Calderon-Serra v. Wilimington Trust Company

United States Court of Appeals
For the First Circuit
No. 11-2449
CÉSAR CALDERÓN-SERRA ET AL.,
Plaintiffs, Appellants,
v.
WILMINGTON TRUST CO. ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Gustavo A. Gelpí, U.S. District Judge]
Before
Lynch, Chief Judge,
Selya and Lipez, Circuit Judges.
Francis T. Pagán-Martínez, with whom Rafael González Vélez and
González Vélez Law Office were on brief, for appellants.
Stephen E. Hudson, with whom Eduardo A. Zayas-Marxuach,
McConnell Valdés LLC, and Kilpatrick Townsend & Stockton LLP were
on brief, for appellee Wilmington Trust Co.
Sara Lydia Vélez-Santiago, with whom Néstor M. Méndez-Gómez,
Margarita Mercado-Echegaray, and Pietrantoni Mendez & Alvarez LLC
were on brief, for appellee Banco Popular de Puerto Rico.
April 22, 2013
SELYA, Circuit Judge. Most people make investments in
the expectation (or at least the hope) of turning a profit. But
investments sometimes go sour. That happened here, and the
appellants are trying to recoup their losses through a novel
interpretation of an exemption in the Trust Indenture Act of 1939
(TIA), 15 U.S.C. §§ 77aaa-77bbbb.1 Construing the exemption as a
matter of first impression, we conclude that the appellants'
interpretation fails. Their suit fails with it. Federal courts do
not have jurisdiction to redress every perceived wrong, and we
agree with the court below that this case falls outside the
encincture of federal subject matter jurisdiction.
The appellants, César Calderón-Serra and Teresita Palerm-
Nevares, purchased and still own nonrecourse notes (the Notes) in
the face amount of approximately two million dollars, issued by the
Puerto Rico Conservation Trust Fund (PRCTF). The PRCTF operates as
a nonprofit organization, see 26 U.S.C. § 501(c)(3), with the
stated purpose of protecting and enhancing Puerto Rico's natural
resources.
The proceeds from the sale of the Notes were used by the
PRCTF to acquire preferred securities and to pay the costs of
issuance of the Notes. The Notes were not registered under the
1
Although this appeal was argued in conjunction with the
appeal in Nikitine v. Wilmington Trust Co., No. 12-1874, we have
opted to dispose of the cases by separate opinions.
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Securities Act, see 15 U.S.C. § 78l, based on an exemption from
registration.
After the Notes went into default, the appellants sued
the appellees — Banco Popular de Puerto Rico (BPPR), trustee of the
Notes, and Wilmington Trust Company (WTC), indenture trustee of the
securities that the PRCTF purchased with Note proceeds — alleging
that "they were deceived into believing that the [N]otes were
backed by the government of Puerto Rico."2 They brought their suit
in the United States District Court for the District of Puerto Rico
on the basis of federal question jurisdiction. See 28 U.S.C.
§ 1331. After amending their complaint once as of right, see Fed.
R. Civ. P. 15(a)(1)(B), the appellants premised their assertion of
subject matter jurisdiction on both the Edge Act, 12 U.S.C. § 632,
and the TIA.3
Each appellee moved to dismiss the first amended
complaint for want of subject matter jurisdiction. The appellants
opposed these motions. Some five months after the first amended
complaint was filed (while the fully briefed motions to dismiss
2
A third defendant, UBS Financial Services, Inc., was dropped
from the case prior to the filing of the appellants' first amended
complaint.
3
In the jurisdictional section of their first amended
complaint, the appellants also refer to the Sarbanes-Oxley Act of
2002, 15 U.S.C. §§ 7201-7202, 7211-7220, 7231-7234, 7241-7246,
7261-7266, 78o-6, 78d-3; 18 U.S.C. §§ 1348-1350, 1514A, 1519-1520.
In the same pleading, however, they concede "that no right of
action under Sarbanes-Oxley exists." Thus, we do not ponder the
Sarbanes-Oxley Act as a source of subject matter jurisdiction.
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were under advisement), the appellants sought leave to file a
second amended complaint. The district court denied that motion
and summarily rejected a motion for reconsideration. Then, the
court, in a thoughtful opinion, granted the motions to dismiss.
See Calderón-Serra v. Wilmington Trust Co., No. 10-1905, 2011 WL
5335395, at *1 (D.P.R. Nov. 4, 2011). This timely appeal followed.
We begin with bedrock. "Federal courts, as courts of
limited jurisdiction, may not presume the existence of subject
matter jurisdiction, but, rather, must appraise their own authority
to hear and determine particular cases." Cusumano v. Microsoft
Corp., 162 F.3d 708, 712 (1st Cir. 1998). "[T]he party invoking
the jurisdiction of a federal court carries the burden of proving
its existence." Murphy v. United States, 45 F.3d 520, 522 (1st
Cir. 1995) (internal quotation marks omitted). Where, as here, a
district court grants a motion to dismiss for want of subject
matter jurisdiction on the pleadings, its order of dismissal
engenders de novo review. See Fothergill v. United States, 566
F.3d 248, 251 (1st Cir. 2009). In performing this task, "we take
as true all well-pleaded facts in the plaintiffs' complaints,
scrutinize them in the light most hospitable to the plaintiffs'
theory of liability, and draw all reasonable inferences therefrom
in the plaintiffs' favor." Id.
In this venue, the appellants do not pursue their claim
that the Edge Act confers federal subject matter jurisdiction.
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This is a wise decision: in order for that statute to supply a
basis for federal subject matter jurisdiction, "one party to the
action [must] be an entity that owes its existence to the federal
sovereign." Viqueira v. First Bank, 140 F.3d 12, 19 (1st Cir.
1998); see 12 U.S.C. § 632. Typically, that would be a nationally
chartered bank. Here, however, both defendants are state-chartered
banks (WTC is organized under the laws of Delaware and BPPR is
organized under the laws of Puerto Rico). Hence, the Edge Act does
not afford a basis for subject matter jurisdiction here.
The appellants propose that there is federal subject
matter jurisdiction under the TIA. The district court rejected
this proposition, see Calderón-Serra, 2011 WL 5335395, at *3, and
so do we.
Congress enacted the TIA in 1939 as a means of combating
unsavory practices related to the public offering of bonds, notes,
and debentures. See 15 U.S.C. § 77bbb(b); see also SEC v. Capital
Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963). The
district courts have jurisdiction over all suits brought to enforce
any duty or liability arising under the TIA, subject to an
exception not relevant here. See 15 U.S.C. § 77v(a). But the TIA
does not have a limitless scope. For example, it does not apply to
"any security exempted from the provisions of the Securities Act of
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1933," by, among other provisions, paragraphs 2 through 8 of 15
U.S.C. § 77c(a).4 Id. § 77ddd(a)(4)(A).
Pertinently, paragraph 4 exempts charitable organizations
from the reach of the Securities Act, see id. § 77c(a)(4), and thus
from the reach of the TIA.5 That provision reads:
[T]he provisions of this subchapter shall not
apply to . . . [a]ny security issued by a
person organized and operated exclusively for
religious, educational, benevolent, fraternal,
charitable, or reformatory purposes and not
for pecuniary profit, and no part of the net
earnings of which inures to the benefit of any
person, private stockholder, or individual
. . . .
Id. This, in effect, comprises a two-part test.
In this case, the Notes were issued by the PRCTF, which
the appellants concede is a section 501(c)(3) nonprofit
organization. Consequently, the Notes come within the first part
of the charitable organization exemption to the Securities Act.
In an effort to soften the bite of this reasoning, the
appellants posit that the Notes have an "individual profit-
generating effect" that places them outside the charitable
organization exemption. They insist that as long as note-holders
4
The appellants contend that section 77c does not apply to
the TIA. Since they have offered no developed argumentation for
this counter-intuitive proposition, we deem it waived. See United
States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990).
5
For ease in exposition, we refer to this exemption as the
"charitable organization exemption." We recognize, however, that
organizations other than charities are also shielded by the terms
of the provision.
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have a noncharitable purpose in purchasing notes (say, a desire to
earn interest), the exemption is inapposite. This construction of
the charitable organization exemption is antithetic to the plain
meaning of the unambiguous statutory language. We explain briefly.
We think it is obvious that the purpose on which the
first part of the exemption hinges is the purpose for which the
note-issuing organization exists, not the parochial motivations of
particular note-holders. See, e.g., SEC v. Children's Hosp., 214
F. Supp. 883, 888-90 (D. Ariz. 1963). The critical determinant
under the first part of the test, then, is whether the issuing
organization is structured and operated as a charitable
organization and not for pecuniary profit. In this connection, the
"pecuniary profit" of which the charitable organization exemption
speaks relates to the organization's purpose, not the note-holders'
investment returns. See SEC v. Universal Serv. Ass'n, 106 F.2d
232, 237-38 (7th Cir. 1939). The PRCTF unarguably satisfies this
eleemosynary requirement.
There is, of course, a second requirement that must be
satisfied: if any part of the "net earnings" of the charitable
organization "inures to the benefit of any person, private
stockholder, or individual," the exemption does not apply. 15
U.S.C. § 77c(a)(4). In our view, it is equally obvious that this
"net earnings . . . inures to the benefit" language does not refer
to interest payments made by a charitable organization on funds
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borrowed in the ordinary course of business from outside investors
and intended to allow the organization to fulfill its mission. See
Warfield v. Alaniz, 569 F.3d 1015, 1025 (9th Cir. 2009); SEC v. Am.
Found. for Advanced Educ. of Ark., 222 F. Supp. 828, 831 (W.D. La.
1963). Properly construed, this language does not encompass
interest payments to outside bond-holders, note-holders, or
debenture-holders. Cf. SEC v. World Radio Mission, Inc., 544 F.2d
535, 537 & n.1 (1st Cir. 1976) (discussing interest-bearing notes
issued by nonprofit religious organization).
The appellants' contrary reading turns the charitable
organization exemption inside out and, if implemented, would
unravel the fabric of the exemption. There is no dispute that the
PRCTF disclosed its intention to use the Note capital to purchase
preferred stock and to use dividends from the preferred stock to
finance the Notes. This investment approach is common practice
among charitable organizations. The offering circular does not
suggest — let alone support — any basis for the appellants'
assertion that a "majority of the proceeds generated by the
[PRCTF's securities] transactions" would be directed to "private
stockholders." We therefore disregard that assertion as
implausible.
Virtually every person who purchases a bond, a note, or
a debenture is motivated, at least in part, by the prospect of
earning interest; and basing the legal status of a nonprofit
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organization upon the motives of those who purchase its securities
defies common sense. We cannot conceive that Congress intended so
bizarre a result.
Resisting this conclusion, the appellants hurl an array
of doctrines as if they were frisbees. These initiatives are of no
help. We mention two of them to illustrate this point.
First, the appellants suggest that the Howey test, see
SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 301 (1946), tips the
jurisdictional scales in their favor. But the Howey test is only
used to determine whether an instrument is an "investment contract"
for purposes of the Securities Act. See, e.g., SEC v. Edwards, 540
U.S. 389, 393 (2004). There is no question that the Notes are
securities, so the Howey test has no bearing here. Second, the
appellants say that the "step-transaction" doctrine leads to a
finding of subject matter jurisdiction. They are wrong. The step-
transaction doctrine is used to assess tax liability, see, e.g.,
Comm'r of Internal Revenue v. Clark, 489 U.S. 726, 738 (1989);
Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517,
1521-22 (10th Cir. 1991), and it is of no assistance in this non-
tax case.
That ends this aspect of the matter. We hold that, in
the circumstances of this case, the TIA is not a hook on which the
appellants may hang federal subject matter jurisdiction. We also
hold that the appellants have failed to show any other cognizable
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predicate for such jurisdiction. Their suit simply does not arise
under federal law.
These holdings do not complete our journey. As a
fallback, the appellants contend that the district court
arbitrarily denied them leave to file a second amended complaint.
A brief chronology suffices to put this claim of error into
perspective.
The appellants filed their action (and thus their initial
complaint) on September 20, 2010. They filed their first amended
complaint approximately six months later. They did not move for
leave to file a second amended complaint until September 6, 2011.
The appellees opposed their motion.
It is common ground that leave to amend should be "freely
give[n]" in circumstances in which "justice so requires." Fed. R.
Civ. P. 15(a)(2). But the largesse that Rule 15(a)(2) contemplates
is not without limits. The rule "does not mean . . . that a trial
court must mindlessly grant every request for leave to amend."
Aponte-Torres v. Univ. of P.R., 445 F.3d 50, 58 (1st Cir. 2006).
A district court may deny leave to amend when the request is
characterized by "undue delay, bad faith, futility, [or] the
absence of due diligence on the movant's part." Palmer v. Champion
Mortg., 465 F.3d 24, 30 (1st Cir. 2006). So, too, the court may
deny the request if the proposed amendment "would serve no useful
purpose." Aponte-Torres, 445 F.3d at 58.
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We review a district court's refusal to grant leave to
amend for abuse of discretion. See Palmer, 465 F.3d at 30; Hatch
v. Dep't for Children, Youth & Their Families, 274 F.3d 12, 19 (1st
Cir. 2001). In the course of such review, we "defer to the
district court's hands-on judgment so long as the record evinces an
adequate reason for the denial." Aponte-Torres, 445 F.3d at 58.
In this instance, the district court rejected the
appellants' motion because of undue delay. It noted that the
appellants previously had amended their complaint. It then
emphasized that the motion for permission to file a second amended
complaint was not filed until nearly a year after the commencement
of the action and many months after the fully briefed motions to
dismiss had been taken under advisement.
We discern no abuse of discretion. Appreciable delay
alone, in the absence of good reason for it, is enough to justify
denying a motion for leave to amend. See, e.g., Kay v. N.H. Dem.
Party, 821 F.2d 31, 34 (1st Cir. 1987) (per curiam) (affirming a
finding of undue delay when three months had elapsed).
The appellants strive to persuade us that they had good
reason for the delay. To this end, they point to the fact that
this case was twice passed from judge to judge and vaguely assert
that these reassignments justified their laggardly pace. We are
not convinced.
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The record reflects that, when filed, the case was
originally assigned at random to a district judge who immediately
recused himself. The case was redrawn that same day to Judge
Domínguez. On May 13, 2011, Judge Domínguez withdrew and the case
was reassigned during the same month to Judge Gelpí. Judge Gelpí
did not undo any of Judge Domínguez's earlier orders and there is
no indication that the transition was unwieldy.
The appellants have given no coherent explanation as to
how these reassignments caused delay. The first reassignment was
so immediate that it hardly is worth mentioning. The second
reassignment — from Judge Domínguez to Judge Gelpí — resulted in
what appears to have been a seamless transition. We cannot infer
any good reason for the appellants' delay from that scenario.
The appellants touched upon other grounds below in
support of their motion to amend. Specifically, they adverted to
the "very special interest to the public trust"; difficulty in
understanding the case; and an alleged public loss of over $600
million. These arguments were not renewed on appeal and,
therefore, are deemed abandoned. See United States v. Zannino, 895
F.2d 1, 17 (1st Cir. 1990). In all events, they do not come close
to suggesting an abuse of discretion.
Relatedly, the appellants assign error to the district
court's summary denial of their motion for reconsideration of the
order denying leave to file a second amended complaint. We review
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the denial of a motion to reconsider for abuse of discretion. See
Mulero-Abreu v. P.R. Police Dep't, 675 F.3d 88, 94 (1st Cir. 2012).
"For such a motion to succeed, the movant must demonstrate either
that newly discovered evidence (not previously available) has come
to light or that the rendering court committed a manifest error of
law." Id. (internal quotation marks omitted). The appellants do
not identify any newly discovered evidence, and the court below
committed no discernable errors of law. Accordingly, we find no
abuse of discretion in the denial of reconsideration.
There is one loose end. The appellants invite us,
without meaningful elaboration, to remand the case for an
assessment of federal question jurisdiction under yet another
statute: the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 to
80a-64. They are grasping at straws and, inasmuch as they have
offered no developed argumentation on the point, we decline their
invitation. See Zannino, 895 F.2d at 17.
We need go no further. For the reasons elucidated above,
we affirm the judgment of the district court. This order operates
without prejudice to the right of the appellants to pursue their
claims against the appellees in a local court.
Affirmed.
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