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Spring 2005-08 No federal jurisdiction based on defenses

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Number 59
Spring 2005

No federal jurisdiction based on defenses

A local developer cannot invoke federal jurisdiction to avoid a foreclosure action filed in the Puerto Rico courts where such jurisdiction is based on the developer's own allegations in defense of the lawsuit. So held the federal district court sitting in Puerto Rico in an action relating to the repayment of a construction loan in default.

The complaint

In Scotiabank v. Residential Partners, S.E., 350 F. Supp. 2d 334 (D. P.R., 2005), the lender filed a civil action before the Puerto Rico Court of First Instance against a special partnership and its general partner, a guarantor of the partnership's debts, to foreclose on the mortgage of a construction development in Fajardo. The bank also added as co-defendants the guarantor's wife and the conjugal partnership constituted by them, so that they would be on notice of the action and their obligations from the debts, as required by Article 1308 of the Civil Code, 31 P.R. Laws Ann. §3661. Another special partnership was also added as a co-defendant, as it had pledged to the lender certain mortgage notes to guarantee the main borrower's debts.

The action asserted four causes of action, seeking collection of monies, foreclosure of pledge agreements and mortgages, and personal guarantees, and the enforcement of an assignment of a construction contract, permits, drawings, plans and specifications. The complaint did not assert any claim under the Bank Holding Company Act.

The defense

The defendants filed a Notice of Removal before the U.S. District Court, obtaining the automatic stay of the actions filed in the Fajardo court, alleging that:

  • the pleadings "relate to certain Construction Loan Agreement";
  • the loan agreement contains a clause providing the bank with a right of first refusal to provide the lender "the first opportunity to consider and negotiate [the terms for financing] any commercial development on the portion of the Property zoned for commercial use";

"plaintiff [sic] has progressively encumbered the assets of the defendants with joint and several mortgages through modifications and expansions that commenced on September 12, 2000, and were repeated on several occasions . . ."; and

  • that the pleadings "establish a case and controversy" under the Bank Holding Company Act's provisions prohibiting tying arrangements (Section 106 of the Act, codified as 12 U.S.C. §1972). The defendants asserted that documents attached to the complaint as evidence of the debts owed by them in fact "evidence tying arrangements, the mechanism through which the alternate credit pursuit and control was established and the alleged spouse's liability emerges, even when the husband had and has sufficient credit worthiness."

Federal jurisdiction

The bank moved to remand the case back to the Fajardo court, asserting that there was no basis to exercise federal jurisdiction over the controversy.

Any civil action of which the district court has original jurisdiction founded on a claim or right arising under federal law is removable from state or Puerto Rico courts without regard to the citizenship or residence of the parties. 28 U.S.C. §1441(b). The governing principle is that the right or immunity created by some meaningful aspect of federal law that is claimed to provide the basis for bringing the state court case into the federal system by way of removal must be an essential element of the plaintiff's properly pleaded claim for relief. Removal on the basis of a federal question is unavailable, however, under the "arising under" requirement and the "well-pleaded" complaint rule if federal law is only set up by way of defense or counterclaim in the defendant's answer or the federal defensive matter is improperly anticipated in the plaintiff's complaint, even if the matter is dealt with in the notice of removal. This is to say that, while a plaintiff may not attempt to disguise a federal claim to avoid removal into federal court, the federal claim cited by a removing defendant must be more than merely colorable, or collateral or incidental to a claim that is primarily based in state, or Puerto Rico law.

Bank Holding Company Act

The defendants asserted that the complaint filed in the Fajardo court "establish(es) a case and controversy under the Bank Holding Company Act's provisions prohibiting tying arrangements," and that documents attached to the complaint as evidence of the debts owed by them "evidence tying arrangements, the mechanism through which the alternate credit pursuit and control was established and the alleged spouse's liability emerges, even when the husband had and has sufficient credit worthiness."

These assertions were deemed insufficient to meet the burden of establishing that, as the record stood on the date of the filing of the notice of removal, the court had federal question jurisdiction over the case. In fact, the four causes of action, seeking collection of monies, foreclosure of pledge agreements and mortgages, and personal guarantees, and enforcement of an assignment of construction contract, permits, drawings, plans and specifications, were all claims for relief based on Puerto Rico law, be it contract law or mortgage law. In addition, the very Construction Credit Agreement upon which the defendants relied to file their petition for removal expressly included a section stating that the "Agreement and the other Loan Documents shall be construed and enforced in accordance with, and governed by, the laws of Puerto Rico, and the parties submit themselves to the jurisdiction and venue of the Court of First Instance of Puerto Rico, San Juan Part."

The District Court agreed with the bank, and remanded the case to the Puerto Rico court. In doing so, the court held that nothing in the complaint involved federal law. "The court perceives defendant's defense to the case to be grounded in federal law, which is insufficient to assert federal jurisdiction."

In addition, the court held that the parties' mutually agreed forum selection clause made it mandatory to remand the case to the Puerto Rico court.


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