Fonseca v. Gov't Emps. Ass'n (In re Fonseca)

• Decision Date: 24 December 2015
• Docket Number: BAP NO. PR 15–033,Bankruptcy Case No. 12–06148–MCF,Adversary Proceeding No. 13–00184–MCF
• Citation: 542 B.R. 628
• Parties: Rafael Velez Fonseca, Debtor. Rafael Velez Fonseca, Plaintiff–Appellant, v. Government Employees Association (AEELA), a/k/a Asociación de Empleados del Estado Libre Asociado de Puerto Rico, Defendant–Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

542 B.R. 628

Rafael Velez Fonseca, Debtor.Rafael Velez Fonseca, Plaintiff–Appellant,

v.Government Employees Association (AEELA), a/k/a Asociación de Empleados del Estado Libre Asociado de Puerto Rico, Defendant–Appellee.

BAP NO. PR 15–033

Bankruptcy Case No. 12–06148–MCF

Adversary Proceeding No. 13–00184–MCF

United States Bankruptcy Appellate Panel of the First Circuit.

December 24, 2015

Carlos C. Alsina–Batista, Esq. and Edgardo Veguilla–González, Esq., on brief for Appellant.

Javier Vilariño Santiago, Esq., and Rosario Vidal–Arbona, Esq., on brief for Appellee.

Before Feeney, Deasy, and Cary, United States Bankruptcy Appellate Panel Judges.

Deasy, U.S. Bankruptcy Appellate Panel Judge.

Rafael Velez Fonseca (the "Debtor") appeals from the bankruptcy court's May 7, 2015 Opinion and Order granting the motion for summary judgment filed by Government Employees Association, a/k/a Asociación de Empleados del Estado Libre Asociado de Puerto Rico ("AEELA"), and denying the Debtor's cross-motion for summary judgment, on the Debtor's complaint against AEELA for alleged violations of the discharge injunction imposed by § 524(a).¹ For the reasons set forth below, we AFFIRM.

BACKGROUND²

AEELA is a "non-profit savings and loan association" established by Puerto Rico Law No. 133 of June 28, 1966, known as the "Puerto Rico Commonwealth Employees Association Act," P.R. Laws Ann. tit. 3, § 862, et seq. (the "Act"). Asociación de Empleados del Estado Libre Asociado de Puerto Rico v. Unión Internacional de Trabajadores de la Industria de Automóviles, Aeroespacio e Implementos Agrícolas, 559 F.3d 44, 46 n. 2 (1st Cir.2009). The purpose of the Act is to stimulate savings among, establish insurance plans for, and make loans to government employees. See P.R. Laws Ann. tit. 3, § 862b ; see also Barrios–Velázquez v. Asociación de Empleados del Estado Libre Asociado de Puerto Rico, 892 F.Supp. 42, 44 (D.P.R.1995), aff'd, 84 F.3d 487 (1st Cir.1996) ; Ortiz Vega v. Asociación de Empleados del Estado Libre Asociado de Puerto Rico (In re Ortiz Vega), 75 B.R. 858, 860 (Bankr.D.P.R.1987). AEELA is "an entity governed by its own Board of Directors, which is in turn elected by delegates who are themselves elected representatives of the membership at large." Barrios–Velázquez, 892 F.Supp. at 44. "AEELA is not an agency, department or instrumentality of the Government of Puerto Rico." Barrios–Velázquez, 84 F.3d at 491.

The Act requires all permanent government employees to be members of AEELA, and mandates a 3% deduction from all members' salaries to be placed into a savings and loan fund. See P.R. Laws Ann. tit. 3, § 862c and 862g. AEELA is authorized to grant loans to its members from the savings and loan fund under unique favorable terms with competitive rates. See P.R. Laws Ann. tit. 3, § 862f.

The Debtor was a government employee and member of AEELA from 1986 until he retired in December 2012. In May and June of 2012, the Debtor signed two promissory notes for loans from AEELA.³

On August 3, 2012, the Debtor filed a chapter 7 petition. On his Schedule B, the Debtor listed $18,457.76 in his savings and dividends accounts with AEELA as part of his personal property. On Schedule D, he listed AEELA as having a claim in the amount of $27,400.64, which was partially secured by the savings and dividends accounts at AEELA and was partially unsecured in the amount of $8,942.88. On Schedule F, the Debtor listed a revolving credit account with AEELA as an unsecured non-priority debt in the amount of $1,086.00. AEELA neither filed a proof of claim nor objected to the Debtor's discharge or to the dischargeability of any specific debt. At some point, the parties agreed that the funds in the Debtor's savings and dividends accounts with AEELA served as collateral for the loans provided by AEELA. Thus, with the Debtor's consent, AEELA collected the $18,457.76 from the savings and dividends accounts as partial payment for its claims.

In September 2012, the Debtor filed a petition for retirement, and his retirement became official in December 2012. In the meantime, in November 2012, the bankruptcy court entered an order discharging the Debtor, and closed the case.

On January 9, 2013, AEELA issued a letter to the Municipality of Caguas: (1) requesting the balance of the Debtor's accumulated vacation and sick leave;⁴ (2) indicating the Debtor had a pending debt balance of $7,611.28; (3) stating no payment or deduction of any kind should be processed until authorized by the bankruptcy court; and (4) indicating the letter was for "interagency purposes ... in accordance with the statutory lien established" and it should not "be deemed as a collection procedure against the [Debtor]."⁵ In its response, the Municipality of Caguas certified that the Debtor had a balance of 40.87 days of accumulated vacation leave in excess of 13 days and 99.75 days of accumulated sick leave in excess of 8 days.⁶

On February 6, 2013, AEELA issued a second letter to the Municipality of Caguas stating that the bankruptcy case had concluded, and, therefore, bankruptcy court authorization was not needed to withhold the $7,611.28 owed to AEELA from the liquidation of the Debtor's accumulated vacation and sick leave. AEELA did not send any written communication directly to the Debtor giving notice of its intent to collect the $7,611.28. As of the date of the filing of this appeal, neither AEELA nor the Debtor received any money relating to the accumulated leave.

On May 22, 2013, the Debtor asked the bankruptcy court to reopen his bankruptcy case in order to file a complaint against AEELA for alleged violations of the discharge injunction. Although AEELA opposed the request, the bankruptcy court reopened the case on July 8, 2013.

The Debtor then filed a complaint against AEELA seeking damages for alleged violations of the discharge injunction based on the two letters AEELA sent to the Municipality of Caguas, which the Debtor claimed were acts to collect on a pre-petition debt that had been discharged in his chapter 7 case. In its answer, AEELA admitted it sent the two letters to the Municipality, but denied that its actions violated the discharge injunction.

Thereafter, AEELA filed a motion for summary judgment, in which it argued that it did not violate the discharge injunction because it sent the letters in question to the Municipality, as required under state law after a member has retired, and not to the Debtor in an attempt to collect a debt from him personally. It also asserted that its claim was secured by a statutory lien that rode through the bankruptcy court unaffected. According to AEELA, the accumulated leave was one of various guarantees that secured the loans it granted to the Debtor, and the statutory lien was perfected when the loans were granted. Accordingly, AEELA argued, although the discharge eliminated "in personam" liability against the Debtor, it did not affect AEELA's right to proceed "in rem" against its collateral, which included the lump sum payment for the accumulated leave by operation of local law. AEELA acknowledged, however, that it was only entitled to payment for pre-petition accumulated leave; payment for any post-petition leave belonged to the Debtor.

The Debtor filed an opposition to AEELA's motion and a cross-motion for summary judgment. The Debtor argued that the two letters AEELA sent to the Municipality of Caguas violated the discharge injunction because AEELA knew of the discharge order and was trying to collect a pre-petition debt that had been discharged. Although the Debtor acknowledged that the letters were not sent to him personally, he contended that AEELA's actions prevented him from collecting monies to which he was entitled, i.e., payment for his accumulated leave. The Debtor also acknowledged AEELA's statutory lien on his savings and dividends accounts, but argued there was no statutory lien encumbering his accumulated leave because there was no such lien at the time of his bankruptcy filing. According to the Debtor, AEELA's statutory lien on the accumulated leave did not arise until after his retirement in December 2012, and because the discharge order had already entered at the time of his retirement, there was no existing personal debt to which the lien could attach. Thus, the Debtor contended, once AEELA collected the $18,457.76 in his savings and dividends accounts, the remaining balance did not have any collateral to secure it and was subject to discharge pursuant to § 524.

The bankruptcy court held a hearing on the cross-motions for summary judgment, and, on May 7, 2015, it issued an opinion and order granting AEELA's motion for summary judgment and denying the Debtor's cross-motion for summary judgment. See In re Velez Fonseca, supra. In reaching its decision, the bankruptcy court examined the applicable Puerto Rico statutes, and concluded AEELA had a statutory lien which arose at the moment the Debtor obtained the loans from AEELA. The bankruptcy court also determined AEELA's statutory lien attached not only to the Debtor's savings and dividends, but also to all credits, deposits, or surplus held by the government, including the Debtor's accumulated vacation and sick leave. The bankruptcy court concluded, therefore, as follows:

Since AEELA has a valid statutory lien that secures the loans provided to the Plaintiff, it is allowed to proceed against the collateral to collect on its claim up to the amount of collateral available. The two letters sent by AEELA to the Municipality of Caguas clearly stated that they were not an attempt to collect on plaintiffs' [sic] personal debts but to collect against the collateral "in rem." The fact that AEELA had notice of the entry of discharge is inconsequential since it would not bar AEELA from acting as it did. Therefore, AEELA's actions did not violate the discharge injunction and it may proceed "in rem" against the collateral that secures its debts but limited to the amounts of its collateral since Plaintiff

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