Mercado v. Banco Popular De Puerto Rico

• Decision Date: 17 April 2019
• Docket Number: Bankruptcy Case No. 15-09902-MCF,Adversary Proceeding No. 17-00286-MCF,BAP NO. PR 18-021
• Citation: 599 B.R. 406
• Parties: Eduardo RIVERA MERCADO, Debtor. Wilfredo Segarra Miranda, Chapter 7 Trustee, Plaintiff-Appellant, v. Banco Popular de Puerto Rico, Defendant-Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

599 B.R. 406

Eduardo RIVERA MERCADO, Debtor.Wilfredo Segarra Miranda, Chapter 7 Trustee, Plaintiff-Appellant,

v.Banco Popular de Puerto Rico, Defendant-Appellee.

BAP NO. PR 18-021

Bankruptcy Case No. 15-09902-MCF

Adversary Proceeding No. 17-00286-MCF

United States Bankruptcy Appellate Panel of the First Circuit.

April 17, 2019

Rafael A. González Valiente, Esq., Santurce, on brief for Plaintiff-Appellant.

Sergio A. Ramírez de Arellano, Esq., on brief for Defendant-Appellee.

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

Cary, U.S. Bankruptcy Appellate Panel Judge.

This appeal concerns the effect of an unrecorded mortgage under Puerto Rico law and, more particularly, whether the bankruptcy court properly denied the chapter 7 trustee's request to avoid an unrecorded mortgage and to preserve the avoided lien for the benefit of the bankruptcy estate (the "Order"). In addition, the bankruptcy court, sua sponte, dismissed the chapter 7 trustee's complaint pursuant to Rule 12(b)(6) "for failure to state plausible claims" under §§ 544 and 551.¹ We conclude that the bankruptcy court did not commit error either by denying the relief sought by the chapter 7 trustee or by dismissing the complaint. For the reasons set forth below, we AFFIRM .

BACKGROUND

The facts relied upon by the bankruptcy court are undisputed.

I. Pre-Petition Events

Eduardo Rivera Mercado (the "Debtor") acquired real property in Orocovis, Puerto Rico (the "Property") in 2002. In 2014, he executed a note in the amount of $ 104,923, and granted a mortgage (the "Mortgage") on the Property in favor of Metro Island Mortgage Inc. ("Metro Island"). Banco Popular de Puerto Rico ("BPPR") is the current holder of the note and Mortgage. Neither Metro Island nor BPPR ever presented the Mortgage to the Puerto Rico Property Registry (the "Property Registry") for recording.

II. The Bankruptcy Filing

The Debtor filed a chapter 7 bankruptcy petition in December 2015. On his schedules, he listed a "50% interest" in the Property (which he valued at $ 136,000) and claimed a homestead exemption under Puerto Rico law of "100% of [the] fair market value" of the Property. He also listed BPPR as holding a claim in the amount of $ 99,926 secured by the Property, and he indicated his intention to retain the Property and "pay pursuant to contract." BPPR filed a proof of claim asserting a secured claim in the amount of $ 99,373.86 based on a "mortgage loan."

The Debtor received a chapter 7 discharge in March 2016. In December 2017 (one month after the Trustee filed the complaint commencing the subject adversary proceeding), the Debtor filed a motion seeking an order compelling the Trustee to abandon the Property, indicating that the Property "serves as collateral over a mortgage loan duly registered in the Property Registry of Puerto Rico," and that there was "no liquidation value" to benefit the estate. No objections were filed, and the bankruptcy court granted the motion on January 4, 2018.²

III. The Adversary Proceeding

A. The Complaint

In November 2017, the Trustee filed a two-count complaint against BPPR. In Count I, the Trustee raised two grounds for avoiding the Mortgage. First, he asserted that the Mortgage, which was not presented to the Property Registry for recording before the bankruptcy filing, was a post-petition transfer of an interest in real property which he could avoid under § 549(a). Alternatively, the Trustee argued that, as the mortgage lien was not properly perfected against the Property as of the date of the Debtor's bankruptcy filing, he was entitled under § 544(a) to avoid the lien "as a hypothetical lien creditor and a bona fide purchaser who perfected his right as of the date of the filing[.]" In Count II, the Trustee asserted that, as the Mortgage was voidable under either § 544 or § 549, the lien was "preserved in favor of the [e]state" under § 551.

B. BPPR's Answer

In its answer, BPPR admitted most of the factual allegations (including that the Mortgage "was never filed before the Property Registry before the filing of the petition"), but denied any allegation that there was a "post-petition transfer," a "lien to be avoided," or an "enforceable mortgage." BPPR also raised numerous affirmative defenses, including that the Debtor's execution of the Mortgage in May 2014 "was not a post-petition transfer" and "did not create a lien that may be avoided." It also asserted as an affirmative defense that the complaint failed to include the Debtor, who had claimed a homestead exemption with respect to the Property, as "an indispensable party." BPPR did not pose an affirmative defense under Rule 12(b)(6) that the complaint failed to state a claim upon which relief can be granted.

C. Motion for Judgment on the Pleadings

In February 2018, the Trustee moved for judgment on the pleadings under Rule 12(c), contending that the relevant facts were uncontested and he was entitled as a matter of law to avoid the unrecorded Mortgage under either § 549 or § 544, and preserve it for the benefit of the estate under § 551. Again, the Trustee asserted two alternative grounds for avoiding the Mortgage. He first argued that, although the Mortgage was never presented to the Property Registry prior to the filing of the petition, it could be presented to the Property Registry "at any time." Therefore, he contended, the Mortgage "represent[ed] a post-petition transfer of property without authorization of the [c]ourt" which he could avoid under § 549. Beyond quoting § 549, the Trustee did not provide any legal support for his argument that the unrecorded Mortgage constituted a post-petition transfer of property of the estate.

In the alternative, the Trustee argued that the unrecorded Mortgage was "unperfected" under Puerto Rico law as of the petition date and, therefore, it was voidable under § 544. In support of this argument, he cited two cases he claimed were "identical" to the present one. First, he cited Segarra v. Banco Popular de P.R. (In re Matienzo Lopez), Adv. Pro. No. 16-00123, Docket No. 42 (Bankr. D.P.R. Aug. 23, 2017) (hereinafter, "Matienzo Lopez"), where the court ruled, without discussion, that the bank's unrecorded mortgage was avoidable under § 544 and preserved in favor of the estate pursuant to § 551. Second, he relied on DeGiacomo v. Traverse (In re Traverse), 753 F.3d 19, 26 (1st Cir. 2014) (hereinafter, " Traverse"), in which the United States Court of Appeals for the First Circuit ruled, in a case that originated in Massachusetts, that a trustee could avoid and preserve a creditor's "unperfected lien" on the debtor's property for the benefit of the estate. As to his cause of action under § 551, the Trustee, again citing Traverse, asserted that he was entitled to preserve the "unrecorded lien" for the benefit of the estate.

Based on the foregoing, the Trustee requested that the bankruptcy court enter a judgment: (1) determining that the Mortgage was an "avoidable transfer" pursuant to §§ 544 and 549; (2) preserving the "mortgage lien" in favor of the estate pursuant to § 551; and (3) granting "any other remedy" the bankruptcy court deemed appropriate.

D. BPPR's Opposition to Motion for Judgment on the Pleadings

BPPR opposed the motion for judgment on the pleadings, arguing that the Trustee's reliance on Traverse was misplaced in light of contrary legal authority. Specifically, BPPR cited Segarra v. Schwarz Reitman (In re Schwarz Reitman), Adv. Pro. No. 15-00020 (MCF), Docket No. 56 (Bankr. D.P.R. Nov. 29, 2016) (hereinafter "Schwarz Reitman"), in which the bankruptcy court ruled that the trustee was "unable to utilize [§§] 544 and 551 [to avoid an unrecorded mortgage in Puerto Rico] because those sections [only] apply when there is [an] unperfected security interest in property," and, under Puerto Rico law, an unrecorded mortgage is a nullity. The Schwarz Reitman court also determined that Traverse was inapplicable because it was based on the effect of an unrecorded mortgage under Massachusetts law. BPPR pointed out that the Trustee "did not acknowledge or distinguish" the court's ruling in Schwarz Reitman.

E. The Order

On June 15, 2018, the bankruptcy court, without a hearing, entered the Order denying the Trustee's request for judgment on the pleadings and sua sponte dismissing the complaint. See Segarra Miranda v. Banco Popular de P.R. (In re Rivera Mercado), 587 B.R. 224, 229 (Bankr. D.P.R. 2018). The bankruptcy court concluded that the unrecorded Mortgage did not constitute a "transfer" which could be avoided and preserved under §§ 544 and 551. The court observed that, under Puerto Rico law, "the recording of a mortgage is a necessary prerequisite to the creation of a valid lien," id. at 227, and "a mortgage is [non]existent unless it is registered." Id. at 225. Therefore, "[a] lender does not have a lien or a security interest over real property unless the mortgage deed is recorded in the Property Registry." Id. at 227. As BPPR did not record the Mortgage in the Property Registry, the court determined, "a pre[-]petition transfer never occurred in its favor." Id. And because the unrecorded Mortgage was not a "transfer" of property under § 101(54),³ the court ruled, the Trustee could not avoid it under § 544 or preserve it for the benefit of the estate under § 551. Id. Thus, not only did the court deny the Trustee's request for judgment on the pleadings under Rule 12(c), it dismissed the complaint "for failure to state plausible claims for relief regarding the avoidance and preservation actions under ... §§ 544 and 551, pursuant to [Rule] 12(b)(6)." Id. at 229.⁴

1. Distinguishing Traverse

In rendering its decision, the bankruptcy court distinguished Traverse from the case before it based on the differences between mortgage law in Puerto Rico and Massachusetts,⁵ stating:

The trustee in Traverse was able to avoid the unrecorded mortgage as a transfer of an interest in real property because under Massachusetts law a mortgage is

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