Soto-Rios v. Banco Popular De Puerto Rico

• Decision Date: 23 November 2011
• Docket Number: No. 10–2270.,10–2270.
• Citation: 662 F.3d 112,66 Collier Bankr.Cas.2d 1083,55 Bankr.Ct.Dec. 199
• Parties: Luis A. SOTO–RIOS; Brenda Tosado–Arbelo, Plaintiffs, Appellants, v. BANCO POPULAR DE PUERTO RICO, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

55 Bankr.Ct.Dec. 199

66 Collier Bankr.Cas.2d 1083

662 F.3d 112

Luis A. SOTO–RIOS; Brenda Tosado–Arbelo, Plaintiffs, Appellants,

v.BANCO POPULAR DE PUERTO RICO, Defendant, Appellee.

No. 10–2270.

United States Court of Appeals, First Circuit.

Heard Sept. 15, 2011.Decided Nov. 23, 2011.

Isabel M. Fullana, with whom Garcia–Arregui & Fullana, P.S.C. was on brief, for appellants.

Lucas A. Córdova–Ayuso, with whom Patrick D. O'Neill and O'Neill & Gilmore, P.S.C. were on brief, for appellee.

Before LIPEZ, RIPPLE,^* and HOWARD, Circuit Judges.HOWARD, Circuit Judge.

Luis Soto–Rios and Brenda Tosado–Arbelo (“debtors”) filed for bankruptcy under Chapter 11, years after they had executed three mortgage deeds in favor of Banco Popular de Puerto Rico. In the midst of the bankruptcy proceedings, the debtors sought to avoid the mortgages, and to prevent any post-petition actions that would perfect them. See 11 U.S.C. §§ 362(a), 544(a), 547(b). On summary judgment, the bankruptcy court rejected the debtors' efforts. When the district court later affirmed this decision, the debtors pursued this appeal before us. We affirm.

I. BACKGROUND

In 2004 and 2005 the debtors executed the three mortgage deeds to secure two loans. The mortgagee Banco Popular, in turn, presented the documents for recording to the Registry of the Property for Puerto Rico (hereinafter, “registry” or “registrar”). Two deeds were presented in October 2004, and the third approximately ten months later in 2005. Due to an administrative backlog, however, the three presented mortgage deeds were still pending recordation when the debtors filed for bankruptcy nearly three years later. ¹

During the bankruptcy proceedings, Banco Popular filed a secured proof of claim regarding the loan debts putatively secured by the three mortgage deeds. In response, the debtors filed an adversary proceeding asserting their right to avoid the mortgages under certain provisions of the Bankruptcy Code, including the automatic stay, the “strong arm” power and the avoidance of preferential transfers.² See 11 U.S.C. §§ 362(a)(5), § 544(a), 547(b). After an exchange of pleadings, the parties agreed that the case could be resolved on summary judgment and subsequently filed competing motions. The bankruptcy court granted Banco Popular's motion and dismissed the debtors' adversary action. In ruling that exceptions to the automatic stay and strong arm power applied, 11 U.S.C. §§ 362(b)(3), 546(b)(1)(A), the court rejected the debtors' argument that, until the deeds were fully recorded, Banco Popular lacked a pre-petition property interest. The bankruptcy court also ruled that the debtors failed to establish the necessary elements of a preferential transfer, 11 U.S.C. §§ 547(b), 547(e)(1)(A). After an unsuccessful appeal to the district court, this appeal followed.

II. STANDARD OF REVIEW AND ISSUES ON APPEAL

Bankruptcy practice encompasses traditional summary judgment standards, as provided under Rule 56 of the Federal Rules of Civil Procedure. See Bank. R. 7056; In re Varrasso, 37 F.3d 760, 762 (1st Cir.1994). Accordingly, summary judgment is warranted only if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); see Varrasso, 37 F.3d at 763. When a bankruptcy court issues summary judgment, the losing party may seek intermediate review by a district court or a bankruptcy appellate panel. See In re Vázquez Laboy, 647 F.3d 367, 373 (1st Cir.2011); see also 28 U.S.C. § 158. With either path, our review focuses on the bankruptcy court's decision, and we do not afford special deference to the intermediate decision. Vázquez Laboy, 647 F.3d at 374; In re Spigel, 260 F.3d 27, 31 (1st Cir.2001). We conduct de novo review of the bankruptcy court's decision. In re Colarusso, 382 F.3d 51, 57–58 (1st Cir.2004).

Before us, the debtors first challenge the bankruptcy court's application of the exceptions to the automatic stay and trustee strong arm power on the sole basis that Banco Popular never obtained the required pre-petition property interest. They contend that because recording is essential to the valid constitution of a mortgage deed under Puerto Rico law, the three deeds evidenced no more than unsecured personal obligations at the time that the bankruptcy petition was filed. The debtors also argue that the bankruptcy court erred in ruling that they failed to establish the elements of a preferential transfer. See 11 U.S.C. § 547(b). We address each argument in turn.

III. GOVERNING LAW AND ANALYSIS

A. Exceptions to Automatic Stay and Strong Arm Power

Resolution of this appeal involves the interplay between and among provisions of the Bankruptcy Code and Puerto Rico law. Certain portions of the Bankruptcy Code serve as the framework for the legal issue, and so we begin our endeavor there. We then will turn to navigate local law. While the path is a bit meandering, in the end the conclusion is clear.

1. Pertinent Bankruptcy Code Provisions

As a familiar bedrock of bankruptcy law, the automatic stay creates “breathing room” for debtors, at least temporarily, by foreclosing creditors from pursuing certain collection efforts against the debtor's assets once a petition for bankruptcy has been filed. 11 U.S.C. § 362(a); In re 229 Main St. Ltd. P'ship, 262 F.3d 1, 3 (1st Cir.2001). The stay bars a variety of creditor activities, including “any act to create, perfect, or enforce any lien against property of the estate.” 11 U.S.C. § 362(a)(4); see also 11 U.S.C. § 362(a)(5). This broad proscription has limits. Pertinent here, section 362(b)(3) provides that the stay does not extend to “any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee's rights and powers are subject to such perfection under section 546(b) of [the Bankruptcy Code]....” Application of this exception to the stay depends upon the existence of three conditions: “there must be (1) an ‘act to perfect’ (2) an ‘interest in property’ (3) under circumstances in which the perfection-authorizing statute fits within the contours of section 546(b) [ ].” 229 Main St., 262 F.3d at 4 (emphasis added).

While section 362(b)(3) limits the automatic stay, its companion statute, section 546(b), limits the debtor's power to avoid statutory liens under the so-called strong arm provision. See id. The instant that a bankruptcy petition is filed, the bankruptcy trustee is vested with the status of a hypothetical bona fide purchaser of real property, and may ordinarily avoid any transfer of the property or obligation of the debtor to the extent allowed under state law. See 11 U.S.C. § 544(a)(3); In re Ryan, 851 F.2d 502, 505 (1st Cir.1988); see also 11 U.S.C. § 544(a)(1) (trustee deemed to have status of hypothetical judicial lien holder). Section 546(b)(1)(A), however, staves off this pervasive power when “generally applicable law ... permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection.” 11 U.S.C. § 546(b)(1)(A) (emphasis added); see also 11 U.S.C. § 546(b)(1)(B). For a creditor to enjoy this haven, “(1) the creditor must act pursuant to a law of general applicability; (2) that law must allow the creditor to perfect an interest in property; and (3) such perfection must be effective against previously acquired rights in the property.” 229 Main St., 262 F.3d at 10 (emphasis added). The gist of this exception “is that the filing of a bankruptcy petition does not prevent the holder of an interest in property from perfecting its interest if, absent the bankruptcy filing, the interest holder could have perfected its interest against an entity acquiring rights in the property before the date of perfection.” Id. at 12 (quotations omitted).

As earlier noted, the debtors' challenge to the application of sections 362(b) and 546(b)(1)(A) is solely based on the existence of a single element common to both exceptions—whether Banco Popular had acquired a pre-petition “interest in property.” See 229 Main St., 262 F.3d at 9 (“the simultaneous postpetition creation and perfection of a lien may come within the pertinent exception to the automatic stay so long as the creditor holds a valid prepetition interest in the property”). We limit our review accordingly.

2. Meaning of “ Interest in Property ”

Local law ordinarily dictates the existence and extent of an entity's interest in property. See 229 Main St., 262 F.3d at 6; Butner v. United States, 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); see also In re The Ground Round, Inc., 482 F.3d 15, 17 (1st Cir.2007). We emphasize, however, that “interest in property” under sections 362(b)(3) and 546(b)(1)(A) is a federal statutory term, and “the meaning of [language under the Bankruptcy Code] is a matter of federal law”. See The Ground Round, Inc., 482 F.3d at 17. Thus, our primary focus is whether Banco Popular gained a pre-petition property interest in substance and scope that is superior to that of a bona fide purchaser or a judicial lien holder in accord with sections 362(b)(3) and 546(b)(1)(A) and as informed by the laws of Puerto Rico. We thoroughly analyzed the meaning of the federal term “interest in property” under the exceptions at issue here in 229 Main Street, 262 F.3d at 5–7. Therefore, we briefly review that decision before proceeding further.

In 229 Main Street, the Commonwealth of Massachusetts sought relief from the automatic stay so that it could establish and secure a lien for monies that it had expended in the pre-petition environmental cleanup of the debtor's property. Id. at 3. Under Massachusetts environmental law, a debt comes into being once the Commonwealth incurs the cleanup expenses, which simultaneously ripens into a lien and becomes perfected when a claim statement is recorded, registered or filed. See id. at 4, 7. The Commonwealth had notified the property...