U.S.I. Properties Corp. v. M. D. Construction

• Decision Date: 13 September 2000
• Docket Number: No. 99-1933,99-1933
• Citation: 230 F.3d 489
• Parties: (1st Cir. 2000) U.S.I. PROPERTIES CORP., Plaintiff, Appellee, v. M.D. CONSTRUCTION CO., Defendant, Appellant, COMPANIA DE DESARROLLO COOPERATIVO, Defendant, Appellee. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 489

230 F.3d 489 (1st Cir. 2000)

U.S.I. PROPERTIES CORP., Plaintiff, Appellee, v. M.D. CONSTRUCTION CO., Defendant, Appellant, COMPANIA DE DESARROLLO COOPERATIVO, Defendant, Appellee.

No. 99-1933

United States Court of Appeals For the First Circuit

Heard September 13, 2000

Decided November 6, 2000

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Jose Antonio Fuste, U.S. District Judge] [Copyrighted Material Omitted] Fernando L. Gallardo with whom Geoffrey M. Woods, Amy Adelson, Nathan Z. Dershowitz, Alan M. Dershowitz, Woods & Woods, and Dershowitz, Eiger & Adelson were on brief, for appellant.

Paul B. Smith, Jr., with whom Smith & Navares was on brief, for defendant-appellee.

Before Lynch, Circuit Judge, Coffin, Senior Circuit Judge, and Lipez, Circuit Judge.

LYNCH, Circuit Judge.

This case presents a difficult question of the limits on the subject matter jurisdiction of the federal courts. At issue is whether a state, not ever subject to diversity jurisdiction, may be subjected to the ancillary enforcement jurisdiction of the federal courts on a theory that the judgment debtor in an action originally based on diversity is the alter ego of the state. We conclude that the state cannot be so subjected to federal court subject matter jurisdiction unless there is an independent basis for such jurisdiction.

Compania de Desarrollo Cooperativo ("CDC"), a public corporation created by the Commonwealth of Puerto Rico to foster housing cooperatives, entered into a multiparty agreement in 1978 to build a low income housing project, the Ciudad Cristina project. Parties to that agreement included CDC, U.S.I. Properties Corp. ("USI"), a Delaware corporation, and MD Construction ("MD"), incorporated under the laws of Puerto Rico and the predecessor in interest to defendant-appellant Futura Development of Puerto Rico, Inc. ("Futura"). Largely due to CDC, that project was never completed and the private companies suffered heavy damages. More than a decade of litigation has ensued.

In October 1983, after CDC filed suit against MD in Puerto Rico Superior Court, USI sued both MD and CDC in federal court under diversity jurisdiction for violating the agreements. MD filed a crossclaim against CDC, which in turn filed a crossclaim against MD and a counterclaim against USI. After a five week jury trial in 1987, a jury found that CDC had violated its contracts with MD (as well as with USI), and rejected CDC's cross- and counterclaims, finding that CDC's stated reasons for terminating the project were false. The jury awarded $12.3 million against CDC. This court affirmed. U.S.I. Properties Corp. v. M.D. Construction Co., 860 F.2d 1 (1988), cert. denied, sub nom Compania de Desarrollo Cooperativo v. U.S.I. Properties Corp., 490 U.S. 1065 (1989).

Futura attempted to collect its judgment against CDC. Futura was unsuccessful because the Commonwealth of Puerto Rico had depleted CDC of its funds and assets so that CDC could not satisfy the judgment against it. Futura then filed a new federal court action to collect the judgment, this time directly against the Commonwealth, arguing that CDC was an alter ego of the Commonwealth and that the Commonwealth had waived its Eleventh Amendment immunity. The district court agreed with Futura in this second suit. This court vacated that judgment, holding there was no federal jurisdiction over this second action. Futura Development of Puerto Rico, Inc. v. Estado Libre Asociado de Puerto Rico, 144 F.3d 7 (1st Cir. 1998) ("Futura II"). And so, Futura tried again, this time filing the same alter ego claims against the Commonwealth, but now as a supplementary proceeding in the original action. Futura alleged that the federal court had ancillary enforcement jurisdiction and that CDC was an alter ego of the Commonwealth. The district court took jurisdiction over the postjudgment action but denied the claim.

We hold that there is no federal enforcement jurisdiction over this claim and leave Futura to whatever remedies it may have against the Commonwealth in its own courts. Futura's effort to establish liability against the Commonwealth exceeds the proper scope of federal enforcement jurisdiction absent some independent ground of federal jurisdiction over the claim. Federal enforcement jurisdiction does not extend so far as to allow enforcement proceedings to establish direct liability against the Commonwealth on an alter ego theory here, where the limitations on diversity jurisdiction would have prevented the Commonwealth from being named a defendant in the action originally.

I.

A detailed prior history of this litigation is set forth in our Futura II opinion. 144 F.3d at 8-9. To explain the issues on this appeal, it is useful to describe the development of the case since the original judgment. In the second suit, the district court found on summary judgment that CDC had been acting as an alter ego of the Commonwealth and held the Commonwealth accountable for payment of CDC's $12 million judgment plus interest. See Futura Development of Puerto Rico, Inc. v. Estado Libre Asociado de Puerto Rico, 962 F. Supp. 248 (D.P.R. 1997) ("Futura I"). As the alter ego finding sought by Futura depended on the "nature of the entity created by state law," the district court first turned to the legal status of CDC. Id. at 252. Noting that the Supreme Court of Puerto Rico had remarked in the unpublished opinion, Cintron Ortiz v. Compania de Desarrollo Cooperativo, CE-92-575 (unpublished "sentencia," June 8, 1994), that the enabling statute for CDC fails to define clearly "whether [CDC] is or isn't an instrumentality of the Commonwealth," the district court based its conclusion that CDC was an alter ego of the Commonwealth on the following findings: (1) the Commonwealth provided the principal source of CDC's finances; (2) the Commonwealth acknowledged making additional special appropriations to enable CDC to pay its debts; (3) CDC's financial statements refer to CDC as an agency of the Commonwealth; (4) CDC's enabling statute provides that the CDC's Finance Committee is composed of a Commonwealth agency administrator and four appointees of the Governor; (5) that agency administrator is also the president of CDC, and names CDC's executive director subject to the Governor's approval; (6) CDC's accounting system was to be established in consultation with the Commonwealth's Secretary of the Treasury, and CDC was to entrust all funds to a depository recognized for funds of the Government of the Commonwealth; (7) CDC's property and activities were exempted from taxes; and (8) CDC is required to submit a financial statement and a transactional report to the Governor at the close of each fiscal year. Futura I, 962 F. Supp. at 253-54.

Having determined that CDC was an alter ego of the Commonwealth, the district court turned to the question of whether the Commonwealth had waived its Eleventh Amendment immunity through the actions of CDC. Given that the Commonwealth controlled CDC's daily operations before the original litigation over the Ciudad Cristina project and provided ninety-seven percent of CDC's income through legislative appropriations, the district court focused its waiver analysis on the critical question of whether at the time of the original litigation, the Commonwealth "acted as though it were defending an agency and, consequently, its own coffers." Id. at 255. In addition to CDC's assertion of its own claim, the district court identified six findings in favor of waiver: (1) the litigation materials and documentation were in the control of the Commonwealth's Secretary of Justice, not the CDC administrators; (2) in closing arguments CDC argued that any judgment against it would have to be paid with Puerto Rico tax dollars; (3) CDC's counsel promised Futura that the Commonwealth would include payment of the judgment in its budget in order to deter Futura from attaching assets or requiring the posting of a supersedeas bond during the appellate process; (4) the appeal of the judgment to the First Circuit and consequently the Supreme Court was handled by the Secretary of Justice and paid for by the Commonwealth; (5) the Commonwealth engaged in "a pattern of conveniently allowing CDC to fall into insolvency by refusing to provide the company with the necessary and customary appropriations, thus letting CDC's debts mount, wiping out its capital, and in effect, precluding the possibility of satisfying plaintiff's judgment"; and (6) the Commonwealth stripped the agency of its employees and transferred them to a complementary governmental agency. Id. at 255-56. In light of the Commonwealth's support and control of CDC in maintaining its counterclaim, the district court concluded that the Commonwealth "simply cannot expect to act as CDC's alter ego throughout the Ciudad Cristina litigation in an effort to increase its own coffers, and hope that, when its plan boomerangs, this Court tolerates its efforts to distance itself from CDC by pleading and interposing Eleventh Amendment immunity." Id at 257.

This court in Futura II, however, vacated that judgment, holding that the district court lacked jurisdiction as neither enforcement jurisdiction nor supplementary jurisdiction existed over the claim against the Commonwealth in this separate proceeding. This court first held that under Peacock v. Thomas, 516 U.S. 349 (1996), the federal courts lacked enforcement jurisdiction over a separate proceeding to enforce a judgment where there was no independent basis for federal jurisdiction. Futura II, 144 F.3d at 11-12. Second, this court rejected Futura's efforts to append the claim to an action against Commonwealth officials under the federal courts' supplementary jurisdiction in light of the different factual bases for the claims. Id. at 12-13. In so ruling, this court expressly declined to reach the substantive issues of whether CDC actually was an alter ego of the Commonwealth and...