Oriental Bank v. Builders Holding Co. (In re Builders Holding Co.)
| Decision Date | 28 July 2022 |
| Docket Number | 21-1299 |
| Citation | 43 F.4th 1 |
| Parties | IN RE: BUILDERS HOLDING CO., CORP., Debtor. Oriental Bank, Appellant, v. Builders Holding Co., Corp. ; MAPFRE PRAICO Insurance Company; Endurance Assurance Corporation; Puerto Rico Financing Authority ; Noreen Wiscovitch-Rentas, Trustee, Appellees. |
| Court | U.S. Court of Appeals — First Circuit |
Cristina A. Fernández Rodríguez, with whom MCD Law LLC was on brief, for appellant.
José A. Sánchez Girona, with whom Saldaña, Carvajal & Vélez-Rivé, PSC was on brief, for appellees MAPFRE PRAICO Insurance Company and Endurance Assurance Corporation.
Jeannette López de Victoria, with whom Luis R. Ortiz Segura and Oliveras & Ortiz, PSC were on brief, for appellee Puerto Rico Financing Authority.
Before Barron, Chief Judge, Howard and Gelpí, Circuit Judges.
Builders Holding Company ("Builders"),1 a general contractor, filed for bankruptcy in the United States Bankruptcy Court for the District of Puerto Rico in August 2016. Builders then filed an adverse action against the Puerto Rico Infrastructure Financing Authority ("Financing Authority"), which had hired Builders for construction projects, and Oriental Bank, with which Builders had a deposit account. Builders's surety, MAPFRE PRAICO Insurance Company and Endurance Assurance Corporation ("MAPFRE"), intervened in that adverse action and filed its own claims against Oriental Bank. At the same time, Oriental Bank filed counterclaims in the adverse action against MAPFRE and Builders. All the claims in the adverse action pertained to funds -- totaling more than $450,000 -- that the Financing Authority had directly deposited in Builders's deposit account with Oriental Bank and that Oriental Bank had taken from that account to set off a debt that Builders owed to it.
The Bankruptcy Court granted summary judgment against Oriental Bank on all the claims asserted against it.2 Oriental Bank appealed that ruling to the District Court, which affirmed. We vacate and remand the grant of summary judgment against Oriental Bank on all the claims.
Builders offers general-contractor services for construction projects. It entered into an indemnification agreement with MAPFRE on August 5, 2010.
The agreement provided that MAPFRE would issue surety bonds to guarantee the payment of labor and materials for Builders's construction projects and that Builders would hold MAPFRE harmless and indemnify MAPFRE against any and all loss from the surety bonds that it issued. The agreement further provided that Builders would assign "all payments received for or on account of any contract" to a trust that would "inure to the benefit of [the] surety for any liability or loss it may have or sustain under any bond" (capitalization adjusted).
MAPFRE registered the agreement as a financing statement at the Puerto Rico Department of State pursuant to Puerto Rico law. The parties do not dispute that MAPFRE's registration of the agreement perfected MAPFRE's security interest in Builders's accounts receivable.
A number of years passed, and, on November 14, 2013, Builders executed a Cash Management Agreement with Oriental Bank. The agreement enabled Builders to use an existing charge account at Oriental Bank as its operational account for business income and expenses ("Deposit Account").
On December 26, 2014, Builders opened two lines of credit for business operational expenses with Oriental Bank pursuant to a Line of Credit Agreement. One line of credit was for $675,000. The other was for $500,000.
The lines of credit were secured by Builders's accounts receivable and Deposit Account.3 Oriental Bank recorded its security interest in this collateral on December 30, 2014.
In September 2015, the Financing Authority contracted with Builders for construction projects in the town of Cabo Rojo. MAPFRE acted as surety for this contract and issued performance and payment bonds. The bonds had a maximum of $3,070,480. The Financing Authority was named as obligee on the bonds and Builders was named as the principal.
Builders's lines of credit with Oriental Bank matured approximately three months later. Thus, as of December 26, 2015, Builders was required to repay Oriental Bank the entirety of the sum due on the lines of credit, which was more than $450,000.
Then, on February 16, 2016, MAPFRE sent a letter to the Financing Authority. The letter informed the Financing Authority that MAPFRE had received claims from contractors on Builders's projects for payment for the cost of labor or materials under the surety bonds that MAPFRE had issued for Builders's projects with the Commonwealth. The letter further informed the Financing Authority that, per the terms of MAPFRE's indemnification agreement with Builders, payments from the Financing Authority for the costs of Builders's construction projects in Cabo Rojo were to be sent to MAPFRE and made payable jointly to Builders and MAPFRE. Approximately one week later, Builders also informed the Financing Authority that it should send all future payments for Builders's work on the construction projects in Cabo Rojo to MAPFRE and that the payments should be made out jointly to MAPFRE and Builders.
Notwithstanding these instructions, the Financing Authority on May 23, 2016, deposited $537,924.18 directly into Builders's Deposit Account at Oriental Bank. The Financing Authority did not in doing so make any payment to MAPFRE. At the time of the Financing Authority's deposit of the more than $500,000 into Builders's Deposit Account, Builders had yet to repay in full the amount that it owed to Oriental Bank on its lines of credit.
Under Puerto Rico law, a bank with "a security interest in a deposit account perfected by control ... may apply the balance of the deposit account to the obligation secured by the deposit account." P.R. Laws Ann. tit. 19, § 2367(a)(4). Acting pursuant to that provision, Oriental Bank applied $464,757.60 from the balance deposited into Builders's Deposit Account against the outstanding balance on Builders's lines of credit.
The following day, the Financing Authority unsuccessfully attempted to reverse the deposit that it had made to Builders's Deposit Account with Oriental Bank. Moreover, the Financing Authority sent Oriental Bank a letter the following week that explained its error in not making any payment to MAPFRE and instead making the deposit directly into Builders's Deposit Account. Oriental Bank did not return the money that it had taken from Builders's Deposit Account to use as a set-off in connection with the debt that Builders owed it.
The Financing Authority followed up with another letter to Oriental Bank on December 12, 2017, in which the Financing Authority again requested that the funds in question be turned over to MAPFRE. Oriental Bank again did not do so.
MAPFRE sent its own letter to Oriental Bank on July 1, 2016, in which it requested that Oriental Bank send to MAPFRE the money that it had taken from Builders's Deposit Account as a set-off of Builders's debt to Oriental Bank. Builders sent a similar letter of its own. Oriental Bank did not take the action requested in either letter.
Builders filed for bankruptcy under Chapter 11 of the Bankruptcy Code on August 20, 2016. Builders then brought an adverse action against the Financing Authority and Oriental Bank on January 12, 2017.
The complaint set forth four claims under §§ 542 and 543 of the Bankruptcy Code. Those provisions of the Code require all the debtor's property to be delivered to the trustee.4
Counts One and Two of Builders's complaint allege, respectively, that under §§ 542 and 543, the Financing Authority is required to turn over the funds Builders alleges that the Financing Authority still owes it for the construction projects in Cabo Rojo. Builders alleges in those two counts that the Financing Authority did not satisfy its obligations to Builders by directly depositing funds into Builders's Deposit Account because Builders had instructed the Financing Authority to send those funds directly to MAPFRE. Counts Four and Five allege, under §§ 542 and 543 of the Bankruptcy Code, that Oriental Bank is required to return the funds that it took from Builders's Deposit Account as a set-off, so that those funds can be delivered to MAPFRE, which the complaint further alleges has a senior claim as to those funds. Count Three of the complaint alleges that "[u]nder Puerto Rico [l]aw[,] the wrongly made payment does not extinguish the obligation" that the Financing Authority has under its construction contract with Builders for the construction projects in Cabo Rojo, such that the Financing Authority still owes Builders a debt under that contract that must be paid.
Oriental Bank moved to dismiss Builders's complaint under Federal Rule of Civil Procedure 12(b)(6) on February 6, 2017. The Bankruptcy Court denied the motion.
On April 3, 2017, MAPFRE intervened in Builders's adverse action, and on May 26, 2017, MAPFRE filed its own complaint against Builders, the Financing Authority, and Oriental Bank. MAPFRE requested in that complaint, among other things, that Oriental Bank turn over the funds that had been deposited by the Financing Authority in Builders's Deposit Account.
Following the Bankruptcy Court's denial of Oriental Bank's motion to dismiss, Oriental Bank answered Builders's complaint on June 2, 2017. As part of the answer, Oriental Bank brought a counterclaim against Builders, in which Oriental Bank alleged that, under Puerto Rico law, it had a valid, enforceable lien against Builders's accounts receivable and Deposit Account and thus that it was entitled under 11 U.S.C. § 553 to set off the amount that Builders owed to it on Builders's lines of credit.5
That same day, Oriental Bank answered MAPFRE's intervenor complaint and brought a counterclaim against MAPFRE. Oriental Bank's counterclaim alleged that Oriental Bank's secured interest in Builders's accounts receivable and Deposit Account was senior to that of MAPFRE, such that Oriental Bank was...
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