Prestige Capital Corp. v. United Surety & Indemnity Co.
Docket: CIVIL NO. 16-1998 (GAG)
Court: District Court, D. Puerto Rico; March 28, 2017; Federal District Court
Prestige Capital Corporation ("Prestige") initiated a lawsuit against United Surety and Indemnity Company ("USIC") on May 29, 2016, seeking reimbursement of $104,505.36 that USIC obtained from a local court's interpleader action. Prestige asserts a superior claim to these funds and invokes diversity jurisdiction under 28 U.S.C. § 1332. USIC filed a Motion to Dismiss, which the Court granted after reviewing the case.
Prestige, a New Jersey corporation specializing in accounts receivables financing, entered into a Purchase and Sale Agreement (P&S Agreement) with Pipeliners of Puerto Rico, Inc. ("Pipeliners") on June 9, 2005. This agreement granted Prestige a continuing security interest in Pipeliners' accounts and other assets. Pipeliners had contracts with the Puerto Rico Aqueduct and Sewer Authority ("PRASA"), for which USIC issued a Payment and Performance Bond.
PRASA was obligated to pay Pipeliners based on work certifications, specifically Certifications 1 and 2, totaling $439,153.13. However, Pipeliners defaulted on their payment obligations, leading to a debt of at least $1,211,968.66 owed to Prestige. Prestige notified Pipeliners of this default on November 23, 2010, and subsequently filed a collection action against Pipeliners, PRASA, and the Economic Development Bank for Puerto Rico due to these unpaid amounts.
On December 3, 2010, PRASA initiated an interpleader action in the Puerto Rico Superior Court to consign funds requested through Certifications 1 and 2, with Case No. KAC 2010-1450(508). USIC was not involved in this action since it had not disbursed any funds or worked on the project at that time. On May 20, 2011, PRASA terminated its agreement with Pipeliners for default, simultaneously acknowledging the owed amounts through the interpleader action.
Subsequently, on January 11, 2013, PRASA and USIC entered a Takeover Agreement for USIC to complete the project. This agreement recognized Pipeliners' Certifications for work performed. USIC claimed to have spent $279,321.75, exceeding the remaining project balance by $104,505.56, prompting USIC to intervene in the interpleader action to recover this excess amount.
Negotiations led to a “Final Settlement Agreement” on July 14, 2015, and subsequent stipulations between Prestige and the Puerto Rico Treasury Department, which USIC opposed. To resolve disputes over the consigned funds, Prestige and USIC reached a stipulation allowing the Treasury’s approval while preserving Prestige's right to claim reimbursement from USIC.
On May 19, 2016, Prestige filed a complaint against USIC for the reimbursement of $104,505, asserting a perfected first priority lien on accounts receivable owed to Pipeliners by PRASA, including amounts from the Certifications. Prestige contended that PRASA had fulfilled its payment obligations before Pipeliners’ termination and before USIC took over the project, asserting that the consigned funds were not PRASA's property at that time. Therefore, Prestige claimed entitlement to the funds, arguing that USIC, as surety, held no legitimate claim to them due to Prestige's secured interest in Pipeliners’ accounts.
USIC has filed a motion to dismiss Prestige's complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that, as a performing surety, it possesses a superior legal interest in the unpaid funds from the bonded project. USIC asserts that its entitlement to these funds, based on the subrogation doctrine, is greater than any claim Prestige might have, regardless of Prestige's assertion that its claim predates USIC's by two years. USIC maintains that Prestige has no legal right to the funds obtained from the interpleader action and requests attorney fees.
In response, Prestige argues it is entitled to recover funds wrongfully disbursed to USIC, claiming that at the time of the interpleader action, USIC was not involved and had not contributed funds to complete the project. Prestige cites provisions of the Puerto Rico Civil Code, asserting that payment is considered made upon the deposit of funds, thus claiming that funds related to Certifications 1 and 2 were improperly paid to USIC. Prestige contends it holds a superior right to these funds and seeks reimbursement.
The legal standard for reviewing a motion to dismiss requires the court to follow a two-step process based on the plausibility standard established by the Supreme Court. Initially, the court eliminates conclusory statements and legal labels from the complaint. Then, it assesses the remaining well-pleaded factual allegations, taking them as true and drawing reasonable inferences in favor of the pleader to determine if a plausible claim for relief is presented. The standard necessitates more than mere possibilities, requiring enough factual basis to raise a reasonable expectation that discovery may support the necessary elements of the claim.
Under Puerto Rico law, a surety that fulfills a contractor's obligations is subrogated to the rights of the owner and contractor regarding contract retainages, which takes precedence over an attaching creditor's rights, even if the creditor attaches the retainages before the subrogation occurs. Article 1737 of the Puerto Rico Civil Code stipulates that a surety who pays a debtor is entitled to indemnification covering the total debt amount, legal interest from the payment notification date, expenses incurred after notifying the debtor of the lawsuit, and any applicable losses or damages. Article 1738 permits the surety who pays a debtor to assume all rights the creditor had against that debtor. Additionally, Article 1166 clarifies that subrogation transfers the credit and associated rights to the subrogated party against the debtor or third parties.
The dispute focuses on whether certain funds should be classified as paid or unpaid concerning the subrogation doctrine. USIC contends that the case parallels previous First Circuit precedents (National Shawmut Bank and American Fire Casualty Co.), asserting that the funds in question were earned and certified but not yet paid to Prestige prior to USIC's subrogation. Consequently, USIC, as a performing surety, claims a preferential right to those funds over any claims by Prestige. The First Circuit has determined that while a surety cannot recover progress payments that were paid prior to default, it does have a superior claim to recover payments that were earned but not yet paid before the default. The rationale is that the surety’s completion of the work entitles it to the funds, which would otherwise have been directed toward project completion costs.
Before default, the contractor had the authority to assign progress payments, and the Bank could not be divested by the surety unless fraud was involved. Upon default, however, the surety assumes the government's rights, stepping into the contractor's position, which loses its rights. The surety is subrogated to the government's right to pay laborers and suppliers from retained progress payments and to use earned but unpaid progress payments for completing the work.
Prestige argues that PRASA’s payment through judicial consignment should be considered made when the funds were consigned, according to a Puerto Rico Supreme Court ruling. This would imply that the funds were earned and paid prior to USIC’s involvement. Consignation involves a legal deposit of owed funds, managed by judicial authority until they are made available to the creditor. Under Articles 1130 to 1135 of the Puerto Rico Civil Code, while consignation releases the debtor from liability when multiple claims exist, the debtor retains the right to withdraw the consigned funds until the creditor accepts them or a court confirms the consignation's validity.
Prestige claims that the consignation by PRASA constitutes payment, positioning December 3, 2010, as the payment date for Certifications 1 and 2, arguing that this would preclude USIC from recovering those funds. However, the court disagrees, noting that while the funds were consigned, Prestige did not possess them, and the ownership of the funds was disputed during the interpleader proceedings. Thus, the argument that the consignation equates to payment is rejected.
Prestige claimed a superior right to certain funds, but the court had not approved the consignation, allowing PRASA to withdraw the funds at any time under Article 1134 of the Puerto Rico Civil Code. The Puerto Rico Supreme Court's ruling in T.O.L.I.C. established that once consignation is approved, payment is retroactively effective from the deposit date for interest calculations. USIC contended that Prestige misinterpreted this ruling, asserting that the implications of the ruling do not apply to this case. The court confirmed that while a formal release from the debtor depends on proper consignation, interest does not accrue from the date of consignation if it is found to be proper. The funds in question were deemed earned but unpaid prior to Pipeliners’ default, and despite USIC not being an original party, approval for PRASA's consignation occurred after USIC intervened. Consequently, the court concluded USIC had a superior claim to the funds due to subrogation rights acquired from Pipeliners. Prestige's claims were dismissed with prejudice as it lacked legal entitlement to the funds. USIC's motion for attorney's fees was also addressed; while initially skeptical, the court found Prestige's litigation conduct warranted fees under Rule 44 of the Puerto Rico Rules of Civil Procedure, given its obstinacy.
Two months after USIC filed a motion to dismiss, Prestige moved for summary judgment on November 7, 2016, while USIC's motion was still pending and before any discovery had occurred. Prestige’s motion reiterated arguments from the motion to dismiss, which were still under consideration by the Court. This preemptive summary judgment motion forced USIC to respond and file a cross-motion for summary judgment. The Court references case law indicating that a losing party exhibiting obstinacy during litigation may be liable for prejudgment interest and attorneys' fees, aimed at penalizing the party for causing unnecessary costs and delays. Obstinacy is assessed based on whether a party has acted unreasonably litigious, wasting time and resources. The Court found Prestige's actions to be obstinate and frivolous, warranting the award of attorney's fees to USIC. USIC is directed to submit a supplemental petition for these fees within thirty days. The Court also granted USIC’s Motion to Dismiss, dismissing Prestige's claims with prejudice.
Petitioner Febles Gordián argues against the exemption of TOLIC from paying interest on the minor's funds from the date of consignation until the judgment date, citing the Civil Code which states an obligation persists until the creditor accepts consignation or a court order validates it. However, the concept of consignation, defined as the legal deposit of owed assets under judicial authority, extinguishes the obligation as a form of payment even without creditor acceptance. The relevant Civil Code articles clarify that while a debtor is not released from liability until a court confirms proper consignation, this does not necessitate the payment of interest during the interim. Spanish legal doctrine supports that the effects of proper consignation are retroactive to the deposit date. Consequently, imposing interest from the consignation date would contradict the principles of legal consignation and the intended purpose of Civil Procedure Rule 19. The court concludes that if the consignation is deemed proper, the payment effect is retroactive to the deposit date, thus exempting TOLIC from paying interest during the period before the court ruling.
