Caribbean Mushroom Co. v. Government Development Bank for Puerto Rico

United States Court of Appeals
For the First Circuit

No. 96-1279

CARIBBEAN MUSHROOM CO., INC.,

Plaintiff, Appellee,

v.

THE GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO AND
PUERTO RICO DEVELOPMENT FUND,

Defendants, Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Jaime Pieras, II, Senior U.S. District Judge]

Before

Coffin and Campbell, Senior Circuit Judges,

and DiClerico,* District Judge.

John W. Dougherty with whom Peter J. Satz was on brief for

appellants.
Heidi L. Rodriguez with whom Jorge I. Peirats and Maria de Los

Angeles Trigo was on brief for appellee.

December 23, 1996

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

COFFIN, Senior Circuit Judge. Plaintiff-appellant Caribbean

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

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

alia, that Caribbean's claim was time barred. It contended that

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

Puerto Rico, 906 F. Supp. 70, 74 (D.P.R. 1995) (quoting Rivera

Surillo & Co. v. Falconer Glass Indus., 37 F.3d 25, 28 (1st Cir.

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

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

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,

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.

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,

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,

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.

Aponte, 108 P.R. Dec. 657, 660, 8 P.R. Offic. Trans. 698, 700

(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

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

promised to make a loan.5 Because no provision of the Commerce

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

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,

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

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

14, 17-18 (1st Cir. 1986) (holding that loan agreement and notes

were commercial, and thus subject to three-year period); FDIC v.

Cardona, 723 F.2d 132, 133-36 (1st Cir. 1983) (alternative

holding: non-commercial promissory notes at issue, and so

fifteen-year period applies); FDIC v. Francisco Inv. Corp., 638

F. Supp. 1216, 1217-18 (D.P.R. 1986) (promissory notes not

commercial; fifteen-year period applies); Mediterranean Inv.

Corp. v. Rodriguez, 575 F. Supp. 268, 268-69 (D.P.R. 1983)

(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

Corp. v. Pablo Eguia & Sons, Inc., 15 F.3d 8, 10 (1st Cir. 1994)

(emphasis in original). Indeed, we quoted in Georgia Pacific the

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

Comentado 503-504 (1936) (translated, and quoted, in Portilla, 75

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

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

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

7 We note that one commentator who addressed a related
issue assumed that an action on a loan contract, as distinguished

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

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

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.

Commonwealth, 91 J.T.S. 18, P.R. Offic. Trans., slip op. at 9

(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

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

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

(fifteen-year breach of contract limitations provision applies to

this business dispute if no other specific period applies); K-

Mart Corp. v. Oriental Plaza, Inc., 875 F.2d 907, 911 n.2 (1st

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.,

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.

Abarca Warehouses Corp., 476 F.2d 44, 47 (1st Cir. 1973)

(assuming that, if claim were contractual, fifteen-year statute

of limitations would apply); Mortensen & Lange, 19 P.R. Offic.

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

Hernandez Denton, J., dissenting) (concluding that the

transaction was not a charterparty, and that fifteen-year term

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

Puerto Rico, 92 P.R.R. 320, 324 (1965) (action based on

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

v. E.M. Amy & Sons, Inc., 87 P.R.R. 527, 533 (1963) ("actions for

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

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

Ramallo Bros., P.R. Offic. Trans., slip op. at 7. See also

Georgia Pacific, 15 F.3d at 11.

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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