United States Court of Appeals
For the First Circuit
____________________
No. 99-1933
U.S.I. PROPERTIES CORP.
Plaintiff, Appellee,
v.
M.D. CONSTRUCTION CO.
Defendant, Appellant,
COMPANIA DE DESARROLLO COOPERATIVO
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jose Antonio Fuste, U.S. District Judge]
____________________
Before
Lynch, Circuit Judge,
Coffin, Senior Circuit Judge, and
Lipez, Circuit Judge.
____________________
Fernando L. Gallardo with whom Geoffrey M. Woods, Amy Adelson,
Nathan Z. Dershowitz, Alan M. Dershowitz, Woods & Woods, and
Dershowitz, Eiger & Adelson were on brief, for appellant.
Paul B. Smith, Jr., with whom Smith & Navares was on brief, for
defendant-appellee.
____________________
November 6, 2000
____________________
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LYNCH, Circuit Judge. This case presents a difficult
question of the limits on the subject matter jurisdiction of the
federal courts. At issue is whether a state, not ever subject
to diversity jurisdiction, may be subjected to the ancillary
enforcement jurisdiction of the federal courts on a theory that
the judgment debtor in an action originally based on diversity
is the alter ego of the state. We conclude that the state
cannot be so subjected to federal court subject matter
jurisdiction unless there is an independent basis for such
jurisdiction.
Compañía de Desarrollo Cooperativo ("CDC"), a public
corporation created by the Commonwealth of Puerto Rico to foster
housing cooperatives, entered into a multiparty agreement in
1978 to build a low income housing project, the Ciudad Cristiána
project. Parties to that agreement included CDC, U.S.I.
Properties Corp. ("USI"), a Delaware corporation, and MD
Construction ("MD"), incorporated under the laws of Puerto Rico
and the predecessor in interest to defendant-appellant Futura
Development of Puerto Rico, Inc. ("Futura"). Largely due to
CDC, that project was never completed and the private companies
suffered heavy damages. More than a decade of litigation has
ensued.
In October 1983, after CDC filed suit against MD in
Puerto Rico Superior Court, USI sued both MD and CDC in federal
court under diversity jurisdiction for violating the agreements.
MD filed a crossclaim against CDC, which in turn filed a
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crossclaim against MD and a counterclaim against USI. After a
five week jury trial in 1987, a jury found that CDC had violated
its contracts with MD (as well as with USI), and rejected CDC's
cross- and counterclaims, finding that CDC's stated reasons for
terminating the project were false. The jury awarded $12.3
million against CDC. This court affirmed. U.S.I. Properties
Corp. v. M.D. Construction Co., 860 F.2d 1 (1988), cert. denied,
sub nom Compañía de Desarrollo Cooperativo v. U.S.I. Properties
Corp., 490 U.S. 1065 (1989).
Futura attempted to collect its judgment against CDC.
Futura was unsuccessful because the Commonwealth of Puerto Rico
had depleted CDC of its funds and assets so that CDC could not
satisfy the judgment against it. Futura then filed a new
federal court action to collect the judgment, this time directly
against the Commonwealth, arguing that CDC was an alter ego of
the Commonwealth and that the Commonwealth had waived its
Eleventh Amendment immunity. The district court agreed with
Futura in this second suit. This court vacated that judgment,
holding there was no federal jurisdiction over this second
action. Futura Development of Puerto Rico, Inc. v. Estado Libre
Asociado de Puerto Rico, 144 F.3d 7 (1st Cir. 1998) ("Futura
II"). And so, Futura tried again, this time filing the same
alter ego claims against the Commonwealth, but now as a
supplementary proceeding in the original action. Futura alleged
that the federal court had ancillary enforcement jurisdiction
and that CDC was an alter ego of the Commonwealth. The district
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court took jurisdiction over the postjudgment action but denied
the claim.
We hold that there is no federal enforcement
jurisdiction over this claim and leave Futura to whatever
remedies it may have against the Commonwealth in its own courts.
Futura's effort to establish liability against the Commonwealth
exceeds the proper scope of federal enforcement jurisdiction
absent some independent ground of federal jurisdiction over the
claim. Federal enforcement jurisdiction does not extend so far
as to allow enforcement proceedings to establish direct
liability against the Commonwealth on an alter ego theory here,
where the limitations on diversity jurisdiction would have
prevented the Commonwealth from being named a defendant in the
action originally.
I.
A detailed prior history of this litigation is set forth in
our Futura II opinion. 144 F.3d at 8-9. To explain the issues on this
appeal, it is useful to describe the development of the case since the
original judgment. In the second suit, the district court found on
summary judgment that CDC had been acting as an alter ego of the
Commonwealth and held the Commonwealth accountable for payment of CDC's
$12 million judgment plus interest. See Futura Development of Puerto
Rico, Inc. v. Estado Libre Asociado de Puerto Rico, 962 F. Supp. 248
(D.P.R. 1997) ("Futura I"). As the alter ego finding sought by Futura
depended on the "nature of the entity created by state law," the
district court first turned to the legal status of CDC. Id. at 252.
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Noting that the Supreme Court of Puerto Rico had remarked in the
unpublished opinion, Cintron Ortiz v. Compañía de Desarrollo
Cooperativo, CE-92-575 (unpublished "sentencia," June 8, 1994), that
the enabling statute for CDC fails to define clearly "whether
[CDC] is or isn't an instrumentality of the Commonwealth," the
district court based its conclusion that CDC was an alter ego of
the Commonwealth on the following findings: (1) the Commonwealth
provided the principal source of CDC's finances; (2) the
Commonwealth acknowledged making additional special
appropriations to enable CDC to pay its debts; (3) CDC's
financial statements refer to CDC as an agency of the
Commonwealth; (4) CDC's enabling statute provides that the CDC's
Finance Committee is composed of a Commonwealth agency
administrator and four appointees of the Governor; (5) that
agency administrator is also the president of CDC, and names
CDC's executive director subject to the Governor's approval; (6)
CDC's accounting system was to be established in consultation
with the Commonwealth's Secretary of the Treasury, and CDC was
to entrust all funds to a depository recognized for funds of the
Government of the Commonwealth; (7) CDC's property and
activities were exempted from taxes; and (8) CDC is required to
submit a financial statement and a transactional report to the
Governor at the close of each fiscal year. Futura I, 962 F.
Supp. at 253-54.
Having determined that CDC was an alter ego of the
Commonwealth, the district court turned to the question of
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whether the Commonwealth had waived its Eleventh Amendment
immunity through the actions of CDC. Given that the
Commonwealth controlled CDC's daily operations before the
original litigation over the Ciudad Cristiána project and
provided ninety-seven percent of CDC's income through
legislative appropriations, the district court focused its
waiver analysis on the critical question of whether at the time
of the original litigation, the Commonwealth "acted as though it
were defending an agency and, consequently, its own coffers."
Id. at 255. In addition to CDC's assertion of its own claim,
the district court identified six findings in favor of waiver:
(1) the litigation materials and documentation were in the
control of the Commonwealth's Secretary of Justice, not the CDC
administrators; (2) in closing arguments CDC argued that any
judgment against it would have to be paid with Puerto Rico tax
dollars; (3) CDC's counsel promised Futura that the Commonwealth
would include payment of the judgment in its budget in order to
deter Futura from attaching assets or requiring the posting of
a supersedeas bond during the appellate process; (4) the appeal
of the judgment to the First Circuit and consequently the
Supreme Court was handled by the Secretary of Justice and paid
for by the Commonwealth; (5) the Commonwealth engaged in "a
pattern of conveniently allowing CDC to fall into insolvency by
refusing to provide the company with the necessary and customary
appropriations, thus letting CDC's debts mount, wiping out its
capital, and in effect, precluding the possibility of satisfying
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plaintiff's judgment"; and (6) the Commonwealth stripped the
agency of its employees and transferred them to a complementary
governmental agency. Id. at 255-56. In light of the
Commonwealth's support and control of CDC in maintaining its
counterclaim, the district court concluded that the Commonwealth
"simply cannot expect to act as CDC's alter ego throughout the
Ciudad Cristiána litigation in an effort to increase its own
coffers, and hope that, when its plan boomerangs, this Court
tolerates its efforts to distance itself from CDC by pleading
and interposing Eleventh Amendment immunity." Id at 257.
This court in Futura II, however, vacated that
judgment, holding that the district court lacked jurisdiction as
neither enforcement jurisdiction nor supplementary jurisdiction
existed over the claim against the Commonwealth in this separate
proceeding. This court first held that under Peacock v. Thomas,
516 U.S. 349 (1996), the federal courts lacked enforcement
jurisdiction over a separate proceeding to enforce a judgment
where there was no independent basis for federal jurisdiction.
Futura II, 144 F.3d at 11-12. Second, this court rejected
Futura's efforts to append the claim to an action against
Commonwealth officials under the federal courts' supplementary
jurisdiction in light of the different factual bases for the
claims. Id. at 12-13. In so ruling, this court expressly
declined to reach the substantive issues of whether CDC actually
was an alter ego of the Commonwealth and whether the
Commonwealth's Eleventh Amendment immunity had been waived for
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this claim. Id. at 13 n.6.
Having been denied relief against the Commonwealth in
a separate proceeding, Futura then filed a motion in the
original action for proceedings on and in aid of the execution
of the original judgment, seeking to hold the Commonwealth
directly accountable for that judgment. Futura advanced two
theories. First, Futura asserted the Commonwealth was liable as
the judgment debtor of the original MD judgment under Fed. R.
Civ. P. 69(a), which affords federal district courts the
enforcement mechanisms available under state law. Under this
theory, Futura relies in the alternative on two Puerto Rico
Rules of Civil Procedure, contending that under Rule 51.7,1 the
Commonwealth is a jointly-liable debtor who was not party to the
original action, and that under Rule 59,2 a declaratory judgment
should issue that the Commonwealth is the party in interest in
the original litigation and required to comply with the
judgment. Secondly, Futura moved to substitute or join the
1 Puerto Rico Rule 51.7 provides in relevant part,
When a judgment is recovered against one or more of several
debtors, jointly liable for an obligation, those debtors who are
not parties to the action may be summoned to show cause why they
should not be bound by the judgment in the same manner as if they
had been originally sued. . . . It shall not be necessary to file
a new complaint. . . . [T]he judgment debtor . . . may assert any
defense of fact and of law that may release him from liability.
2 Puerto Rico Rule 59 provides that when appropriate, "[t]he
Court of First Instance shall have the power to declare rights, status
and other legal relationship, even though another remedy is or may be
instigated. . . . The declaration . . . shall have the force and effect
of final judgments or resolutions."
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Commonwealth in the original proceeding as successor in interest
to CDC under Fed. R. Civ. P. 25(c). Importantly, the
substantive claim that the Commonwealth was liable as an alter
ego of CDC and thus a de facto party to the original litigation
underlies both these efforts.
CDC opposed Futura's motion, asserting that the
district court would not have had jurisdiction over the original
action had the Commonwealth been a party, both because the
Commonwealth (or its alter ego) is not subject to diversity
jurisdiction and because the Commonwealth enjoys Eleventh
Amendment immunity from suit in the federal courts.
Under the mistaken impression that this court in Futura
II had ruled against Futura's alter ego claim on the merits, the
district court denied Futura's motion, holding that (1) Futura
could not hold the Commonwealth liable as judgment debtor under
Fed. R. Civ. P. 69(a) since meeting the requirements of either
Puerto Rico rule required what the court took to be a precluded
finding that CDC was the alter ego of the Commonwealth, and (2)
the Commonwealth could not be substituted for CDC under Fed. R.
Civ. P. 25(c) because that would render the corporate form of
CDC a nullity and abrogate the immunity of the Commonwealth from
suit in federal court. U.S.I. Properties Corp. v. M.D.
Construction Co., 186 F.R.D. 255, 259-61 (D.P.R. 1999). Futura
now appeals.
II.
CDC urges this court to resolve this case on Eleventh
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Amendment grounds and dismiss the motion for lack of
jurisdiction over the Commonwealth.3 We need not address
Eleventh Amendment issues where the matter may be disposed of in
favor of the state (that is, the defendant alleged to be the
state) more readily on other grounds. Parella v. Retirement Bd.
of the Rhode Island Employee's Retirement System, 173 F.3d 46,
54-57 (1st Cir. 1999). In this case there are good reasons not
to reach the Eleventh Amendment grounds.
Futura's contention that the Commonwealth waived its
Eleventh Amendment immunity through the actions of its alter
ego, CDC, in pursuing counterclaims against MD in federal court
presents a difficult Eleventh Amendment issue: does a state
voluntarily waive its Eleventh Amendment protection against suit
in federal court when its alter ego invokes the jurisdiction of
the federal court through counterclaims and cross-claims?
Futura presents a more than colorable claim that in this case,
the actions of CDC in the original action (in invoking the
jurisdiction of the court by filing its counterclaims against
3 While the Supreme Court has reserved ruling on the immunity
of the Commonwealth under the Eleventh Amendment, see Puerto Rico
Aqueduct and Sewer Authority v. Metcalf & Eddy, Inc., 506 U.S.
139, 141 n.1 (1993), it is the settled law of this circuit that the
Commonwealth enjoys Eleventh Amendment immunity from suit in federal
court, see, e.g., Ramirez v. Puerto Rico Fire Serv., 715 F.2d 694, 697
(1st Cir. 1983). Therefore, to hold the Commonwealth accountable for
the MD judgment rendered in federal court, Futura must show that the
Commonwealth has waived that immunity.
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both USI and MD4 and the like) were sufficient to provide consent
to suit in federal court on the part of the Commonwealth. See
Gunter v. Atlantic Coast Line R. Co., 200 U.S. 273 (1906)
(holding that South Carolina waived Eleventh Amendment immunity
where county treasurers empowered to act on behalf of the state
litigated state claims in federal court represented by the state
attorney general); cf. College Savings Bank v. Florida Prepaid
Postsecondary Education Expense Bd., 527 U.S. 666 (1999)
(raising the standard for finding waiver in another context,
holding that states must unequivocally consent to suit even
where Congress explicitly seeks to shape state behavior through
coercive regulation). Given the complexities of this issue,
resolving it properly might well require a remand for a hearing
and resolution of questions of fact before a trial court.
Instead, we refrain from resolving this complex question of
Eleventh Amendment jurisprudence because of a prior question of
statutory subject matter jurisdiction.
III.
The doctrine of enforcement jurisdiction5 is a judicial
4 CDC filed counter- and crossclaims against USI and MD
respectively alleging that the properties were contaminated by mercury
and seeking several million dollars in damages. These claims were
expressly rejected by the jury in the original litigation.
5 Like Futura II, we use the phrase "enforcement jurisdiction"
to refer to that portion of ancillary jurisdiction based in the
inherent power of federal courts to exercise jurisdiction in order to
enforce their judgments in certain situations where jurisdiction would
otherwise be lacking. We do so both to maintain consistency and to
avoid confusion arising from the relationship of ancillary and pendent
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creation, born of the necessity that courts have the power to enforce
their judgments. Federal courts have the ancillary enforcement
jurisdiction necessary "to enable a court to function successfully,
that is, to manage its proceedings, vindicate its authority, and
effectuate its decrees." Kokkonen v. Guardian Life Ins. Co., 511 U.S.
375, 380 (1994). Without this ability to enforce judgements rendered,
"[t]he judicial power would be incomplete, and entirely inadequate to
the purposes for which it was intended." Bank of the United States v.
Halstead, 23 U.S. (10 Wheat.) 51, 53 (1825). Consequently "[t]he
jurisdiction of a Court is not exhausted by the rendition of its
judgment, but continues until that judgment shall be satisfied."
Wayman v. Southard, 23 U.S. (10 Wheat.) 1, 23 (1825). See also Riggs v.
Johnson County, 73 U.S. (6 Wall.) 166, 187 (1868) ("[I]f the power is
conferred to render the judgment or enter the decree, it also includes
the power to issue proper process to enforce such judgment or decree.")
(citation omitted).
Hence, although federal courts are courts of limited
jurisdiction, they often retain residual federal jurisdiction over
postjudgment enforcement proceedings flowing from their original
jurisdiction over the action. Ancillary enforcement jurisdiction,
given its origins in the courts of equity, traditionally has an
jurisdiction. See Futura II, 144 F.3d at 9 n.1. See also S. Glenn,
Note, Federal Supplemental Enforcement Jurisdiction, 42 S.C. L. Rev.
469, 472 (1991).
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equitable and discretionary character. Cf. The Judicial Improvements
Act of 1990, Pub. L. No. 101-650, § 310, 104 Stat. 5089, 5113-14
(1990), codified at 28 U.S.C. § 1367 (codifying the judicially-crafted
common law of pendent and ancillary jurisdiction); 28 U.S.C. § 1367(d)
(conferring discretion over exercise of supplementary jurisdiction
where claim involves "novel or complex" state law issues or in cases in
which the jurisdictionally insufficient claims predominate). The
question of whether such jurisdiction should be exercised may well vary
with the nature of the underlying basis for federal jurisdiction and
the nature of the postjudgment claims made. See, e.g., Thomas, Head &
Grisen Employees Trust v. Buster, 95 F.3d 1449, 1453-54 (9th Cir. 1996)
(making independent assessment of jurisdiction over supplemental
proceedings involving new parties on the basis of the nature of the
claims presented); Sandlin v. Corporate Interiors, Inc., 972 F.2d
1212, 1216-17 (10th Cir. 1992) (assessing jurisdiction of the court
over postjudgment supplemental proceedings on basis of the nature of
the claims made).
Where the postjudgment claim is simply a mode of execution
designed to reach property of the judgment debtor in the hands of a
third party, federal courts have often exercised enforcement
jurisdiction. The principle that federal courts have jurisdiction over
an ancillary action "to secure or preserve the fruits and advantages of
a judgment or decree rendered," whether in law or in equity, is well
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settled. See, e.g., Local Loan Co. v. Hunt, 292 U.S. 234, 239 (1934).
Where the state procedural enforcement mechanisms incorporated by Rule
69(a) allow the court to reach assets of the judgment debtor in the
hands of third parties in a continuation of the same action, such as
garnishment or attachment, federal enforcement jurisdiction is clear.
See, e.g., First National Bank v. Turnbull & Co., 83 U.S. (16 Wall.)
190 (1872) (dispute with third party over property levied by sheriff
supplemental to original action); Pratt v. Albright, 9 F. 634
(C.C.E.D.Wis. 1881) (postjudgment garnishment proceeding supplemental
to original action). See also Peacock, 516 U.S. at 356-57 (listing
cases allowing garnishment, attachment, voidance of fraudulent
conveyances, and mandamus to demonstrate that enforcement jurisdiction
encompasses "a broad range of supplementary proceedings involving third
parties to assist in the protection and enforcement of federal
judgments"); S. Glenn, Note, Federal Supplemental Enforcement
Jurisdiction, 42 S.C. L. Rev. 469, 489 n.139 (1991).6
Federal courts have expressly recognized their ability to
6 Federal courts have also at times awarded monetary
judgments against impecunious police officers and then allowed
enforcement proceedings against municipalities which had
contractual obligations to pay such judgments. Argento v.
Village of Melrose Park, 838 F.2d 1483 (7th Cir. 1988);
Skevofilax v. Quigley, 810 F.2d 378 (3d Cir. 1987). But cf.
Berry v. McLemore, 795 F.2d 452 (5th Cir. 1986). We do not
decide whether such indemnification proceedings fall within
enforcement jurisdiction.
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exercise jurisdiction over new parties in supplemental proceedings
where those proceedings concerned property under the control of the
federal court due to an existing judgment, even where those new parties
are nondiverse. See Freeman v. Howe, 65 U.S. (24 How.) 450 (1860);
Minnesota Co. v. Saint Paul Co., 69 U.S. (2 Wall.) 609 (1864); Gwin v.
Breedlove, 43 U.S. (2 How.) 29, 35 (1844) (diversity not necessary for
a writ of attachment incidental to execution of judgment). While the
presence of a new party does not in itself relieve the court of
jurisdiction, the enforcement proceeding must be a mere continuation of
the prior proceeding and not an action based on new grounds. See
Anglo-Florida Phosphate Co. v. McKibben, 65 F. 529 (5th Cir. 1894).
Insofar as such proceedings are a continuation of the
original action, the federal court retains residual jurisdiction
flowing from its original authority to render a judgment in the case.
This extension of jurisdiction is necessary to ensure the court's
ability to enforce a judgment rendered against the judgment debtor. As
the Court remarked in Peacock, ancillary enforcement jurisdiction is
"at its core, a creature of necessity," 516 U.S. at 359. Thus these
proceedings can reach third parties so long as it is necessary to reach
assets of the judgment debtor under the control of the third party in
order to satisfy the original judgment and thereby guarantee its
eventual executability.
In many ways this case gives the appearance of fitting within
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this traditional paradigm of enforcement jurisdiction. After all, the
claim is in part that the assets of CDC were in effect transferred from
the judgment debtor -- CDC -- to a third party7 -- the Commonwealth --
through mechanisms of depletion and nonpayment in order to evade the
judgment. State postjudgment enforcement procedures, incorporated into
federal procedure by Rule 69(a), classically encompass such fact
patterns. And in colloquial terms, it could be thought that exercise
of enforcement jurisdiction here simply protects the MD judgment.
Futura draws an analogy to a situation where a judgment is entered
against a corporate subsidiary and the judgment is unenforcable because
the corporate parent has looted the subsidiary. In such instance,
suits or enforcement proceedings against the corporate parent to
enforce the judgment have been permitted. See, e.g., Explosives Corp.
of America v. Garlam Enterprises Corp., 817 F.2d 894 (1st Cir. 1987)
(holding parent corporation which controlled litigation on behalf of
subsidiary bound by judgment); Pan America Match Inc. v. Sears, Robuck
7 We use the language of "third parties" without in any way
implying an outcome to the alter ego question. The very theory of
alter ego liability depends on there being two entities to start with.
See, e.g., Brotherhood of Locomotive Engineers v. Springfield Terminal
Ry. Co., 210 F.3d 18, 25 (1st Cir. 2000) (piercing the corporate veil
and thus disregarding corporate formalities entails determining that
two apparently independent entities are in fact mere alter egos),
petition for cert. filed (U.S. Oct. 10, 2000) (No. 00-569). In Futura
II this court recognized that and referred to CDC and the Commonwealth
as distinct "jural entities," while not deciding the alter ego
question. The district court erred in thinking that this reference to
distinct jural entities resolved the alter ego issue.
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and Co., 454 F.2d 871 (1st Cir. 1972) (holding parent company bound in
subsequent action by res judicata effect of judgment against
subsidiary).
While it is true that one might envision Futura's efforts to
recover here as analogous to pursuing assets of CDC that were
fraudulently transferred to the Commonwealth, Futura has opted not to
so characterize its efforts, likely in recognition that there is an
analogy but not a perfect fit. Rather, Futura has consistently
characterized its efforts to enforce the MD judgment against the
Commonwealth as an attempt to establish liability directly on the part
of the Commonwealth as the alter ego of CDC. See, e.g., Peacock, 516
U.S. at 358 (distinguishing cases relied on by plaintiff Thomas because
they, unlike Thomas, did not seek "the shifting of liability for
payment of the judgment from the judgment debtor" to the new party).
Federal courts have drawn a distinction between postjudgment
proceedings that simply present a mode of execution to collect an
existing judgment and proceedings that raise an independent controversy
with a new party, attempting to shift liability, and it is here that
Futura's present claim founders.
Where a postjudgment proceeding presents an attempt simply
to collect a judgment duly rendered by a federal court, even if chasing
after the assets of the judgment debtor now in the hands of a third
party, the residual jurisdiction stemming from the court's authority to
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render that judgment is sufficient to provide for federal jurisdiction
over the postjudgment claim. See, e.g., Thomas, Head, 95 F.3d at 1454
(allowing plaintiff to disgorge from third parties the fraudulently
conveyed assets of the judgment debtor because plaintiff is "not
attempting to establish [the third parties'] liability for the original
judgment"). However, where that postjudgment proceeding presents a new
substantive theory to establish liability directly on the part of a new
party, some independent ground is necessary to assume federal
jurisdiction over the claim, since such a claim is no longer a mere
continuation of the original action. See, e.g., id. at 1454 n.7,
citing Peacock, 516 U.S. at 356 n.6; Futura II, 144 F.3d at 11 n.2
("[Enforcement jurisdiction] cannot extend to most cases that seek to
assign liability for the judgment to a new party."); Sandlin, 972 F.2d
at 1217 ("[W]hen postjudgment proceedings seek to hold nonparties
liable for a judgment on a theory that requires proof on facts and
theories significantly different from those underlying the judgment, an
independent basis for federal jurisdiction must exist.").8 These
8 Nor is it sufficient to rely on the incorporation of
state procedures in Rule 69(a) to establish federal enforcement
jurisdiction. State courts, as courts of general jurisdiction,
are free to employ any enforcement mechanisms warranted by state
law, even where those mechanisms allow liability to be
established directly against a third party to the original
action. However, the limited nature of federal jurisdiction in
general confines the scope of enforcement jurisdiction as well.
The incorporation of state enforcement procedures through Rule
69 is not alone sufficient to create federal jurisdiction over
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distinctions might strike a metaphysical note for some, but they have
been long honored by the law and have been recognized by the Supreme
Court.
Thus in Peacock, the Court rejected an argument by the amicus
United States to the effect that Thomas' veil-piercing claim fell under
classic cases seeking to "force payment by mandamus" or to "void
postjudgment transfers," noting that "neither Thomas nor the courts
below characterized this suit this way," and that indeed "Thomas
expressly rejects that characterization of his lawsuit." 516 U.S. at
357 n.6. Since Thomas sought "to establish liability" on the part of
a third party and not simply "to collect a judgment," the Court
required some independent basis to assert federal jurisdiction over the
claim. Id. See also Sandlin, 972 F.2d at 1217 (declining to assert
enforcement jurisdiction over an alter ego claim against third party
presented in supplemental postjudgment proceedings under Rule 69(a)
such enforcement proceedings. The fact that Rule 69(a) may (by
way of state law) afford procedural mechanisms for enforcing an
existing federal judgment against a third party not otherwise
liable does not obviate the need to establish the jurisdiction
of the federal court over the supplemental proceeding. The
Federal Rules of Civil Procedure can neither expand nor limit
the jurisdiction of the federal courts, Fed. R. Civ. P. 82, and
the issue of jurisdiction remains distinct from the question of
procedure. See Sandlin, 972 F.2d at 1215 ("Rule 69 creates a
procedural mechanism for exercising postjudgment enforcement
when ancillary jurisdiction exists, . . . but cannot extend the
scope of that jurisdiction.") (citations omitted).
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where the factual predicate of the alter ego claim was substantially
distinct from the facts proving the underlying claim and no independent
basis for federal jurisdiction existed).
In the present proceeding, Futura seeks to hold the
Commonwealth accountable for the existing MD judgment as an alter ego
of CDC. Like piercing the corporate veil, an alter ego claim presents
a substantive theory seeking to establish liability on the part of a
new party not otherwise liable. See Futura II, 144 F.3d at 12
(describing alter ego theory as "a substantive theory for imposing
liability upon entities that would, on first blush, not be thought
liable" and as requiring "a subsequent and distinct inquiry"). See
also Sandlin, 972 F.2d at 1217-18 (holding that federal enforcement
jurisdiction does not reach alter ego claims unless sufficiently
intertwined with the merits of the underlying action, as they involve
"different legal theories"). Indeed, Futura has consistently
characterized its claim in this fashion. Since the alter ego argument
offers a new substantive theory that seeks to establish liability
directly on the part of a third party, the residual federal
jurisdiction from the original action does not flow to such a claim,
and hence some independent ground for federal jurisdiction is
necessary.9
9 We do not answer the question of whether there is
federal enforcment jurisdiction for any possible scenario
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Here an independent basis in federal jurisdiction is lacking:
the sole basis for federal jurisdiction over the original action was
diversity, and diversity jurisdiction does not exist where a state is
a party. As federal courts are courts of limited jurisdiction, they
can act only where the Constitution and Congress endow them with some
affirmative ground to do so. See Kokkonen, 511 U.S. at 377. In
particular, Congress has not empowered the federal courts to exercise
diversity jurisdiction over the states. By the express terms of the
statute, the diversity jurisdiction does not ever extend to the states,
nor does it extend to Puerto Rico. See 28 U.S.C. § 1332; id. § 1332(d)
(Puerto Rico treated as a "state" for purposes of the statute, and
therefore not subject to diversity jurisdiction); Nieves v. University
of Puerto Rico, 7 F.3d 270, 272 (1st Cir. 1993). The rule that
neither Puerto Rico nor a state is subject to diversity jurisdiction
extends to their alter egos, as the alter ego of the state stands in
the same position as the state for diversity purposes. Moor v. Alameda
County, 411 U.S. 693, 718 (1973); University of Rhode Island v. A.W.
involving an alter ego claim. We do not rule out the
possibility that some alter ego claims will present sufficiently
intertwined factual issues to warrant federal courts to assume
pendent jurisdiction over the claims. However, this is not such
a case. In this case, the factual bases of Futura's alter ego
claim are independent and substantially distinct from the facts
relevant to establishing liability against CDC in the original
action. In any event, any possible judicial economy from the
simultaneous adjudication of interdependent facts vanished when
the initial proceedings closed.
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Chesterton Co., 2 F.3d 1200, 1202-03 (1st Cir. 1993). Futura's claim
is not simply one to collect a judgment already rendered but rather one
to newly establish liability directly on the part of a third party, the
Commonwealth. In light of the lack of an independent basis for federal
jurisdiction over that party in diversity, we conclude that there is
no federal enforcement jurisdiction over this claim.10
This conclusion accords with the general congressional policy
against reaching states in diversity actions. An extension of federal
10 We are not persuaded by Futura's efforts to distinguish
this case from Peacock and Futura II on the ground that this
claim is brought in the context of a supplemental proceeding
rather than a subsequent postjudgment action. Because it brings
its motion for proceeding on and in aid of the execution of an
existing judgment, Futura maintains that the court possesses
"the threshold jurisdictional power that exists where ancillary
claims are asserted in the same proceeding as the claims
conferring federal jurisdiction" that was lacking in those
cases. See Peacock, 516 U.S. at 355. However, the fact that
the district court had a basis for asserting jurisdiction over
the original matter only meets that threshold -- it does not
conclude the jurisdictional inquiry, as it is not a sufficient
showing alone to justify the exercise of enforcement
jurisdiction over any supplemental proceeding. The
appropriateness of the exercise of federal jurisdiction must be
shown for supplemental proceedings as well, particularly where
they involve the imposition of obligations on new parties. The
simple fact that the supplemental proceeding is brought as part
of the same case does not relieve the court from independent
consideration of its authority to address the specific claims
before it in the supplemental proceeding. See, e.g., Sandlin,
972 F.2d at 1216-17 (assessing jurisdiction of the court over
postjudgment supplemental proceedings on basis of the nature of
the claims made).
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enforcement jurisdiction to such cases would potentially provide a
means to evade, in effect, such limitations on federal court
jurisdiction. To permit the exercise of federal enforcement
jurisdiction against the Commonwealth on a theory that the original
defendant was a mere alter ego of the Commonwealth, and thereby to hold
the Commonwealth the real party in interest, would violate these
limitations on diversity jurisdiction. This is not a case where the
Commonwealth is plainly a third party holding by happenstance the
assets of the judgment debtor. Rather, Futura maintains that CDC was
the alter ego of the Commonwealth all along. On that theory and in
light of the congressional policy against making the states (or the
Commonwealth) party to diversity actions, Futura should not be able to
reach the Commonwealth here.
The analysis would be different if there were an independent
jurisdictional base to bring in the Commonwealth. See Blackburn Truck
Lines, Inc. v. Francis, 723 F.2d 730, 732-33 (9th Cir. 1984) (allowing
enforcement jurisdiction over alter ego claim but noting that federal
jurisdiction would have existed had the new defendants been joined in
the original suit). That is not the case. In fact, had CDC then been
determined to be the alter ego of the Commonwealth, federal
jurisdiction would not have existed over CDC at the outset of this
action. To evade this outcome and hold the Commonwealth liable now by
asserting federal enforcement jurisdiction would undermine the limited
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nature of federal court jurisdiction and transgress, at least in
spirit, the congressional policy against making states party to
diversity actions.
It is no answer to say, as Futura does, that diversity is to
be assessed at the time the action is filed. Freeport-McMoran, Inc. v.
K N Energy, Inc., 498 U.S. 426, 428 (1991) (per curiam).11 It is true
that a party later moving to a different domicile does not destroy
previously established diversity. But that is a different problem than
this. A state is never subject to diversity jurisdiction, unlike an
individual.
It is undisputed that there was diversity jurisdiction over
the original action against CDC. The Commonwealth has denied that CDC
is its alter ego, and Futura did not then make the claim. It would be
an anomalous result if Futura could do through ancillary enforcement
jurisdiction what it could not do through original jurisdiction: force
Puerto Rico (or a state) to be a defendant in federal court based on
diversity jurisdiction when Congress has determined states are simply
11 Nor does Futura's reliance on Laird v. Chrysler, 92 F.R.D.
473 (D. Mass. 1971), persuade us. Without deciding whether that case
is correctly decided, Futura does not seek to add the Commonwealth as
a new third party defendant (as the defendant in Laird sought to add
the state of Rhode Island as a third party defendant) but rather
contends that "CDC and the Commonwealth . . . are now, and have
always been, one and the same party." This contention that the
Commonwealth is already party to the judgment renders Laird factually
inapposite.
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not subject to diversity jurisdiction.
To sum up, since Peacock, courts have allowed postjudgment
actions to proceed against third parties where they seek to establish
the control of the court over the assets of the judgment debtor in the
hands of that third party, and involve the third party only
incidentally. Those proceedings are different in kind from the alter
ego theory advanced by Futura in this case, which by contrast seeks to
hold the third party itself, the Commonwealth, directly accountable as
the judgment debtor under a new substantive theory of liability.
Absent some independent ground in federal jurisdiction, there is no
federal enforcement jurisdiction over such a claim.
IV.
Because it is inappropriate for the federal courts to
exercise ancillary enforcement jurisdiction over this matter, we
vacate the district court's findings that CDC was not an alter
ego of the Commonwealth and that Puerto Rico Rules of Civil
Procedure 51.7 and 59 do not allow for enforcement against the
Commonwealth, and we order dismissal of Futura's motion for
supplemental proceedings in aid of execution of judgment for
lack of federal jurisdiction. While the findings of the
district court in this proceeding were at odds with the finding
of the district court in Futura I that CDC was an alter ego of
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the Commonwealth, both opinions have been vacated, and hence
neither have any preclusive weight. This leaves Futura free to
pursue whatever remedies may be available in the courts of the
Commonwealth of Puerto Rico. Under Puerto Rico's saving clause,
the statute of limitations has been tolled during the resolution
of the questions of jurisdiction in the suits in federal court,
as CDC conceded at oral argument. 31 L.P.R.A. § 5303. See Soto
v. Chardon, 681 F.2d 42, 49 (1st Cir. 1982) ("Under P.R. Laws
Ann. tit. 31, § 5303, the limitations period against an action
ceases to run when the action is instituted in court; if the
action is discontinued, the case law has held that the
limitations period begins to run anew from that time. E.g.,
Feliciano v. Puerto Rico Aqueduct & Sewer Auth., 93 P.R.R. 638,
644 (1966); Heirs of Gorbea v. Portilla, 46 P.R.R. 279 (1934);
De Jesus v. De Jesus, 37 P.R.R. 143 (1927)."). Our denial of
jurisdiction over the supplemental proceedings leaves Futura no
worse off than had it sought to establish liability directly
against the Commonwealth as an alter ego of CDC in the first
instance -- that is, with an opportunity to pursue its cause in
the Commonwealth courts.
In Futura II, this court said the Commonwealth's treatment
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of Futura "has been despicable," and the Commonwealth has
"cleverly used its sovereignty to shield itself from the fair
consequences of its action," 144 F.3d at 13-14. This court
there described "the manifest injustice of the conduct of the
government of the Commonwealth of Puerto Rico throughout this
affair," 144 F. 3d at 14. Even manifest injustice, however,
does not create federal court jurisdiction. If CDC pursues the
matter, it will be up to the Commonwealth, through its courts or
legislature, to address the issue of that injustice.
So ordered.
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