Krisel v. Duran

Decision Date17 August 1966
Docket NumberNo. 65 Civ. 2702.,65 Civ. 2702.
Citation258 F. Supp. 845
PartiesMaurice A. KRISEL, Plaintiff, v. Rafael DURAN, Sam J. Van Hining, Economic Development Administration of Puerto Rico and Phillips Petroleum Company, Defendants.
CourtU.S. District Court — Southern District of New York


Cardozo & Cardozo, New York City, for plaintiff; Benjamin M. Cardozo, Edwin D. Kyle, New York City, of counsel.

Rafael Hernandez Colon, Atty. Gen., Commonwealth of Puerto Rico, Arnold & Porter, Washington, D. C., William D. Rogers, John T. Rigby, Washington, D. C., of counsel.

Breed, Abbott & Morgan, New York City, Robert A. Bicks, New York City, of counsel, for Commonwealth of Puerto Rico.

Sullivan & Cromwell, New York City, for Phillips Petroleum Co.; Robert MacCrate, Thomas E. Patton, New York City, of counsel.

WEINFELD, District Judge.

Plaintiff by this action seeks thirty million dollars damages, injunctive relief, an accounting and to impress a trust. The defendants are the Economic Development Administration of Puerto Rico (EDA), its administrator, Rafael Durand, its economic consultant, Sam J. Van Hyning,1 and Phillips Petroleum Company (Phillips).

The essence of plaintiff's claim is that he conceived a novel and original program for the development of a petro-chemical plant in Puerto Rico and for obtaining a substantial oil import quota therefor; that it was revealed in trust and confidence to the defendants Durand and Van Hyning, as officials of EDA, upon an agreement of nondisclosure; that in breach thereof they and EDA disclosed the program to Phillips; that the defendants wrongfully appropriated plaintiff's program when Phillips undertook its development under an agreement whereby EDA is to share in its profits and benefits.

The defendant EDA moves to dismiss the complaint on various grounds which, in the main, rest upon its contention that it is an agency of the government of the Commonwealth of Puerto Rico, and as such enjoys sovereign immunity and is not subject to diversity jurisdiction. It moves to dismiss under:

(a) Rule 12(b) (1) of the Federal Rules of Civil Procedure for lack of jurisdiction over the subject matter based upon nondiversity of citizenship;2
(b) Rule 12(b) (2) for lack of jurisdiction over the person, since it has not consented to be sued;
(c) Rule 12(b) (5) for insufficient service of process on the ground that as a "state"3 or "governmental organization" it was not served with process as required under Rule 4(d) (6).

EDA also moves under Rule 12(b) (6) to dismiss the complaint for failure to state a claim, or in the alternative for summary judgment pursuant to Rule 56. Phillips also moves (by way of cross-motion) for summary judgment. On this aspect of the motion the parties have submitted affidavits, including the deposition of the plaintiff and exhibits. Phillips' cross-motion was made in response to plaintiff's motion directed to its answer.


We first consider the motion of the defendant EDA. Federal jurisdiction is alleged upon diversity of citizenship.4 Plaintiff is a citizen of the State of New York. The complaint, as amended, alleges that EDA is a body corporate organized under the laws of the Commonwealth of Puerto Rico, with its principal place of business in San Juan, Puerto Rico, and is a citizen of Puerto Rico. Phillips is alleged to be a Delaware corporation engaged in business within this district, with its principal place of business in the State of Oklahoma.

EDA challenges federal diversity jurisdiction on the ground that it is not a citizen of Puerto Rico but in fact is the "arm or alter ego"5 of the Commonwealth of Puerto Rico, which is the real party in interest, and that since diversity jurisdiction does not extend to controversies between a state and a citizen of another state, the action must fail.6 As plaintiff concedes, "either the defendant EDA is a `citizen' within the meaning of § 1332, or the Court lacks diversity jurisdiction over EDA." While the issue of diversity jurisdiction is separate from that of sovereign immunity,7 as a practical matter the fact determination of whether the EDA is the agency of the Commonwealth resolves both issues.

The pleadings do not control; the fact that the complaint names EDA as a defendant does not preclude inquiry to ascertain who in fact is the real party in interest in order to determine whether diversity jurisdiction exists. The issue is to be determined by the essential nature and effect of the suit as disclosed by the entire record,8 and if it appears that the Commonwealth is the real, substantial party against whom the claim is asserted, the jurisdictional attack based upon the plea of sovereign immunity must be upheld even though the Commonwealth is not specifically named as a defendant.9

Since the issue is one of federal jurisdiction, governed by the legislation which defines the status of Puerto Rico10 and the diversity statute, federal law controls.11 However, local law and decisions defining the status and nature of the agency involved in its relation to the sovereign are factors to be considered, but only one of a number that are of significance.12

Among the other factors, no one of which is conclusive,13 perhaps the most important is whether, in the event plaintiff prevails, the payment of the judgment will have to be made out of the state treasury;14 significant here also is whether the agency has the funds or the power to satisfy the judgment. Other relevant factors are whether the agency is performing a governmental or proprietary function;15 whether it has been separately incorporated;16 the degree of autonomy over its operations;17 whether it has the power to sue and be sued18 and to enter into contracts;19 whether its property is immune from state taxation,20 and whether the sovereign has immunized itself from responsibility for the agency's operations.21

Before analyzing the nature, structure and functions of EDA, it is desirable that the underlying purpose which brought it into being be considered. In the 1940's Puerto Rico's economic life was geared principally to sugar production and distribution—essentially its economy was agrarian. In an effort to expand and to diversify its economy, and to increase employment—all to raise the standard of living of its citizens—the government instituted a vast program of industrial and economic development. Tax benefits, financial assistance in plant construction and other incentives were offered to potential investors; offices were maintained in the United States and Canada to publicize the advantages and opportunities available to investors in Puerto Rico and to attract risk capital.

The program had marked success in the two decades of its existence. It is stated that new industrial plants are being established at an average rate of 250 per year and that the economy, now widely diversified, enjoys one of the highest rates of annual income growth in the world—some ten per cent.

Prior to 1950 the vehicle used by the Commonwealth to carry out the program of industrial and economic development, sometimes referred to as "Operation Bootstrap," was a public corporation, the Puerto Rico Industrial Development Company (PRIDCO). Its activities were two-gauged, one operational and the other promotional. In 1950 the promotional aspects of the program were transferred to EDA. The origin of the transfer and the details with respect to the differences in functions and duties of the two agencies are discussed hereafter, since they bear significantly on the issue of sovereign immunity.

Since the 1950's petroleum refineries and related petro-chemical production and processes have been a critical part of Puerto Rico's economic development program. Its importance to Puerto Rico's industrial and economic growth, to compensate for the island's scarcity of materials, has long been recognized. An essential of petro-chemical production is oil feed stock for refining, the derivatives of which are fed into related petro-chemical and chemical plants for ultimate processing into synthetic fibers, plastics and other consumer products, marketable in Puerto Rico and abroad. In end result product diversification, industrial expansion, increased employment and improved housing are achieved. Because of proximity and cost factors, Venezuela has been the principal source of the required oil feed stock.

However, in March 1959, the importation into Puerto Rico and the United States of crude oil and crude oil derivatives, the feed stock essential for petro-chemical processes, was restricted by proclamation of the President of the United States.22 Quotas for the importation of oil were granted by the United States Secretary of Interior on a sliding scale according to the refinery input to those who at the effective date of the mandatory program operated refineries or had histories of oil importation.23 When the restrictive order became effective, two oil companies had already been in operation in Puerto Rico and they, as well as nonrefinery operators, had with Commonwealth support obtained quotas for the importation of oil.

The instant suit centers about plaintiff's submission in September 1961 to EDA of a proposal for a petro-chemical complex which contemplated the erection of a refinery for processing and petro-chemical plants, together with a plan which he asserts he conceived for a modification of oil import quota restrictions in order to obtain the essential crude oil. The proposal was hinged to the importation into Puerto Rico from Venezuela of 35-40,000 barrels of crude oil per day for the first two-three years and ultimately of 70,000 barrels per day.

While the Court at this point does not consider the merits of plaintiff's claim, he contends that his program was novel, original, and submitted to EDA in confidence; that he was the first to conceive a practical program for building a plant and obtaining the required oil feed stock. The essence of his claim of novelty, as his...

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