 860 F.2d 1(1st Cir.1988).The jury found that CDC had unilaterally terminated a construction contract with M.D. Construction, predecessor in interest to Futura, which provided for the building of a low-income housing project called "Ciudad Cristiana."The jury in that case rejected CDC's cross-claims alleging that the Ciudad Cristiana property was contaminated with mercury.Jurisdiction in that case was premised entirely upon diversity.Seeid.Now, almost ten years later, this court is faced with the current dispute over satisfaction of that judgment.

CDC is a public corporation that was created by the Puerto Rico Legislative Assembly in order to develop housing cooperatives across Puerto Rico.SeeP.R. Laws Ann. Tit. 5, §§ 981 et seq. A majority of the CDC's budget each year is provided by the Commonwealth.Since the original litigation, the Commonwealth has engaged in a de facto liquidation of CDC in order to avoid satisfying the sizable judgment pending against it.Specifically, the Commonwealth has failed to provide for satisfaction of the judgment in CDC's budgets, stripped CDC of its assets, transferred its employees, and replaced CDC in the organizational chart of Commonwealth agencies and public corporations.During its liquidation, CDC settled debts with some creditors, but not with Futura.CDC, insolvent and devoid of official responsibility, now exists in name only.

Futura, frustrated by these tactics, brought this suit against the Commonwealth in federal court under the court's enforcement jurisdiction.¹Futura argues that the Commonwealth of Puerto Rico is liable for the original judgment because it was a de facto party to the original litigation.This assertion is supported not only by the generally close relationship between the Commonwealth and the CDC, but specifically by the fact that the Attorney General of Puerto Rico took over the original litigation for CDC.Furthermore, in its closing argument to the jury in that original litigation, CDC argued that any judgment against it would have to be paid with Puerto Rico tax dollars.

The Commonwealth argues that, even if CDC were its "alter ego," it retains Eleventh Amendment immunity from this suit in federal court.Despite its active participation in the defense of the original suit and use of the "tax dollars" argument with the jury, the Commonwealth asserts that it did not implicitly waive its immunity.The district court disagreed, awarding summary judgment in Futura's favor on the first count, and dismissing sua sponte Futura's remaining claims against the individual defendants.See962 F.Supp. at 257-58.Because we conclude that the district court acted without proper jurisdiction, we do not reach the questions raised regarding implicit waiver of Eleventh Amendment immunity.

Analysis

I.Enforcement Jurisdiction

The first question to be resolved in this case is whether the district court properly exercised jurisdiction over Futura's claim against the Commonwealth.The parties acknowledge that federal question jurisdiction is inapplicable to Futura's alter ego claim, and that the Commonwealth of Puerto Rico is not subject to diversity jurisdiction.Cf.28 U.S.C. § 1332(d)(Puerto Rico treated as a "state" for purposes of the statute, and therefore not subject to diversity jurisdiction);Nieves v. University of P.R., 7 F.3d 270, 272(1st Cir.1993).Futura's primary jurisdictional argument is that federal jurisdiction over the alter ego claim against the Commonwealth of Puerto Rico is premised upon federal enforcement jurisdiction.However, in actions such as this, where the district court had original jurisdiction founded solely on diversity jurisdiction, extending enforcement jurisdiction over a non-diverse party without sound reasons for doing so may represent an impermissible expansion of federal jurisdiction.At the same time, it is generally recognized that "without jurisdiction to enforce a judgment entered by a federal court, 'the judicial power would be incomplete and entirely inadequate to the purposes for which it was conferred by the Constitution.' "Peacock v. Thomas, 516 U.S. 349, 356, 116 S.Ct. 862, 868, 133 L.Ed.2d 817(1996)(quotingRiggs v. Johnson County, 6 Wall. 166, 187, 18 L.Ed. 768(1868)).Futura argues that under the doctrine of enforcement jurisdiction, federal courts generally possess jurisdiction over new proceedings in which a federal judgment creditor seeks to impose liability for a judgment on a person or entity not named in the original judgment, even where there is no independent basis for federal jurisdiction.However, Futura's argument fails in light of recent Supreme Court doctrine.

In Peacock, the Supreme Court explained that it had "never authorized the exercise of [enforcement] jurisdiction in a subsequent lawsuit to impose an obligation to pay an existing federal judgment on a person not already liable for that judgment."Id. at 357, 116 S.Ct. at 868.In that case, Thomas, the plaintiff, had obtained a large ERISA class action judgment against his former employer, Tru-Tech, Inc.Instead of paying the judgment, Peacock, an officer and shareholder of Tru-Tech, settled Tru-Tech's debts with other creditors, including himself, and ignored the debt owed to Thomas.After collection efforts proved unsuccessful, Thomas sued Peacock in federal court using a "veil-piercing" rationale.Despite the absence of an independent jurisdictional basis for the proceeding, the district and circuit courts agreed to exercise enforcement jurisdiction in piercing the corporate veil.The Supreme Court reversed, explaining that there was insufficient factual dependence between the claims raised in Thomas' suits to justify the extension of enforcement jurisdiction.Seeid. at 354-55, 116 S.Ct. at 866-67.

Through Peacock, the Court reaffirmed the doctrine that "[i]n a subsequent lawsuit involving claims with no independent basis for jurisdiction, a federal court lacks the threshold jurisdictional power that exists when ancillary claims are asserted in the same proceeding as the claims conferring federal jurisdiction."Id. at 355, 116 S.Ct. at 867(citingKokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 380-81, 114 S.Ct. 1673, 1677, 128 L.Ed.2d 391(1994);H.C. Cook Co. v. Beecher, 217 U.S. 497, 498-99, 30 S.Ct. 601, 601-02, 54 L.Ed. 855(1910)).The Court reasoned that, while a proper exercise of enforcement jurisdiction will result in efficiencies which outweigh comity concerns, an exercise of enforcement jurisdiction over a factually independent proceeding has no practical benefit for judicial economy.Seeid. at 355-56, 116 S.Ct. at 867-68.Where a plaintiff plans to use the federal court to examine the defendant's identity and finances, as Thomas did in his veil-piercing claim, the court is asked to delve into a new and separate matter, and an independent basis for jurisdiction is required.This situation is distinguishable from where a party uses a post-judgment proceeding to challenge or revisit an issue or determination made by the federal court in the original proceeding.

Futura attempts to distinguish Peacock on two grounds.First, Futura argues that, under Peacock, enforcement jurisdiction will only be refused where the new defendant's liability is premised upon that party's actions which took place after the original judgment was rendered.According to Futura, the Commonwealth's liability stems from its actions...