LUIS A. FELICIANO-MUÑOZ; AIR AMERICA, INC., Plaintiffs, Appellants, v. FRED J. REBARBER-OCASIO, Defendant, Appellee.
No. 18-2075
United States Court of Appeals For the First Circuit
August 11, 2020
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO [Hon. Marcos E. López, U.S. Magistrate Judge]
Before Torruella, Dyk,* and Barron, Circuit Judges.
José R. Olmo-Rodríguez, for appellants.
Carlos A. Mercado-Rivera, with whom Mercado Rivera Law Offices was on brief,
TORRUELLA, Circuit Judge. Plaintiff-Appellant Luis A. Feliciano-Muñoz (“Feliciano“) appeals the district court‘s grant of summary judgment and dismissal of his complaint with prejudice with respect to his breach of contract and incidental deceit claims against Defendant-Appellee Fred J. Rebarber-Ocasio (“Rebarber“). Although we agree with the district
I.
A. Factual Background
In September 2014, Feliciano approached Rebarber to buy all of the shares of Air America, Inc. (“AA“), an outfit owned by Rebarber that provided airline services pursuant to Federal Aviation Regulations Part 135. In an earlier commercial venture, Feliciano had bought and owned Cub Pipers, small one-passenger airplanes, which are considerably different from the multi-engine, multi-passenger commercial airplanes that comprised AA‘s six airplane fleet.
Feliciano first sent Rebarber a letter of intent (“LOI“) on September 30, 2014, in which he proposed to purchase one hundred percent of AA‘s shares at a price of $1,500,000. On October 21, 2014, Rebarber sent an email rejecting the terms of the first LOI, stating his intention that the deal be “as is” without language qualifying the deal as “offer subject to” or “satisfaction to the buyer.” The email stated that “[i]t was [Rebarber‘s] understanding that [the buyer] ha[d] everything [he] need[ed] to make an unconditional offer” and that Rebarber was “more than willing to be accountable for any claims, penalties, fees, law[suits], unpaid invoices, etc[.] up to the closing date.” Feliciano then sent a second LOI on November 6, 2014, and finally, a third was issued on November 12, 2014, which Rebarber signed. The final LOI did not contain language to the effect of “offer subject to” or “satisfaction to the buyer” and did not reference the condition of the airplanes or guarantee the operation of the airline or the retention of employees or pilots. Nor did the final LOI include “as is” language.
During this period, to assist him with the purchase, Feliciano hired two accountants and an aviation consultant, Verlyn Wolfe. Wolfe‘s company Wolfe Aviation offers advice on aircraft acquisitions, sales, and services. Rebarber provided Feliciano with spreadsheets containing information about the airplanes that had been requested by the aviation consultant. Rebarber provided the airplane serial numbers, as well as lists of the airplanes’ avionics and equipment. According to Feliciano, Rebarber disallowed mechanical inspection of the airplanes because it would hurt the morale of AA‘s employees if they believed Rebarber was selling. Still, Feliciano, accompanied by his accountant, was allowed to, and did in fact, visually inspect the airplanes and take pictures, including photos of one of the plane‘s interior. As Feliciano pursued AA, at least one of his consultants attempted to sway him to abandon the deal, advice that he did not heed.
The deal culminated on December 17, 2014, when Feliciano and Rebarber executed a Stock Purchase Agreement (“SPA“). For a price tag of $1,300,000, Rebarber sold eighty percent of his stock in AA to Feliciano. In addition to a prior $100,000 deposit, Feliciano paid $950,000 at signing with a final installment of $250,000 scheduled for twelve months later, secured by a
The Corporation and/or Seller [Rebarber] have satisfied 100% of any known accrued expenses and debt of the Corporation. Any unrecorded or undisclosed expenses and liabilities related with the operations of the Corporation prior to this date (the “Unrecorded Expenses“) found by the Purchaser [Feliciano] after the date hereof, shall be paid by Seller to the Corporation upon claim thereof by Purchaser or the Corporation supported by adequate evidence. If Seller fails to reimburse the Corporation, in addition to any rights available at law to collect the Unrecorded Expenses, Purchaser shall have the right to deduct or set-off the Unrecorded Expenses from face value of the Note. All expenses incurred by the Corporation prior to the date hereof shall run on the account of the Seller; and all expenses incurred by the Corporation after the date hereof will run on account of the Corporation. In addition, any expenses incurred by the Corporation after the date hereof that should have been incurred by the Corporation prior to this date, will be on the account of the Seller and shall be considered Unrecorded Expenses.
According to Feliciano, Section A of Article IV of the SPA was also included to safeguard his investment by indemnifying him against a breach of Rebarber‘s representations:
Seller agrees to indemnify and save and hold harmless the Purchaser from and against all losses, claims, causes of action, obligations, suits, costs, damages, expenses . . . and liabilities which the Purchaser . . . may suffer or incur or be compelled to or be subject to and which are caused by or arise directly or indirectly by reason of the breach of any representations and warranties of the Seller contained herein.
Feliciano explains that Sections D and I of Article II serve as said representations, for which Rebarber would be liable if breached:
The Corporation has all operating authority, licenses, franchises, permits, certificates, consents, rights and privileges (collectively “Licenses“) as are necessary or appropriate to the operation of its business as now conducted and as proposed to be conducted and which the failure to possess would have a material adverse effect on the assets, operations or financial condition of the Corporation. Such Licenses are in full force and effect, no violations have been or are expected to have been recorded in respect of any such Licenses, and no proceeding is pending that could result in the revocation or limitation of any such Licenses. The Corporation has conducted its business so as to comply in all material respects with all such Licenses . . . [And t]he Corporation has no material unrecorded or unreported liabilities or contingencies.
Prior to signing the SPA, Feliciano represents that he evaluated “AA‘s financial records and aircraft flight and maintenance
Only a week after signing the SPA, on December 23, 2014, Feliciano discovered “maintenance[] and repair[] issues that placed the licenses and permits at risk which were not recorded on the logbooks and should have been recorded and repaired before the purchase.”2 AA thus incurred expenses to repair the airplanes and purchase new equipment, which according to Feliciano, “should have been done before the SPA.” In addition, AA incurred the collateral costs of chartering flights, the result of having to ground the airplanes, according to Feliciano.
A year later, Feliciano‘s final payment to Rebarber came due under the terms of the deal. Feliciano notified Rebarber that he was exercising his right to set off a claim against Rebarber for the full amount of $250,000 and was requesting an additional $25,395.46 to top it off. Feliciano charged Rebarber with having breached the contract because equipment in all six airplanes had either been broken or inoperative and the airplanes had had to be grounded and expenditures incurred in order for the airplanes to be airworthy. Rebarber, in turn, rejected these allegations. Feliciano then sent him the $250,000 payment, and approximately a year later, filed this suit.
B. Procedural History
On September 26, 2016, Feliciano and AA filed a diversity action against Rebarber in the United States District Court for the District of Puerto Rico. The case was referred to a Magistrate Judge pursuant to the parties’ consent. With leave from the court, on April 28, 2017, Feliciano and AA3 amended their complaint. The complaint alleged “an action for a breach of contract arising from the false representations of the Defendant regarding the Corporation‘s compliance with applicable FAA laws and regulations.” The complaint cited three contractual provisions that, according
On October 18, 2018, the district court granted Rebarber‘s motion for summary judgment. The district court, finding Feliciano‘s allegation in the amended complaint “elusive,” determined that “while Plaintiffs ha[d] spoken the language of breach of contract, what Plaintiffs [we]re in essence alleging [wa]s a claim of deceit, known as ‘dolo’ under Puerto Rico contract law.” Feliciano-Muñoz v. Rebarber-Ocasio, Civ. No. 16-2719 (MEL), 2018 WL 8805486, at *4 (D.P.R. Sept. 28, 2018). The district court, having before it a motion for summary judgment, dismissed the breach of contract claim under
C. Discussion
1. Breach of contract
“We review the district court‘s decision to treat the defendant[‘s] motion for summary judgment as a motion to dismiss for abuse of discretion.” Ríos-Campbell v. U.S. Dep‘t of Com., 927 F.3d 21, 24 (1st Cir. 2019) (citing Vélez v. Awning Windows, Inc., 375 F.3d 35, 41 (1st Cir. 2004)). “The dispositive question is whether, in the absence of special circumstances or persuasive reasons, the district court abused its discretion in transmogrifying a fully developed motion for summary judgment, replete with exhibits gleaned partially through discovery, into a motion to dismiss for failure to state a claim.” Id. at 24 (holding sua sponte that the district court abused its discretion when it converted the defendants’ motion for summary judgment
Although support in our rules can be found for sometimes treating a motion to dismiss for failure to state a claim as a motion for summary judgment, see
As explained above, the district court, when confronted with Rebarber‘s motion for summary judgment, determined that to the extent the complaint contained a breach of contract claim, such a claim did not survive the threshold question of plausibility, the familiar standard appropriate at the motion to dismiss stage. See Feliciano-Muñoz, 2018 WL 8805486, at *5 (“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.‘” (quoting Iqbal, 556 U.S. at 678)); see, e.g., Zell v. Ricci, 957 F.3d 1, 7 (1st Cir. 2020) (“[F]irst, ‘isolate and ignore statements in the complaint that simply offer legal labels and conclusions or merely rehash cause-of-action elements[,]’ then ‘take the complaint‘s well-pled (i.e., non-conclusory, non-speculative) facts as true, drawing all reasonable inferences in the pleader‘s favor, and see if they plausibly narrate a claim for relief.‘” (alterations in original) (quoting Zenón v. Guzmán, 924 F.3d 611, 615-16 (1st Cir. 2019))). The court went on to explain that
[w]hile Plaintiffs did invoke the term “breach of contract,” and not “deceit,” it should come as no surprise to Defendant that Plaintiffs are in fact bringing a deceit claim for two reasons. First, in the joint proposed pretrial report, Plaintiffs argue that “Defendant‘s actions constitute deceit in the formation of the contractual relationship (also known as ‘dolo’ under the Code).” Second, in his motion for summary judgment, Defendant raises some arguments which are relevant to a deceit claim, and not relevant to a breach of contract claim. Specifically, Defendant argues that summary judgment should be granted because Mr. Feliciano-Muñoz had previous experience buying and owning aircrafts [sic] and because he retained three consultants to assist him with the purchase. Mr. Feliciano-Muñoz‘s previous experience buying and owning aircrafts [sic] and hiring of consultants is irrelevant to the question of whether Rebarber later breached the terms of the contract between him and Mr. Feliciano-Muñoz.
Feliciano-Muñoz, 2018 WL 8805486, at *5 (record citations omitted).
On appeal, Feliciano requests that this Court vacate the district court‘s decision to dismiss the breach of contract claim and remand with instructions that the contract claim be reinstated. Feliciano argues in his opening brief that his complaint alleged breach of contract by identifying which clauses in the SPA had been breached, the specific facts which led to their breach, and an accounting of the costs that resulted, which according to the SPA, should have been covered by Rebarber. He posits that the breach of contract claim, “while factually intertwined with the allegations
Here, we find that the district court erred in concluding that Feliciano did not assert a breach of contract claim and abused its discretion when it converted Rebarber‘s motion for summary judgment on said claim into a motion to dismiss. Rebarber chose to answer the complaint rather than move to dismiss it under the proper procedures and filed his motion for summary judgment months after the close of discovery. See Ríos-Campbell, 927 F.3d at 25 (“The defendants chose not to file a motion to dismiss but instead to move for summary judgment, and that choice should be given some weight . . . .“). Notwithstanding the addition in the proposed pretrial order of the deceit claim (which can be asserted concurrently with a breach of contract claim, see, e.g., P.C.M.E. Com., S.E. v. Pace Membership Warehouse, Inc., 952 F. Supp. 84, 91, 94 (D.P.R. 1997)), there is no indication in the record that Feliciano was no longer pressing the breach of contract claim. The district court observed that Rebarber had raised arguments related to Feliciano‘s “previous experience buying and owning aircrafts [sic] and hiring of consultants,” which would be irrelevant to the breach of contract claim but relevant to a deceit claim.5 But it is unclear why a purported inadequacy in the moving party‘s formation of arguments would warrant the court to accommodate that party‘s failure to satisfy its own burden as the moving party and to conveniently convert the motion to apply a standard that is less evidentiarily demanding in the moving party‘s favor. See
We do, however, recognize that this case differs from Ríos-Campbell in at least one key respect: here, the district court did decide a separate claim under the summary judgment framework. While this
2. Dolo Claim
We review the grant of summary judgment de novo and draw all reasonable inferences in favor of the non-moving party. Tang v. Citizens Bank, N.A., 821 F.3d 206, 215 (1st Cir. 2016) (citing Pérez-Cordero v. Wal-Mart P.R., Inc., 656 F.3d 19, 25 (1st Cir. 2011)). Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Under Puerto Rico contract law, “[t]here is deceit when by words or insidious machinations on the part of one of the contracting parties the other is induced to execute a contract which without them he would not have made.”
Dolo, like fraud, may not be presumed, and “the party alleging dolo bears the burden of proof” and must “demonstrate the intentional fault or bad faith of the person to whom it is imputed.” Burk, 100 F. Supp. 3d at 135 (quoting P.C.M.E., 952 F. Supp. at 92); see Miranda Soto v. Mena Eró, 9 P.R. Offic. Trans. 628, 634 (1980). “[I]n determining whether to permit invalidation of a contract on the basis of dolo, Puerto Rico courts place considerable weight on the education, social background, economic status, and business experience of the party seeking to avoid the contract.” Citibank Glob. Markets, Inc. v. Rodríguez Santana, 573 F.3d 17, 29 (1st Cir. 2009) (citing Cabán Hernández v. Philip Morris USA, Inc., 486 F.3d 1, 12 (1st Cir. 2007)); see also Citibank v. Dependable Ins. Co., 21 P.R. Offic. Trans. 496, 512 (1988). “The cases in which a party has been held to a contract by virtue of that party‘s sophistication involve a lack of evidence of bad faith on the part of the defendant, a plaintiff that is a sophisticated business entity, or both.” Estate of Berganzo-Colón ex rel. Berganzo v. Ambush, 704 F.3d 33, 42 (1st Cir. 2013) (citations omitted); see, e.g., Cabán Hernández, 486 F.3d at 12 (“[While] the appellants are reasonably well-educated, experienced individuals, all of whom have held responsible positions in the private sector . . . they have presented no significantly probative evidence of deception.“); see also Citibank Glob. Markets, 573 F.3d at 29 (“Fernandez‘s sophistication, coupled with his failure to allege sufficient, colorable bad faith on the part of Smith Barney, defeats any claimed dolo in this case.“).
As we mentioned above, the district court credited Feliciano with having alleged a claim for deceit, or dolo, under Puerto Rico contract law. See Feliciano-Muñoz, 2018 WL 8805486, at *4. Although the dolo claim was only first named as such in the proposed pretrial order,6 the amended complaint stated that
“[t]his is a breach of contract arising from false representations and warranties” whereby “Feliciano reasonably relied on Rebarber‘s representations and warranties.”
Presumably responding to this allegation, Rebarber‘s motion for summary judgment argued that Feliciano, who had several professionals assisting him with the deal and who had prior experience purchasing airplanes, had been provided with lists of the airplanes’ serial numbers, avionics, and equipment and had had the opportunity to visually inspect the airplanes with one of his consultants. Thus, Rebarber‘s motion posited that Feliciano had not reasonably relied on Rebarber‘s alleged representations.7
In response, Feliciano argued
In an effort to make sense of the parties’ arguments, the district court concluded that Feliciano was essentially alleging dolo, akin to fraud in the inducement, which requires the asserting party to show “(1) a false representation by the defendant; (2) the plaintiff‘s reasonable and foreseeable reliance thereon; (3) injury to the plaintiff as a result of the reliance; and (4) an intent to defraud.” Feliciano-Muñoz, 2018 WL 8805486, at *4 (citing Kellogg USA v. B. Fernández Hermanos, Inc., 2010 WL 376326, No. 07-1213 (GAG/BJM), at *12 (D.P.R. Jan. 27, 2010)); see Portugués-Santana, 657 F.3d at 62 (citing P.R. Elec. Power Auth. v. Action Refund, 515 F.3d 57, 66 (1st Cir. 2008)); Lummus Co. v. Commonwealth Oil Ref. Co., 280 F.2d 915, 933 (1st Cir. 1960). The district court, accepting for purposes of summary judgment Feliciano‘s allegations that Rebarber had made misrepresentations about the airplanes, nevertheless, determined that the circumstances showed that Rebarber was a sophisticated buyer who had not reasonably relied on Rebarber‘s representations about AA‘s compliance with FAA regulations or the airplanes’ excellent condition. Feliciano-Muñoz, 2018 WL 8805486, at *8.
On appeal, Feliciano argues that the district court erred in considering whether or not Feliciano was a sophisticated buyer. He explains that the cases the court relied on to set forth the law of sophisticated buyer all dealt with claims of serious dolo, where the party alleging deceit was seeking to invalidate the contract. See Kellogg USA, 2010 WL 376326, at *11; Citibank Glob. Markets, Inc., 573 F.3d at 29; Citibank, 21 P.R. Offic. Trans. at 512; Miranda Soto, 9 P.R. Offic. Trans. 628. As Feliciano is only requesting damages for incidental dolo, he insists the law of sophisticated buyer is inapplicable. In the alternative, Feliciano posits that his “education, social background and economic status w[ere] never put into evidence for the district court to consider the degree of his sophistication as a buyer, or the degree in which he relied on the false representations by Rebarber.” Finally, Feliciano avers that there was reasonable reliance and that the district court‘s determination that Feliciano “threw caution to the wind and chose to rely on Rebarber‘s representations . . . rather than insisting on a mechanical inspection” was contrary to the evidence in the record.
First, we acknowledge that most of the cases applying the sophisticated party concept relate to the invalidation of contracts under a theory of serious dolo. See, e.g., Citibank Glob. Mkts., Inc., 573 F.3d at 29. But see Portugués-Santana, 657 F.3d at 62 (rejecting argument in a case of incidental dolo that plaintiff‘s “education and business experience” meant that his reliance on defendants’ assurances was unreasonable not because the plaintiff‘s background was irrelevant, but because defendants’ assurances
Second, we find that Feliciano has failed to put forth evidence that would allow a reasonable factfinder to conclude that he reasonably relied on Rebarber‘s alleged misrepresentations.10 See Portugués-Santana, 657 F.3d at 59 (requiring “the plaintiff‘s reasonable and foreseeable reliance” on a party‘s false representation); see also P.R. Elec. Power Auth., 515 F.3d at 67 (“Puerto Rico law places little weight on a sophisticated and experienced business party‘s assertion of unknowing reliance.“). Feliciano faults the district court for ruling that he was a sophisticated buyer when “[his] education, social background and economic status was [sic] never put into evidence.” Although Feliciano points to gaps in the record about his background, he cannot resist summary judgment by “rest[ing] on mere allegations or denials, but must identify and allege specific facts showing a genuine issue for trial.” Torrech-Hernández v. Gen. Elec. Co., 519 F.3d 41, 47-48 (1st Cir. 2008) (citing Colantuoni v. Alfred Calcagni & Sons, Inc., 44 F.3d 1, 6 (1st Cir. 1994)). He has failed to do so. Setting aside the question of whether Feliciano was a sophisticated buyer per se, we find that there is not sufficient evidence in the record to allow a jury to find reasonable reliance.
Feliciano does not dispute that he was an experienced businessman, who had owned airplanes in the past, and that he hired three experts, including an aviation consultant, to advise him on this deal. To the extent that the district court found this to be dispositive as to whether it was reasonable for Feliciano to rely on Rebarber‘s alleged misrepresentations, we disagree.
When we construe the facts in Feliciano‘s favor, as we must at this stage, his arguments foreclose the possibility that a reasonable factfinder could find in his favor, and he is not entitled to the inferences he seeks based on the evidence in the record. See Pina v. Children‘s Place, 740 F.3d 785, 796 (1st Cir. 2014) (“[A] nonmovant cannot rely merely upon conclusory allegations, improbable inferences, and unsupported speculation.” (internal quotation marks omitted) (quoting Dennis v. Osram Sylvania, Inc., 549 F.3d 851, 855-56 (1st Cir. 2008))). For example, Feliciano posits that because one of his experts advised him to walk away from the deal and he did not, he must have “relied solely on Rebarber‘s warranties.” Appellant‘s Br. 28 (emphasis added). This is not a reasonable inference. “[B]lind faith cannot vitiate the[] opportunity to detect the fraud.” Kennedy v. Josephthal & Co., 814 F.2d 798, 805 (1st Cir. 1987).
While this may not be relevant to a breach of contract claim, given the SPA‘s integration clause, the summary judgment record shows that Feliciano was on notice that Rebarber intended the deal to be “as is” and did not allow for a mechanical inspection of the airplanes. This further confirms that the dolo claim fails for want of reasonable reliance.
If, on the one hand, the executed contract was “as is,” then a reasonable jury would have to conclude that any reliance by Feliciano was not reasonable.11 Feliciano insisted in his deposition that he only conducted partial due diligence related to accounting and a long arm, soft appraisal; but he does not offer any evidence as to why a reasonable factfinder could find his reliance, in lieu of conducting due diligence, to be reasonable, given the circumstances and the stakes involved in the transaction. Feliciano also suggests that it would not have made a difference had his experts conducted due diligence because the information provided about the airplanes was “not true or reliable.” In the same breath, he argues that the airplane logbooks were not reliable because they did not show “entries . . . of any discrepancies or maintenance issues, for a long time . . . in order to conceal that the aircrafts [sic] were not in airworthy condition.” Feliciano‘s conclusion about the unreliability of the logbooks is based entirely on the face of them, and there is no evidence that this information was not available to Feliciano
If, on the other hand, the SPA -- contrary to Rebarber‘s stated intention -- was not “as is,” but contained, instead, an express warranty related to the condition of the assets, then a reasonable jury would here have to conclude that Feliciano did not actually rely on the alleged misrepresentation. Indeed, in this regard, Feliciano has argued that [p]recisely” because he questioned Rebarber‘s alleged representation “that the airplanes were in excellent condition,” “the SPA contain[ed] provisions for Plaintiff Feliciano to recover from Defendant Rebarber any expenses for repairs that Defendant Rebarber should have done before the SPA.” Put otherwise, in this scenario, far from actually relying on a misrepresentation, Feliciano took contractual measures to safeguard against its falsity. Although we leave open the question of whether the deal here was, in fact, “as is,” it is clear enough that, under either circumstance, the dolo claim fails.
That there is no probative evidence indicating Feliciano‘s reasonable reliance does not create a triable issue. In fact, it is precisely because there is no evidence to support Feliciano‘s claim of reasonable reliance that there is not a question for the jury. McCarthy, 56 F.3d at 315 (“As to issues on which the summary judgment target bears the ultimate burden of proof, she cannot rely on an absence of competent evidence . . . .“). Based on the evidence in the record, we conclude that no reasonable jury could rule in Feliciano‘s favor as to the reasonable reliance issue.13
For the reasons explained above, we affirm the district court‘s decision to grant Rebarber‘s motion for summary judgment on the dolo claim.
II. Conclusion
In sum, we hold that the district court erred in concluding that Feliciano did not assert a breach of contract claim and abused its discretion when it evaluated Rebarber‘s motion for summary judgment with respect to the breach of contract claim as if it were a
Affirmed in part, Vacated and Remanded in part.