WISCOVITCH RENTAS v. DORAL FINANCIAL CORPORATION et al

OCR transcription for search; preserved printed pages are authoritative

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO

In re:
SAMUEL LOPEZ PABON, : Case No. 03-00477 (ESL)

Debtor : Chapter 7

NOREEN WISCOVITCH RENTAS, as
Trustee for the estate of
SAMUEL LOPEZ PABON

Plaintiff

2

Vv. : Adv. No. 05-00197

DORAL FINANCIAL CORPORATION, i
r

LED & ENTERED»

Defendants

U.S. BANKRUPTCY COURT

DECISION AND ORDER SAN JUAN, PUERTO RICO
This case is before the Court upon plaintiff’s motion for
summary judgment and a cross motion for summary judgment and the
opposition thereto by Doral Financial Corporation (“Doral”). In the
present case, the trustee, Noreen Wiscovitch Rentas, filed an
adversary proceeding seeking to avoid a lien over debtor’s real

estate property (docket #1).

I. Procedural Background

The debtor filed the petition for bankruptcy on January 22,
2003 (docket #1, legal Case 03-00477). On March 4, 2004, the debtor
and Doral filed an stipulation in which, if the debtor failed to
comply with the mortgage payments and with the post-petition
arrears, then the stay would be lifted automatically (docket #76,

1

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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legal case). Doral filed a motion requesting the lift of the
automatic stay on May 20, 2004, asserting that debtor failed to
comply with the stipulation (docket #81, legal case). Then, on July
1, 2004, the Court entered an order grating the request (docket
#83, legal case). On September 1, 2005, the trustee filed the
instant complaint (docket #1, adversary proceeding) and on October
9, 2005, Doral filed an answer to the complaint (docket #5). On
October 13, 2005, the court entered an order setting the pre-trial
hearing (docket #6). The parties filed the joint pre-trial report
on December 5, 2005 (docket #10). Then, on February 23, 2009, the
trustee filed a motion for summary judgment (docket #18) and on
March 12, 2009, Doral filed a cross motion for summary judgment and
an opposition to plaintiff’s motion for summary judgment (docket
#26).

IT. Arguments by the Parties

A. Trustee

The trustee asserts that the undisputed facts of the case are:
that Doral filed Proof of Claim #10 as a secured claim in the
amount of $65,238.12; that on November 8, 1994, the debtor and his
former spouse, executed a Promisory Note in favor of First
Financial Caribbean for the original principal amount of
$105,800.00; that Doral is the current holder of said note; that on
November 8, 1994, the debtor and his former spouse, by Public Deed
786, executed in San Juan, Puerto Rico, before Notary Public Luis

A. Archilla Diaz, a mortgage encumbering certain property located

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at Hato Puerco Ward of the Municipality of Loiza, Puerto Rico, as

guarantee of the promissory note; that said property is duly
registered at page 143 of volume 70 of Loiza, Property number
2,659, Registry of the Property of Carolina, Third Section; that

Public Deed 786 was presented for recording in the Registry of the

Property of Carolina, Third Section, on January 8, 1994, at entry
175 of Book 18 (before, entry 58 of Book 101) of the Diary of

Operations of said Registry of the Property; that on July 1, 2004,

the Court granted Doral relief from stay to foreclose the property;

that on February 25, 2005, the Registrar notified that the Mortgage

Deed was defective and unrecordable as presented; that later, the

Mortgage Deed was withdrawn from the Registry on April 28, 2005,

and finally that on August 25, 2005, the mortgage was presented
again for recording.

The trustee argues that in order for the mortgage to he
perfected, Article 188 of the Puerto Rico Mortgage Law requires
that the same be recorded at the designated Registry of Property.
The trustee asserts that First Financial Caribbean presented the
mortgage document for recording at the Property Registry and was
pending inscription pre-petition. Then, Doral sought relief from
stay which was granted. Notwithstanding, the document was not
recorded and was pending "Calificacion" or what is also know as
"Bitacora". After Doral obtained relief from stay, the Registrar of
Property notified a defect on February 28, 2005, which impeded the

recording of (1) a will, which created a property interest in favor

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of Ernest George Vater Soukop; (2) the sale and purchase deed in
favor of the Debtor and his former spouse, Luz Delia Rodriguez

Gomez; (3) a mortgage in favor of First Financial Caribbean, which
Doral now holds the right to said mortgage. The trustee also

asserts that on April 28, 2006, after the notification of the

defect, all of the documents were withdrawn from the registry by
the notary, 59 days after notified of the defect. Then, the three

documents were presented again for recording on August 25, 2005,

119 days after withdrawing the document from the Registry of

Property.

The trustee contends that under Article 69 of the Puerto Rico
Mortgage Law, the Notary has only 60 days to correct the defect and
in this case the notary did not correct them and re-filed the
mortgage 119 days after the expiration period. She also contends
that under § 72 of the Puerto Rico Mortgage Law, if the defects are
corrected after the expiration of the cautionary notice, a new
presentation shall be made which shall become effective on the date
of the new entry. The trustee asserts that to her knowledge there
is no indication that Doral requested a reconsideration of the
Registrar's calification of the document. Thus, the trustee's
position is that the re-filing of the mortgage after the time frame
provided by Article 69, created a new entry. Hence, a new date for
the recording of the mortgage. This new date was after the
bankruptcy had been filed. Thus, the trustee concludes that Doral

lost its possible pre-petition lien holder position, that would

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have made Doral's mortgage retroactive had Doral acted timely and

now the trustee is a superior lien holder than Doral.

The trustee also asserts that Doral's motion for relief from
stay was sought to foreclose on an allegedly perfected mortgage and
not to perfect an unperfected lien. The trustee further argues that
allowing the perfection of the mortgage post-petition, would affect
the unsecured creditors in this case and that if Doral is to be
considered a secured creditor, it would receive payment in full and
the general unsecured creditors, would receive a lower pro-rata
share in a final distribution.

Finally, the trustee argues that in the alternative, to allow
Doral to perfect its lien post-petition, may be consider a post-
petition transfer of property of the estate also avoidable by the
trustee under 11 U.S.C. § 549.

B. Doral

Doral asserts that its mortgage rights were protected by the
Registry of Property as of the commencement of the case because as
of the filing date, the debtor and his former wife’s deed of
ownership of the Loiza property, as well as Doral’s mortgage were
presented for recordation at the Registry of Property. Doral
asserts that under Puerto Rico Mortgage Law, both deeds had a
protected rank at the Registry of Property because the Registry of
Property works on a historical, chronological manner. Doral
concludes that as a result of such system, no other party such as

a bona fide purchaser or judgment lien creditor could acquire a

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superior right over the Loiza property.

On the other hand, Doral asserts that during the pendency of
the bankruptcy case, the Court granted Doral relief from the
automatic stay on July 1, 2004, while Debtor was still in Chapter
11. Doral asserts that the relief from stay requested was not
exclusively to execute the mortgage and foreclose the property. It
asserts that because the Court granted the lift of stay, Doral is
relieve from the Trustee’s claims that it violated the automatic
stay.

Doral argues that according to the Registrar, the mortgage was
not defective, but on the contrary, the defect was in a document
executed and presented prior to Doral’s mortgage deed. On February
28, 2005, the Registrar of Property notified the following problems
with the three deeds pending recordation: (1) a will, which created
a property interest in favor of Ernest George Vater Soukoup; (2)
the sale and purchase deed in favor of the Debtor and her former
spouse, Luz Delia Rodriguez Gémez; (3) the Mortgage Deed in favor
of First Financial Caribbean (now Doral). Doral contends that the
real problem was with the “tracto” or debtor’s ownership of the
real property, not Doral’s Mortgage Deed.

Doral asserts that on April 28, 2005, the automatic stay was
no longer applicable to Doral and that all three documents
previously presented for recordation at the Registry, were
withdrawn from the Registry of Property to prevent the loss of the

stamps and vouchers attached to each of the deeds. Doral asserts

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that the rights of all parties to the Loiza property were not
affected because it appears from the Registry Certification
attached by the Trustee, that no documents or transactions by third
parties were presented subsequently at the Registry of Property.
Then, on August 25, 2005, all three documents were again presented
in the same order for recordation at the Registry of Property.

Doral contends that the new presentation at Registry of
Property of the three deeds is not an unauthorized transfer of
property of the estate avoidable under 11 U.S.C. § 549. First,
because there is no “transfer” of property of the estate as defined
in § 101(54), which includes “creation of a lien” and because the
lien was created prior to the filing of the petition, and that the
perfection was made after the commencement of the case. Secondly,
because the withdrawal of the deeds from the Registry of Property
and their new presentation on August 25, 2005, were authorized
under § 362(d).

Doral contends that it would be inequitable to hold that the
refiling of the deeds by the Trustee was authorized, and that
Doral’s refiling was not. Finally, Doral argues that the refiling
of the deeds would preserve Doral’s rights which existed at the
time of the filing of the petition and prior to the finding of
defects in the Trustee’s title and that there has not been any
improvement of position vis-a-vis the estate or creditors
postpetition.

TIT. Discussion

A. Summary Judgment Standard

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Under Federal Rule of Civil Procedure 56(c), made applicable
in bankruptcy by Federal Rule of Bankruptcy Procedure 7056, summary
judgment is available “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as

a matter of law.” Fed. R. Civ. P. 56(c); Celotex Corporation v.

Catrett, 477 U.S. 317 (1986) (citing Anderson v. Liberty Lobby,

inc., 477 U.S. 242, 250 (1986)). As to issues on which the movant,
at trial, would be compelled to carry the burden of proof, it must
identify those portions of the pleadings which it believes
demonstrates that there is no genuine issue of material fact. In

re Edgardo Ryan Rijos & Julia E. Cruz Nieves v. Banco Bilbao

Vizcaya & Citibank (In re Rijos), 263 B.R. 382, 388 (B.A.P. lst

Cir. 2001). A fact is deemed "material" if it potentially could

affect the outcome of the suit. Cortes-Irizarry v. Corporacién

Insular, 111 F.3d 184, 187 (lst Cir. 1997). Moreover, there will
only be a "genuine" or "trial worthy" issue as to such a "material
fact," "if a reasonable fact-finder, examining the evidence and
drawing all reasonable inferences helpful to the party resisting
summary judgment, could resolve the dispute in that party's favor."
id. The Court must view the evidence in a light most favorable to

the nonmoving party. In re Rijos, 263 B.R. 382, at 388. Therefore,

summary judgment is “inappropriate if inferences are necessary for

the judgment and those inferences are not mandated by the record.”

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id.

B. Applicable Law

A trustee may invalidate unperfected security interests

pursuant to 11 U.S.C. § 544(a) (3). In re Sullivan, 387 B.R. 353,

357 (lst Cir. BAP, 2008); In re Garrido Jimenez, 370 B.R. 878, 881
(lst Cir. BAP, 2007).

1. The Automatic Stay

The automatic stay provision is one of the fundamental debtor
protections in the Bankruptcy Code. It gives the debtor a
“breathing spell” from creditors and it stops all collection
efforts, all harassment, and all foreclosure actions. H.R.Rep. No.
95-595, 95th Cong. Ist Sess. 340-342 (1977); S. Rep. No.989, 95%
Cong., 2d Sess. 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787,
9840, 6296-97. “It allows the debtor to attempt a repayment or
reorganization plan or simply to be relieved of the financial
pressures that drove him into bankruptcy.” Id.

The automatic stay specifically includes “any act to create,
perfect, or enforce any lien against property of the estate.” 11
U.S.C. § 362(a) (4). The automatic stay also prohibits “any act to
create, perfect, or enforce against property of the debtor any lien
to the extent that such lien secures a claim that arose before the
commencement of the case . . .” 11 U.S.C. § 362(a) (5).

Under Section 362(d) upon request of a party in interest, the
Court may terminate, annul, modify, or condition the automatic

stay. The stay is a fundamental protection for all parties affected

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by the filing of a petition in bankruptcy, and “it should not be

dismantled without good reason.” Soares v. Brockton Credit Union

(In re Soares), 107 F.3d 969 (1st Cir.1997). Furthermore,

“Because a section 362 stay freezes in place all
proceedings against the debtor, and because only an
order of the bankruptcy court can authorize any
further progress in the stayed proceeding, it
follows that the continuation of any proceeding can
derive legitimacy only from the bankruptcy court
order. The terms of an order modifying the
automatic stay must therefore be strictly
construed.”

Casperone v. Landmark Oil & Gas Corp., 819 F.2d 112, 114 (5th

Cir.1987). Therefore, any proceeding “not fairly encompassed within
the language of the order” remains subject to the automatic stay.

Interbusiness Bank, N.A, v. First National Bank of Mifflintown, 328

F.Supp.2d 522, 525-526 (M.D.Pa.2004).

In the present case, Doral requested an order lifting the stay
which the Court granted on July 1, 2004 (Docket #83, legal case).
Doral's motion only alluded to the stipulation filed by the
parties, in which if the debtor failed to comply with the mortgage
payments and with the post-petition arrears, then the stay would be
lifted automatically (docket #76, legal case). Doral did not state
that it wanted to perfect a lien post-petition. This Court could
only interpret that Doral's intention was to proceed in rem against
its collateral, as is typically requested by secured creditors in
motions to terminate the stay. Furthermore, since our order lifting
the stay was entered as requested by Doral, its language was

general in nature, and did not specifically allow Doral to proceed

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against debtor’s estate and try to perfect a lien post-petition.

See In re Russell, Corp., 156 B.R. 347 (Bankr. N.D.Ga. 1193); In re

Virginia Hill Partners TI, 110 B.R. 84 (Bankr.N.D.Ga. 1989).

Therefore, the Court finds that the order lifting the automatic did
not allow Doral to proceed against debtor’s estate and try to
perfect a lien post-petition and thus, the automatic stay did apply

to Doral’s actions.

2. Avoidance Action

Section 544(a)(3) of the U.S. Bankruptcy Code provides in
relevant part that:

(a) The trustee shall have, as of the
commencement of the case, and without regard
to any knowledge of the trustee or of any
creditor, the rights and powers of, or may
avoid any transfer of property of the debtor
or any obligation incurred by the debtor that
is voidable by-

(3) a bona fide purchaser of real property
from the debtor, against whom applicable law
permits such transfer to be perfected, that
obtains the status of a bona fide purchaser
and has perfected such transfer at the time of
the commencement of the case, whether or not
such a purchaser exists.

11 U.S.C. § 544(a) (3).
The rights of the trustee under 11 U.S.C. § 544 are determined

by state law. Abboud v. The Ground Round, Inc.,482 F.3d 15, 20 (1st

Cir. 2007) (holding Pennsylvania law determined the rights of a
hypothetical lien creditor under 11 U.S.C. § 544(a)(1)).
Under Puerto Rico mortgage law, “[r]legistered titles shall

become effective for third parties from the date of their

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registration.” P.R. Laws Ann. tit. 30, § 2256. “In order to
determine preference between two or more registrations of the same
property, attention shall be given to the date, hour and
presentation number of the respective titles in the Registry.” Id.
Furthermore, a buyer who acquires an interest in property from the
owner of record by purchasing in good faith and records that
interest is protected against “actions or titles of ownership or of
other real rights that are not duly recorded.” P.R. Laws Ann. tit.
30, § 2355. A bankruptcy trustee acting as a hypothetical bona fide
purchaser is a “third party” under Puerto Rico law. See In re

Garrido Jimenez, 370 B.R. 878 (lst Cir. BAP, 2007); In re Santos &

Nieves, Inc. 814 F.2d 57, 61(1st Cir. 1987).

On the other hand, the Puerto Rico mortgage law recognizes in
Article 69, P.R. Laws Ann. tit. 30, § 2272, what procedure must be
followed by public notaries in order to correct any defects found
in the Property Registry by the Registrar. Article 69 in the Puerto
Rico mortgage law, states in part that:

If the Registrar finds a defect in the document,
exclusively in accordance with § 2271 of this
title, he/she shall notify the presenters and
the authorizing notary, in writing, of his/her
judgment, if it is so requested in the entry,
within sixty (60) days of the date of said
entry, either by hand delivery or by mail, or
electronically, so that they may correct the
defect within a period of sixty (60) days from
the date of the notice. If more than one notice
were made, the term shall start counting after
the last one made to the notary.

The notice must contain all the legal grounds on
which the judgment is based. The notice shall be
recorded with a dated notation in the

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presentation entry and at the bottom of the
document being notified with the signature of
the Registrar and, when this is done, it shall
be valid.

If the defect is not corrected before the
expiration of the sixty (60) -day period, the
Registrar shall make a note of the expiration in
the presentation entry and at the bottom of the
document. When the fees paid upon presentation
of the document whose notice has expired do not
exceed two hundred dollars ($200), the Registrar
shall cancel twenty-five dollars ($25); when-the
fees paid upon presentation exceed two hundred
dollars ($200), the Registrar shall cancel fifty
dollars ($50).-- Mortgage Law, 1979, § 69; Aug.
10, 1988, No. 159, p. 687; Dec. 14, 1997, No.
146, § 1; Feb. 17, 2000, No. 48, § 16, eff. 90
days after Feb. 17, 2000.

Moreover, Article 72 of the Puerto Rico mortgage law, P.R.
Laws Ann. tit. 30, § 2275, contemplates that if the document is
presented outside of the term given by Article 69, it is consider
a new entry. Article 72 states in pertinent part that: “In cases
such as those outlined in the preceding sections, if the defects
are corrected after the presentation entry has expired, a new entry
shall be made which shall become effective from the date of the new
entry.” P.R. Laws Ann. tit. 30, § 2275.

In the case of In re Millivision, 331 B.R. 515 (Bankr. Ma.

2005), the court concluded that because the defendant had yet to
perfect their security interest in the debtor's collateral, they
were unperfected secured creditors at the time of commencement of
debtor's case. As of the commencement of a bankruptcy case, the
trustee has the status of a hypothetical judicial lienholder and

has the power to avoid any transfer of the debtor's property that

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such creditor could avoid. 11 U.S.C. Section 544(a)(1) In _ re

Millivision, 331 BR, 515 (Bankr. Ma. 2005). Furthermore, the court

expressed that: “Congress made its choices long ago by providing
estate representatives with hypothetical judicial lien status as of

the date of case commencement.” In re Millivision, at 524. See

Bankruptcy Act of 1898, Sec. 70(c), amended by 11 U.S.C. § 110(c)
(repealed 1978); see also, 11 U.S.C. § 544(a) (2005). Furthermore,
it concluded that “[i]t is hardly an accident that § 544(a) has
been characterized as a ‘strong arm power.’ To protect unperfected
secured creditors from the effect of § 544{(a) would be to rewrite

the Bankruptcy Code.” In re Millivision, 331 B.R. 515 at 524

(Bankr. Ma. 2005); In re Planned Protective Serv., Inc., 130 B.R.

at 98.

In view of the foregoing, the Court concludes that because the
notary public did not correct the defects in the deeds presented
within the time provided by the Puerto Rico Mortgage Law § 2272,
which was 60 days, the unrecorded deed became ineffective against
the trustee in his strong-arm capacity as a hypothetical bona fide
purchaser. When the 60 days, elapsed and the mortgage deed was
presented outside of the time provided, the trustee became a bona
fide purchaser of the residence before the deed was presented for
the second time. Thus, Doral’s mortgage deed entry could not relate
back to the date it was first recorded due to the trustee’s
intervening interest in the property under 11 U.S.C. § 544 (a) (3).

Furthermore, the Court also concludes that the trustee met her

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burden in establishing that there is no genuine issue of material
fact and that he is entitled to summary judgment as a matter of

law. Celotex Corp., 477 U.S. at 323, 106 S.Ct. 2548. On the other

hand, Doral failed to meet its burden of establishing the existence
of a trialworthy issue to defeat the trustee’s motion for summary
judgment.

CONCLUSION

WHEREFORE, IT IS ORDERED that the Motion for Summary Judgment
filed by the trustee (docket #18) be and it is hereby GRANTED.

IT IS FURTHER ORDERED that the Motion for Summary Judgment
filed by Doral (docket #26) be and it is hereby DENIED.

IT IS FURTHER ORDERED to the Registry of the Property of
Carolina, Third Section, to cancel the registration of Mortgage
Deed 786.

IT IS FURTHER ORDERED that Proof of Claim #10 filed by Doral
be and is hereby allowed as a general unsecured claim.

JUDGMENT WILL BE ENTERED ACCORDINGLY.

SO ORDERED.

San Juan, Puerto Rico, this 18th day of November 2009.

Were

Puke S. LAMOUTTE
Bankruptcy Judge

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