Redondo Construction v. Banco Exterior ( 1993 )


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

    No. 93-1407

    REDONDO CONSTRUCTION CORPORATION,

    Plaintiff, Appellee,

    v.

    BANCO EXTERIOR DE ESPANA, S.A.,

    Defendant, Appellant.

    ____________________


    APPEAL FROM THE UNITED STATES DISTRICT COURT

    FOR THE DISTRICT OF PUERTO RICO

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

    ____________________

    Before

    Breyer, Chief Judge,
    ___________

    Aldrich, Senior Circuit Judge,
    ____________________

    and McAuliffe,* District Judge.
    ______________

    ____________________


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

    ____________________

    November 24, 1993
    ____________________





    ____________________

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















    ALDRICH, Senior Circuit Judge. This is the
    ______________________

    epilogue to a charade designed by a foreign lender to avoid

    payment of Puerto Rico income taxes on Puerto Rico income.

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

    Its reviewers give it a bad notice.

    I. Background
    __________

    Plaintiff, Redondo Construction Corp., is a Puerto

    Rico corporation engaged in the construction business.

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

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

    its vice presidents to Puerto Rico, where he solicited the

    opportunity to finance a part of plaintiff's construction

    work. Negotiations ensued; plaintiff disclosed its financial

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

    it was economically sound. At some point defendant

    conditioned its performance on plaintiff's acceptance of a

    structure it concocted to prevent its incurring tax liability

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

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

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

    3119(a)(1). Plaintiff agreed.

    The parties accordingly created a third entity,

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

    nominal borrower on defendant's credit line. Counsel for

    defendant drew up the incorporation papers and mailed them to



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    plaintiff in Puerto Rico. Plaintiff's president was made

    president of Redondo-USA. The agreement provided that a

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

    would then forward the funds to plaintiff for its

    construction projects; plaintiff would assign the proceeds

    from its construction contracts to Redondo-USA, which would

    then use these funds to repay defendant. Plaintiff and its

    two stockholders appeared as guarantors and "principal

    obligors" on the credit line agreement.

    After the execution of the agreement, the parties

    largely disregarded the separate existence of Redondo-USA.

    Although the agreement provided that loan payments to

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

    made those payments throughout, by its own checks, naming

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

    Plaintiff and defendant both certified annually to

    defendant's auditors defendant's running account with

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

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

    even to the participants.

    In 1990 the Puerto Rico Department of Treasury

    determined that plaintiff had made interest payments to

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

    withholding of the 29% tax from interest payments, the

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



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

    brought this action seeking compensation from defendant for

    these payments. The district court found defendant liable to

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

    interest. Defendant appeals. We affirm.

    II. Discussion
    __________

    A. Jurisdiction
    ____________

    The district court determined that it had specific

    jurisdiction over defendant on the grounds that plaintiff's

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

    regardless of whether defendant's contacts with the forum

    were sufficient to establish jurisdiction for all purposes.

    We agree that there is ample basis for specific

    jurisdiction. Defendant's vice president traveled to Puerto

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

    solicitation, plaintiff and defendant negotiated the credit

    agreement. Plaintiff signed the credit agreement and was a

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

    the agreement, plaintiff incurred ongoing obligations to

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

    its construction proceeds to Redondo-USA. Thus even under

    its own characterization of the agreement, defendant had

    sufficient involvement in Puerto Rico to have foreseen that

    it might be sued there on disputes arising from the

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



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

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

    Defendant has not asserted any particular burden in

    appearing in Puerto Rico rather than Florida, and Puerto Rico

    has a distinct interest in having disputes under its tax code

    adjudicated in Puerto Rico courts. Even if the agreement had

    been strictly performed, it would not be unreasonable or

    unfair, in these circumstances, to subject defendant to the

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

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

    Moreover, we need not blind ourselves to the

    reality behind the agreement's transparent fictions. The

    agreement is no different in substance from one in which

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

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

    not shield itself from suit by a careful but formalistic

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

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

    B. Forum clause
    ____________

    In this situation defendant points to a provision

    in the agreement as an escape hatch. The agreement provided

    that the "Borrower and the Guarantors each hereby expressly
    _________


    ____________________

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

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    submits to the jurisdiction of all Federal and State courts

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

    Defendant argues that this clause prohibits plaintiff from

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

    Affirmatively conferring Florida jurisdiction by consent does

    not negatively exclude any other proper jurisdiction. See
    ___

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

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

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

    thought to be ambiguity, its resolution must be in

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

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

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

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

    if the agreement could have some effect upon this collateral

    action, that effect, jurisdictionally, would be nil.

    C. Liability
    _________

    The court held that defendant was liable to

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

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

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

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

    assumption that defendant was the party ultimately

    responsible for payment of the tax, which defendant disputes.

    We note first that nothing before us indicates that



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    the assessment of taxes on plaintiff by the Puerto Rico

    Treasury was erroneous. Defendant makes much of the

    contractual language stating that only Redondo-USA, a

    Delaware corporation, shall make payments, but that language

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

    Treasury. Defendant does not dispute that payments on the

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

    Puerto Rico account and that defendant accepted those

    payments. This is sufficient to bring the payments squarely

    within 3231 as income derived "from sources within Puerto

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

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

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

    intangible property is place where intangible property "is

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

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

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

    the personal property from which the income is derived is

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

    properly disregard the corporate status of the nominal

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

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

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

    Just as the transactional structure is insufficient

    to shift the tax burden away from defendant by operation of



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

    that burden by agreement. Had the parties explicitly agreed

    that plaintiff would be responsible for the taxes that would

    otherwise fall on defendant, no further analysis would be

    necessary. The parties expressed no such intention, as they

    could easily have done; in fact, the agreement contains

    sections entitled "Payment of Taxes" and "Payment of

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

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

    more to evade the imposition of the tax altogether than to

    reallocate that burden between the parties. While obviously

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

    language of the agreement evidencing a mutual intent that

    plaintiff take on the tax burden itself. We find no

    contractual defense to the action.2

    Affirmed.
    ________












    ____________________

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

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