Marrero-RolóN v. Autoridad De Energía Eléctrica De Puerto Rico

Decision Date28 September 2015
Docket NumberCIV. NO.: 15-1167(JAG/SCC)
CourtU.S. District Court — District of Puerto Rico

Alleging a RICO conspiracy aimed at defrauding Puerto Rico's electric ratepayers by procuring, selling, and burning substandard fuels while passing along to the ratepayers the costs of compliant fuel, the named plaintiffs and a putative class of all electric ratepayers has sued the Autoridad de Energía Eléctrica de Puerto Rico ("PREPA," as it is known in English) and numerous other individuals and corporations. Docket No. 1 ("Compl."). Collectively, the defendants have filed fourteen motions to dismiss, Docket Nos. 82, 102, 108, 110,116, 121, 126, 130, 133, 135, 136, 137, 161, 164, which the presiding district judge referred to the undersigned for a report and recommendation, Docket No. 207. After carefully considering the defendants' motions and the plaintiffs' responses, I recommend that the Complaint's allegations be deemed sufficient in most regards.1

1. Factual Background

The complaint in this case is eighty pages long and very detailed. Thus, in this section I will provide a summary of Plaintiffs' allegations, taking up the more specific allegations as necessary in the analysis that follows.

1.1 The Alleged Scheme

PREPA is a public company with a monopoly on power generation and electricity distribution in Puerto Rico. Two-thirds of the power PREPA generates comes from the burning of petroleum or fuel oil, all of which is imported to the island. Pursuant to a 1999 Consent Decree with the EPA, the fuel burned by PREPA must meet certain minimum specifications;Plaintiffs refer to this as Compliant Fuel Oil, and refer to oil that fails to meet these specifications as Non-Compliant Fuel Oil.

To purchase oil, PREPA is meant to request bids for Compliant Fuel Oil and choose the lowest bidder. When the oil arrives, it is tested by independent laboratories, which issue Certrificates of Analysis. These and other tests performed by laboratories hired by PREPA are meant to ensure that only Compliant Fuel Oil is burned. PREPA's costs for the purchase of fuel are passed directly on to consumers. Between June 2013 and June 2014, more than $2.6 billion was charged to PREPA clients as a pass-through cost for the purchase of fuel.

In essence, Plaintiffs allege that this system has been hijacked by what it calls the Cartel de Petroleo. In Plaintiffs' reckoning, the Cartel is made up of three branches: the PREPAParticipants,2 the Fuel Oil Supplier Participants,3 and the Laboratory Participants.4 At the behest of the PREPA Participants, the Laboratory Participants regularly falsified fuel test reports such that it looked like PREPA was buying (and paying full price for) Compliant Fuel Oil, when in fact it was purchasing Non-Compliant Fuel Oil, which was worth less. The Laboratory Participants agreed to this arrangement to ensure future work from PREPA, while the PREPA Participants participated in exchange for kickbacks from the Fuel OilSupplier Participants. The Fuel Oil Supplier Participants, of course, received an inflated price for discount oil.

2.2 Plaintiffs' Discovery of the Alleged Scheme

According to Plaintiffs, the existence of the Cartel was revealed to the public principally by a May 2014 television program in which the president of Puerto Rico's Senate, Eduardo Bhatia, said that PREPA buys $3 billion of fuel a year, and the people in charge of making those purchases are getting a ten-percent commission, or as much as $300 million a year. Bhatia futher implied that those individuals "would do the unspeakable" to protect those commissions.

But long before the 2014 television report, there were indications that something was wrong at PREPA. For instance, in 2002, PREPA's Office of the Comptroller released an audit of PREPA's Fuel Oil Office. This report disclosed that prior to 1999, employees at an outside laboratory had been pressured to falsify hundreds of test results. In August 2002, PREPA then sued that laboratory (but not any of the Fuel Oil Supplier Participants) in federal court, accusing it of engaging in a conspiracy to provide Non-Compliant Fuel Oil at Compliant Fuel Oil prices. In the course of the lawsuit, PREPA denied knowledge of the scheme (though some witnesses gavetestimony to the contrary).

Much later, in October 2011, news reports emerged claiming that PREPA had on two occasions used Non-Compliant Fuel Oil and that an internal audit had been shutdown before it could be completed. As a result, PREPA hired an outside auditor, Ivan Clark. His report showed that between December 8 and October 2011, just six of almost 700 samples revealed Non-Compliant Fuel Oil.5

2. Analysis

I will begin by taking up several miscellaneous—and yet case-dispositive—defenses that are raised by one or another of the defendants. Sustaining none of them, I then turn to the numerous arguments arrayed against Plaintiffs' RICO claim. And finally, I consider Plaintiffs' state-law unjust enrichment claim.

2.1 Miscellaneous Defenses

I will begin by considering several arguments that, if sustained, would lead to the dismissal of one or two defen-dants without wading into the RICO claims.

2.1.1 The claims against Bureau Veritas and Petróleo Brasileiro, S.A., should not be dismissed for insufficient service of process

The Complaint in this case was filed on February 24, 2015. Service had to be completed within 120 days of that date, Fed. R. Civ. P. 4(m), which period elapsed on June 24, 2015. Bureau Veritas and Petróleo Brasileiro were not served until June 29, 2015. Under such circumstances, the Court "must dismiss the action without prejudice" unless the plaintiff "shows good cause for the failure." Id. Plaintiffs claim to have good cause: when they filed the Complaint, the CM/ECF system automatically entered a service deadline of June 29, 2015. Docket No. 1. I think it obvious that being told by the Court's docketing system that June 29, 2015, was the day by which Plaintiffs had to serve the defendants is a sufficiently good reason for their having waited until that date to do so. Moreover, as Plaintiffs point out, the Court can change the Rule 4(m) deadline, and it is plausible that the CM/ECF system's automatic entry of June 29, 2015, constituted such a change. And even if it did not, relying on that date would constitute good cause for a brief five-day delay in service. Accordingly, I would deny themotions to dismiss for insufficient service of process.

2.1.2 The Court has personal jurisdiction over Bureau Veritas Holdings, Inc.

Bureau Veritas Holdings, Inc., argues that it should be dismissed from this action because it does not have contacts with Puerto Rico sufficient to justify personal jurisdiction over it. Bureau Veritas relies on general principles of personal juridiction. In doing so, it forgets, as Plaintiffs point out, that the RICO statute provides for nationwide service of process "when it is shown that the ends of justice require." 18 U.S.C. § 1965(b). A plurality of courts interpreting this provision have held that it gives personal jurisdiction over an out-of-state defendant so long as the Court has jurisdiction established by the minimum contacts of at least one other defendant. FC Inv. Grp. LC v. IFX Markets, Ltd., 529 F.3d 1087, 1099 (D.C. Cir. 2008); see also id. (collecting cases); Cory v. Aztec Steel Bldg., Inc., 468 F.3d 1226, 1231 (10th Cir. 2006) (coming to the same conclusion as IFX Markets). Here, the great majority of the facts giving rise to this case occurred in Puerto Rico and relate to Puerto Rico's electricity market. The ends of justice thus require that the entire case be heard by this court. Personal jurisdiction over Bureau Veritas is thus appropriate.

2.1.3 Petróleo Brasileiro is not immune under the Foreign Sovereign Immunity Act.

Petróleo Brasileiro, S.A., argues that, pursuant to the Foreign Sovereign Immunity Act, it is immune from suit in this case. Plaintiffs admit that Petróleo Brasileiro is a foreign state for FSIA purposes, but they argue that its immunity has been waived by virtue of its direct economic activity in the United States.

The FSIA waives the immunity of foreign states for, among other things, actions "based upon a commercial activity carried on in the United States" by that foreign state. 28 U.S.C. § 1605(a)(2). Petróleo Brasileiro's only argument about why this waiver does not apply is that it does not have any fuel contracts with PREPA. Docket No. 164-1, at 14 & n.5. But contracts with PREPA are not the sine qua non of commercial activity, and the Complaint alleges that Petróleo Brasileiro engaged in economic activity in the United States in other ways. For example, it provided Shell Trading with low-sulfur fuel specifically for the Puerto Rico market. Furthermore, a Petróleo Brasiliero executive, Roberto Costa, was allegedly involved in securing PREPA contracts for Petróleo Brasileiro'sAmerican subsidiary, Petrobras America.6

Once a defendant establishes that it is a foreign state, the plaintiff has an initial burden of producing evidence that would support an exception to immunity. Universal Trading & Inv. Co. v. Bureau for Representing Ukrainian Interests in Int'l & Foreign Courts, 727 F.3d 10, 17 (1st Cir. 2013). In some cases, the court may thereafter have to hold a hearing and resolve factual disputes. Id. Here, however, Petróleo Brasileiro has not challenged any of Plaintiffs' facts (and has not filed a reply brief at all). Rather, Petróleo Brasileiro has argued that the facts stated in the Complaint are legally deficient. It has done so, moreover, by ignoring numerous facts bearing on its participation in the alleged scheme. Given that Petróleo Brasileiro bears the burden of persuading the Court of its immunity, id., its arguments must be deemed deficient for this reason. I would thus deny its motion to dismiss on FSIA grounds, or,...

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