Miranda v. Banco Popular De P.R. (In re Mercado)

Citation: 587 B.R. 224Docket: CASE NO. 15–09902 (MCF); ADVERSARY CASE NO. 17–00286 (MCF)

Court: United States Bankruptcy Court, D. Puerto Rico; June 15, 2018; Us Bankruptcy; United States Bankruptcy Court

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Mildred Caban Flores, United States Bankruptcy Judge, ruled on the request by Chapter 7 Trustee Wilfredo Segarra Miranda for judgment on the pleadings concerning avoidance and preservation of an unrecorded mortgage. The Court determined that, under Puerto Rico law, an unrecorded mortgage is considered inexistent, thus the Trustee cannot avoid it. Consequently, the Court denied the Trustee's request and dismissed the adversary case against Banco Popular de Puerto Rico.

The procedural history reveals that Eduardo Rivera Mercado, the Debtor, acquired property in Orocovis, Puerto Rico, in 2002 and executed a mortgage in favor of Metro Island Mortgage, Inc. in 2014, which was later transferred to Banco Popular, but was never recorded. Following the Debtor's Chapter 7 bankruptcy filing in December 2015, the Trustee sought to avoid the unrecorded mortgage and preserve it for the estate.

In addressing the motion for judgment on the pleadings, the Court referenced Rule 12(c) of the Federal Rules of Civil Procedure, applicable in bankruptcy cases, emphasizing that all well-pleaded factual allegations must be accepted as true. The Trustee contended that the unrecorded mortgage constituted an avoidable transfer under 11 U.S.C. 544(a)(3) and 551, citing relevant case law. However, Banco Popular argued that mere execution of the mortgage without recordation does not equate to an avoidable transfer, and pointed out the Court's prior ruling that a trustee cannot assert avoidance or preservation actions for unrecorded mortgages under the relevant bankruptcy code sections.

An unrecorded mortgage cannot be avoided as a transfer under 11 U.S.C. § 544(a) since it does not constitute a valid lien in Puerto Rico without proper recording. According to 11 U.S.C. § 544(a), a trustee may avoid debtor transfers that are voidable by a bona fide purchaser who has perfected a transfer. A transfer, as defined under 11 U.S.C. § 101(54), includes the creation of a lien or any mode of disposing of property. State law governs property interests, and in Puerto Rico, the recording of a mortgage is essential for establishing a valid lien. If a mortgage deed is not recorded in the Property Registry, as was the case with Banco Popular, no transfer of interest occurs. Thus, the Trustee cannot avoid the unrecorded mortgage for the estate’s benefit under section 551, since it does not meet the definition of a transfer under 11 U.S.C. § 101(54). Comparatively, in Massachusetts, an unrecorded mortgage is enforceable between the parties but invalid against third parties without actual notice, highlighting the difference in treatment of unrecorded mortgages between jurisdictions.

Under Massachusetts law, an unrecorded mortgage is enforceable between the debtor and the mortgagee, allowing a trustee to avoid such a mortgage as a transfer. However, under Puerto Rico law, unrecorded mortgages are unenforceable among the debtor, mortgagee, and third parties, and do not create a lien or security interest unless recorded. In Puerto Rico, a mortgagee must record the mortgage deed in the Property Registry to secure a legal interest in the property and to have the right to foreclose in case of default. The court highlights that, despite the trustee's ability to avoid the unrecorded mortgage, the trustee cannot gain superior rights over Banco Popular, which did not record its mortgage deed, rendering the mortgage lien nonexistent under local law. Consequently, the trustee’s ability to preserve the unrecorded mortgage for the estate under 11 U.S.C. 551 is also denied as no transfer of property occurred. The court dismisses the trustee’s request for judgment on the pleadings under Fed. R. Civ. P. 12(c), stating that an unrecorded mortgage does not transfer interest in real property in Puerto Rico, leading to the dismissal of claims related to avoidance and preservation under 11 U.S.C. 544 and 551. Banco Popular asserts that the debtor is an indispensable party in the adversary action, as Puerto Rico law requires property owners to be included in actions affecting their rights.

In Segarra v. Schwarz Reitman, Case No. 15-00020, the court emphasized that all co-owners must be included in litigation concerning jointly owned real property, as established in Metropolitan Marble Corp. v. Pichardo. A judicial proceeding for the execution of a judgment and public sale is rendered void if any co-owner is absent. An indispensable party, one whose rights could be affected by the judgment, must be included; even those who may benefit from the litigation have a right to be heard. The Trustee cannot avoid a mortgage in the Property Registry without involving the Debtor, as it affects their property rights. The case references In re Traverse, which illustrates that the debtor's inclusion is necessary for the Trustee to preserve the mortgage for the estate's benefit. The Trustee's failure to include the Debtor was a significant oversight. To perfect a property interest beyond recording a mortgage, the lender must file a collection action and possibly record a favorable judgment to improve its status. The Trustee erroneously relied on outdated legal rationale and failed to disclose adverse rulings against him, violating ABA Model Rules of Professional Conduct. Additionally, the Trustee's argument regarding the avoidance of Banco Popular's mortgage as a post-petition interest under 11 U.S.C. 549 is unfounded since the mortgage was executed prepetition.