
USCA1 Opinion

	




                            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.                                         -2-          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.                                         -3-               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."                                         -4-          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.                                         -5-          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                                         -6-          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.                                         -7-          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."                                         -8-          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).                                           -9-          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                                         -10-          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                                         -11-          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.                                         -12-          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                                  ____ ___ ___                                         -13-          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.               ________                                         -14-
