800 F.

2d 3

Tito OLIVERAS and Henry Compta, Plaintiffs, Appellants,

v.
Sergio MIRANDA LOPO, et al., Defendants, Appellees.
No. 85-2030.

United States Court of Appeals,

First Circuit.
Sept. 2, 1986.

Ronald L. Rosenbaum, Hato Rey, P.R., for plaintiffs, appellants.

George Lopez Keelan, Hato Rey, P.R., with whom Luis R. Torres, San
Juan, P.R., was on brief, for defendants, appellees.
Before COFFIN and BOWNES, Circuit Judges, and MALETZ, * Senior
Judge.
BOWNES, Circuit Judge.

This is an appeal by Tito Oliveras and Henry Compta from a dismissal of their
diversity action against Sergio Miranda Lopo, Maria Palacias and Advanced
Computer Services, Inc. (Advanced), on the grounds of res judicata and
collateral estoppel. A detailed exposition of the facts leading to the dismissal is
necessary.

I. THE PUERTO RICO CASE

2

On October 4, 1977, appellants entered into a written contract with Sergio

Miranda Lopo for the formation and operation of a computer service business.
The contract provided in pertinent part as follows: appellants would form a
corporation to be known as Advanced Computer Services, Inc., and "invest" in
it office space, a computer and certain office equipment and furniture;
appellants agreed to advance, with certain limitations, the money necessary for
operation, which was to be repaid out of profits; Miranda would get 50% of the
profits; appellants agreed to sell and Miranda agreed to buy shares of stock in
Advanced to the total amount of the original investment, which was valued at

$142,457; Miranda had a three-year option in which to purchase 49% of the

stock and an option, after the expiration of the three years, to purchase an
additional 31% of the stock of Advanced. An addendum was added to the
contract on September 4, 1979, modifying the original contract and transferring
one-third of the stock of Advanced to Miranda.
3

On November 3, 1982, a complaint was brought in the Superior Court of Puerto

Rico, San Juan Part, by Miranda, his wife, and their conjugal partnership
against appellants and Advanced. The complaint alleged, as a first cause of
action, that appellants had refused to deliver the certificates of stock and share
the profits as agreed under the contract. The second cause of action alleged
failure of appellants to carry out their corporate duties and unjust enrichment.

A settlement agreement was entered into between the parties on February 15,
1983. On March 30, 1983, the parties moved for a voluntary dismissal of the
suit stating:

2. That, as part of this settlement, the parties are mutually released, exonerated
and freed of all responsibility related to Advanced Computer Services, Inc.,
except as stipulated in the stock purchase and sale documents of Advanced
Computer Services, Inc., dated February 15, 1983, and the executed mortgage
deeds on personal property and mortgage on real property, related with same.

3. That this release also applies to Computer Maintenance Corporation.

The Superior Court of Puerto Rico issued a judgment on April 12, 1983,
stating: "Judgment of Dismissal because of Voluntary Dismissal of Action,
pursuant to the parties' Motion of March 30, 1983, which is made a part of this
Judgment, is hereby entered."

The pertinent paragraphs of the settlement agreement provided as follows:

2. Appellants transferred to Miranda all of their shares and rights in Advanced;

all assets were listed in Annex A.

10

3. Advanced agreed to pay promptly all obligations listed in Annex B. The

buyers agreed to send sellers evidence of payment of the obligations on or
before their due dates. The sellers certified that the list of obligations was
complete and correct as of February 14, 1983.

11

The certification was followed by these sentences:If within a term of TWO (2)

11

The certification was followed by these sentences:If within a term of TWO (2)
years there arises any pending obligation that belonged to the Corporation prior
to February 1983, the Corporation shall have the right to deduct the amount of
said obligation from the amount agreed on paragraph 5. Should such an
incident happen, the BUYER shall advise the SELLING party in writing, and
the latter shall have the right to answer said claim.

12

5. A debt of $46,413.90 owed to Computer Maintenance Corp., a company

owned by appellants, was waived provided that Advanced pay to appellants the
sum of $30,000 within two years. This debt was secured by a mortgage on real
estate in the amount of $27,500 and a chattel mortgage in the amount of $5,000.

13

8. It was agreed that immediately on the execution of the agreement the parties
would stipulate to the dismissal of the Superior Court action.

14

At the end of the list of accounts receivable in Annex A, there is the following:
"Note: Amount in 'Over 90' column may be uncollectible."

15

On December 14, 1983, Miranda wrote appellants stating that he was deducting
$19,902.55 from the $30,000 owed under the settlement agreement and that the
debt was, therefore, reduced to $10,097.45. The claimed justification for the
reduction was $1,687.63 in undisclosed liabilities of Advanced and $18,214.92
in "non-existing" accounts receivable. Appellants responded on January 3,
1984. The pertinent portion of their letter states:

16
ACCOUNTS
PAYABALE: According to the terms of paragraph 3 that guarantees
the amounts to be paid and if it is documented that they are preexisting debts, they
must be accepted.
17
VACATIONS:
Vacations owed at the signing of the contract were then current
exactly as it appears in line 16, Annex B. Claims are not valid.1
18
ACCOUNTS
RECEIVABLE: It was never represented that the amounts in column
"over 90" were collectible. The note at the bottom of Annex A so expresses and the
exclusion of all warranties in paragraph 1. No claim is justified.
II. THE FEDERAL CASE
19

On August 8, 1984, appellants filed a complaint in the federal district court.

Jurisdiction was based on diversity of citizenship. The pertinent allegations are:
that the parties entered into an agreement in settlement of litigation whereby
Advanced would pay appellants $30,000; that appellees advised appellants of
their intent to deduct $19,902.55 from the $30,000 in violation of the litigation

settlement agreement; and that this constituted an anticipatory breach of the

settlement agreement. The relief appellants asked was payment of the $30,000
due under the settlement agreement and rescission of it, vesting ownership of
Advanced in appellants.
20

In their answer, appellees claimed that the action was barred by the doctrine of
res judicata and that appellant's remedy was to execute on the Commonwealth
Court judgment. On June 25, 1985, appellants amended their complaint to state
that no payment had been made on February 15, 1985, as required under the
settlement agreement so that the anticipatory breach alleged in the original
complaint had become an actual breach.

III. RES JUDICATA

21

The district court dismissed the action "on grounds of res judicata and collateral
estoppel" and this appeal ensued. In our discussion, we will use the term res
judicata to mean "claim preclusion" and collateral estoppel to mean "issue
preclusion." See Fiumara v. Fireman's Fund Insurance Companies, 746 F.2d 87,
90 n. 1 (1st Cir.1984); Lovely v. Laliberte, 498 F.2d 1261, 1263 (1st Cir.) cert.
denied, 419 U.S. 1038, 95 S.Ct. 526, 42 L.Ed.2d 316 (1974).

22

It is now well established that local law should be used in deciding the
preclusive effect to be given a local judgment in a federal court. See, e.g., Migra
v. Warren City School District Board of Education, 465 U.S. 75, 81, 104 S.Ct.
892, 896, 79 L.Ed.2d 56 (1984); Kremer v. Chemical Construction Corp., 456
U.S. 461, 466, 102 S.Ct. 1883, 1889, 72 L.Ed.2d 262 (1982); Allen v.
McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 415, 66 L.Ed.2d 308 (1980); Capraro
v. Tilcon Gammino, Inc., 751 F.2d 56, 58 (1st Cir.1985) (per curiam); Fiumara
v. Fireman's Fund Insurance Companies, 746 F.2d at 91; Roy v. City of
Augusta, Maine, 712 F.2d 1517, 1520 (1st Cir.1983).

23

In Puerto Rico, the doctrine of res judicata is part of the statutory law. P.R.
Laws Ann. tit. 31, Sec. 3343 (1968) provides in pertinent part:

Sec. 3343. Destruction of presumptions; res judicata

24
25

Presumptions established by law may be destroyed by proof to the contrary,

except in the cases in which it is expressly prohibited.

26

Only a judgment obtained in a suit for revision shall be effective against the
presumption of the truth of the res adjudicata.

27

In order that the presumption of the res adjudicata may be valid in another suit,
it is necessary that, between the case decided by the sentence and that in which
the same is invoked, there be the most perfect identity between the things,
causes, and persons of the litigants, and their capacity as such.

28

The conclusive effect to be given a judgment of the kind in issue here is found
in P.R. Laws Ann. tit. 32, Sec. 1793 (1968):

29

2. In other cases the judgment or order is, in respect to the matter directly
adjudged, conclusive between the parties and their successors in interest by title
subsequent to the commencement of the action or special proceeding, litigating
for the same thing under the same title and in the same capacity, provided they
have notice, actual or constructive, of the pendency of the action or proceeding.

30

The Supreme Court of Puerto Rico held in Lausell Marxuach v. Diaz de Yanez,
103 P.R.Dec. 533, 535 (1975), that the doctrine of res judicata was part of the
civil law of Puerto Rico.

31

Our res judicata analysis focuses on the pleadings brought in the Superior
Court of Puerto Rico and the subsequent complaint filed in the federal district
court. Suit was brought in the Puerto Rico Court on the basis of a violation of
the October 1977 contract. The federal action was based on a violation of the
February 1983 settlement agreement. The federal complaint refers specifically
to this contract; it does not invoke or even refer to the original contract. This
was a new and different cause of action.

32

The application of the doctrine of res judicata was discussed by the Supreme
Court of Puerto Rico in Mercado Riera v. Mercado Riera, 100 P.R.R. 939, 950
(1972). The court quoted Millan v. Caribe Motors Corp., 83 P.R.R. 474, 487
(1961):

33has been said that the best test for determining whether a former judgment is a bar
It
to a subsequent action is to inquire whether the same evidence will sustain both
actions. If different evidence is required to sustain the different actions, then the
causes of action are different and the former judgment is no bar to litigate the other
cause of action. Freeman [Law of Judgments, 5th ed.], Sec. 687.
34

Applying this test, we think it clear that the same evidence will not sustain both
actions. The basic issue in the federal action is the meaning to be given the
settlement agreement in light of the intention of the parties. The Superior Court
action would have required entirely different evidence.

35

Moreover, Advanced and appellants had been sued by Miranda in the

Commonwealth action; in the federal action, appellants have brought suit
against Miranda and Advanced. The relief sought in the two actions is also
different. In the Superior Court action, Miranda asked that defendants be
ordered to render accounts, deliver the shares of stock and pay the damages
caused. In the federal action, appellants asked that the $30,000 allegedly due
under the settlement be paid, and for rescission of the settlement agreement
reverting ownership of Advanced in them. While these facts do not, by
themselves, establish the existence of different claims, they highlight what the
pleadings clearly show: the federal case and the Superior Court case center on
different disputes calling for separate and distinct evidence.

36

In Futura Development Corporation v. Centex Corporation, 761 F.2d 33, 42-46

(1st Cir.) cert. denied, --- U.S. ----, 106 S.Ct. 147, 88 L.Ed.2d 121 (1985), we
analyzed the law in Puerto Rico on res judicata and held that under the facts of
that case, the doctrine did apply. We found it difficult in Futura to find that a
fraud claim in the federal court was distinct from that of an earlier Superior
Court action because the federal action, except for the fraud claim, tracked the
language of the complaint in the Superior Court. Id. at 45. A further factor in
applying res judicata was that the damages sought in the federal action were in
exactly the same amount as the damages previously sought in the Superior
Court. Id. The contrast between the two sets of pleadings in Futura and those
now before us is evident.

37

There is, however, one aspect of Puerto Rico law, not discussed below or
briefed by the parties, that requires comment. P.R. Laws Ann. tit. 31, Sec. 4827
(1968) provides: "A compromise has, with regard to the parties, the same
authority as res adjudicata; but summary proceedings shall not be proper except
when the fulfilment of a judicial compromise is in question." Compromise is
defined in P.R. Laws Ann. tit. 31, Sec. 4821 (1968): "A compromise is a
contract by which each of the parties in interest, by giving, promising, or
retaining something, avoids the provocation of a suit, or terminates one that has
already been instituted."

38

The Puerto Rico Supreme Court has allowed an aggrieved party to sue for
rescission of a compromise agreement. Alvarado v. Bonilla, 86 P.R.R. 464
(1962); Riera v. Macias de Riera, 42 P.R.R. 560 (1931).

39

In Alvarado, one of the issues in a complicated real estate case was whether the
plaintiff could sue for the original debt after a compromise contract had been
breached by the defendant. Alvarado, 86 P.R.R. at 475. In discussing this issue,
the court held:

40 said [compromise] contract had been violated, the creditor could sue for the
Once
amount of the original debt. This is so, because the noncompliance with or breach of
the terms of the contract of compromise, even supposing that there was a novation,
produced its resolution and consequently it ceased to exist. Riera v. Macias de Riera,
42 P.R.R. 560; Heirs of Escalera v. Barreto, 81 P.R.R. 580.
41

Id. at 475.

42

In the second case, Riera v. Macias de Riera, 42 P.R.R. 560, Riera loaned
Macias de Riera $50,000, which was secured by various stock certificates.
Later, Macias de Riera offered two compromise proposals. Riera accepted the
first one which was mainly a stock transfer. After the defendant refused to
deliver the stock, Riera sued for the original debt of $50,000. After determining
that a compromise contract had been entered into and that Macias de Riera did
not perform on the compromise for a sufficient reason, the Puerto Rico
Supreme Court held:

43

In accordance with the above provisions, as the plaintiff had fulfilled his
obligation embodied in the compromise agreement, and as the debtor had failed
to perform hers, the former was entitled to consider said agreement as
rescinded.... Therefore, Don Olegario Riera was entitled in this case to treat the
compromise agreement as rescinded and to bring his action for the recovery of
the $50,000. Once such agreement is rescinded, the compromise ceases to exist
and the novation which would have arisen therefrom had the agreement
subsisted must also fail.

44

Id. at 571.

45

Neither case discussed the effect to be given Sec. 4827. We are not sure,
therefore, whether Sec. 4827 applies to the case before us. We are sure,
however, that Sec. 4827 aside, the Puerto Rico doctrine of res judicata does not
bar the federal action. Because the applicability of Sec. 4827 has not been
briefed by the parties--and because the district court is familiar with Puerto
Rico law--we think it best that the district court address the issue on remand
before we reach a conclusion on the question.

IV. COLLATERAL ESTOPPEL

46

Nor is collateral estoppel (issue preclusion) a bar. As the United States

Supreme Court teaches, the defense of collateral estoppel should not apply
unless there has been a "full and fair opportunity" to litigate the issue in a prior

hearing. Allen v. McCurry, 449 U.S. at 95, 101 S.Ct. at 415; Montana v. United
States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979); BlonderTongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313,
328, 91 S.Ct. 1434, 1442, 28 L.Ed.2d 788 (1971). There never was a "full and
fair opportunity" to litigate the interpretation of the compromise agreement
since the dispute over its interpretation did not arise until long after the
Commonwealth case had been settled.
47

We also note in passing that neither the absention doctrine of Railroad

Commission v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941),
nor of Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971),
applies here.

48

Although it may have been preferable for the parties to return to the Puerto
Rico Superior Court, there can be no doubt that the district court has diversity
jurisdiction over the cause of action and the parties. Unless the statute giving a
compromise agreement res judicata effect dictates otherwise, this case must be
tried in the federal district court. On remand, the district court should first
determine the effect of P.R. Laws Ann. tit. 31, Sec. 4827.

49

Reversed and Remanded.

Of the United States Court of International Trade, sitting by designation

Included in the amount for undisclosed liabilities was $699.80 for vacation due
an employee. This footnote is ours