REDONDO CONSTRUCTION CORPORATION v. SUMMERTIME DEVELOPERS CORPORATION et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
IN RE: 	:
:
REDONDO CONSTRUCTION 	: 	CASE NO. 02-02887 (GAC)
CORPORATION, CORP., 	:
Debtor 	: 	CHAPTER 11
___________________________________:
:
REDONDO CONSTRUCTION 	:
CORPORATION, CORP., 	:
Plaintiff 	:
:
v. 	: 	ADV. NO. 04-00017
:
SUMMERTIME DEVELOPMENT, CORP.,:
Defendant 	:
:
EUROBANK 	:
Defendant 	:
Third Party Plaintiff 	:
:
v. 	:
:
DORAL BANK 	:
Third Party Defendant 	:
Third Party Plaintiff 	:
:
v. 	:
:
LYON BUILDERS CORP. 	:
Third Party Defendant 	:
Cross-Claimant 	:
:
v. 	:
:
REDONDO CONSTRUCTION 	:
CORPORATION, CORP., 	:
Cross-Defendant 	:
...................................:
DECISION AND ORDER
I. 	Procedural Background
Pending 	before 	the 	Court 	is 	a 	Motion 	for 	Summary 	Judgment
filed by Eurobank (docket #161) and an Opposition to the Motion for
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Summary 	Judgment 	and 	a 	Cross-Motion 	for 	Partial 	Summary 	Judgment
filed by Redondo Construction Corporation (“debtor”)(docket #169).
The 	debtor 	filed 	a 	voluntary 	petition 	under 	Chapter 	11 	on
March 	19, 	2002. 	On 	October 	8, 	2003, 	the 	debtor 	filed 	a 	motion
requesting 	an 	order 	to 	show 	cause 	against 	Summertime 	Development
Corp. 	(“Summertime”) 	and 	its 	president, 	Ramon 	Martinez 	Perez
(“Martinez”), 	for 	violation 	of 	the 	automatic 	stay 	(docket 	#586,
legal case). The debtor claimed that Summertime withheld the sum of
$390,579.00, that it owed debtor for work performed at the project
Summertime Beach Resort (“Casa de Playa”), and that these funds are
property of the estate. On December 1, 2003, Summertime requested
leave to deposit the disputed amounts in court (docket #669, legal
case).
On March 24, 2004, the Court scheduled a hearing and ordered
the 	debtor 	to 	file 	an 	adversary 	proceeding 	to 	seek 	turnover 	of
property. The Court ordered Summertime to show cause as to why it
failed to deposit the funds (docket #743, legal case). The debtor
filed 	the 	present 	adversary 	proceeding 	on 	February 	9, 	2004,
requesting 	the 	same 	relief 	that 	it 	had 	requested 	in 	its 	motion
seeking the order to show cause (docket #1).
On 	April 	27, 	2004, 	the 	Court 	held 	a 	hearing 	in 	which 	it
concluded that the debtor had a strong possibility of prevailing on
the merits and that Summertime ignored the orders of the Court to
deposit 	the 	sum 	of 	$390,579.00. 	It 	concluded 	that 	instead
Summertime 	sold 	the 	project 	receiving 	$250,000.00 	as 	a 	down
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payment, 	$500,000.00 	at 	the 	closing 	and 	the 	note 	payable 	of
$500,000.00. The Court fined Summertime and Martinez the amount of
$10,000.00 and ordered Summertime, Martinez and the Bank & Trust of
Puerto 	Rico 	(“B&T”) 	to 	deposit 	the 	$500,000.00 	note 	payable 	with
the Court until the matter was decided (docket #819, legal case).
Eurobank, 	as 	subsequent 	holder 	in 	interest 	of 	the 	mortgage
note, 	filed 	a 	motion 	for 	reconsideration 	of 	the 	Court’s 	order 	to
deposit the note (docket #842, legal case), arguing it had the sole
right 	to 	hold 	the 	mortgage 	note 	until 	full 	payment 	of 	the 	first
mortgage 	and 	arguing 	that 	the 	Court’s 	order 	deprived 	Eurobank 	of
property without due process.
On 	October 	3, 	2005, 	the 	Court 	entered 	a 	Decision 	and 	Order
granting Eurobank’s motion for reconsideration of the Court’s order
to deposit the mortgage note, vacating the order requiring Eurobank
to 	deposit 	the 	note 	without 	prejudice 	to 	the 	debtor 	seeking 	this
relief 	in 	this 	adversary 	proceeding 	(dockets 	#1185 	in 	legal 	case
and #56 in the present adversary proceeding).
On December 19, 2005, the debtor filed an amended complaint to
include 	Eurobank 	as 	a 	co-defendant, 	in 	the 	present 	adversary
proceeding (docket #85). The complaint was later dismissed against
Juan Martinez and Ramon Martinez (docket #114). On August 24, 2006,
Eurobank 	filed 	a 	motion 	to 	dismiss, 	and 	debtor 	filed 	a 	reply
(dockets 	#122 	and 	#123). 	On 	May 	25, 	2007, 	the 	Court 	entered 	an
order 	denying 	Eurobank’s 	motion 	to 	dismiss, 	finding 	that 	the
complaint was sufficiently served (docket #151).
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On 	August 	10, 	2007, 	Eurobank 	filed 	the 	motion 	for 	summary
judgment 	(docket 	#161) 	and 	the 	debtor 	filed 	and 	opposition 	and 	a
cross-motion for partial summary judgment (dockets #169 and #170).
Then, the debtor filed a motion requesting entry of order denying
Eurobank’s motion for summary judgment (docket #185) and 	Eurobank
filed 	a 	reply 	to 	the 	debtor’s 	opposition 	(docket 	#187). 	Finally,
the debtor filed a sur-reply (docket #196).
On 	June 	26, 	2008, 	Eurobank 	filed 	a 	Third 	Party 	complaint
against 	Doral 	(docket 	#197). 	Then, 	on 	December 	12, 	2008, 	Doral
filed a Third Party complaint against Lyon (docket #203) and on the
same day, Doral filed the answer to complaint (docket #204). On May
28, 	2009, 	Lyon 	filed 	the 	answer 	to 	complaint 	and 	a 	cross-party
complaint 	against 	the 	debtor 	(docket 	#209). 	Finally, 	the 	debtor
filed 	the 	answer 	to 	the 	cross-complaint 	on 	June 	11, 	2009 	(docket
#210).
II. Position of the Parties
A. Debtor
Debtor 	asserts 	that 	B&T, 	predecessor 	to 	Eurobank, 	provided
financing to Summertime for the Project Casa de Playa (docket #169-
2, Exhibit B page 1). On February 28 and March 4, 2003, the debtor
and 	Summertime 	executed 	amendments 	to 	the 	Contract, 	including 	a
Subcontract Agreement and an Amended Contract, whereby the parties
agreed that the construction of the Project was to be completed by
Lyon Builders, Inc. (“Lyon”), Summertime’s affiliate. The Amended
Contract 	was 	relative 	to 	the 	construction 	of 	sixty 	(60) 	walk 	up
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units. 	The 	debtor 	asserts 	that 	under 	the 	Amended 	Contract,
Summertime 	agreed 	to 	pay 	the 	debtor 	$6,509.65 	per 	unit 	as
retainage, 	due 	and 	payable 	at 	the 	execution 	of 	the
individualization and purchase deed of each unit or within six (6)
months 	from 	the 	execution 	of 	the 	amendment, 	whichever 	came 	first
(docket #169-2, Exhibit B page 2).
The 	debtor 	asserts 	that 	on 	March 	2004, 	Summertime 	sold 	the
Project to Playa Bahía, Inc. (“Playa Bahía”) and from the sale of
the Project, Summertime was to receive $588,024.03 at the time of
the purchase, and $500,000.00 deferred as a mortgage note issued by
Playa 	Bahía, 	due 	in 	120 	days 	to 	a 	year, 	secured 	by 	a 	second
mortgage 	on 	the 	Project 	(docket 	#169-2, 	Exhibit 	B 	page 	4). 	The
debtor also asserts that on several occasions, prior to the closing
on 	the 	sale, 	B&T’s 	officials 	agreed 	that 	from 	the 	proceedings 	of
the 	sale 	of 	the 	Project 	to 	Playa 	Bahía, 	the 	debtor 	would 	be 	paid
the $390,579.00, due thereto (docket #169-2, Exhibit B page 3). The
sale to Playa Bahía was effected and despite demands for payment of
the 	$390,579.00, 	B&T 	refused 	to 	comply 	with 	the 	agreement. 	The
debtor asserts that he fulfilled its obligations under the Amended
Contract and that there is no valid reason for Eurobank to withhold
the $390,579.00 due.
Secondly, 	the 	debtor 	asserts 	that 	B&T 	issued 	checks 	made
payable jointly to the debtor, Summertime and Lyon for payment to
the debtor for work performed and certified. He also asserts that
B&T 	authorized 	payments 	on 	the 	jointly 	issued 	checks 	without 	the
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debtor’s 	indorsement. 	Specifically, 	checks 	numbers 	36-005797 	for
$74,916.90, 36-005926 for $151,791.30, 36-006010 for $188,483.00,
36-006090 for $204,377.40, and 36-006223 for $163,977.30, for the
total of $783,545.90, were paid to Summertime and Lyon without the
debtor’s indorsement (docket #169-5, Exhibit E). The debtor argues
that 	some 	case 	law 	has 	found 	that, 	not 	only 	does 	the 	depositary
bank have responsibility, as Eurobank contends, but also the payor
bank in favor of the non-indorsing joint payee.
Finally, 	as 	to 	Eurobank 	assertion 	that 	it 	does 	not 	have
responsibility 	as 	a 	successor 	bank, 	the 	debtor 	contends 	that
Eurobank’s arguments refer to the asset purchase agreement and are
inapposite 	to 	a 	merger 	transaction, 	as 	that 	of 	B&T 	and 	Eurobank
(docket #170-6, Exhibit F).
The 	debtor 	contends 	that 	Eurobank’s 	acts 	of 	withholding 	the
amount 	due 	to 	the 	debtor 	under 	the 	Amended 	Contract 	violates 	the
provisions of 11 U.S.C. § 362(a)(3). Thus, the debtor requests that
Eurobank 	pays 	$100,000.00 	as 	compensatory 	damages, 	plus 	interest
thereon 	from 	the 	filing 	of 	this 	complaint, 	plus 	costs 	and
attorneys’ 	fees. 	Also, 	that 	it 	be 	imposed 	punitive 	damages 	and
sanctions pursuant to 11 U.S.C. § 105(a).
B. Eurobank
Eurobank asserts that it is not liable for B&T’s obligations
simply because of its succession to such corporation’s property. It
asserts 	that 	an 	express 	agreement 	is 	necessary 	to 	assume 	the
other’s 	company’s 	liabilities, 	and 	in 	this 	case 	Eurobank 	did 	not
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expressly assume B&T’s liabilities. Eurobank asserts that there was
no acknowledgment regarding the existence of said indebtedness and
that 	none 	of 	its 	officials 	agreed 	with 	the 	debtor 	that 	B&T 	would
disburse 	the 	sum 	of 	$390,579.00 	(docket 	#187, 	Exhibits 	A 	and 	B,
pages 12-15). Secondly, Eurobank asserts that the debtor diligently
pursued 	payment 	from 	Summertime 	and 	at 	the 	same 	time, 	Summertime
recognized to owe the debtor the amount of $390,579.00, as the only
outstanding 	balance 	owed, 	from 	the 	work 	performed 	at 	the 	project
Casa 	de 	Playa. 	However, 	Eurobank 	contends 	that 	when 	the 	debtor
filed 	the 	Second 	Amended 	Complaint, 	it 	was 	the 	first 	time 	it
claimed 	a 	right 	to 	receive 	the 	total 	sum 	of 	$783,545.90 	from 	the
five 	manager's 	checks. 	Eurobank 	contends 	that 	the 	debtor 	cannot
claim 	that 	Summertime 	owes 	the 	sum 	of 	$390,579.00, 	while 	at 	the
same time also claiming $783,545.90 for work performed in the same
project. 	Thus, 	Eurobank 	concludes 	that 	the 	debtor 	has 	failed 	to
prove 	its 	title 	to 	the 	$783,545.90 	and 	moreover, 	that 	the 	debtor
cannot claim the total sum of $783,545.90 because two of the checks
have 	endorsements 	written 	“Redondo 	Construction” 	and 	“Redondo
Corporation.”
Thirdly, 	Eurobank 	asserts 	that 	none 	of 	its 	officials
acknowledged the validity of the debtor’s claim regarding the issue
of 	the 	endorsements 	(docket 	#187, 	Exhibits 	A 	and 	B). 	On 	the
contrary, Eurobank asserts that they informed Mr. Redondo that his
claim was against Doral, as the payor bank (docket #187, Exhibits
A and B). Eurobank 	cites 	case 	law 	in 	which 	the 	courts have found
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liable the depository bank and not the payor bank. Eurobank asserts
that 	B&T, 	now 	Eurobank, 	as 	a 	payor 	bank 	followed 	reasonable
commercial 	standards 	relying 	on 	the 	clearing 	process 	and 	the
warranties 	given 	by 	Doral 	Bank 	through 	its 	indorsement 	as 	a
depository 	bank. 	Eurobank 	further 	contends 	that 	Doral’s 	primary
obligation and legal duty, as a depository bank, was to verify the
validity of the endorsements and that it is primarily liable both
to the debtor and Eurobank for its failure to do so. Thus, Eurobank
contends 	that 	the 	debtor 	has 	failed 	to 	include 	an 	indispensable
party.
Wherefore, 	Eurobank 	requests 	from 	this 	Honorable 	Court 	to
enter summary judgment dismissing the case and denying the debtor’s
request for partial summary judgment.
C. Doral
In the answer to the complaint, Doral asserts that the checks
were credited to Lyon’s account in Doral (Docket #204, page 2, line
8). 	Among 	Doral’s 	affirmative 	defenses, 	included 	in 	a 	generic
answer were: that the Third Party Complaint fails to state a cause
of 	action 	against 	Doral, 	that 	the 	Court 	lacks 	subject 	matter
jurisdiction, that all causes of action are time barred, that the
alleged 	economic 	loss 	was 	caused 	due 	to 	the 	exclusive 	negligence
or, 	in 	the 	alternative 	the 	comparative 	negligence 	of 	Eurobank
and/or the debtor, and that the debtor or Eurobank have failed to
include indispensable parties.
Doral 	requests 	that 	the 	Court 	dismiss 	the 	instant 	complaint
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with the imposition against Eurobank of all costs, disbursements,
interest, and attorney's fees.
On the other hand, in the third party complaint, Doral asserts
that 	at 	all 	relevant 	times, 	the 	five 	checks 	were 	deposited 	and
credited to an account held by Lyon at Doral, at the request of the
debtor, Summertime and/or Lyon. Doral asserts that if the debtor is
entitled 	to 	the 	compensation 	alleged, 	such 	liability 	is
attributable to Eurobank and/or Lyon. They also assert, that in the
event 	of 	judgment 	against 	Doral, 	Doral 	is 	entitled 	to 	judgment
against 	Lyon, 	for 	the 	full 	amount 	of 	the 	damages 	awarded 	to 	the
debtor or Eurobank.
Doral requests that the Court grants the Third Party Complaint
plus all costs, expenses, attorney fees and any other remedy that
may be fair and equitable.
D. Lyon
In its answer to the complaint, Lyon contends that the Court
lacks subject matter jurisdiction, that it fails to state a claim
upon 	which 	relief 	can 	be 	granted 	and 	raises 	the 	defense 	of
estoppel. 	Lyon 	also 	asserts 	that 	Doral 	and 	the 	debtor 	were
negligent 	in 	the 	filing 	of 	the 	complaint 	against 	defendants 	and
Lyon; 	that 	it 	was 	entitled 	to 	collect 	all 	checks 	made 	payable 	to
the corporation for work performed at the project known as Casa de
Playa, 	as 	agreed 	to 	in 	the 	standard 	form 	of 	agreement 	between
contractor 	and 	subcontractor; 	that 	it 	obtained 	the 	indorsement
signature 	from 	the 	debtor 	on 	the 	checks 	received, 	and/or 	was
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authorized by debtor to endorse the checks on its behalf, prior to
the third party indorsement for deposit of the check in its banking
account, 	and 	in 	any 	event, 	that 	all 	causes 	of 	action 	are 	time
barred.
Lyon claims that if Lyon has to reimburse Doral, because Doral
had 	to 	repay 	Eurobank, 	who 	in 	turn 	will 	have 	to 	reimburse 	the
debtor, then Lyon will be entitled to collect from the debtor the
total 	funds 	disbursed 	by 	Doral 	because 	it 	is 	entitled 	to 	collect
from the debtor, for the work performed and completed pursuant to
the terms and conditions of the executed construction contract at
Casa de Playa project.
Lyon 	requests 	the 	Court 	to 	deny 	the 	third 	party 	complaint
filed by Doral against Lyon and in the alternative that the third
party complaint is awarded, then the cross-claim filed against the
debtor 	be 	granted 	plus, 	all 	costs, 	legal 	expenses 	and 	attorney’s
fees, including but not limited to the dismissal of the complaint
originally filed by the debtor against defendants and/or all third
party defendants.
III. Factual Background
A. On February 28 and March 4, 2003, the debtor and Summertime
executed 	amendments 	to 	the 	Contract, 	including 	a 	Subcontract
Agreement and Amended Contract, whereby the parties agreed that the
construction 	of 	the 	Project 	was 	to 	be 	completed 	by 	Lyon 	(docket
#169-4, Exhibit D).
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B. 	The 	Amended 	Contract 	was 	relative 	to 	the 	construction 	of
sixty (60) walk up units totaling $5,771,149.00. Under the Amended
Contract, Summertime agreed to pay the debtor $6,509.65 per unit as
retainage, 	due 	and 	payable 	at 	the 	execution 	of 	the
individualization and purchase deed of each unit or within six (6)
months 	from 	the 	execution 	of 	the 	amendment, 	whichever 	came 	first
(docket #169-4, Exhibit D).
C. 	B&T 	issued 	checks 	made 	payable 	jointly 	to 	the 	debtor,
Summertime 	and 	Lyon 	for 	payment 	to 	the 	debtor 	for 	work 	performed
and 	certified, 	from 	May 	2003 	to 	September 	of 	2003. 	Specifically,
checks 	nos. 	36-005797 	for 	$74,916.90, 	36-005926 	for 	$151,791.30,
36-006010 for $188,483.00, 36-006090 for $204,377.40, and 36-006223
for 	$163,977.30, 	for 	the 	total 	of 	$783,545.90, 	were 	paid 	to
Summertime and Lyon (docket #169-5, Exhibit E).
D. 	B&T merged with Eurobank (docket # 170-6, Exhibit F).
IV. 	Discussion
There are various matters pending before the Court. The first
is whether Eurobank is responsible and liable for B&T’s obligations
entered into with the debtor prior to the merger. Secondly, whether
an agreement was reached between B&T, now Eurobank, and the debtor
regarding the payment of the amount of $390,579.00, relating to the
Amended Contract, to be paid once the project was sold. Finally, if
the checks were properly negotiated by the bank.
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. 	1st
Cir. 	2001). 	A 	fact 	is 	deemed 	"material" 	if 	it 	potentially 	could
affect 	the 	outcome 	of 	the 	suit. 	Cortes-Irizarry 	v. 	Corporación
Insular, 	111 	F.3d 	184, 	187 	(1st 	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
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the judgment and those inferences are not mandated by the record.”
Id.
B. Successor’s Liability
Sections 	91 	and 	91a 	of 	Title 	7 	of 	the 	Puerto 	Rico 	Laws
Annotated (2006) regulate the merger and consolidation of banks in
Puerto Rico. Section 91(k) provides that:
The obligations of the merged or consolidated
corporations 	and 	the 	rights 	of 	the 	creditors
of any of said corporations, shall in no case
be 	injured 	or 	impaired 	in 	any 	way 	by 	such 	a
merger 	or 	consolidation, 	and 	none 	of 	the
rights, obligations and claims of any person,
creditor, 	depositary 	and 	trustee 	shall 	be
affected by said merger or consolidation, and
the 	consolidated 	corporation 	or 	the 	newly
organized 	corporation, 	as 	the 	case 	may 	be,
shall 	have 	all 	the 	obligations 	and 	be 	liable
for 	all 	the 	debts 	and 	responsible 	for
complying 	with 	all 	the 	contracts 	and
obligations 	of 	the 	merged 	or 	consolidated
corporations, just as they were 	prior to such
a 	merger 	or 	consolidation, 	and 	their
stockholders 	of 	said 	corporations 	so 	merged
and consolidated shall continue to be subject
to the same obligations, claims and suits that
existed against them when or before the merger
or 	the 	consolidation 	was 	made, 	and 	all 	the
suits, 	actions 	and 	other 	proceedings 	then
pending before any court, to which any of the
merged or consolidated corporation is a party,
shall continue to their determination as if no
such merger or consolidation had taken place,
Provided, 	however, 	That 	the 	resulting
corporation or newly organized entity, as the
case may be, can be substituted in lieu of the
corporations 	which 	have 	merged 	or
consolidated, by order of the court cognizant
of the proceedings.
P.R. Laws Ann. tit. 7, § 91(k) (2006).
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In 	the 	present 	case, 	Eurobank 	asserts 	that 	they 	have 	no
responsibility 	for 	B&T’s 	liabilities 	because 	they 	did 	not 	assume
expressly or through a contract or otherwise, B&T’s obligations or
liabilities associated with Redondo Construction. Section 91(k) of
the 	PR 	Laws 	Annotated 	expressly 	states 	that 	the 	newly 	organized
corporation 	shall 	have 	all 	the 	obligations 	and 	is 	liable 	for 	all
the debts and responsible for complying with all the contracts and
obligations 	of 	the 	merged 	or 	consolidated 	corporations, 	just 	as
they were prior to such a merger or consolidation. Eurobank at no
moment 	indicates 	or 	denies 	that 	it 	merged 	with 	B&T, 	nor 	it
contradicts 	docket 	#170-6, 	Exhibit 	F, 	presented 	by 	the 	debtor.
Thus, 	the 	Court 	concludes 	that 	Eurobank 	is 	liable 	for 	B&T‘s
obligations and liabilities, contracted with the debtor and entered
prior to the merger.
C. 	Applicable Law
“Property 	and 	contract 	rights 	implicated 	in 	bankruptcy
disputes are determined in accordance with state law.” 	In re Ward,
194 B.R. 703, 711, fn 21 	(Bankr. D.Mass. 1996) (citing Butner v.
United States, 440 U.S. 48 (1979) and Ralar Distribution, Inc. v.
Rubbermaid, 	Inc. 	(In 	re 	Ralar 	Distrib., 	Inc.), 	4 	F.3d 	62, 	67-68
(1st 	Cir. 	1993)). 	Thus, 	the 	Laws 	of 	the 	Commonwealth 	of 	Puerto
Rico 	(“Civil 	Code 	of 	1930”) 	govern 	the 	breach 	of 	contract 	and
damages claims in the present case.
Contracts in Puerto Rico are governed by the Puerto Rico Civil
Code of 1930. The Civil Code in article 1044 states that: “[t]hose
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obligations 	arising 	from 	contracts 	have 	legal 	force 	between 	the
contracting parties, and must be fulfilled in accordance with their
stipulations.” Lopez Torres v. Gonzalez Vazquez, 2004 PRSC 172, 2.
See also P.R. Laws Ann. tit. 31, § 2994 (1990).
1. Contracts in General
In 	Puerto 	Rico, 	the 	law 	recognizes 	that 	the 	contracting
parties 	may 	make 	any 	agreement 	and 	“establish 	the 	clauses 	and
conditions, which they may deem advisable, provided that they are
not in contravention of the law, morals, or public order.” 	Lopez
Torres 	v. 	Gonzalez 	Vazquez, 	2004 	PRSC 	172, 	2. 	See 	P.R. 	Laws 	Ann.
tit. 31, § 3372 (1990). Contracts are perfected by the mere consent
of the parties, and from that time they are binding, not only with
regard 	to 	the 	fulfillment 	of 	what 	has 	been 	expressly 	stipulated,
but 	also 	with 	regard 	to 	all 	the 	consequences 	which 	are 	in
accordance with good faith, use and law. 	Lopez Torres v. Gonzalez
Vazquez, 2004 PRSC 172, 2. See also P.R. Laws Ann. tit. 31, § 3375
(1990).
2. 	Interpretation of Contracts in Puerto Rico
The 	Puerto 	Rico 	Civil 	Code 	of 	1930, 	Articles 	1233 	through
1250, 	regulates 	contract 	interpretation. 	See 	P.R. 	Laws 	Ann. 	tit.
31, § 3471 through 3479 (1990). In Municipio de Mayaguez v. Lebron,
the Puerto Rico Supreme Court stated that the target in contractual
interpretation 	is 	to 	determine 	what 	are 	the 	real 	and 	common
intentions 	of 	the 	contracting 	parties. 	Municipio 	de 	Mayaguez 	v.
Lebron, 2006 PRSC 70, 4.
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In Marcial v. Tome, 144 P.R. Dec. 522 (1997), the leading case
in 	contracts 	interpretation, 	cited 	throughout 	the 	opinion 	of
Municipio de Mayaguez, 2006 PRSC 70, the Puerto Rico Supreme Court
held that:
[a]lthough 	the 	starting 	point 	of 	contract
interpretation 	must 	be 	the 	expressions
contained in the words, the trier cannot stop
at 	the 	literal 	sense, 	but 	must 	fundamentally
investigate the intent of the parties and the
spirit and purpose of the transaction, as they
are 	inferred 	from 	the 	overall 	conduct 	of 	the
interested 	parties 	and 	from 	the 	concurring
circumstances 	that 	may 	contribute 	to 	an
adequate 	investigation 	of 	the 	will 	of 	the
executing parties. Coop. La Sagrada Familia v.
Castillo, 	107 	D.P.R. 	405, 	417 	[7 	P.R. 	Offic.
Trans. 	449, 	461] 	(1978). 	See: 	Marina 	Ind.,
Inc. v. Brown Boveri Corp., 114 D.P.R. 64, 69-
70 	[14 	P.R. 	Offic. 	Trans. 	86, 	94-95] 	(1983);
Merle 	v. 	West 	Bend 	Co., 	97 	D.R.R. 	392, 	399
(1969).
Marcial v. Tome, 144 P.R. Dec. at 537. “To judge the intention of
the contracting parties, all circumstances showing the will of the
parties must be examined.” Id. at 538. See also P.R. Laws Ann. tit.
31, § 3472 (1990). Specifically, special attention must be paid to
“their acts, previous to, contemporaneous with, and subsequent to
the execution of the contract.” Marcial v. Tome, 144 P.R. Dec. at
538. 	The 	Court 	also 	held 	that 	a 	Court 	should 	consider 	“the
occasion, 	the 	circumstances, 	the 	persons 	involved, 	and 	the
agreement they intended to negotiate.” Id.
The Puerto Rico Supreme Court in Marcial v. Tome, reversed the
decision 	of 	the 	circuit 	court 	because 	the 	latter 	decided 	to
interpret 	a 	partnership 	contract 	by 	way 	of 	summary 	judgment. 	The
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Supreme 	Court 	held 	that 	when 	interpretation 	of 	a 	contract 	is 	the
matter in question, the best way to know the intent of the parties
is to present extrinsic evidence at trial as to the real intention
of 	the 	parties. 	The 	Puerto 	Rico 	Supreme 	Court 	remanded 	the 	case
stating:
[t]hese 	doubts 	preclude 	us 	from 	adjudicating
this 	issue 	without 	giving 	the 	parties 	an
opportunity 	to 	present 	evidence 	at 	the
pertinent 	trial. 	We 	deem 	that 	there 	is 	a
genuine 	issue 	of 	facts 	material 	to 	the
interpretation 	of 	the 	contract 	clause
concerning the intention or purpose for which
the special partnership was created.
Id. at 540 (1997).
In the present case, the only uncontested facts and the only
factual findings that this Court is in a position to make regarding
the 	amount 	of 	$390,579.00 	claimed 	by 	the 	debtor 	against 	B&T 	are:
that B&T provided financing to Summertime for the Project Casa de
Playa, 	that 	B&T 	issued 	the 	five 	checks 	relating 	to 	the 	project,
that 	on 	March 	2004, 	Summertime 	sold 	the 	Project 	to 	Playa 	Bahia
(docket #56).
The 	debtor 	asserts 	that 	he 	reached 	an 	agreement 	with
Summertime and with B&T, now Eurobank, relating to the payment of
the 	$390,579.00 	owed 	(docket 	#169-2, 	sworn 	statement, 	Exhibit 	B
page 3). 	On the other hand, Eurobank alleges that it did not reach
any kind of agreement and that Summertime is the one who owes the
debtor the amount sought (docket #187, sworn statement, Exhibits A
and B pages 12-15).
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The Court finds that in order to determine if an agreement was
reached by the parties regarding the payment of the $390,579.00, in
view 	of 	the 	fact 	that 	both 	parties 	have 	submitted 	totally
contradicting 	sworn 	statements, 	the 	Court 	must 	hold 	a 	trial 	with
all 	the 	parties 	involved 	to 	clarify 	regarding 	the 	closing 	and
selling of the project and the payment due to the debtor.
D. Negotiable Instruments
The Uniform Commercial Code (“UCC”) applies in Puerto Rico in
virtue 	of 	the 	Law 	of 	Negotiable 	Instruments 	and 	Banking
Transactions, Law #208 of August 17, 1998, 19 L.P.R.A. §§ 1-2001.
Liability 	is 	imposed 	to 	the 	banks 	if 	they 	do 	not 	follow 	the
“Ordinary Care” standard. The Ordinary Care standard is defined by
the UCC in §3-103(7) as:
[I]n the case of a person engaged in business
means 	observance 	of 	reasonable 	commercial
standards, prevailing in the area in which the
person 	is 	located, 	with 	respect 	to 	the
business 	in 	which 	the 	person 	is 	engaged. 	In
the 	case 	of 	a 	bank 	that 	takes 	an 	instrument
for 	processing 	for 	collection 	or 	payment 	by
automated 	means, 	reasonable 	commercial
standards do not violate the bank’s prescribed
procedures 	and 	the 	bank’s 	procedures 	do 	not
vary 	unreasonably 	from 	general 	banking 	usage
not disapproved by this Article or Article 4.
1. 	Identification 	of 	the 	person 	to 	whom 	the 	instrument 	is
payable
Section 3-110 of the UCC, indicates to whom an instrument is
payable. This section states:
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(a) The person to whom an instrument is initially
payable 	is 	determined 	by 	the 	intent 	of 	the
person, whether or not authorized, signing as, or
in 	the 	name 	or 	behalf 	of, 	the 	issuer 	of 	the
instrument. 	The 	instrument 	is 	payable 	to 	the
person intended by the signer even if that person
is 	identified 	in 	the 	instrument 	by 	a 	name 	or
other 	identification 	that 	is 	not 	that 	of 	the
intended person. If more than one person signs in
the name or behalf of the issuer of an instrument
and all the signers do not intend the same person
as payee, the instrument is payable to any person
intended by one or more of the signers.
....
(c) A person to whom an instrument is payable may
be 	identified 	in 	any 	way, 	including 	by 	name,
identifying 	number, 	office, 	or 	account 	number.
....
In 	the 	present 	case, 	the 	debtor 	claims 	that 	B&T 	issued 	five
checks made payable jointly to the debtor, Summertime and Lyon for
payment to the debtor, for work performed and certified, and that
B&T 	authorized 	payments 	on 	the 	jointly 	issued 	checks 	without 	the
debtor’s indorsement.
The 	checks 	were 	made 	to 	the 	order 	of 	“Redondo 	Construction
Corp., Summertime Developer Corp. & Lyon Builder” (docket #169-5,
Exhibit 	E). 	As 	section 	3-110(a) 	and 	3-110(c) 	of 	the 	UCC 	states,
the person to whom the check is payable is determined by the intent
of 	the 	issuer 	of 	the 	check, 	and 	that 	person 	may 	be 	identified 	by
its name. No extrinsic evidence has been presented by Eurobank to
prove that the intent of B&T, now Eurobank, was to pay Summertime
and Lyon, and not Redondo because the five checks clearly identify
the 	three 	parties 	by 	name. 	When 	a 	check 	is 	made 	to 	the 	order 	of
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more than one entity or person, section 3-110(d) states to whom the
check will be payable to and who may enforce it.
Section 	3-110(d) 	of 	the 	UCC 	deals 	with 	checks 	with 	multiple
endorsements, specifically, section 3-110(d) states:
(d) If an instrument is payable to two or more
persons alternatively, it is payable to any of
them 	and 	may 	be 	negotiated, 	discharged, 	or
enforced 	by 	any 	or 	all 	of 	them 	in 	possession
of the instrument. If an instrument is payable
to 	two 	or 	more 	persons 	not 	alternatively, 	it
is 	payable 	to 	all 	of 	them 	and 	may 	be
negotiated, 	discharged, 	or 	enforced 	only 	by
all 	of 	them. 	If 	an 	instrument 	payable 	to 	two
or more persons is ambiguous as to whether it
is 	payable 	to 	the 	persons 	alternatively, 	the
instrument 	is 	payable 	to 	the 	persons
alternatively.
The Official Comment in the Maryland UCC and in the Texas UCC,
both 	having 	the 	same 	language 	for 	section 	3-110(d) 	of 	the 	UCC,
specifically state the treatment to be given a check with multiple
payees:
“An 	instrument 	payable 	to 	X 	or 	Y 	is 	governed
by 	the 	first 	sentence 	of 	subsection 	(d). 	An
instrument 	payable 	to 	X 	and 	Y 	is 	governed 	by
the 	second 	sentence 	of 	subsection 	(d). 	If 	an
instrument is payable to X or Y, either is the
payee 	and 	if 	either 	is 	in 	possession 	that
person 	is 	the 	holder 	and 	the 	person 	entitled
to enforce the instrument.... If an instrument
is payable to X and Y, neither X nor Y acting
alone is the person to whom the instrument is
payable.... 	The 	instrument 	is 	‘payable 	to 	an
identified person.’ ” The “identified person”
is X and Y acting jointly.
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Pelican Nat. bank v. Provident Bank of Maryland, 849 A.2d 475, 481
(Md. 2004). See also, New Wave Technology, Inc. v. Legacy Bank of
Texas, 281 S.W.3d 99, 101 (Tex. 2008).
On 	the 	other 	hand, 	section 	3-301 	of 	the 	UCC 	states 	who 	is
entitled to enforce an instrument, in this particular case, the five
checks in question. Section 3-301 of the UCC states:
Person 	entitled 	to 	enforce 	an 	instrument.-
Means: (i) the holder of the instrument, (ii) a
nonholder in possession of the instrument who has
the rights of a holder, or (iii) a person not in
possession 	of 	the 	instrument 	who 	is 	entitled 	to
enforce the instrument pursuant to Section 3-309
or 3-418(d). A person may be a person entitled to
enforce the instrument even though the person is
not the owner of the instrument or is in wrongful
possession of the instrument.
In the present case, B&T issued five checks paid to the order
of 	“Redondo 	Construction 	Corp., 	Summertime 	Developer 	Corp. 	& 	Lyon
Builder.” The three names were separated by a coma and the connector
word symbol “&”, which means “and”.
The first check, dated May 16, 2003, and number 36-005797 was
indorsed the following way: line 1: “Summertime Developers, Inc.,”
line 2: “Lyon Builders, Inc.,” and line 3: “Account # 05-4000631-9"
(Docket 	#169-5, 	Exhibit 	E 	page 	2, 	check 	number 	1). 	The 	Court 	can
conclude from a simple examination of the copy of the check that it
lacks the debtor’s indorsement.
The second check, dated June 24, 2003, and number 36-005926 was
indorsed 	the 	following 	way: 	line 	1: 	illegible 	signature, 	line 	2:
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“Summertime 	Developers 	Corp.,” 	line 	3: 	“Lyon 	Builders 	Inc.,” 	line
4: “For deposit only to acc. #,” and line 5: “0540006319" (Docket
#169-5, 	Exhibit 	E 	pages 	1-2, 	check 	number 	2). 	The 	Court 	cannot
conclude 	with 	certainty 	that 	the 	check 	lacked 	the 	debtor’s
indorsement because there is an illegible signature in line 1.
The third check, dated July 24, 2003, and number 36-006010 	was
indorsed 	the 	following 	way: 	line 	1: 	“Summertime 	Developers 	Corp.”
line 	2: 	“Lyon 	Builders, 	Inc.,” 	and 	line 	3: 	“Cta. 	# 	05-4000631-9"
(Docket 	#169-5, 	Exhibit 	E 	pages 	1-2, 	check 	number 	3). 	This 	check
lacked 	the 	debtor’s 	indorsement. 	The 	Court 	can 	conclude 	from 	a
simple 	examination 	of 	the 	copy 	of 	the 	check 	that 	it 	lacks 	the
debtor’s indorsement.
The fourth check, dated August 26, 2003, and number 36-006090
was indorsed the following way: line 1: “Redondo Construction Corp,”
Line 2: “Summertime Developers Corp.,” line 3: “Lyon Builders Inc.,”
and a notation in Spanish which means “to deposit into the account
of 	Lyon 	Builders, 	Inc. 	account 	#05-4000631-9" 	(Docket 	#169-5,
Exhibit E pages 3-4, check number 1). The Court cannot conclude with
certainty that the check lacked the debtor’s indorsement because the
name of the debtor is in line 1 of the check.
The fifth check, dated September 25, 2003, and number 36-006223
was 	indorsed 	the 	following 	way: 	line 	1: 	“Redondo 	Construction,”
Line 2: “Summertime Developers” line 3: “Lyon Builders, Inc.,” and
line 	4 	“05-40006319" 	(Docket 	#169-5, 	Exhibit 	E 	pages 	3-4, 	check
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number 2). The Court cannot conclude with certainty that the check
lacked the debtor’s indorsement because the name of the 	debtor 	is
in line 1 of the check.
As 	section 	3-110(d) 	states 	of 	the 	UCC, 	the 	checks 	were 	made
payable to more 	than one payee jointly and not in the alternative
thus, 	the 	checks 	could 	only 	be 	negotiated, 	discharged 	or 	enforced
by all of the joint payees. Hence, because some of the checks lacked
the 	necessary 	indorsement 	of 	the 	debtor, 	they 	could 	not 	be
negotiated. 	Moreover, 	the 	three 	entities 	were 	entitled 	to 	enforce
the 	checks 	because 	they 	were 	payable 	to 	them 	and 	although, 	the
debtor was a nonholder in possession of the instrument, he had the
rights of a holder. The Court concludes that the checks were payable
to 	the 	order 	of 	debtor, 	Summertime 	and 	Lyon, 	and 	could 	only 	be
negotiated 	when 	the 	checks 	were 	endorsed 	by 	the 	three 	entities
acting jointly.
2. Restrictive Indorsement and Conversion
The 	second 	check 	had 	the 	notation 	“for 	deposit 	only 	to 	acc.
#0540006319," 	this 	type 	of 	indorsement 	is 	called 	a 	restrictive
indorsement 	(Docket 	#169-5, 	Exhibit 	E 	pages 	1-2, 	check 	number 	2).
Section 3-206 of the UCC regulates the negotiation or transfer of
checks with this kind of indorsement. Specifically, section 3-206(c)
of the UCC states:
(c) If an instrument bears an indorsement (i)
described 	in 	Section 	4-201(b), 	or 	(ii) 	in
blank or to a particular bank using the words
"for 	deposit," 	"for 	collection," 	or 	other
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words 	indicating 	a 	purpose 	of 	having 	the
instrument 	collected 	by 	a 	bank 	for 	the
indorser 	or 	for 	a 	particular 	account, 	the
following rules apply:
(1) 	A 	person, 	other 	than 	a 	bank, 	who
purchases the instrument when so indorsed
converts the instrument unless the amount
paid for the instrument is received by the
indorser or applied consistently with the
indorsement.
(2) 	A 	depositary 	bank 	that 	purchases 	the
instrument or takes it for collection when
so indorsed converts the instrument unless
the 	amount 	paid 	by 	the 	bank 	with 	respect
to 	the 	instrument 	is 	received 	by 	the
indorser or applied consistently with the
indorsement.
In Commonwealth Federal Sav. & Loans Ass’n v. First Nat. Bank
of New Jersey, 513 F.Supp. 296, 305(D.C.Pa. 1979) in citing 	Titan
Air Conditioning Corp. v. Chase Manhattan Bank, 20 U.C.C Rep. Serv.
1234, 	1235 	(N.Y.Sup.Ct.1977), 	the 	court 	concluded 	that
“(u)ndisputedly, 	established 	banking 	practice 	mandates 	that 	any
check payable to a designated business entity can be accepted for
deposit 	only 	into 	the 	account 	of 	such 	named 	payee.” 	Also, 	in
Commonwealth Federal Sav., supra, the court cited a statement by H.
Wallgren, Principles 305 of Bank Operations 92 (rev. ed. 1975):
Many unlawful conversions involve checks payable to
legal entities such as corporations, trade-styles,
partnerships, decedents’ estates, rather than to a
natural persons. Checks payable to corporations are
normally 	deposited 	to 	an 	account 	in 	the 	payee
corporation’s name and should never be accepted for
deposit 	to 	an 	account 	in 	any 	other 	name 	without
prior investigation....
Commonwealth Federal Sav. & Loans Ass’n v. First Nat. Bank of New
Jersey, 513 F.Supp. 296, 305( D.C.Pa. 1979).
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Although all checks were endorsed differently, the same account
number appears in all of the five checks. Doral asserts that all the
checks were credited to Lyon’s account in Doral (Docket #204, page
2, line 8). The Court concludes that the five checks could not be
deposited 	into 	the 	account 	of 	Lyon 	because 	as 	in 	the 	case 	of
Commonwealth Federal Sav., supra, any check payable to a designated
business entity can be accepted for deposit only into the account
of such named payee and it should never be accepted for deposit to
an 	account 	in 	any 	other 	name 	without 	prior 	investigation. 	In 	the
present case, although the five checks were paid to the order of the
debtor, 	Summertime 	and 	Lyon, 	the 	checks 	were 	deposited 	into 	an
account that belong exclusively to Lyon.
On the other hand, section 3-420 of the UCC, deals specifically
with the conversion of an instrument:
(a) 	The 	law 	applicable 	to 	conversion 	of
personal 	property 	applies 	to 	instruments. 	An
instrument is also converted if it is taken by
transfer, 	other 	than 	a 	negotiation, 	from 	a
person 	not 	entitled 	to 	enforce 	the 	instrument
or a bank makes or obtains payment with respect
to the instrument for a person not entitled to
enforce 	the 	instrument 	or 	receive 	payment. 	An
action for conversion of an instrument may not
be brought by (i) the issuer or acceptor of the
instrument or (ii) a payee or indorsee who did
not 	receive 	delivery 	of 	the 	instrument 	either
directly 	or 	through 	delivery 	to 	an 	agent 	or 	a
co-payee.
(b) 	In 	an 	action 	under 	subsection 	(a), 	the
measure 	of 	liability 	is 	presumed 	to 	be 	the
amount payable on the instrument, but recovery
may 	not 	exceed 	the 	amount 	of 	the 	plaintiff's
interest in the instrument.
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(c) 	A 	representative, 	other 	than 	a 	depositary
bank, 	who 	has 	in 	good 	faithdealt 	with 	an
instrument or its proceeds on behalf of one who
was 	not 	the 	person 	entitled 	to 	enforce 	the
instrument is not liable in conversion to that
person 	beyond 	the 	amount 	of 	any 	proceeds 	that
it has not paid out.
The 	cases 	hold 	that 	an 	action 	for 	conversion 	against 	a 	bank
will 	lie 	where 	a 	check 	was 	negotiated 	lacking 	indorsement.
Commonwealth Federal Sav. & 	Loans Ass’n v. First Nat. Bank of New
Jersey, 513 F.Supp. 296, 300(D.C.Pa. 1979) In a case similar to the
one 	before 	us, 	in 	Federal 	Deposit 	Insurance 	Company 	v. 	Marine
National 	Bank 	of 	Jacksonville, 	the 	court 	concluded 	that 	the
acceptance for deposit to the account of one of two named payees on
the 	check 	imposed 	liability 	upon 	the 	bank 	accepting 	such 	deposit.
Federal 	Deposit 	Insurance 	Corporation 	v. 	Marine 	National 	Bank 	of
Jacksonville, 	431 	F.2d 	341 	(5 th 	Cir.1970). 	See 	also 	Handel 	v.
Manufacturers 	Hanover 	Trust 	Co., 	16 	U.C.C.Rep.Serv. 	762 	(N.Y.
SupremeCt.1975) 	and 	Williams 	Mechanical 	Corp. 	v. 	Manufacturers
Hanover Trust Co., 	20 U.C.C. Rep.Serv. 468 (N.Y. Supreme Ct. 1976).
In 	the 	present 	case, 	the 	debtors 	indorsement 	was 	lacking 	in
three 	of 	the 	five 	checks 	and 	all 	were 	deposited 	into 	an 	account,
which 	was 	not 	in 	the 	debtor’s 	name. 	Section 	3-420(a) 	of 	the 	UCC
states two requirements to bring forth an action for conversion. The
first one is that an action for conversion can not be brought by the
issuer, in this case B&T, now Eurobank, and secondly, that it could
not 	be 	brought 	by 	a 	payee 	who 	did 	not 	receive 	delivery 	of 	the
instrument. 	In 	the 	present 	case, 	the 	action 	for 	conversion 	is
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brought 	by 	the 	debtor, 	who 	is 	a 	payee 	and 	not 	the 	issuer 	of 	the
check, 	thus 	the 	first 	requirement 	is 	met. 	On 	the 	other 	hand, 	the
official comment of section 3-420 of the UCC states that “if a check
is payable to more than one payee, delivery to one of the payees is
deemed 	to 	be 	delivery 	to 	all 	of 	the 	payees.” 	Thus, 	although 	the
debtor never received delivery of the checks, because Summertime and
Lyon are co-payees and they did receive the checks, then the debtor
has a cause of action for conversion against the bank.
3. Transfer Warranties and Presentment Warranties
Section 4-207 of the UCC, titled Transfer Warranties, allocates
the liability of banks, when more than one is involved in a banking
transaction where liability maybe imposed. The section states:
(a) A costumer 	or collecting bank that transfers
an 	item 	and 	receives 	a 	settlement 	or 	other
consideration 	warrants 	to 	the 	transferee 	and 	to
any subsequent collecting bank that:
(1) 	the 	warrantor 	is 	a 	person 	entitled 	to
enforce the item;
(2) all signatures on the item are authentic
and authorized;
(3) the item has not been altered;
(4) the item is not subject to a defense or
claim 	in 	recoupment 	(Section 	3-305(a)) 	of
any 	party 	that 	can 	be 	asserted 	against 	the
warrantor; and....
....
(c) 	A 	person 	to 	whom 	the 	warranties 	under
subsection (a) are made and who took the item in
good 	faith 	may 	recover 	from 	the 	warrantor 	as
damages for breach of warranty an amount equal to
the loss suffered as a result of the breach, but
not 	more 	than 	the 	amount 	of 	the 	item 	plus
expenses 	and 	loss 	of 	interest 	incurred 	as 	a
result of the breach.
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....
(e) 	A 	cause 	of 	action 	for 	breach 	of 	warranty
under this section accrues when the claimant has
reason to know of the breach.
On 	the 	other 	hand, 	section 	4-208 	of 	the 	UCC 	deals 	with 	the
presentment 	warranties 	banks 	give 	to 	each 	other 	in 	case 	of
liability. The section states:
(a) 	If 	an 	unaccepted 	draft 	is 	presented 	to 	the
drawee 	for 	payment 	or 	acceptance 	and 	the 	drawee
pays 	or 	accepts 	the 	draft, 	(i) 	the 	person
obtaining 	payment 	or 	acceptance, 	at 	the 	time 	of
presentment, 	and 	(ii) 	a 	previous 	transferor 	of
the 	draft, 	at 	the 	time 	of 	transfer, 	warrant 	to
the drawee that pays or accepts the draft in good
faith that:
(1) 	the 	warrantor 	is, 	or 	was, 	at 	the 	time
the 	warrantor 	transferred 	the 	draft, 	a
person 	entitled 	to 	enforce 	the 	draft 	or
authorized 	to 	obtain 	payment 	or 	acceptance
of the draft on behalf of a person entitled
to enforce the draft;
(2) the draft has not been altered; and
(3) the warrantor has no knowledge that the
signature 	of 	the 	purported 	drawer 	of 	the
draft is unauthorized; and
(4) 	with 	respect 	to 	any 	remotely-created
consumer 	item, 	that 	the 	person 	on 	whose
account 	the 	item 	is 	drawn 	authorized 	the
issuance of the item in the amount for which
the item is drawn.
(b) 	A 	drawee 	making 	payment 	may 	recover 	from 	a
warrantor damages for breach of warranty equal to
the amount paid by the drawee less the amount the
drawee 	received 	or 	is 	entitled 	to 	receive 	from
the 	drawer 	because 	of 	the 	payment. 	In 	addition,
the 	drawee 	is 	entitled 	to 	compensation 	for
expenses and loss of interest resulting from the
breach. 	The 	right 	of 	the 	drawee 	to 	recover
damages under this subsection is not affected by
any 	failure 	of 	the 	drawee 	to 	exercise 	ordinary
care in making payment. If the drawee accepts the
draft (i) breach of warranty is a defense to the
obligation 	of 	the 	acceptor, 	and 	(ii) 	if 	the
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acceptor makes payment with respect to the draft,
the 	acceptor 	is 	entitled 	to 	recover 	from 	a
warrantor 	for 	breach 	of 	warranty 	the 	amounts
stated in this subsection.
(c) 	If 	a 	drawee 	asserts 	a 	claim 	for 	breach 	of
warranty 	under 	subsection 	(a) 	based 	on 	an
unauthorized 	indorsement 	of 	the 	draft 	or 	an
alteration of the draft, the warrantor may defend
by 	proving 	that 	the 	indorsement 	is 	effective
under 	Section 	3-404 	or 	3-405 	or 	the 	drawer 	is
precluded 	under 	Section 	3-406 	or 	4-406 	from
asserting 	against 	the 	drawee 	the 	unauthorized
indorsement or alteration.
....
(f) 	A 	cause 	of 	action 	for 	breach 	of 	warranty
under this section accrues when the claimant has
reason to know of the breach.
Numerous 	states 	have 	held 	that 	payment 	of 	a 	check 	without 	a
necessary indorsement of a payee breaches the presentment warranty
of 	good 	title. 	See 	Federal 	Deposit 	Insurance 	Corp. 	v. 	Marine
National 	Bank 	of 	Jacksonville, 	431 	F.2d 	341 	(5 th 	Cir.1970-
interpreting 	Florida 	Law; 	Trust 	Co. 	of 	Columbus 	v. 	Refrigeration
Supplies, 	Inc., 	246 	S.E.2d 	282, 	284-285 	n.1 	(1978); 	Morgan 	Guard.
Trust 	Co. 	v. 	Chase 	Manhattan, 	36 	UCCRep.584 	(N.Y. 	Sup. 	Ct 	1983);
Foremost 	Insurance 	Co. v. First City 	Savings & Loan Association,
374 	So.2d 	840, 	842-8423 	(Miss. 	1978); 	Miller, 	656 	P.2d 	at 	633;
Chilson 	v. 	Capital 	Bank 	of 	Miami, 	701 	P.2d 	903, 	906-907 	(1985);
Stapleton 	v. 	First 	Security 	Bank, 	675 	P.2d 	83, 	86 	(1983). 	In
Longview 	Bank 	& 	Trust 	Co. 	v. 	First 	Nat. 	Bank 	of 	Azle, 	the 	court
define what is a warranty of good title. It stated that:
[a] 	warranty 	of 	good 	title 	is 	nothing 	more
than an assurance that no one has better title
to 	a 	check 	than 	the 	warrantor, 	that 	the
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instrument 	presented 	contains 	all 	necessary
endorsements 	and 	that 	such 	endorsements 	are
genuine or otherwise deemed effective.
Longview Bank & Trust Co. v. First Nat. Bank of Azle, 750 S.W. 2d
297, 299 (Tex. 1998). See also Aetna Life and Casualty Company v.
Hampton State Bank, 497 S.W.2d 80, 84 (Tex. Civ.App.- Dallas 1973,
writ ref’d n.r.e.)and Miller v. Federal Deposit Ins. Corp., 656 P.
2d 631, 633 (Ariz. Ct. App. 1982).
In 	the 	present 	case, 	there 	were 	two 	banks 	involved 	in 	this
transaction, 	the 	one 	that 	issued 	the 	checks, 	which 	was 	B&T, 	now
Eurobank, which is called the payor or drawee bank, and the one that
deposited 	the 	check 	which 	was 	Doral, 	called 	the 	collecting 	or
depository bank. The debtor filed the present adversary proceeding
against 	the 	Eurobank, 	which 	is 	the 	drawee 	or 	payor 	bank, 	for 	the
checks 	that 	were 	negotiated 	by 	Lyon, 	without 	the 	debtor’s
indorsement. 	Eurobank 	contends 	that 	Doral 	is 	liable 	because 	they
actually deposited the checks into Lyon’s account, with the debtor’s
missing indorsement.
The 	question 	of 	the 	establishing 	the 	liability 	between 	banks
was 	dealt 	with 	in 	Capital 	Dit. 	Te. 	Emp. 	Federal 	Credit 	Union 	v.
Berthaiaume, 	the 	court 	discussed 	the 	holding 	in 	Myers 	v. 	First
National Bank of Scotia, 42 A.D. 2d 657 at 658, stating that:
the collecting bank is liable to the payor bank
when the collecting bank presents a check to the
payor, 	is 	paid 	on 	the 	check, 	and 	subsequently
learns 	that 	its 	warranty 	of 	title 	to 	the 	payor
was 	breached, 	under 	section 	4-207(1)(a) 	of 	the
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UCC, 	because 	the 	check 	was 	not 	properly
endorsed.
Capital Dit. Te. Emp. Federal Credit Union v. Berthaiaume, 432 N.Y.
2d 435, 440 (N.Y. Supp. 1980). Also, in Continental Bank & Trust Co.
v. American Bank & Trust of Pennsylvania, 274 A.2d 549 (1970), it
stated:
[i]n deciding which of the parties must bear this
loss, the court below correctly held that Section
4-207 	of 	the 	Code 	is 	controlling. 	That 	section
provides 	in 	pertinent 	part 	that 	"(e)ach 	...
collecting bank who obtains payment or acceptance
of 	an 	item 	and 	each 	prior 	... 	collecting 	bank
warrants to the payor bank or other payor who in
good faith pays or accepts the item that (a) he
has 	good 	title 	to 	the 	item 	or 	is 	authorized 	to
obtain payment or acceptance on behalf of one who
has 	a 	*304 	good 	title." 	Thus 	the 	Code 	puts 	the
ultimate 	burden 	on 	the 	first 	bank 	honoring 	the
instrument 	to 	make 	certain 	that 	the 	item 	is
properly indorsed.
In 	Federal 	Deposit 	Insurance 	Corp. 	v. 	Marine 	National 	Bank 	of
Jacksonville, supra, footnote 4, at 344. Furthermore, under section
4-207(1)(a), a bank which pays a check on a forged indorsement may
recover payment from a prior collecting bank or person who received
payment thereof, such having warranted to 	the 	payor 	bank 	or 	other
payor who in good faith pays the item, that he has a good title to
it. Commonwealth Federal Sav. & Loan Ass'n v. First Nat. Bank of New
Jersey 513 F.Supp. 296 (D.C. Pa. 1979).
In the case of Longview Bank & Trust Co. v. First Nat. Bank of
Azle, 750 S.W. 2d 297, 299 (Tex. 1998), a payor bank brought a suit
against the depository bank, for the collection of check, 	which was
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accepted 	without 	the 	indorsement 	of 	one 	of 	the 	joint 	payees. 	The
court concluded that the loss falls on the depository bank because
it violated the presentment warranty of good title in section 4-207.
The court stated that “[d]epository banks are best situated to catch
alterations 	or 	unauthorized 	or 	missing 	endorsements 	because 	they
deal 	‘face 	to 	face’ 	with 	the 	endorser 	or 	holder 	presenting 	the
check.” See Fidelity & 	Casualty Co. v. First City Bank of Dallas,
675 S.W.2d 316 (Tex.App.-Dallas 1984, writ ref’d n.r.e.).
In the present case, the Court concludes that Doral was in the
best position to find that the debtor’s indorsement was missing in
three of the five checks in question and that it could not deposit
the 	checks 	into 	the 	account 	of 	Lyon, 	because 	the 	debtor 	was 	not
named 	in 	the 	account. 	Doral 	converted 	the 	three 	checks 	when 	it
negotiated them lacking the debtor’s indorsement and by depositing
them 	in 	Lyon’s 	account. 	B&T, 	now 	Eurobank, 	did 	not 	convert 	the
checks 	because, 	although 	it 	paid 	the 	checks 	to 	Lyon’s 	account 	in
Doral, 	it 	was 	not 	in 	the 	best 	position 	to 	know 	that 	debtor’s
indorsement 	was 	missing 	and 	because 	it 	relied 	on 	the 	presentment
warranties of good title of Doral.
4. Damages
Under section 4-207(c) of the UCC,supra,:
...the 	person 	to 	whom 	the 	warranties 	under
subsection 	(a) 	are 	made 	and 	who 	took 	the 	item 	in
good 	faith 	may 	recover 	from 	the 	warrantor 	as
damages 	for 	breach 	of 	warranty 	an 	amount 	equal 	to
the 	loss 	suffered 	as 	a 	result 	of 	the 	breach, 	but
not more than the amount of the item plus expenses
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and 	loss 	of 	interest 	incurred 	as 	a 	result 	of 	the
breach.
In the case of Commonwealth Federal Sav. & Loan Ass'n v. First Nat.
Bank of New Jersey 513 F.Supp. 296 (D.C. Pa. 1979), the court stated
that 	when 	a 	bank 	pays 	a 	check 	on 	a 	forged 	endorsement, 	which 	has
been made applicable also to the situation when there is a missing
endorsement, it may recover payment from a prior collecting bank or
person 	who 	received 	payment 	thereof, 	such 	having 	warranted 	to 	the
payor bank or other payor who in good faith pays the item, that he
has a good title to it.
On the other hand, in the case of Saxon Mortg. Services, Inc.
v. Harrison, __ A.2d __, 2009 WL 1652157 at page 17 (Md. App. 2009),
the court addressed the issue of a conversion and negligence action
against a depository bank 	and a payor bank regarding a check that
was issued by an insurance company bearing a forged endorsement. In
the 	case, 	the 	court 	analyzed 	different 	factual 	situations 	and 	one
of them similar to the present case; where a check was converted by
a 	depositary 	bank 	and 	the 	debtor 	was 	asking 	in 	damages 	the 	face
value of the check converted. The court stated:
The 	supplier 	should 	not, 	without 	qualification,
be able to recover the entire amount of the check
from the bank that converted the check. Depending
upon the contract between the contractor and the
supplier, the amount of the check may be due [1]
entirely 	to 	the 	contractor, 	in 	which 	case 	there
should 	be 	no 	recovery, 	[2] 	entirely 	to 	the
supplier, 	in 	which 	case 	recovery 	should 	be 	for
the entire amount, or [3] part may be due to one
and the rest to the other, in which case recovery
should 	be 	limited 	to 	the 	amount 	due 	to 	the
supplier.
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Saxon Mortg. Services, Inc. v. Harrison, __ A.2d __, 2009 WL 1652157
at page 17 (Md. App. 2009).
However, 	in 	the 	present 	case, 	the 	debtor 	has 	not 	presented
evidence as to what amount of the checks, if any, he is entitled to.
The 	Court 	finds 	that 	in 	order 	to 	make 	a 	finding 	regarding 	the
debtor’s 	entitlement 	to 	the 	amount 	in 	the 	checks, 	the 	Court 	must
hold a trial where evidence should be submitted by the parties in
order 	to 	know 	what 	agreement, 	if 	any, 	was 	reached 	between 	the
debtor, Summertime and Lyon regarding the checks in controversy.
V. Summary
In the present case, the Court concludes that the debtor has
an action for conversion against Doral, as the payor bank, because
it did not follow the ordinary care standard under section 3-103(7)
of the UCC, it deposited the checks into an account held exclusive
by Lyon, and because it violated the presentment warranties of good
title under section 4-208 of the UCC.
The Court also finds that Eurobank, has failed to identify the
portions of the pleadings which it believes demonstrates that there
is no genuine issue of material fact to 	grant summary judgment as
to 	the 	lack 	of 	agreement 	with 	the 	debtor 	regarding 	the 	amount 	of
$390,579.00, that was going to be disbursed at the 	closing of the
sale of the project. Furthermore, although Eurobank did prove that
Doral 	is 	the 	one 	who 	converted 	the 	checks, 	Eurobank 	still 	has 	to
litigate 	this 	adversary 	proceeding 	in 	order 	to 	prove 	that 	it
discharged 	its 	responsibility 	by 	paying 	the 	checks, 	in 	which 	only
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Lyon was able to collect on. In other words, if Doral has to collect
from 	Lyon 	to 	pay 	the 	debtor, 	and 	then 	Lyon 	has 	to 	collect 	from
Eurobank, 	then 	neither 	of 	the 	parties 	can 	be 	released 	from
responsibility until the 	question as to the debtor’s title to the
proceeds of the checks has been determined.
ORDER
IT 	IS 	ORDERED 	that 	the 	Motion 	for 	Summary 	Judgment 	filed 	by
Eurobank (docket # 161) is hereby DENIED. Furthermore, the Partial
Summary 	Judgment 	(docket 	# 	169) 	filed 	by 	Redondo 	shall 	be, 	and 	it
hereby 	is 	DENIED. 	The 	Clerk 	to 	enter 	a 	new 	Pre-Trial 	order
scheduling the matter.
SO ORDERED.
In San Juan, Puerto Rico, this 31st day of August, 2009.
/s Gerardo A. Carlo-Altieri
____________________________
GERARDO A. CARLO-ALTIERI
Chief, U.S. Bankruptcy Judge
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