Almeida-Leon v. WM Capital Management, Inc.

Citations: 236 F. Supp. 3d 524; 2017 WL 655447; 2017 U.S. Dist. LEXIS 23343Docket: Civil No. 16-1394 (SEC)

Court: District Court, D. Puerto Rico; February 16, 2017; Federal District Court

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The Federal Deposit Insurance Corporation (FDIC) filed a motion to dismiss, which was granted by U.S. Senior District Judge Salvador E. Casellas. The case involves a complex series of events surrounding a $2.6 million credit line obtained by plaintiffs Juan and Francisco Almeida from RG Premier Bank of Puerto Rico (RG) to finance a third party, Emérito Estrada, for his car dealership. An RG executive allegedly promised the Almeidas expedited processing of a construction loan in exchange for their financial assistance to Estrada, who secured the credit line through mortgage notes on Puerto Rican properties. The Almeidas claimed they felt pressured to assist Estrada for the loan approval.

The FDIC contended that the arrangement was a questionable straw borrower scheme orchestrated by the Almeidas. Estrada subsequently defaulted, leading to a series of lawsuits after RG failed and the FDIC took over as receiver. The FDIC filed a lawsuit against Juan Almeida seeking to recover the default amount, resulting in a default judgment in favor of the FDIC for $2,828,850. Meanwhile, Francisco and his wife sued Estrada in state court, obtaining a judgment against him.

Juan Almeida later transferred his interest in the mortgage notes securing the FDIC's judgment to Francisco and Tenerife LLC. Upon discovering this transfer and the impending auction of the collateral, the FDIC sought a temporary restraining order to prevent the auction, arguing that Juan had fraudulently transferred the assets to evade the FDIC’s claims. The district court granted this order, halting the auction.

An agreement was reached between the FDIC and the Almeidas, wherein the FDIC acquired Juan Almeida’s 50% interest in a State Court Judgment to satisfy his debt related to a Federal Judgment. The agreement mandated that the FDIC conduct an environmental study of the properties before auctioning them, a commitment that the FDIC failed to uphold despite reminders from the Almeidas over several months. As a result, the Almeidas claim they were deprived of significant income from the properties, amounting to over $10,000 monthly. In January 2016, the Almeidas formally alleged that the FDIC breached the agreement due to its inaction. The FDIC later informed the Almeidas that it had sold its rights to the State Court Judgment to WM Capital Management, Inc., which cost approximately $92,840.71, but initially withheld the buyer's identity. After identifying WM Capital, the Almeidas asserted their right to redeem the sale and filed a proof of claim with the FDIC. They also initiated a lawsuit against WM Capital, which was subsequently removed to federal court. WM Capital filed a motion to dismiss the Almeidas' co-owner and litigious credit redemption claims, leaving the breach of contract claim for summary judgment. The Almeidas conceded the litigious redemption claim lacked merit, leading to its dismissal with prejudice. The court agreed that the co-owner redemption claim should be similarly dismissed. The legal standard for reviewing the pleadings under Rule 12(b)(6) involves assessing whether the complaint presents well-pled facts that can plausibly support a claim for relief.

In this case, Puerto Rico's substantive law governs due to the diversity jurisdiction. According to Article 326 of the Puerto Rico Civil Code, ownership shared among multiple individuals is considered common ownership, although the Civil Code discourages such arrangements due to potential conflicts among co-owners. Co-owners, referred to as 'comuneros,' cannot be compelled to remain in joint ownership and may demand division or transfer their shares at any time. Upon the sale of a co-owner's share, remaining co-owners have the right of redemption, known as 'retracto de comuneros,' allowing them to purchase the share at the price paid plus related expenses.

The plaintiffs argue that the FDIC's assignment of Juan Almeida’s interest in a State Court Judgment made them co-owners, thus enabling their right of redemption. However, WM Capital contends that the assignment under Article 1129 did not transfer ownership but merely established a right to manage the assets for liquidation purposes. The court agrees with WM Capital, asserting that for redemption rights to apply, the essential condition of co-ownership must exist, which is absent in this case. The court further notes that the Civil Code allows debtors to extinguish obligations through various methods, including 'dación en pago,' where an asset different from the original promise may be accepted to satisfy a debt.

Article 1129 of the Civil Code permits a debtor to assign property to creditors to satisfy debts, but this assignment only releases liability for the net value of the assigned property unless otherwise agreed. In this context, Juan Almeida assigned his interest in a State Court Judgment to satisfy an FDIC judgment. The core issue is whether the FDIC became a co-owner of this asset under the terms of the original Agreement. 

The Agreement's Section 3 outlines a 'Procedure to Satisfy Judgment,' where the Almeidas and Tenerife LLC assigned an undivided one-half interest in mortgage notes as payment for the FDIC's judgment credit. The Agreement characterizes this as a 'Dación o Cesión para Pago,' creating some ambiguity between 'dación' (transfer of ownership to extinguish a debt) and 'cesión' (assignment under Article 1129). However, the Agreement stipulates that the English version prevails in cases of inconsistency, and the intent is clarified by distinguishing between 'for' payment and 'in' payment, aligning with Article 1129 assignments.

Further, the Agreement specifies that the judgment credit would not be extinguished solely through the assignment; proceeds from the auction would first satisfy the FDIC’s judgment before any excess is delivered to the Plaintiffs. This interpretation is consistent with Article 1129, which emphasizes that clear contract terms should be observed according to Puerto Rico law. 

The central dispute revolves around whether assignments under Article 1129 imply ownership transfer. Although the Puerto Rico Supreme Court has not ruled on this, legal commentators, like Puig Brutau, assert that creditors do not acquire ownership of the assigned property; instead, debts are extinguished up to the net proceeds from the property liquidation.

Article 1129 primarily aims to liquidate assets to satisfy creditor debts, without implying a transfer of ownership. The Spanish Supreme Court clarifies that the debtor grants creditors possession and administration of the property to sell and pay their debts, which does not constitute ownership transfer. Consequently, since the agreement involved an assignment under Article 1129, the FDIC is not considered a co-owner, leading to the failure of the Plaintiffs’ co-owner redemption claim.

The Plaintiffs argue against the assignment being governed by Article 1129, suggesting that when an assignment is made to a single creditor, different provisions of the Civil Code apply, indicating ownership transfer. They point out that Article 1129 refers to "creditors" in plural and argue that the assignment needs court review of debt priorities in a bankruptcy context. However, this interpretation is flawed because legal principles dictate that singular terms can encompass plural meanings unless context indicates otherwise. The text of Article 1129 does not exclude single-creditor scenarios, and prior rulings support that it is applicable in such cases.

Furthermore, the Plaintiffs propose that Article 1129 can only be used in judicial actions, asserting that judicial oversight is necessary for protecting creditor priorities. This claim contradicts established court interpretations, which confirm that Article 1129 can facilitate extrajudicial assignments, with its applicability extending to both singular and plural creditor situations, provided it adheres to Civil Code regulations.

Plaintiffs challenge the validity of the FDIC’s sale of assets to WM Capital, arguing that a Power of Attorney was necessary for the sale due to an alleged failure to convey title. They assert that since they did not execute such a power, the FDIC was incapable of completing the sale. The court finds this argument largely irrelevant; if the sale were invalid, the Plaintiffs’ co-owner redemption claim would fail. Furthermore, the law distinguishes between a power of attorney and a mandate, with the latter potentially being implied and not requiring formal documentation. Article 1129 of the Civil Code provides creditors with the legitimacy to liquidate a debtor's assets, suggesting that a power of attorney was not needed for the FDIC's actions.

Plaintiffs also invoke judicial estoppel, claiming WM Capital cannot dispute its co-ownership status due to previous motions filed in state court. However, the court finds the estoppel argument underdeveloped and insufficiently articulated, with key elements of the argument presented as an afterthought. Judicial estoppel requires proving that a party successfully persuaded a court with a prior inconsistent assertion, but the Plaintiffs fail to demonstrate this. The court outlines three necessary elements for judicial estoppel: a clear inconsistency between positions, previous court acceptance of the earlier position, and the potential for unfair advantage if the new position is accepted. None of these elements are met in this case, as the Plaintiffs' motions do not indicate mutually exclusive positions taken by either the FDIC or WM Capital.

WM Capital's motion to replace the FDIC as a party in a state court action is central to the dispute. Plaintiffs argue that WM Capital's claim in its reply brief—that the purchase agreement allowed for the substitution of the FDIC as co-owner of 50% of the note—contradicts the terms of the agreement. However, the agreement does not support WM Capital's assertion, leading Plaintiffs to argue that this inconsistency undermines WM Capital's current position. Despite the isolated statement, WM Capital’s motion follows a joint request from the FDIC and others to join the FDIC as a co-plaintiff, without asserting co-ownership of the mortgage notes. The motion is based on the rights acquired from the FDIC, which did not include ownership transfer. The state court only recognized the FDIC as a plaintiff, not as a co-owner.

Furthermore, the issue of ownership was not contested in the state court. Both WM Capital and the FDIC aimed to be included as plaintiffs to enforce the mortgage notes. Judicial estoppel, which prevents a party from taking a contradictory position, is not applicable here since the state court did not indicate reliance on WM Capital's prior statement. Plaintiffs also fail to demonstrate how WM Capital would gain an unfair advantage from its current position. The agreement's purpose was for the FDIC to liquidate assets to satisfy a judgment, and applying judicial estoppel would unfairly benefit the Plaintiffs while prejudicing WM Capital. Ultimately, the court finds no intent to manipulate and dismisses Plaintiffs’ claims with prejudice, ordering judgment accordingly.

Juan was not a plaintiff in the case at hand. WM Capital contended that enforcing any redemption claim against it would breach the Financial Institutions Reform and Recovery Act (FIRREA). With Plaintiffs having abandoned their litigious credit claim, WM Capital's argument now only concerns the co-owner redemption claim. However, WM Capital's preemption argument is adequately supported for the former claim but lacks sufficient detail for the latter, as cited cases primarily address litigious credit rather than co-owner redemption claims. Despite this, the co-owner redemption claim is fundamentally flawed and does not necessitate further analysis of the FIRREA argument.

The Civil Code indirectly references 'dación en pago,' without an explicit definition. The Plaintiffs' abandoned claim focused on selling the Judgment Credit, whereas the co-owner claim aimed at the FDIC's stake in the State Court Judgment. Generally, materials outside the complaint are not considered at this stage, unless they are central to the claim or sufficiently referenced. In this instance, the co-owner redemption claim is based on an Agreement, which is heavily referenced in the Amended Complaint and attached to the original state court filing, allowing the Court to consider it fully.

Under Puerto Rico's Civil law, treatises and Spanish Supreme Court decisions serve as valid legal sources, providing insight into how the Puerto Rico Supreme Court might rule. The FDIC's subsequent sale of assets to WM Capital is deemed irrelevant, as the FDIC could not transfer ownership it never possessed. The court emphasized that the extrajudicial assignment follows the Agreement's provisions and general contract rules, not civil judicial procedures for multiple creditors, which are not applicable here. Consequently, the Plaintiffs' previous arguments regarding a 'trust obligation' are dismissed by the Court based on WM Capital's compelling counterarguments.