Redondo Construction v. Banco Exterior

• Court: Court of Appeals for the First Circuit
• Decided: November 24, 1993
• Docket: 93-1407
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                FOR THE FIRST CIRCUIT
                                 ____________________

        No. 93-1407

                          REDONDO CONSTRUCTION CORPORATION,

                                 Plaintiff, Appellee,

                                          v.

                           BANCO EXTERIOR DE ESPANA, S.A.,

                                Defendant, Appellant.

                                 ____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

                           FOR THE DISTRICT OF PUERTO RICO

                    [Hon. Hector M. Laffitte, U.S. District Judge]
                                              ___________________

                                 ____________________

                                        Before

                                 Breyer, Chief Judge,
                                         ___________

                            Aldrich, Senior Circuit Judge,
                                     ____________________

                           and McAuliffe,* District Judge.
                                           ______________

                                 ____________________

Jose  A.  Axtmayer,  Francisco  A.  Besosa,  Danilo M.  Eboli  and
            __________________   _____________________   ________________
        Goldman Antonetti Cordova & Axtmayer on brief for appellant.
        ____________________________________
            Antonio Moreda-Toledo,  Pedro J. Diaz-Garcia  and Moreda  & Moreda
            _____________________   ____________________      ________________
        on brief for appellee.

                                 ____________________

                                  November 24, 1993
                                 ____________________

____________________

        *Of the District of New Hampshire, sitting by designation.

ALDRICH,  Senior  Circuit  Judge.     This  is  the
                                ______________________

            epilogue to a  charade designed by a foreign  lender to avoid

            payment of Puerto  Rico income taxes  on Puerto Rico  income.

            The script was a  farce; the players did not  even follow it.

            Its reviewers give it a bad notice.

            I.        Background
                      __________

                      Plaintiff, Redondo Construction  Corp., is a Puerto

            Rico  corporation  engaged  in  the  construction   business.

            Defendant, Banco Exterior de  Espa a, is a Spanish  bank with

            an office in Miami, Florida.   In 1985 defendant sent one  of

            its vice  presidents to Puerto  Rico, where he  solicited the

            opportunity to  finance a  part  of plaintiff's  construction

            work.  Negotiations ensued; plaintiff disclosed its financial

            statements, and those of its two stockholders, as  proof that

            it  was  economically   sound.    At  some   point  defendant

            conditioned its performance  on plaintiff's  acceptance of  a

            structure it concocted to prevent its incurring tax liability

            under 13 L.P.R.A.   3231 that imposes on foreign corporations

            a 29% tax on income earned in Puerto Rico, including interest

            on  loans  to  a  Puerto   Rico  corporation.    13  P.R.L.A.

              3119(a)(1).  Plaintiff agreed.

                      The  parties accordingly  created  a third  entity,

            "Redondo-USA," a Delaware  corporation that  would appear  as

            nominal borrower  on defendant's  credit line.   Counsel  for

            defendant drew up the incorporation papers and mailed them to

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plaintiff in  Puerto Rico.   Plaintiff's  president was  made

            president  of Redondo-USA.   The  agreement  provided that  a

            credit line  would  be extended  to Redondo-USA;  Redondo-USA

            would  then   forward  the   funds  to   plaintiff  for   its

            construction projects;  plaintiff would  assign the  proceeds

            from its construction contracts  to Redondo-USA, which  would

            then use these  funds to repay defendant.   Plaintiff and its

            two  stockholders  appeared  as  guarantors  and   "principal

            obligors" on the credit line agreement.

                      After  the execution of  the agreement, the parties

            largely disregarded  the separate  existence of  Redondo-USA.

            Although   the  agreement  provided  that  loan  payments  to

            defendant were to  be made by Redondo-USA,  in fact plaintiff

            made those  payments throughout,  by its  own checks,  naming

            defendant as the payee.  There was no mention of Redondo-USA.

            Plaintiff   and   defendant   both  certified   annually   to

            defendant's   auditors  defendant's   running  account   with

            plaintiff.  Again, no mention of  Redondo-USA.  The tri-party

            agreement, made  much of  in defendant's brief,  was a  joke,

            even to the participants.

                      In  1990 the  Puerto  Rico  Department of  Treasury

            determined  that  plaintiff  had made  interest  payments  to

            defendant of $591,332.   Because 13 P.R.L.A.    3144 requires

            withholding  of the  29%  tax  from  interest  payments,  the

            Treasury assessed  back taxes  of $171,486,  and penalty  and

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interest  charges of $40,277,  on plaintiff.   Plaintiff then

            brought this action  seeking compensation from defendant  for

            these payments.  The district court found defendant liable to

            plaintiff  for the  back taxes,  but not  for the  penalty or

            interest.  Defendant appeals.  We affirm.

            II.       Discussion
                      __________

                      A.   Jurisdiction
                           ____________

                      The district court determined  that it had specific

            jurisdiction over defendant  on the grounds that  plaintiff's

            claim  arose directly out  of defendant's acts  in the forum,

            regardless  of whether  defendant's  contacts with  the forum

            were sufficient to establish jurisdiction for all purposes.

                      We agree  that there  is ample  basis for  specific

            jurisdiction.  Defendant's vice  president traveled to Puerto

            Rico to  solicit plaintiff's business.   As a result  of that

            solicitation, plaintiff  and defendant negotiated  the credit

            agreement.  Plaintiff signed  the credit agreement and was  a

            party to it, although it was not the nominal borrower.  Under

            the  agreement,  plaintiff  incurred ongoing  obligations  to

            defendant, not only to guarantee  the loan but also to assign

            its  construction proceeds to  Redondo-USA.  Thus  even under

            its  own characterization  of  the  agreement, defendant  had

            sufficient involvement in  Puerto Rico to have  foreseen that

            it  might  be   sued  there  on  disputes  arising  from  the

            agreement.   International Shoe  v. Washington, 326  U.S. 310
                         __________________     __________

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(1945); United Elec.  Workers v. 163 Pleasant St.  Corp., 960
                    _____________________    _______________________

            F.2d 1080 (1st Cir. 1992).

                      Defendant has not asserted any particular burden in

            appearing in Puerto Rico rather than Florida, and Puerto Rico

            has a distinct interest in having disputes under its tax code

            adjudicated in Puerto Rico courts.  Even if the agreement had

            been  strictly performed,  it would  not  be unreasonable  or

            unfair, in these  circumstances, to subject defendant  to the

            authority of  a Puerto Rico  tribunal.  Burger King  Corp. v.
                                                    __________________

            Rudzewicz, 471 U.S. 462, 476-77 (1985).
            _________

                      Moreover,  we  need  not  blind  ourselves  to  the

            reality behind  the agreement's  transparent  fictions.   The

            agreement  is no  different in  substance from  one in  which

            plaintiff is the borrower.  "If International Shoe stands for
                                            __________________

            anything,  . . . it  is that a  truly interstate business may

            not shield  itself  from suit  by a  careful but  formalistic

            structuring of  its business dealings."  Vencedor Mfg. Co. v.
                                                     _________________

            Gougler Indus., 557 F.2d 886, 891 (1st Cir. 1977).1
            ______________

                      B.   Forum clause
                           ____________

                      In this situation defendant  points to a  provision

            in the agreement as an  escape hatch.  The agreement provided

            that the "Borrower  and the Guarantors each  hereby expressly
                                                                _________

____________________

            1.  For  the same reasons,  we find that  defendant's actions
            come within the  language of Puerto Rico's  Long-arm statute,
            32  P.R.L.A.   App.  III   Rule  4.7(a).     See   Industrial
                                                         ___   __________
            Siderurgica,  Inc.  v.  Thyssen  Steel  Caribbean, Inc.,  114
            __________________      _______________________________
            D.P.R. 548, 14 Official Translation 708, 721-22 n.5 (1983).

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submits to the  jurisdiction of all Federal and  State courts

            located  in  the   State  of  Florida."     (Emphasis  ours).

            Defendant  argues that this  clause prohibits  plaintiff from

            suing in the District  of Puerto Rico.  This  is a confusion.

            Affirmatively conferring Florida jurisdiction by consent does

            not  negatively exclude any  other proper jurisdiction.   See
                                                                      ___

            Hunt Wesson Foods, Inc. v.  Supreme Oil Co., 817 F.2d  75, 77
            _______________________     _______________

            (9th  Cir. 1987).    There  is  a  total  difference  between

            "expressly"  and "exclusively."    Even  if  there  could  be

            thought   to  be  ambiguity,   its  resolution  must   be  in

            plaintiff's favor.  Under Florida law (by which the agreement

            provides  it is to  be construed), as  elsewhere, ambiguities

            are  construed against  the drafter.   Capital  City Bank  v.
                                                   __________________

            Hilson, 59 Fla.  215, 219, 51 So. 853, 855 (1910).  Thus even
            ______

            if the agreement  could have some effect upon this collateral

            action, that effect, jurisdictionally, would be nil.

                      C.   Liability
                           _________

                      The  court  held  that  defendant  was  liable   to

            plaintiff on either of two theories: (1) because plaintiff is

            entitled to repayment for having paid the debt of another, 31

            P.R.L.A.    3162;  or  (2)  because  defendant  was  unjustly

            enriched at plaintiff's expense.   Each theory depends on the

            assumption  that   defendant   was   the   party   ultimately

            responsible for payment of the tax, which defendant disputes.

                      We note first that nothing before us indicates that

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the assessment  of  taxes on  plaintiff  by the  Puerto  Rico

            Treasury   was  erroneous.    Defendant  makes  much  of  the

            contractual  language  stating   that  only  Redondo-USA,   a

            Delaware corporation, shall make payments, but that  language

            is irrelevant on this point;  the agreement does not bind the

            Treasury.  Defendant  does not dispute  that payments on  the

            loan  were in  fact made by  plaintiff by check  drawn on its

            Puerto  Rico  account  and   that  defendant  accepted  those

            payments.  This is sufficient to  bring the payments squarely

            within   3231 as  income derived "from sources  within Puerto

            Rico."   13  P.R.L.A. 3231(a)(1)(A).   Cf.  Caribe Crown  Cap
                                                   ___  _________________

            Corp. v. Secretary  of the Treasury,  108 D.P.R. 857,  863-64
            _____    __________________________

            (1979)   (translation)  (source   of   income  derived   from

            intangible property  is place  where intangible  property "is

            actually and effectively used");  Inter-American Orange Crush
                                              ___________________________

            Co. v.  Secretary  of the  Treasury, 81  P.R.R. 286,  297-298
            ___     ___________________________

            (1959) (source  of royalty income "depends on the situs where

            the personal property  from which  the income  is derived  is

            really and  actually used").   Moreover,  the Treasury  could

            properly  disregard  the  corporate  status  of  the  nominal

            borrower,  Redondo-USA, as merely  an instrument "to  evade a

            clear legislative purpose."  South  P.R. Sugar Corp. v. Sugar
                                         _______________________    _____

            Board, 88 P.R.R. 42, 56 (1963).
            _____

                      Just as the transactional structure is insufficient

            to shift the  tax burden away from defendant  by operation of

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law, it  is also insufficient  to show an intention  to shift

            that burden by agreement.   Had the parties explicitly agreed

            that plaintiff would be responsible for the taxes that  would

            otherwise fall  on defendant,  no further  analysis would  be

            necessary.  The parties expressed no such intention,  as they

            could  easily  have  done; in  fact,  the  agreement contains

            sections  entitled   "Payment  of  Taxes"  and   "Payment  of

            Indebtedness, Taxes"  in which no such terms appear.  Rather,

            the parties set up a two-step transaction that appears geared

            more to  evade the imposition  of the tax altogether  than to

            reallocate  that burden between the parties.  While obviously

            defendant hoped  to avoid  the tax, there  is nothing  in the

            language of  the agreement  evidencing a  mutual intent  that

            plaintiff  take  on  the  tax  burden itself.    We  find  no

            contractual defense to the action.2

                      Affirmed.
                      ________

____________________

            2.  Defendant briefly  argues that once  plaintiff had  paid,
            defendant should not  have to make  compensation, even if  it
            would initially  have been responsible.   The cases  cited by
            defendant, however, are all from jurisdictions outside Puerto
            Rico and are unpersuasive in light of Puerto Rico's statutory
            provision  allowing recovery  by  one who  pays  the debt  of
            another.  31 P.R.L.A.   3162.

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