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In re Miranda

United States Bankruptcy Appellate Panel of the First Circuit

April 17, 2019

EDUARDO RIVERA MERCADO, Debtor.
v.
BANCO POPULAR DE PUERTO RICO, Defendant-Appellee. WILFREDO SEGARRA MIRANDA, Chapter 7 Trustee, Plaintiff-Appellant, Bankruptcy Case No. 15-09902-MCF

          Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Mildred Cabán, U.S. Bankruptcy Judge)

          Rafael A. González Valiente, Esq., 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 "represented] 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 enforceable between the mortgagee and mortgagor, which is not the case in Puerto Rico. In re Harbour House Operating Corp., 26 B.R. 324, 331 (Bankr. D. Mass. 1982) ("[I]n Massachusetts, an unrecorded mortgage, which as between the parties would be a valid equitable interest, is invalid against third parties who do not have actual notice."). Although an unrecorded mortgage is valid between the mortgagor and mortgagee, it is not enforceable against third parties. In re Bower, 2010 WL 4023396 at 4, 2010 Bankr. LEXIS 3641 at 12[ ] ("Unrecorded mortgages are only enforceable against the granter, his or her heirs, devisees, and persons with actual knowledge of the mortgage."). Generally, a mortgage gives a mortgagee title to the real property and the mortgagor retains possessory rights, causing a transfer of interest in property. Eaton v. Fed. Nat'l Mortg. Ass'n, 462 Mass. 569, 969 N.E.2d 1118, 1124 (2012). The trustee in Traverse was able to avoid the unrecorded mortgage as a transfer because under Massachusetts law an unrecorded mortgage is enforceable between the debtor and the mortgagee.
In contrast, under Puerto Rico law, an unrecorded mortgage is unenforceable among the debtor, the mortgagee and third parties. In a lien theory jurisdiction, such as Puerto Rico, the mortgagee does not obtain title transfer of the real property. In fact, the lender must record the mortgage deed in the Property Registry to acquire a security interest over the real property. P.R. Laws Ann. tit.
30 § 2607, as superseded by Act No. 210 of December 8, 2015, Article 57. If there is a default by the mortgagor, then the mortgagee may foreclose on the real property in a judicial forum as a result of its recorded lien. P.R. Laws Ann. tit. 30 § 2701, as superseded by Act No. 210 of December 8, 2015, Article 94. However, an unperfected mortgage deed does not entitle the mortgagee the right to foreclose on the property in Puerto Rico. An unrecorded mortgage deed is not considered a lien or an unperfected security interest in real property in Puerto Rico-unlike Massachusetts law, which grounds the ruling in Traverse.

In re Rivera Mercado, 587 B.R. at 228 (footnote omitted).

         Having made this distinction, the bankruptcy court concluded:

The Trustee in the instant case cannot gain superior rights than [BPPR] who failed to record its mortgage deed in the Puerto Rico Property Registry. The mortgage lien is nonexistent under local law and consequently cannot be avoided, pursuant to 11 U.S.C. § 544. Likewise, the Trustee is unable to preserve the unrecorded mortgage for the benefit of the estate under 11 U.S.C. § 551 because a transfer of property did not occur.

Id. at 229 (emphasis added) (footnote omitted).

         The bankruptcy court also quickly disposed of the Trustee's alternative argument that he could avoid the Mortgage as a post-petition transfer under § 549, ruling that "[t]his section has no bearing on the Trustee's argument because the mortgage deed in this case was executed prepetition." Id. at 229 n.5.

         2. The Court's Ruling

         The court then ruled:

The Court denies the Trustee's request for judgment on the pleadings (Docket No. 10), under Fed.R.Civ.P. 12(c) because in Puerto Rico an unrecorded mortgage does not cause transfer of [an] interest in real property. Accordingly, the action is dismissed for failure to state plausible claims for relief regarding the avoidance and preservation actions under . . . §§ 544 and 551, pursuant to Fed.R.Civ.P. 12(b)(6).

Id. at 229.

         F. Judgment

         Thereafter, on June 26, 2018, the bankruptcy court entered a separate judgment "dismissing the adversary proceeding." The Trustee did not seek to vacate, or request reconsideration of, the bankruptcy court's sua sponte dismissal of the complaint.

         IV.The ...


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