USCA1 Opinion
United States Court of Appeals
For the First Circuit
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No. 96-1279
CARIBBEAN MUSHROOM CO., INC.,
Plaintiff, Appellee,
v.
THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO AND
PUERTO RICO DEVELOPMENT FUND,
Defendants, Appellants.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jaime Pieras, II, Senior U.S. District Judge]
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Before
Coffin and Campbell, Senior Circuit Judges,
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and DiClerico,* District Judge.
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John W. Dougherty with whom Peter J. Satz was on brief for
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appellants.
Heidi L. Rodriguez with whom Jorge I. Peirats and Maria de Los
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Angeles Trigo was on brief for appellee.
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December 23, 1996
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*Of the District of New Hampshire, sitting by designation.
COFFIN, Senior Circuit Judge. Plaintiff-appellant Caribbean
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Mushroom Company, Inc. seeks damages for the breach of an
agreement to provide it with a $100,000 loan. The issue before
us is whether the company waited too long to bring its action.
The agreement allegedly was breached in January 1978. The
lawsuit was filed nearly fifteen years later, in January 1993.
The district court concluded that the action was subject to a
three-year statute of limitations, and therefore granted summary
judgment for the defendants. Our review of the relevant statutes
and caselaw persuades us that a fifteen-year limitations period
applies, and, consequently, that the complaint was timely filed.
We therefore reverse.
I. Background
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The facts underlying this appeal are few, and undisputed.
In November 1977, defendant Puerto Rico Development Fund ("PRDF")
sent plaintiff Caribbean Mushroom Co., Inc. ("Caribbean") a
commitment letter in which it agreed to loan Caribbean $100,000,
subject to specific terms and conditions.1 On or about January
10, 1978, PRDF informed Caribbean that it would not loan the
money. Caribbean brought this diversity action on January 7,
1993, alleging that PRDF's refusal to make the loan constituted a
breach of contract. It claimed $4.5 million in damages.
PRDF filed a motion for summary judgment alleging, inter
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alia, that Caribbean's claim was time barred. It contended that
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1 PRDF is a department of the Government Development Bank
for Puerto Rico, the other defendant. For convenience, we refer
throughout this opinion only to PRDF as defendant.
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the applicable statute of limitations was the three-year period
provided in Article 946 of the Puerto Rico Commerce Code, P.R.
Laws Ann. tit. 10, 1908. Caribbean argued in response that the
action was governed by Article 1864 of the Civil Code of Puerto
Rico, P.R. Laws Ann. tit. 31, 5294, which sets a fifteen-year
limitations period for actions for which there is no specific
term set. Because Caribbean's lawsuit was filed just short of
fifteen years after the alleged breach, it is viable only if the
longer period applies.
The district court sided with PRDF. It concluded that the
disputed transaction fell under the Commerce Code and its three-
year limitations provision for actions arising out of commercial
instruments because it involved an agreement to loan money to a
merchant for a commercial purpose. The court rejected
plaintiff's contention that the fifteen-year provision should
apply because the claim involved a breach of contract and not
enforcement of the terms of a commercial loan. In doing so, the
court invoked First Circuit precedent holding that "`litigants
cannot circumvent a specific provision of the Puerto Rico Code by
characterizing their claims generally as a "breach of contract"
in order to obtain the benefit of a longer statute of limitations
period,'" Caribbean Mushroom Co. v. Government Dev. Bank for
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Puerto Rico, 906 F. Supp. 70, 74 (D.P.R. 1995) (quoting Rivera
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Surillo & Co. v. Falconer Glass Indus., 37 F.3d 25, 28 (1st Cir.
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1994)). The court's determination on the limitations question
led it to grant summary judgment for defendants.
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On appeal, Caribbean argues that the district court
misconstrued the scope of Article 946, which contains the three-
year deadline, and erroneously invoked the Rivera Surillo line of
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cases barring litigants from broadly classifying their claims as
contractual breaches to avoid more particular, and shorter,
limitations provisions. Caribbean contends that it has not
artificially re-characterized its lawsuit to fall under Article
1864, but that the fifteen-year period applies because no other
limitations provision fits.
Although the district court's resort to the three-year
limitations period attracts us as a practical matter, we have
concluded that it is not supportable as a matter of law. We
explain our reasoning in the following section.
II. Discussion
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The statute of limitations for actions arising under Puerto
Rico's Commerce Code may be set either specifically by a
provision of that Code or, under Article 940 of the Commerce
Code, P.R. Laws Ann. tit. 10, 1902, by an appropriate provision
of the Civil Code.2 Ramallo Bros. Printing v. Ramis, 93 JTS 84,
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P.R. Offic. Trans. slip op. at 2 (May 25, 1993) ("[T]he Commerce
Code does not have systematic and complete regulations; it only
visualizes certain cases of prescription, and those lacking a
particular term are remitted to the rules of civil law.");
Mortensen & Lange v. San Juan Mercantile Corp., 19 P.R. Offic.
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2 Article 940 states: "The actions which by virtue of this
Code do not have a fixed period in which they must be brought,
shall be governed by the provisions of the common law."
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Trans. 372, 378 (1987); Portilla v. Banco Popular, 75 P.R.R. 94,
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120 (1953).3 Defendants assert, and the district court agreed,
that Article 946 of the Commerce Code specifically governs this
action. That provision reads in its entirety as follows:
Actions arising from drafts shall extinguish three
years after maturity, whether such drafts have been
protested or not.
A similar rule shall be applied to commercial
bills of exchange and promissory notes, checks, stubs
and other instruments of draft or exchange and to
coupons and amounts for the redemption of obligations
issued in accordance with this Code.
P.R. Laws Ann. tit. 10 1908. Plaintiffs maintain that the
applicable term is the Civil Code's fifteen-year "catch-all"
provision, which governs when "no special term of prescription is
fixed," P.R. Laws Ann. tit. 31, 5294 ("Article 1864").
It is undisputed that Article 946 (setting a three-year
term) does not on its face govern here because no promissory note
or other commercial instrument was issued by defendants to
Caribbean. The district court's view, urged on appeal by
defendants, is that the three-year limitation nonetheless applies
because the agreement at issue essentially was equivalent to
those transactions explicitly covered by the provision. Indeed,
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3 The parties do not dispute that the contract at issue here
is governed by the Commerce Code. Consequently, the defendant's
and district court's reliance on Buena Vista Dairy, Inc. v.
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Aponte, 108 P.R. Dec. 657, 660, 8 P.R. Offic. Trans. 698, 700
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(1979), is misplaced. In that case, the court held that the
Commerce Code applied to causes of action "ancillary" to a
commercial agreement even if such claims might not have met the
requirements of the Code on their own. Because applicability of
the Commerce Code is uncontested here, it is unnecessary to
invoke the "ancillary" claim doctrine.
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Caribbean observed in its response to defendants' motion for
summary judgment that caselaw has extended Article 946's reach
"past actions on instruments per se to suits on loans not
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reflected in instruments but which nevertheless have a
`commercial' basis."
On appeal, Caribbean drops this broad depiction of Article
946's scope, and now argues that the three-year provision is
confined to actions based on commercial instruments.4 Contrary
to defendants' assertions, this is not a new argument that should
be cast aside because it was not offered below. Rather, it is a
narrowing of Caribbean's earlier position. While Caribbean no
longer acknowledges that Article 946 can extend beyond its
literal terms, it consistently has argued that this case is
outside the statute's range. Its position below was that, even
if Article 946 can be construed flexibly to cover suits on loans,
it does not govern this case because the transaction sued upon
was not a loan agreement, but a contract in which defendant
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promised to make a loan.5 Because no provision of the Commerce
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4 In its brief on appeal, Caribbean states that "[u]ntil
now, the statute has never once been held to bar an action not
involving an instrument -- every court to which the question has
ever been presented has held that it did not so apply." Brief at
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6 (emphasis in original).
5 In its opposition to PRDF's motion for summary judgment,
plaintiff argued:
The statutory provision is clearly inapplicable here,
not because this action is on a loan which is "non-
commercial" but because it is not on a loan at all.
This action is not on an instrument or on a loan,
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commercial or otherwise. It rather seeks damages for
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Code sets a limitation period for commercial contract actions,
Caribbean maintained -- and continues to maintain -- that the
Civil Code's fifteen-year provision applies.
The threshold question, then, is whether Article 946 governs
the dispute underlying this case. Despite Caribbean's
representation to the district court that Article 946 has been
construed flexibly, we have found no case applying the three-year
limitations period to an action arising from a commercial
agreement that does not involve an instrument such as a
promissory note.6 The primary cases cited by defendants focus on
the preliminary question of whether the loan sued upon is
commercial. In each case, a note had been issued, and a finding
that the underlying transaction was commercial therefore would
mean that that case would fall within Article 946's literal
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the breach of a contract, a suit of a far different
sort. The distinction between an action to recover
money due under an agreement and one to recover damages
sustained by breach of that agreement is almost too
obvious and well recognized to require comment. . . .
If PRDF had gone through with its loan commitment,
a later action by it against CMC based on such loan
might very well . . . have been within the purview of
Article 946 as a suit on a "commercial" obligation.
From the other end, on the same reasoning, even a suit
by CMC to enforce the loan agreement -- to compel the
making of the loan -- might perhaps have been covered
by the statute. No such suit is here present, however.
This is not an action on the contract that existed
between the parties but a suit for damages for its
breach.
Opposition at 12.
6 Caribbean's statement, contained in a footnote of its
summary judgment response, was not supported by citations.
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language. See, e.g., FDIC v. Consolidated Mortgage, 805 F.2d
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14, 17-18 (1st Cir. 1986) (holding that loan agreement and notes
were commercial, and thus subject to three-year period); FDIC v.
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Cardona, 723 F.2d 132, 133-36 (1st Cir. 1983) (alternative
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holding: non-commercial promissory notes at issue, and so
fifteen-year period applies); FDIC v. Francisco Inv. Corp., 638
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F. Supp. 1216, 1217-18 (D.P.R. 1986) (promissory notes not
commercial; fifteen-year period applies); Mediterranean Inv.
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Corp. v. Rodriguez, 575 F. Supp. 268, 268-69 (D.P.R. 1983)
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(same).
Additionally, this Circuit recently gave a limited reading
to Article 946 in rejecting its applicability in a commercial
case involving a guaranty. We observed that the provision
applies to negotiable instruments, and "[t]he promise before us .
. . is plainly not a negotiable instrument," Georgia Pacific
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Corp. v. Pablo Eguia & Sons, Inc., 15 F.3d 8, 10 (1st Cir. 1994)
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(emphasis in original). Indeed, we quoted in Georgia Pacific the
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following passage from a treatise describing the corresponding
provision in the Spanish Code of Commerce:
"But a distinction must be made as regards the aim
of prescription. The three-year prescription bars
actions arising from negotiable instruments, but not
actions arising from the fundamental juridical
relations which the contracting parties have sought to
identify with the actions on negotiable instruments.
If a loan is guaranteed by a negotiable instrument, the
actions derived from the relations arising from the
latter shall prescribe, but the right of action arising
from the mutual contract shall remain intact and shall
survive for its entire term."
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Id. (citing 5 R. Gay de Montella, Codigo de Comercio Espanol
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Comentado 503-504 (1936) (translated, and quoted, in Portilla, 75
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P.R.R. at 119)).7 We understand this passage to reject the
notion that all claims arising from a transaction involving a
negotiable instrument are to be treated identically for
limitations purposes based solely on their common factual
underpinning. See also E.S. Belaval Martinez, "The Puerto Rico
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Commercial Code under the Federal Courts: A Juridical Disaster,"
55 Rev. Jur. U.P.R. (Issue #2) 313, 314 (1986) ("Juridical
Disaster") ("Both the loan and the note are distinct and
separable contracts and as such they give rise to two distinct
and separable actions") (footnote omitted).
The absence of identified caselaw extending the provision to
these or similar circumstances, together with our own cautious
reading of Article 946 in Georgia Pacific (including invocation
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of the treatise passage quoted above), lead us to conclude that
there is no legal support for applying the provision here. Even
if Caribbean correctly informed the district court that precedent
exists to support use of Article 946 for loan agreements not
reflected in a note, this case would be another step away from
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7 We note that one commentator who addressed a related
issue assumed that an action on a loan contract, as distinguished
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from a note, would be subject to the three-year period unless the
plaintiff were able to prove that the contract was not a
commercial loan. Again, however, no caselaw is cited for the
implicit proposition that suits based on commercial loans are
subject to Article 946 whether or not an "instrument" is
involved. See E.S. Belaval Martinez, "The Puerto Rico Commercial
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Code under the Federal Courts: A Juridical Disaster," 55 Rev.
Jur. U.P.R. (Issue #2) 313, 319, 322 (1986).
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that stretching of the provision's specific language. The
contract here represented an earlier step in the financing
process than a contract that actually sets in motion a financing
relationship; it was an agreement to enter into a loan
arrangement at a later time that might, or might not, be
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reflected in a note. In other words, defendant allegedly
breached a promise to make a loan, not to perform the terms of a
loan agreement.
Notwithstanding this distinction, the district court's
decision to use Article 946's three-year term is appealing for
several reasons. First, there is logic in applying the same term
to all transactions related to a commercial loan, no matter what
stage of the process is involved, and regardless of whether the
financing agreement is represented by a promissory note or other
commercial "instrument." Such technicalities arguably should
make no difference when closely related claims are at issue. We
further appreciate the rationale for applying shorter
prescriptive terms in the commercial arena, where the orderly
operation of businesses would seem to call for prompt and
efficient resolution of disputes. The Puerto Rico Supreme Court,
moreover, has "alluded to the modern tendency of shortening the
terms" for prescription, see Culebra Enterprises Corp. v.
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Commonwealth, 91 J.T.S. 18, P.R. Offic. Trans., slip op. at 9
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(Feb. 8, 1991).
Defendant, in fact, argues that Article 946 should be
adopted by analogy in this setting if we deem it inapplicable in
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its own right. It cites the Puerto Rico Supreme Court's decision
in Culebra Enterprises, 91 J.T.S. 18, P.R. Offic. Trans., slip
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op. at 4, where the court endorsed resort to "an analogy to fix
the prescriptive term of a certain action for which the legal
system does not provide a prescriptive term, but which is very
similar to another for which a prescriptive term has been
provided." PRDF's plausible view is that the contract at issue
here is sufficiently analogous to a promissory note that the same
limitations period should be applied. Accepting Article 946 by
analogy would not contradict caselaw limiting its direct reach to
the realm of commercial instruments; it instead would represent a
policy choice in a context in which the law has left a gap.
We do not believe that we are free to make that choice. The
court in Culebra Enterprises seemed to view the controversy
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before it, which involved land classification and implicated
constitutional property principles, as one of first impression.
Multiple factors, including the need to stabilize the use of the
Commonwealth's limited land resources and the desirability of
speedily resolving disputes between the State and its citizens,
influenced its adoption of an "extraordinary" one-year
limitations period rather than any longer term, including the
"ordinary" one of fifteen years.
Here, by contrast, the prescriptive question is not open-
ended, and we therefore need not -- and, it seems to us, we may
not -- cast about for a suitable analogy. As we read the cases,
it is well established that contract claims that are covered by
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the Commerce Code but are not designated for special prescriptive
treatment automatically fall under the Civil Code's fifteen-year
catch-all provision.8 See, e.g., Rivera Surillo, 37 F.3d at 27
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(fifteen-year breach of contract limitations provision applies to
this business dispute if no other specific period applies); K-
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Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 911 n.2 (1st
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Cir. 1989) (in case involving breach of business lease, court
noted that "limitation period for contract claims under Puerto
Rico law is fifteen years"); Kali Seafood, Inc. v. Howe Corp.,
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887 F.3d 7, 9 (1st Cir. 1989) (in case involving commercial
transaction, court noted that Civil Code's fifteen-year term
applies to "contracts and other personal claims `for which no
special term of prescription is fixed'"); Lexington Ins. Co. v.
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Abarca Warehouses Corp., 476 F.2d 44, 47 (1st Cir. 1973)
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(assuming that, if claim were contractual, fifteen-year statute
of limitations would apply); Mortensen & Lange, 19 P.R. Offic.
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Trans. at 378 (noting that fifteen-year term would apply if
transaction at issue were an agency contract between two business
entities, but concluding that it was a "charterparty" and thus
subject to a six-month term); id. at 391 (Negron Garcia, J. and
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Hernandez Denton, J., dissenting) (concluding that the
transaction was not a charterparty, and that fifteen-year term
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8 Defendant does not suggest any possibly applicable
limitations provision other than Article 946. Our determination
that that statute does not apply therefore negates the district
court's ruling that Caribbean improperly sought to evade an
applicable limitations provision by characterizing its alleged
cause of action as breach of contract.
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consequently applied); Maryland Casualty Co. v. Banco Popular de
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Puerto Rico, 92 P.R.R. 320, 324 (1965) (action based on
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fraudulently endorsed checks did not arise from commercial
instrument but is "an action for collection of money based on a
loan contract" and so is governed by fifteen-year period); Lugo
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v. E.M. Amy & Sons, Inc., 87 P.R.R. 527, 533 (1963) ("actions for
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damages [in a mercantile setting] arising from a previous
contractual relation do not have a fixed term of prescription,
for which reason the general prescription of fifteen years fixed
by section 1864 of the Civil Code is applicable thereto"). If,
in the face of this precedent, the Puerto Rico legislature has
refrained from modifying the limitations scheme for commercial
contract cases, we may not second-guess its judgment.
We hasten to add that, notwithstanding our earlier
endorsement of the three-year period as fitting for this context,
we consider use of the fifteen-year term as neither arbitrary nor
irrational. At least for now, that is still the "ordinary"
period of prescription for Commonwealth cases, and Caribbean's
complaint is intrinsically a run-of-the-mill contract claim.
Moreover, although the commercial nature of the proposed
transaction would seem to justify a much shorter term, the fact
that the suit does not concern a negotiable instrument has
counterbalancing weight in rendering Article 946 inapt.
Negotiable instruments by virtue of their negotiability require
particularly quick untangling, and the short limitations term
also may be viewed as a quid pro quo for the fact that the issuer
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of a note has fewer defenses than the typical contract-claim
defendant. See "Juridical Disaster," at 316-17. Lacking those
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elements, this case has a lesser claim to urgency. The Puerto
Rico Supreme Court has recognized, in fact, that some situations
"deviate[] from the doctrinal observation that, as a general
rule, prescriptive terms in commercial law are shorter than in
civil law given the peculiar demands of commercial trade." See
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Ramallo Bros., P.R. Offic. Trans., slip op. at 7. See also
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Georgia Pacific, 15 F.3d at 11.
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In short, Article 946's three-year term is inapplicable here
because the conflict does not involve a negotiable instrument, or
even a loan contract. The provision is equally unavailable by
analogy, since well established precedent directs contract claims
governed by the Commerce Code that lack specific prescriptive
provisions to the Civil Code's fifteen-year catch-all term. We
therefore conclude that the district court erred in granting
summary judgment for defendant based on the timing of plaintiff's
action.
Accordingly, we reverse its judgment and remand the case for
further proceedings.
Reversed.
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