U.S., In re

• Decision Date: 27 July 1998
• Docket Number: No. 98-1765,98-1765
• Citation: 158 F.3d 26
• Parties: In re UNITED STATES (Lorenzo Munoz Franco, et al.), Petitioner. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 26

158 F.3d 26

In re UNITED STATES (Lorenzo Munoz Franco, et al.), Petitioner.

No. 98-1765.

United States Court of Appeals, First Circuit.

Heard July 27, 1998.

Decided Oct. 13, 1998.

J. Douglas Wilson, Attorney, Criminal Division, U.S. Department of Justice, with whom Guillermo Gil, United States Attorney, was on brief, for petitioner.

Michael S. Pasano, with whom Zuckerman Spaeder Taylor & Evans, LLP, Graham A. Castillo Pagan, Joseph J. Rucci, Jr., and Rucci, Burnham, Carta & Edelberg were on brief for respondents Ariel and Enrique Gutierrez.

Harry Anduze Montano, with whom Jorge L. Arroyo Alejandro was on brief, for respondent Lorenzo Munoz Franco.

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

SELYA, Circuit Judge.

After Chief Judge Cerezo of the United States District Court for the District of Puerto Rico set a firm trial date in a case presently pending before her, United States v. Lorenzo Munoz-Franco, 14 F.Supp.2d 167 (D.Puerto Rico 1998) the government moved at the eleventh hour to disqualify the judge from further involvement. The judge denied the motion following a three-day evidentiary hearing. The government then sought a writ of mandamus from this court directing Judge Cerezo to recuse herself. We provisionally stayed the impending trial, set an expedited briefing schedule, and entertained oral argument. We now conclude that the government failed to prove what it had alleged vis-a-vis the judge, and therefore deny the petition.

At the outset, it is important to note the narrowness of the government's position: it does not contend that the judge has any actual bias or prejudice in this case and it does not seek her recusal under 28 U.S.C. § 144 (1994). It likewise eschews the mandatory bases for disqualification limned in 28 U.S.C. § 455(b) (1994). Instead, the government premises its mandamus petition (and the underlying recusal motion) exclusively on 28 U.S.C. § 455(a) (1994), which provides:

Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.

In cases involving section 455(a), the recusal determination inevitably turns on the facts. See Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 865, 108 S.Ct. 2194, 100 L.Ed.2d 855 (1988). Consequently, we describe the pertinent events in some detail. We then discuss the applicable law and, finally, undertake an analysis of the recusal question.

I. BACKGROUND

United States v. Munoz-Franco stems from the May 1990 failure of Caguas Central Federal Savings Bank (Caguas), reputed to be the largest bank failure in the history of Puerto Rico. The government tells us, without demurrer by the respondents, that Caguas's collapse resulted in aggregate losses exceeding $120,000,000.

The defendants in Munoz-Franco include two former Caguas officials, namely, Lorenzo Munoz Franco (Munoz), Caguas's chief executive officer, and Francisco Sanchez Aran (Sanchez), Caguas's chief lending officer. ¹ The indictment charges Munoz and Sanchez with misapplying bank funds, making false entries in banking records, and participating in a conspiracy to perpetrate these offenses and to commit bank fraud. See 18 U.S.C. §§ 371, 657, 1006, & 1344 (1994). In its narrative portions, the indictment describes a "loan-kiting" scheme that purportedly involved the misapplication of real estate loan proceeds to shore up other (failing) commercial loans, thereby creating the illusion that the latter loans were performing well. The government alleges that one object of the scheme--which supposedly persisted for almost the entire decade between 1980 and 1990--was to stave off regulatory intervention and keep Munoz and Sanchez in power.

The transaction upon which the government bases its recusal initiative took wing in 1986 when the judge's husband, Benny Frankie Cerezo, sought to borrow funds from Caguas. Mr. Cerezo approached Arturo Somohano, Caguas's senior vice-president for commercial lending, and explained that he wished to obtain a loan so that he could develop a twenty-eight acre farm and subdivide it into house lots. The record is tenebrous as to whether Mr. Cerezo furnished appraisal reports in support of the loan application, but we do know that he at least provided Caguas with the cover letters from two appraisal reports prepared in 1984. Both letters subscribed that the acreage had a value of $200,000 or more.

Despite the fact that Mr. Cerezo's checking account was overdrawn, ² Somohano approved the application and the Cerezos obtained a $150,000 loan from Caguas in the autumn of 1986 at two points over prime, secured by a first mortgage on the farm. The loan contract and related documents were signed by Mr. Cerezo (individually and on behalf of his wife, via power of attorney). The promissory note called for eleven monthly interest payments and repayment of the loan principal on the first anniversary. Between November 1986 and November 1987 (when the loan matured), the Cerezos made at most three interest payments.

As the note neared maturity, Mr. Cerezo requested a loan of $557,000 as additional financing for his shoe business. He initially made this request in a Spanish-language letter to Munoz, dated October 26, 1987. The salutation of the letter read "Estimado amigo Lorenzo" ("Esteemed friend Lorenzo"), but the body of the letter employed formal verb forms (conjugated for use with "usted" rather than with the more familiar "tu"). Munoz referred the letter to Somohano and, three days later, Mr. Cerezo wrote directly to Somohano, making essentially the same request and indicating that the earlier letter to Munoz had been sent in error. Caguas never approved the $557,000 loan.

Upon maturity, the Cerezos failed to repay the farm loan. During the initial post-default period, which extended from November 1987 (when the note matured) until May 1990 (when control of the note passed into the hands of third parties, see infra ), the record does not reflect that either Munoz or Sanchez had anything to do with Caguas's collection efforts. We review what transpired.

Over the first eight months of the post-default period, Caguas sent Mr. Cerezo three collection letters, each of which demanded immediate payment. Somohano sent a copy of the second letter to Judge Cerezo at the Cerezos' home address because he was concerned that, as a cosigner by power of attorney, she might not have been aware that the loan even existed. The letters did not accomplish their intended purpose. Mr. Cerezo informed Caguas that he did not have liquid funds sufficient to repay the debt. He proposed several alternatives, such as working out a plan to sell the farm or reviving his application for a loan to finance the expansion of his shoe business (combining the existing loan with the new loan). Because Somohano terminated his employment with Caguas shortly after sending the second collection letter, these suggestions were considered by Pedro Suau, Caguas's assistant vice-president for commercial lending. Suau countered with a proposal to rewrite the farm loan for $185,000 in order to cover the accrued interest and create a reserve for interest payments over the following six months. Mr. Cerezo displayed no enthusiasm for this proposal and faxed a letter to Suau in October 1988, with a copy to Munoz, urging approval of his $557,000 loan request. Neither the $557,000 "shoe business expansion" loan nor the $185,000 refinancing of the farm loan ever materialized.

By February 1989, the Cerezos owed a total of $185,373.57 in principal plus accrued interest on the delinquent farm loan. At that juncture, Suau recommended transferring the matter to the bank's special loans department (which handled workouts). The transfer did not occur at that time, however, as the document bearing Suau's recommendation also carried an undated, unsigned, handwritten notation that stated: "This case was not authorized to go or to pass into the special department." The next month, Mr. Cerezo sent $5,000 to Caguas in partial payment of accrued interest on the delinquent farm loan. He made no further payments, and Caguas eventually transferred the loan to the workout section. It was then referred to the bank's outside counsel, who sent a dunning letter to Mr. Cerezo (with a copy to Judge Cerezo) on November 21, 1989.

Mr. Cerezo asked the lawyers for a ninety-day extension, stating that, if he could not sell the farm for an amount sufficient to liquidate the debt within that interval, he would deed the property to Caguas as payment in kind. The law firm approved the extension request, but nothing happened. The attorneys fired off another collection letter. In response, Mr. Cerezo proposed surrendering the farm as payment in kind. Caguas indicated that it would consider the proposal on condition that the Cerezos secure a satisfactory appraisal of the property. Mr. Cerezo acquiesced to this condition and, in May 1990, he retained an appraiser and advised Caguas of the appraiser's identity.

On May 25, 1990, Caguas failed. The Resolution Trust Corporation (RTC) moved into the picture, first as conservator and later as receiver. On August 31, the RTC and Banco Santander Puerto Rico (Santander), an unrelated third party, signed a purchase and assumption agreement pursuant to which Santander bought various assets of Caguas, including the farm loan. On February 22, 1991, Santander's attorneys advised Mr. Cerezo that Santander had acquired the note and mortgage, and was willing to accept the farm as payment in kind. Mr. Cerezo did not respond to this communique.

On April 3, 1991, Santander brought a foreclosure complaint against the Cerezos, alleging an aggregate debt of $220,175.34 through March 28, 1991. Process was served on both Mr. Cerezo and Judge Cerezo during June of that year. The Cerezos did not contest the allegations and a judgment of foreclosure entered on October 28, 1991. At the...