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Fabrica de Muebles J.J. Alvarez, Inc. v. Inversiones Mendoza, Inc.

Fabrica de Muebles J.J. Alvarez, Inc. v. Inversiones Mendoza, Inc., Case No. 11-1985 (1st Cir. June 4, 2012)
The First Circuit Court of Appeals held that the United States District Court, District of Puerto Rico, did not abuse its discretion in denying a (non-debtor) plaintiff's motion for reconsideration of an order dissmissing plaintiff's litigation claims following dismissal of the sole federal claim through a settlement agreement. The First Circuit also held, on de novo review, that the District Court's dismissal of plaintiff's claims for lack of subject matter was proper given that the only claims before the District Court involved state law and plaintiff had failed to adequately plead federal RICO claims against the individual defendants not subject to the earlier release.
Procedural context:
Appeal from an order of the United States District Court, District of Puerto Rico denying plaintiff/appellant's motion for reconsideration and of an order dismissing plaintiff's state law claims against certain certain defendants for lack of subject matter jurisdiction.
The plaintiff, Fabrica de Muebles J.J. Alvarez, Inc. ("Alvarez"), sold its business to Inversiones Mendoza, Inc. ("Mendoza") pursuant to a purchase agreement in a deal financed by Westernbank. Alvarez and Mendoza also entered into a consignment agreement which provided that Mendoza would sell consigned goods which were to be deemed the exclusive property of Alvarez, and remit the product of those sales to Alvarez. In turn, Alvarez was required to make payment to Mendoza. The consigment agreement provided that the proceeds would be placed in an escrow bank at Western Bank under the name of Mendoza, d/b/a J.J. Alvarez. Mendoza separately granted Westernbank control over Mendoza's accounts as security for Mendoza's obligations to the bank. Mendoza ultimately filed Chapter 11. Alvarez brought suit against Westernbank in the District Court, claiming that Westernbank swept funds from the escrow account belonging to Alvarez or prevented Mendoza from remitting sale proceeds to Alvarez. The complaint initially named "Westernbank and various John Doe employees" as defendants and contained a count for "violation of R.I.C.O. Act" as well as state law claims for fraud and recovery of the funds. During the litigation, the FDIC was appointed receiver for Westernbank, the bank's assets were sold to BPPR, and BPPR was substituted for Westernbank as defendant. Subsequently, Alvarez agreed via settlement agreement to voluntarily dismiss three of the five claims against BPPR, including the RICO claim. After dismissal of those claims, the District Court ordered the plaintiff to show cause why the remaining claims, characterized by the Court as state law claims, should not be dismissed for lack of subject matter jurisdiction. The Court ultimately declined to exercise supplemental jurisdiction and dismissed the two remaining claims. Alvarez unsuccessfully moved for reconsideration twice, first asserting that the USDC had jurisdiction since the agreement was entered into as part of a bankruptcy proceeding. In a second motion, Alvarez raised the "new" argument that the RICO claims against the un-named Westernbank employees had not been dismissed. On appeal, the First Circuit found that the USDC's conclusion that all federal claims had been dismissed was reasonable, given that the plaintiff failed to name or serve any particular employees as of the time of settlement. The Court also found that denial of consideration was proper since Alvarez had failed to meet its burden of demonstrating the existence of federal jurisdiction when it had the opportunity to do so. In any event, the District Court had correctly held that a dispute involving interpretation of a settlement agreement executed in a bankruptcy proceeding is not a stand-alone basis for federal jurisdiction; to the contrary, interpretation of those agreements is a matter of state law. Upon de novo review, the Court also held that the District Court's dismissal of the remaining claims was proper for lack of subject matter jurisdiction given that no additional federal claims had been properly pled under the standard of Ashcroft v. Iqbal, 556 U.S. 662 (2009). The District Court orders were affirmed.
Lynch, Boudin, Lipez

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