Redondo Construction Corp. v. Izquierdo

United States Court of Appeals
For the First Circuit

No. 09-2565

REDONDO CONSTRUCTION CORP.,

Plaintiff-Appellant,

v.

JOSÉ M. IZQUIERDO, in his individual capacity and in his official
capacity as Secretary of the Puerto Rico Department of
Transportation and Public Works, et al.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Francisco A. Besosa, U.S. District Judge]

Before

Lipez, Leval,* and Thompson,
Circuit Judges.

Luis Cotto-Román, with whom Yolanda Benítez de Alegría and
José A. Cabiya-Morales were on the brief, for appellant.
María E. Villares-Señeriz, for appellees Puerto Rico Highway
and Transportation Authority and José Izquierdo, in his official
capacity as Secretary of the Puerto Rico Department of
Transportation and Public Works.
Roberto Ruiz Comas, for appellee Puerto Rico Buildings
Authority.
Eliezer A. Aldarondo-López, with whom Eliezer Aldarondo-Ortiz
was on the brief, for appellees the Governor of Puerto Rico, in his
official capacity; José Izquierdo, in his individual capacity;
Fernando Fagundo, in his individual capacity; and José Lluch-
García, in his individual capacity.

*
Of the Second Circuit, sitting by designation.
October 25, 2011
 LEVAL, Circuit Judge. Plaintiff Redondo Construction

Corporation (“Redondo”) appeals from the adverse judgment of the

United States District Court for the District of Puerto Rico in its

suit against the Puerto Rico Highway and Transportation Authority

(the “Highway Authority”), the Puerto Rico Public Buildings

Authority (the “Buildings Authority”) (collectively, the

“Authorities”), and various officials of the Puerto Rican

government. Redondo alleges that the defendants unlawfully applied

a Puerto Rico statute retroactively to breach settlement agreements

entered into by Redondo and the Authorities before the statute was

enacted. Redondo claims that the defendants’ breach of the

agreements impaired the obligation of those contracts in violation

of the Contracts Clause of the federal Constitution and constituted

breaches of contract under Puerto Rico law.

The district court granted the defendants’ motions for

summary judgment on the Contracts Clause claim, accepting their

argument that the obligation of the agreements had not been

impaired because Redondo was not prevented from obtaining damages

if it established breaches of the agreements. Having dismissed the

sole federal claim on the merits, the district court declined to

exercise supplemental jurisdiction over Redondo’s breach of

contract claims under Puerto Rico law and dismissed them without

prejudice.

-3-
 We find that the district court correctly concluded that

Redondo cannot establish its constitutional claim and therefore

affirm that portion of the judgment. We agree with Redondo,

however, that the district court exceeded its discretion in

declining to exercise jurisdiction over Redondo’s remaining claims.

Accordingly, we vacate the judgment with respect to those claims

and remand for further proceedings consistent with this opinion.

Background

On April 15, 1999, Redondo entered into a plea agreement

in United States v. Redondo Construction Corp., No. 95-391

(D.P.R.), a criminal prosecution arising out of its conduct during

performance of a construction project funded by the Federal Highway

Administration (“FHWA”). Pursuant to the agreement, Redondo

admitted to aiding and abetting the making of false statements to

the U.S. Department of Transportation and to Banco Santander de

Puerto Rico, in violation of 18 U.S.C. §§ 2, 1014, and 1020. The

agreement barred Redondo, for a one-year period beginning July 30,

1999, from bidding on, or receiving any benefit from, any contract

funded in whole or part by the FHWA. In addition, for the two

years following the one-year debarment, the agreement conditioned

Redondo’s eligibility to participate in FHWA-funded projects on

supervision by a monitor selected by the FHWA and paid for by

Redondo.

-4-
 The day after Redondo entered into the plea agreement,

the Highway Authority notified Redondo that it was revoking the

bids it had awarded to the company before the guilty plea, that it

was immediately suspending the company from participating in any

bids it awarded for 30 days, and that it intended to extend the

suspension for an undetermined period. A few weeks later, on May

10, 1999, the Buildings Authority notified Redondo that it was also

barring the company from participating in any bids it awarded.

Redondo challenged both suspensions.

Redondo challenged the Buildings Authority’s suspension

in an administrative proceeding. On April 5, 2000, before

Redondo’s administrative action was resolved, Redondo and the

Buildings Authority entered into a settlement agreement that

allowed Redondo to begin bidding for Buildings Authority contracts

on April 16, 2000.

Redondo contested the Highway Authority’s suspension in

a separate administrative proceeding. On May 7, 1999, Redondo

moved for reconsideration of the suspension before the Puerto Rico

Department of Transportation and Public Works (“DTOP”). While

Redondo was challenging the Highway Authority’s suspension, Redondo

and the FHWA were negotiating an agreement (the “Monitoring Plan”)

that would govern Redondo’s obligations between July 30, 2000 and

July 30, 2002, the two-year period during which Redondo’s

eligibility to participate in FHWA-funded projects was conditioned

-5-
on supervision by an outside monitor. In late 2000, the Highway

Authority joined these talks. On November 14, 2000, while the DTOP

administrative proceeding was still pending, Redondo, the FHWA, and

the Highway Authority executed the Monitoring Plan. The same day,

Redondo and the Highway Authority entered into a settlement

agreement and jointly requested the termination of the DTOP

administrative proceeding. The agreement allowed Redondo to

participate, beginning December 11, 2000, on bids awarded by the

Highway Authority if it complied with the conditions set forth in

the Monitoring Plan.

On December 29, 2000, Puerto Rico passed Law 458. P.R.

Laws Ann. tit. 3, §§ 928-928i. The statute prohibits a government

official from awarding contracts to any natural or juridical person

who has been convicted of a crime constituting fraud, embezzlement,

or the misappropriation of public funds.1 The statute also

requires the rescission of any government contract entered into

with a party convicted of a specified offense, § 928c, and provides

that all government contracts are deemed to include a term

authorizing rescission if the counterparty is convicted of a

specified offense, § 928e. The statute expressly provides that it

does not apply to contracts entered into before it took effect:

“The provisions of this chapter shall not apply retroactively nor

1
The prohibition extends to 20 years from the date of
conviction of a felony, and to 8 years from the date of conviction
of a misdemeanor. § 928d.

-6-
shall they interfere with contracts in effect . . . .” § 928h.

Redondo had successfully bid on fourteen Buildings

Authority projects after the settlement agreement between it and

the Buildings Authority became effective on April 16, 2000. But

after Law 458 was passed, the Buildings Authority canceled ten of

the bids, including one for which it had already executed a

contract with Redondo. The Buildings Authority cited lack of

project funding as its reason for canceling the bids.

On February 14, 2001, the Highway Authority informed

Redondo that it was withdrawing its consent to the settlement

agreement and the Monitoring Plan due to Redondo’s failure to make

timely compliance with a term requiring it to deposit $25,000 into

an escrow account to fund the services of the outside monitor.

Deposition testimony of a Highway Authority official, however,

suggests that agency officials decided to terminate the settlement

agreement in an attempt to further the policy of Law 458, despite

their knowledge that the statute could not lawfully be applied

retroactively. After notifying Redondo of its decision, the

Highway Authority asked DTOP to reopen the administrative

proceeding and schedule a hearing to determine the length of

Redondo’s suspension. Redondo deposited $25,000 into the escrow

account the same day, but DTOP nonetheless granted the Highway

Authority’s request.

DTOP held the hearing requested by the Highway Authority

-7-
in late 2003. On June 22, 2004, the hearing examiner issued a

report and recommendation concluding that Redondo had not breached

the Monitoring Plan, and that the Highway Authority’s termination

of the settlement agreement and the Monitoring Plan should be

deemed ineffective. The Secretary of DTOP initially adopted the

examiner’s report, but later granted a motion for reconsideration

by the Highway Authority and determined that the Highway Authority

had validly withdrawn its consent to the settlement agreement and

the Monitoring Plan. Redondo appealed DTOP’s determination to the

Puerto Rico Court of Appeals.

On May 31, 2005, the Court of Appeals ruled that it was

not clear that Redondo had breached the Monitoring Plan, and that

even if Redondo had not timely deposited the $25,000 into the

escrow account, its breach was not sufficiently serious to justify

the Highway Authority’s unilateral termination of the settlement

agreement. The Court of Appeals ordered the Highway Authority to

comply with the terms of the settlement agreement and the

Monitoring Plan as soon as its judgment became final and

enforceable. The Highway Authority petitioned for certiorari in

the Supreme Court of Puerto Rico, but that court denied the

petition and two motions for reconsideration.

In December 2001, while Redondo was litigating the

Highway Authority’s actions in the Puerto Rico courts, it brought

this federal action challenging the actions of both the Highway

-8-
Authority and the Buildings Authority. Redondo alleged that both

Authorities had unlawfully applied Law 458 to breach their

settlement agreements with Redondo -– the Highway Authority by

withdrawing its consent to the settlement agreement and the

Monitoring Plan, and the Buildings Authority by canceling the bids

it had awarded to Redondo after the settlement agreement between

them became effective. Redondo claimed that the Authorities’

actions violated the Contracts Clause of the federal Constitution.

Redondo also asserted breach of contract claims under Puerto Rico

law, claiming that the Authorities’ actions breached the settlement

agreements and that the Buildings Authority’s cancellation of the

bids it had awarded to Redondo constituted independent breaches of

contract. Redondo sought monetary and injunctive relief.2

In January 2003, the district court granted the Highway

Authority’s motion to stay proceedings pending resolution of the

administrative proceeding before DTOP. Proceedings in the district

court resumed after the Puerto Rico Court of Appeals ruled in May

2005 that the Highway Authority’s termination of the settlement

agreement was invalid. But the case stalled for a year and a half

while it was successively reassigned to three judges. The district

court eventually issued a scheduling order in January 2007 granting

the parties until April 30, 2007 to submit dispositive motions.

2
Redondo filed for bankruptcy protection on March 19, 2002,
in the United States Bankruptcy Court for the District of Puerto
Rico.

-9-
The parties engaged in extensive discovery and, pursuant to the

scheduling order, exchanged expert reports. Of the 15 depositions

Redondo took, all but a few were taken in English.

On April 30, 2007, the Highway Authority and the

Buildings Authority each moved for summary judgment on Redondo’s

Contracts Clause claim and argued that the district court should

decline to exercise supplemental jurisdiction over Redondo’s local

law claims if it dismissed the federal claim.

The motions remained pending in December 2007. On

December 24, 2007, Redondo wrote a letter to the district court

explaining that the parties could not submit a joint proposed pre-

trial order by early January, as the court had ordered, without a

ruling on the summary judgment motions. In a brief order, the

court instructed the parties to submit the proposed order by early

January even if it had not yet ruled on the pending motions. After

spending considerable time reaching agreement on factual

stipulations and exhibits to be offered at trial, the parties

submitted a proposed pre-trial order on January 11, 2008.

At a pre-trial conference on January 16, the court

scheduled a final settlement conference for January 25. Trial was

to begin February 11 and was expected to take three weeks. At the

settlement conference on January 25, the court reaffirmed the

February 11 trial date and instructed the parties to submit marked

exhibits to a deputy clerk by February 6. To meet the deadline,

-10-
Redondo’s counsel reviewed hundreds of documents and commissioned

the translation of some that had not yet been translated into

English. In preparation for the impending trial date, Redondo also

incurred expenses to serve subpoenas on several witnesses and make

travel arrangements for others.

On February 7, 2008, four days before trial was scheduled

to begin, the district court granted the Authorities’ summary

judgment motions and dismissed the complaint. The court

acknowledged that the lawfulness of the Highway Authority’s

termination of the settlement agreement had been fully litigated in

the Puerto Rico courts and that the Puerto Rico Court of Appeals’

judgment that the Highway Authority had breached the settlement

agreement was conclusive. Nevertheless, the court ruled, Redondo

had no claim under the Contracts Clause because neither Law 458,

nor any other government action, absolved the Authorities of the

duty to pay damages for breach of the settlement agreements. Thus,

Redondo could not show that an obligation of either contract had

been impaired. Noting that “[i]t is well settled that a district

court may decline to exercise supplemental jurisdiction when all

federal law claims have been dismissed,” the court dismissed

without prejudice Redondo’s claims under Puerto Rico law.

On February 22, 2008, Redondo moved under Federal Rule of

Civil Procedure 59(e) for reconsideration of the judgment. The

-11-
district court denied the motion on September 28, 2009. Redondo

timely appealed.

Discussion

Redondo argues that the district court erred in awarding

summary judgment to the defendants on its Contracts Clause claim

and in declining, on the eve of trial, to exercise supplemental

jurisdiction over its claims under Puerto Rico law. Because the

district court’s analysis of the Contracts Clause claim was

correct, we affirm the judgment on that claim. We vacate the

judgment on the other claims, however, because we conclude the

district court was not at liberty under these unusual circumstances

to decline to adjudicate the local law claims.

A. The Contracts Clause Claim

We review de novo a grant of summary judgment. Alliance

of Auto. Mfrs. v. Gwadosky, 430 F.3d 30, 34 (1st Cir. 2005). We

will uphold the judgment if the evidence, viewed in the light most

favorable to the party against whom it was entered, demonstrates

that there are no genuine issues of material fact and that judgment

is warranted as a matter of law. Fed. R. Civ. P. 56(c); Auto

Mfrs., 430 F.3d at 34.

Redondo claims that the Authorities breached the

settlement agreements in a de facto attempt to retroactively

enforce Law 458 against it. Redondo contends that although neither

Authority cited Law 458 as the reason for its alleged breach, there

-12-
is sufficient evidence in the record from which a jury could

reasonably find that the Authorities’ true motive for breaching the

contracts was a desire to apply Law 458 to Redondo, notwithstanding

the statute’s express proviso against its retroactive application.

Therefore, Redondo argues, the district court erred in granting

summary judgment to the defendants on its Contracts Clause claim.

Redondo misunderstands the nature of the restriction

imposed by the Contracts Clause. Article I, § 10 of the

Constitution prohibits a state from “pass[ing] any . . . Law

impairing the Obligation of Contracts.”3 The clause does not bar

a state from merely breaching a contract, which is the prerogative

of any private party, subject to liability for the breach. See TM

Park Ave. Assocs. v. Pataki, 214 F.3d 344, 348-49 (2d Cir. 2000);

Horwitz-Matthews, Inc. v. City of Chicago, 78 F.3d 1248, 1250 (7th

Cir. 1996) (“It would be absurd to turn every breach of contract by

a state or municipality into a violation of the federal

Constitution.”). A contract creates alternative obligations:

performance or payment of damages for breach. See Oliver Wendell

Holmes, “The Path of the Law,” 10 Harv. L. Rev. 457, 462 (1897).

If a state breaches a contract but does not impair the

counterparty’s right to recover damages for the breach, the state

has not impaired the obligation of the contract. See Hays v. Port

of Seattle, 251 U.S. 233, 237 (1920); cf. Casey v. DePetrillo, 697

3
The defendants do not contest that the Contracts Clause
binds Puerto Rico, even though it is not a state.

-13-
F.2d 22, 23 (1st Cir. 1983) (holding that public employees’ claim

that breach of their employment agreements constituted a taking of

property without just compensation was “at bottom, a simple action

for breach of contract” because there was no showing that the state

would fail to provide a remedy for a demonstrated breach of

contract).

Applying these principles, any breach of the settlement

agreements by the Authorities did not violate the Contracts Clause,

even if committed in an attempt to unlawfully enforce Law 458

retroactively against Redondo. To establish a Contracts Clause

claim, Redondo must show more than a breach of the settlement

agreements; it must show that the defendants have somehow impaired

its ability to obtain a remedy for a demonstrated breach. See

Crosby v. City of Gastonia, 635 F.3d 634, 640 (4th Cir. 2011)

(explaining that the Contracts Clause “provides no basis to

complain of an alleged impairment in the first instance,” but

supports a claim “where a state . . . has foreclosed the imposition

of an adequate remedy for an established impairment”). Redondo has

not alleged any such impairment, and we see evidence of none in the

record.

No action of the defendants, and nothing in Law 458,

prevents Redondo from obtaining a remedy for a demonstrated breach

of the settlement agreements. Redondo is free to sue the

Authorities for breach of the settlement agreements, and has indeed

-14-
done so by bringing the local law claims asserted in this action.

Neither Authority has asserted as an affirmative defense that it is

excused by Law 458, or any other Puerto Rico legislative action,

from compensating Redondo in damages if Redondo establishes a

breach of contract. Nor has any court ruled that Redondo has no

entitlement to compensation in damages if it succeeds in showing

breach of the settlement agreements. Accordingly, there has been

no violation of the Contracts Clause and the district court

properly granted summary judgment to the defendants on the

Contracts Clause claim.

B. The Claims Under Puerto Rico Law

The district court explained its dismissal of Redondo’s

claims under Puerto Rico law by noting, “It is well-settled that a

district court may decline to exercise supplemental jurisdiction

when all federal claims have been dismissed.” While this is so in

most circumstances, it is not an altogether correct statement of

the law.

The Supreme Court indeed said in United Mine Workers v.

Gibbs, 383 U.S. 715, 726 (1966), that “if the federal claims are

dismissed before trial, . . . the state claims should be dismissed

as well.” The Supreme Court, however, has repeatedly clarified

that its statement in Gibbs “does not establish a mandatory rule to

be applied inflexibly in all cases.” Carnegie-Mellon Univ. v.

Cohill, 484 U.S. 343, 350 n.7 (1988); see also Rosado v. Wyman, 397

-15-
U.S. 397, 403-05 (1970). Rather, a district court must exercise

“informed discretion” when deciding whether to assert supplemental

jurisdiction over state law claims. Roche v. John Hancock Mutual

Life Ins. Co., 81 F.3d 249, 256-57 (1st Cir. 1996). No categorical

rule governs the analysis; a court must weigh concerns of comity,

judicial economy, convenience, and fairness. See id. at 257;

Carnegie-Mellon, 484 U.S. at 350 (observing that this analysis is

prescribed by Gibbs).

It is true that “in the usual case in which all federal-

law claims are eliminated before trial, the balance of factors

. . . will point toward declining to exercise jurisdiction over the

remaining state-law claims.” Carnegie-Mellon, 484 U.S. at 350 n.7

(emphasis added) (explaining that the Gibbs court was referring to

the usual case, not every case, when it stated that state law

claims should be dismissed if the federal claims are dismissed

before trial). But that observation does not relieve the district

court of its obligation to consider the relevant factors to

determine whether the exercise of supplemental jurisdiction is

appropriate in the particular case before it. As we have stressed,

the proper inquiry is “pragmatic and case-specific.” Roche, 81

F.3d at 257.

Here, in our view, the relevant factors did not merely

support the propriety of the exercise of supplemental jurisdiction.

Interests in judicial economy, convenience, and fairness weighed

-16-
overwhelmingly in favor of the court’s exercising its jurisdiction.

The district court declined to exercise supplemental jurisdiction

only four days before trial was scheduled to begin, when the action

had been pending in federal court for more than six years, the

summary judgment record had been complete for nearly a year, and

the parties were almost completely prepared for trial.

Moreover, nearly all of the extensive discovery taken was

relevant not only to Redondo’s constitutional claim, but also to

its claims under Puerto Rico law. Redondo’s breach of contract

claims rested on virtually the same factual basis as did its

Contracts Clause claim. Although the federal and Puerto Rico

claims invoked slightly different legal theories, both complained

of the defendants’ violation of Redondo’s contract rights, and both

sought essentially the same relief. See Tomaiolo v. Mallinoff, 281

F.3d 1, 11 (1st Cir. 2002) (finding that exercise of supplemental

jurisdiction “furthered judicial economy” because “all claims arose

from the same core of facts”).

Refusal to exercise jurisdiction over the local law

claims would impose huge burdens on Redondo because the extensive

discovery for the expected federal court trial had been conducted

in English. Puerto Rico’s courts operate in Spanish. Thus, to

litigate the claims in the Puerto Rico courts, Redondo would need

to bear the cost of translating the documents and testimony

produced or taken in English, or of redoing extensive discovery in

-17-
Spanish. In addition, all of Redondo’s trial preparation was done

with a view to a trial conducted in English. Much of its work

would have needed to be redone or translated for use in a Puerto

Rico court.

Given the age and advanced stage of the litigation, the

common factual basis for Redondo’s claims under Puerto Rico and

federal law, and the enormous expense Redondo would incur in

redoing the discovery and trial preparation so as to try the non-

federal claims in courts that operate in a different language, the

district court’s decision to send the parties to the Puerto Rico

courts to begin all over again was both wasteful and enormously

harmful to Redondo.

Consideration of principles of comity does not change the

analysis. As the district court recognized, Puerto Rico courts had

already ruled that the Highway Authority’s “withdrawal of consent”

to the settlement agreement was invalid, leaving unresolved only

the issue of whether Redondo was entitled to damages for the

Highway Authority’s breach, and if so, how much. As for Redondo’s

breach of contract claims against the Buildings Authority, they

raised no thorny or unresolved issues of Puerto Rico law. Federal

courts in Puerto Rico exercising diversity jurisdiction routinely

apply the well-established principles of contract law and damages

calculation that govern Redondo’s breach of contract claims. The

-18-
comity concerns raised by the exercise of supplemental jurisdiction

at this stage are negligible.

In Roche v. John Hancock Mutual Life Ins. Co., 81 F.3d

249, 257 (1st Cir. 1996), we approved the district court’s exercise

of supplemental jurisdiction because “[t]he litigation had matured

well beyond its nascent stages, discovery had closed, the summary

judgment record was complete, the federal and state claims were

interconnected, and powerful interests in both judicial economy and

fairness tugged in favor of retaining jurisdiction.” We therefore

found the district court’s exercise of jurisdiction in that case to

be “squarely within the realm of its discretion.” Id. For very

much the same reasons, as explained above, we conclude that it was

not within the district court’s permissible range of discretion to

decline to exercise jurisdiction over Redondo’s local law claims.4

Conclusion

For the foregoing reasons, we affirm the dismissal of

Redondo’s claim under the Contracts Clause and vacate the dismissal

of its claims under Puerto Rico law. The case is remanded to the

district court for further proceedings consistent with this

4
After the district court dismissed Redondo’s local law
claims, Redondo refiled the claims in a Puerto Rico court. The
defendants argue that Redondo’s appeal of the dismissal of its
local law claims is therefore moot and that, in any event, federal
court abstention is required by the Colorado River doctrine. We
find no merit in either argument.

-19-
opinion.5 Costs are denied at this time pending the conclusion of

the litigation.

So ordered.

5
Redondo’s motion to supplement the record on appeal (which
was styled as a request that we take judicial notice of certain
statements by the Highway Authority) is denied. In any event,
consideration of the submitted statements would not have affected
the disposition of the appeal.

-20-