Oriental Bank v. Builders Holding Co.

• Decision Date: 04 March 2021
• Docket Number: Civil No. 20-1645 (FAB)
• Parties: ORIENTAL BANK, Appellant, v. BUILDERS HOLDING CO. CORP., et al., Appellees.
• Court: U.S. District Court — District of Puerto Rico

626 B.R. 1

ORIENTAL BANK, Appellant,

v.BUILDERS HOLDING CO. CORP., et al., Appellees.

Civil No. 20-1645 (FAB)

United States District Court, D. Puerto Rico.

Signed March 4, 2021

Cristina A. Fernandez-Rodriguez, San Juan, PR, for Appellant.

Javier Vilarino-Santiago, Vilarino & Associates LLC, San Juan, PR, for Appellees.

OPINION AND ORDER

BESOSA, District Judge.

Debtor Builders Holding Company ("Builders") commenced an adversary proceeding against appellant Oriental Bank, seeking to rescind an erroneous payment of $537,924.13. Adv. Pro. 17-012. The United States Bankruptcy Court for the District of Puerto Rico ("bankruptcy court") ruled in favor of appellees Builders, the Puerto Rico Financing Authority ("Financing Authority"), and Mapfre Praico Insurance Company and Endurance Assurance Corporation ("MAPFRE") (collectively, "appellees"). See In re Builders Holding Co., 617 B.R. 414 (Bankr. D.P.R. 2020) (Godoy, Bankr. J.)).¹ Oriental Bank requests that the Court reverse this decision. (Case No. 20-1645, Docket No. 7.) For the reasons set forth below, the disposition of the bankruptcy court is AFFIRMED.

I. Background

This litigation arises from a $537,924.18 payment. The facts are uncontested. In re Builders Holding Co., 617 B.R. 414, 418 (Bankr. D.P.R. 2020) (Godoy, Bankr. J.).

A. The 2010 Agreement of Indemnity

Builders is a general contractor with offices in Puerto Rico and Texas. (Bank. Pet. 16-6643, Docket No. 1 at p. 86.)² On August 5, 2010, MAPFRE and Builders entered into an Agreement of Indemnity. In re Builders Holding Co., 617 B.R. at 418. The parties registered this agreement with the Puerto Rico Department of State on August 30, 2010. In re Builders Holding Co., 617 B.R. at 419.

Pursuant to the Agreement of Indemnity, MAPFRE issued surety bonds to guarantee the payment of labor and materials. (Adv. Pro. 17-012, Docket No. 92 at p. 3.) In turn, Builders agreed to hold MAPFRE harmless and indemnify it "from any and all other such losses and expenses" associated with the suretyship. Id. The agreement is secured by "all moneys" received by Builders from third-party entities. Id. at pp. 4-5. These payments constitute a "trust" to compensate MAPFRE "for any liability or loss it may have or sustain under any BOND." Id.

B. The 2014 Line of Credit

Builders "receive[d] payments and deposits related to its regular business operation" at Oriental Bank. Id. at 419. On December 26, 2014, it obtained two lines of credit for $675,000 and $500,000, respectively. (Adv. Pro. 17-012, Docket No. 111, Ex. 1 at p. 3.) Builders represented to Oriental Bank that it held:

full title of ownership over all of their assets which insure the obligations of [Builders] under the Extensions of Credit. The assets of the Parties are not affected by any mortgage, pledge, surrender or lien, excepting those allowed by the provisions of this Contract and/or all other Loan Documents.

Id. at p. 11. The collateral for the lines of credit include, inter alia, "all of [Builder's] accounts receivables and all type[s] of profit." (Adv. Pro. 17-012, Docket No. 11, Ex. 6 at p. 2.)

The line of credit contract makes no reference to the 2010 Agreement of Indemnity. Indeed, Builders disavowed the:

existence of any mortgage, pledge, surrender, or any other lien or preferential agreement over any nature on the Collateral, except for ... deposits, pledges, and lines established or constituted to cover bonds for bids, contracts (except contracts for payment of monies), legal obligations, public services, appeals, indemnities, compliance or payment, or other similar obligations that arise in the ordinary course of the Debtor's business.

Id. at pp. 14-15. Accordingly, Builders secured consecutive contracts with the same collateral: payments for general contractor services served as "trust funds" for the Agreement of Indemnity, and as security for the lines of credit. (Adv. Pro. 17-012, Docket No. 92 at p. 3.)

Oriental Bank retained the right to setoff "all deposits (general or special, in installments or on demand, provisional or final) against any obligation by the Debtor." Id. at p. 18. Builders and Oriental Bank registered the line of credit contract with the Puerto Rico Department of State. In re Builders Holding Co., 617 B.R. at 420.

C. The Cabo Rojo Construction Project, Default, and Payment to the Wrong Recipient

On September 30, 2015, the Financing Authority commissioned Builders to complete a construction project in Cabo Rojo, Puerto Rico (the "Cabo Rojo project"). In re Builders Holding Co., 617 B.R. at 420. MAPFRE issued bonds for this endeavor in accordance with the Agreement of Indemnity. Id. The bonds guaranteed the acquisition of labor and materials "up to a limit of $3,070,480." Id. Builders experienced a liquidity deficit, however, requiring MAPFRE to pay $1,069,849.13 in accordance with its suretyship obligations. (Adv. Pro 17-012, Docket No. 92, Ex. 1 at p. 3.) Because MAPFRE possessed a contractual and "equitable right of subordination," Builders forfeited "the entire balance on the Project." Id.

In February, 2016, the Financing Authority received notice regarding MAPFRE's right of subordination. In re Builders Holding Co., 617 B.R. at 421. MAPFRE provided a copy of the indemnity agreement, requesting that "all further payments in connection with the [Cabo Rojo] Project, including all progress payments ... be made payable jointly to [Builders] and MAPFRE." (Adv. Pro 17-012, Docket No. 92, Ex. 7 at p. 1.) Builders also instructed the Financing Authority to remit payment directly to MAPFRE. (Adv. Pro 17-012, Docket No. 74.)

The Financing Authority received the payment instructions, but "by mistake and inadvertence," it "wrongfully made an ACH transfer of $537,924.19" to Builders’ account at Oriental Bank on May 23, 2016. (Adv. Pro. 17-012, Docket No. 93 at p. 3.) Oriental Bank immediately setoff $464,757.90 from this amount "to pay off the outstanding line of credit." Id.³

A week after the deposit, the Financial Authority requested that Oriental Bank return the $537,924.19 because the "electronic payment was made by mistake." In re Builders Holding Co., 617 B.R. at 422. MAPFRE also mailed a letter to Oriental Bank, demanding the "return of its money." Id. Oriental Bank refused to return the deposit, however, asserting that the "Puerto Rico Commercial Transactions Act (the "PRCTA") expressly protects the right of Oriental to set-off against secured party." (Adv. Pro. 17-012, Docket No. 92, Ex. 12 at p. 1.) MAPFRE rejoined, stating that "Oriental is not legally entitled to retain such funds" because MAPFRE previously "perfected a first priority lien over [payments]" for general contracting services. (Adv. Pro. 10-012, Docket No. 92, Ex. 14 at p. 2.)

D. The Bankruptcy Petition and Subsequent Litigation

Builders filed a Chapter 11 bankruptcy petition on August 20, 2016. (Bankr. Pet. 16-6643 (EAG), Docket No. 1.) The bankruptcy court ordered the Financing Authority to "make all [prospective] payments for work-in-progress [regarding the Cabo Rojo project] ... directly to MAPFRE Insurance Company (the "Surety")." Id., Docket No. 84 at p. 1. MAPFRE, Oriental Bank, the Financing Authority, and Builders continued to dispute the pre-petition deposit of $537,924.19, however, resulting in an adversary proceeding.

Builders filed the complaint on January 12, 2017, asserting five causes of action pursuant to the Bankruptcy Code and Puerto Rico law. (Adv. Pro. 07-012, Docket No. 1.) Counts one and two allege that the Financing Authority is liable for the mistaken payment pursuant to 11 U.S.C. sections 542 and 543, respectively. Id. at p. 4-5; see 11 U.S.C. §§ 542 ("Turnover of Property to the Estate") & 543 ("Turnover of Property by a Custodian"). Count three purports that the Financing Authority remains responsible for the progress payment pursuant to the Puerto Rico doctrine in which those "who wrongly pay[ ], pay[ ] twice." Id. at p. 5. Lastly, counts four and five claim that Oriental Bank is liable pursuant to 11 U.S.C. sections 542 and 543, respectively. Id. at pp. 6-8. MAPFRE filed an intervenor's complaint, alleging that "if Builder's prevails in its causes of action against Oriental and/or [the Financing Authority] in the case, all proceeds will be subject to the Surety's first-priority and shall be immediately turned over by Builders to Surety." (Adv. Pro. 17-012, Docket No. 39 at p. 7.)

Builders, MAPFRE and the Financing Authority moved for summary judgment pursuant to Federal Rule of Civil Procedure 56 (" Rule 56"). Id., Docket Nos. 73, 74, 75, 79 & 92.⁴ The appellees prevailed. In re Builders Holding Co., 617 B.R. 414. Accordingly, the bankruptcy court ordered Oriental Bank "to turn over to MAPFRE and the chapter 7 trustee, jointly, the money it setoff from the debtor's bank account." Id. at 428-29. Oriental Bank moved for reconsideration. In Re Builders Holding Co., Adv. Pro. 17-012, 2020 WL 6538587, 2020 Bankr. LEXIS 3122 (Bankr. D.P.R. Nov. 5, 2020). The bankruptcy court denied this motion, emphasizing that "the error in payment by the Financing Authority into the debtor's account at Oriental Bank was the dispositive issue in this case." Id. 2020 WL 6538587, at *2, 2020 Bankr. LEXIS 3122, at *5-6.

II. Jurisdiction and Appellate Review

Federal courts are courts of limited jurisdiction. Destek Grp. v. State of N.H. Pub. Utils. Comm'n, 318 F.3d 32, 38 (1st Cir. 2003) ; Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) ("The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute."). Jurisdiction to adjudicate this action derives from 28 U.S.C. § 158 (a). On appeal, this Court may affirm, modify, or reverse a bankruptcy court's judgment, or remand with instructions for further proceedings. Fed. R. Bankr. P. 8013 ; see, e.g., HSBC Bank USA v. Bank of N.Y. Mellon Tr. Co., 646 F.3d 90, 94 (1st Cir. 2011) ("Finding the phrase ambiguous, we remanded to the bankruptcy court...