In re: Colonial Mortgage Bankers Corp.

• Citation: 186 F.3d 46
• Decision Date: 11 June 1999
• Docket Number: TRUSTE,LOPEZ-STUBB,No. 98-2273,A,98-2273
• Parties: (1st Cir. 1999) IN RE: COLONIAL MORTGAGE BANKERS CORPORATION, Debtor. CREFISA INCORPORATED, Plaintiff, Appellee, v. WASHINGTON MUTUAL BANK, F.A., Defendant, Appellant. HANSppellant. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 46

186 F.3d 46 (1st Cir. 1999)

IN RE: COLONIAL MORTGAGE BANKERS CORPORATION, Debtor.

CREFISA INCORPORATED, Plaintiff, Appellee, v. WASHINGTON MUTUAL BANK, F.A., Defendant, Appellant.

HANS LOPEZ-STUBBE, TRUSTEE, Appellant.

No. 98-2273.

United States Court of Appeals for the First Circuit.

Heard June 11, 1999.

Decided Aug. 2, 1999

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

Ivan R. Fernandez-Vallejo with whom Rodriguez & Fernandez, Jorge Souss and Goldman Antonetti & Cordova, P.S.C. were on brief for appellants.

Luis R. Montanez-Aviles with whom Montanez & Alicea Law Offices was on brief for appellee.

Before Selya, Boudin and Lipez, Circuit Judges.

BOUDIN, Circuit Judge.

This appeal is taken from a decision of the United States District Court for the District of Puerto Rico reversing a decision of the federal bankruptcy court. In substance, the district court sustained a claim by Crefisa, Inc., requiring the bankruptcy trustee of Colonial Mortgage Bankers Corporation ("Colonial") to pay over approximately $557,000 comprising security for a note held by Crefisa. The background events are somewhat complicated.

In the 1980s, Colonial was engaged in the business of servicing mortgages. One of its clients was the Bowery Savings Bank ("Bowery") (Washington Mutual Bank has now been substituted for Bowery but it simplifies matters to refer only to Bowery). By agreement, Colonial collected mortgage payments due to Bowery and deposited them into Colonial accounts--in trust for Bowery--in two different Puerto Rico banks: Financiero and Banco Santander. The president of Colonial was Milton J. Rua.

In 1980, Rua began a set of transactions that led to the present case by requesting a $500,000 loan from Caguas Central Federal Savings Bank ("Caguas"), a bank with which Colonial, Rua, or both had had past dealings. The loan to Rua, which may have been irregular, involved Rua's execution on November 26, 1986, of a promissory note due on demand for $500,000 in favor of Caguas. On November 28, 1986, the loan was completed through the following transactions:

Caguas made a $500,000 deposit representing the loan into Rua's personal checking account in the bank;

Rua opened a new savings account at the bank called a Golden Passbook account with a $500,000 check drawn on his checking account;

Rua made a written pledge of the Golden Passbook account as collateral to secure his $500,000 promissory note and any other current or future debts to Caguas.

The Golden Passbook account--the treasure trove in this case--was opened as a personal savings account of Rua, but the passbook bore the legend "Colonial Mortgage Bank, B.S.B., Corp." (the "B.S.B." apparently standing for Bowery Savings Bank) and the passbook was later shown to Bowery auditors to persuade them that the account held funds in Colonial's name belonging to Bowery. There is some indication that Rua later sought to transfer ownership of the Golden Passbook account to Colonial but that Caguas rejected this effort on the ground that it did not maintain savings accounts for corporations.

In December 1987, Colonial filed for bankruptcy giving rise to the present case. Puerto Rico financial authorities later concluded that Colonial and Rua had diverted millions of dollars from trust accounts that Colonial had managed and had channeled the money into accounts at the Caguas bank where the funds were expended for the benefit of Colonial and Rua. In all events, in the same month as the Colonial bankruptcy, Bowery brought suit in the district court seeking to recover from Colonial, Caguas, Rua and Rua's wife about $1,000,000 in diverted Bowery funds. Bowery Savings Bank v. Colonial Mortgage Bankers Corp., 87-874-RLA (D.P.R.) In April 1988, the bankruptcy court entered an order at the behest of Colonial's bankruptcy trustee, Hans Lopez-Stubbe, requiring Caguas to turn over the funds in the Golden Passbook account to the trustee.¹ The trustee's theory, it appears, was that the funds, being held in the Golden Passbook account with a passbook bearing Colonial's name, properly belonged to Colonial's estate. In November 1989, Caguas paid over to the trustee approximately $557,000 pursuant to the bankruptcy court order, the amount representing the original principal of $500,000 plus accumulated interest.

In 1990, Caguas failed, and the Resolution Trust Corporation ("RTC") was appointed, initially as conservator for Caguas and later as its receiver. Thereafter, the RTC on December 21, 1990, endorsed Rua's promissory note in favor of Caguas to Banco Santander. The note was later re-endorsed by Banco Santander to Crefisa, which is apparently a wholly owned subsidiary of Banco Santander. The endorsement was part of a multi-million dollar sale of Caguas' assets by the RTC to Banco Santander pursuant to a purchase and sale agreement. But the question whether the terms of the purchase and sale agreement are properly considered in this case is one of the contested issues on this appeal.

On October 6, 1991, Crefisa brought an adversary proceeding in the Colonial bankruptcy case asserting a security interest in the Golden Passbook account; the claim was based on the pledge of the Golden Passbook account that Rua had made to Caguas on November 28, 1986, to secure his promissory note. Since the funds in the Golden Passbook account had been turned over to the trustee pursuant to the bankruptcy court's earlier order, the relief sought by Crefisa was an order from the bankruptcy court requiring the trustee to transfer the proceeds to Crefisa.

The bankruptcy trustee, supported by Bowery, opposed Crefisa's request that the funds derived from the Golden Passbook account be transferred to Crefisa and filed a discovery request to identify the basis for Crefisa's claim to a security interest in the account. In April 1994, Crefisa produced Rua's promissory note to Caguas, whose markings showed that it had been endorsed successively by the RTC to Banco Santander and by Banco Santander to Crefisa. The trustee then moved to dismiss Crefisa's adversary proceeding or for summary judgment; he asserted that Crefisa had not established any interest in the Golden Passbook account since the promissory note made no reference to any security and Crefisa had provided no other evidence to support its claim to the security.

After additional filings but no further pertinent evidence from Crefisa, the bankruptcy court on January 25, 1995, issued a decision in favor of the trustee and dismissed Crefisa's complaint. In a nutshell, the bankruptcy court ruled that the promissory note's transfer was governed by Puerto Rico's Negotiable Instruments Law,² which did not provide for automatic transfer of the security for an assigned note, rather than by the Civil Code, P.R. Laws Ann. tit. 31, § 1 et seq.; and even if the Civil Code were applicable to the transfer, its requirements for an automatic transfer of a security interest had not been met as to third parties, see P.R. Laws Ann. tit. 31, § 3941. Since the promissory note made no mention of security, Crefisa had not shown that it had obtained Caguas' security interest in the account. The bankruptcy court entered judgment against Crefisa, and Crefisa appealed to the district court on March 3, 1995.

Three days later, on March 6, 1995, Crefisa filed a motion in the bankruptcy court to amend the judgment, tendering portions of the purchase and sale agreement dated December 21, 1990, between the RTC and Banco Santander for the sale of the Caguas assets to Banco Santander. The bankruptcy judge later denied the motion on the ground that it lacked jurisdiction because of the then-pending Crefisa appeal to the district court. The trustee also moved in the district court to strike the agreement from the record on appeal, but in various orders in the spring of 1996, the district court denied the motion to strike and asked Crefisa to submit a complete copy of the purchase and sale document. Crefisa filings in June 1996 and November 1996 purported to comply with this request and to add further information about the RTC-Banco Santander transaction.

In July 1996, the trustee and Bowery moved to "dismiss the appeal" to the district court, essentially arguing the merits of the appeal and defending the bankruptcy court's decision. On August 27, 1996, Crefisa opposed the motion but also argued the merits, urging that the bankruptcy judge had erred. On September 14, 1998, the district court released a decision and judgment reversing the bankruptcy court and determining that Crefisa was entitled to claim a security interest in the Golden Passbook account.

In its decision, the district court found that the purchase and sale agreement between RTC and Banco Santander confirmed the intent of the parties to effect a transfer of the security interest. Alternatively, the court ruled that Caguas' security interest in the Golden Passbook account had been transferred by operation of law under the Civil Code by virtue of transfer of Rua's promissory note from Caguas, through the RTC and Banco Santander, to Crefisa; in the court's view the Negotiable Instruments Law governed the transfer of the note and the Civil Code provided for an automatic transfer of the security interest.

The trustee and Bowery now appeal, asking that we reinstate the bankruptcy court's ruling and confirm the trustee's right to the Golden Passbook account proceeds. Their first argument is that as a procedural matter, the district court had no business considering the purchase and sale agreement because it had not been offered in evidence in the bankruptcy court; and their second argument is that the district court's alternative reliance on the Civil Code to effect an automatic transfer of the security misreads the substantive law. (A third argument merely repeats fragments of the first two.)

On the procedural issue, we sympathize with the district court's desire to know the full...