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The Plaza Resort At Palmas, Inc v. Ernesto Brito

April 25, 2012

THE PLAZA RESORT AT PALMAS, INC., DEBTOR. SCOTIABANK DE PUERTO RICO, PLAINTIFF-APPELLANT,
v.
ERNESTO BRITO, MARIGLORIA DEL VALLE, DAVID NIETO CARRERO, LIZETTE VARGAS VALLE, LETICIA FLORES BERGANZO, FRANCISCO SIERRA MENDEZ, MARIA RODRIGUEZ DE SIERRA, CRUZ A. TORRES COLON, PAULITA COLON FLORES, JOSEPH BURGOS, GILDA CRUZ, NOREEN ORTIZ, CLAUDIO MEDINA, MARIA ROMERO, ELISELINA ROSARIO, AND RAFAEL ALMODOVAR, DEFENDANTS-APPELLEES.



Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Sara E. de Jesus, U.S. Bankruptcy Judge) Bankruptcy Case No. 09-09980-BKT Adversary Proceeding No. 10-00175-BKT

Per curiam.

FOR PUBLICATION

Before Haines, Hillman, and Boroff, United States Bankruptcy Appellate Panel Judges.

Before us is the appeal of Scotiabank de Puerto Rico ("Scotiabank") from the bankruptcy court judgment dismissing its complaint seeking a declaratory judgment that numerous timeshare owners are general unsecured creditors. For the reasons set forth below, we AFFIRM the judgment of the bankruptcy court.

BACKGROUND

I. Pre-Petition Events

In June 2001, The Plaza Resort at Palmas, Inc. ("the Debtor") established a timeshare regime on property located in Humacao, Puerto Rico ("the Property"). On the same date, it also granted a first mortgage on the Property ("Deed 9") to The Bank and Trust of Puerto Rico,*fn1 to secure payment of a loan to develop the timeshare regime.*fn2 At the heart of this controversy is the subordination provision set forth in Paragraph 18 of Deed 9 ("the subordination clause"), which provided:

EIGHTEENTH: Subordination. The MORTGAGEE, without payment, hereby agrees to subordinate the lien created hereby in favor of the personal ownership interest of each owner of an accommodations [sic] or timeshare despite any rejection or cancellation of any such owner's purchase contract with the MORTGAGOR, as a result of any bankruptcy proceedings with respect to MORTGAGOR, so long as such owner remains in good standing with respect to his/her obligations under the timeshare plan documents, including, but not limited to, paying all assessments levied upon his/her accommodation or timeshare. This subordination shall bind all successors and assigns of the MORTGAGOR and MORTGAGEE and any other person who acquired the Property through foreclosure, by deed in lieu of foreclosure or by any other legal means, irrespective of whether the accommodation or timeshare is of the type coupled with a special property right or not. This subordination shall apply only to those persons who [own] or co-own a timeshare or accommodation which have been sold in the ordinary course of Mortgagor's business pursuant to the terms and conditions of the Senior Secured Term Loan Agreement. For purposes of this clause the Mortgagor's unsold timeshares and accommodations shall not be deemed to be included in the subordination.

In July 2001, the Debtor issued a Public Offering Statement ("the OS") regarding the timeshare regime, which stated, in pertinent part:

The Units and Timeshare Interests being offered by the Developer are subject to the provisions of [T]he Puerto Rico Timeshare [and Vacation Club] Act.*fn3 Owners are entitled to the protective measures afforded by [T]he Puerto Rico Timeshare [and Vacation Club] Act to purchasers of Timeshare Interests.

The OS also provided:

c. Status of Title to Underlying Real Property. Title to the real property underlying the Plaza Resort is subject to the following:

(i) Encumbrances. There will be two mortgages encumbering the real property underlying the Plaza Resort. The holder of the first mortgage is the bank that financed the acquisition by the Developer of the real property (including the existing building, parking and related facilities) that was dedicated by the Developer to the timeshare regime to create the Plaza Resort. The holder of the second mortgage is the entity that sold the real property (including the existing building, parking and related facilities) that was dedicated by the Developer to the timeshare regime. The holders of these mortgages, as required by the Puerto Rico Timeshare Act, have subordinated the mortgages to the rights of the Owners and the rights of the owner of any Unit in the Plaza Resort.

In the OS, "Purchaser" was defined as a "prospective Owner," and "Owner" as "the owner of a Timeshare Interest at the Plaza Resort." "Timeshare Interest or Unit Week" meant the timeshare contractual ownership interest in the Plaza Resort owned by the Owner, which timeshare contractual ownership interest gives the Owner the exclusive use and occupancy of a [sic] either a Fixed Week or a Floating Week within a specific Unit at the Plaza Resort in perpetuity.

Additionally, a "Unit" meant "an accommodation of the Plaza Resort which is subject to ownership by one or more persons pursuant to the Plaza Resort Documents."

In June 2002, Ernesto Brito and Marigloria del Valle (collectively "Brito and del Valle") executed an unrecorded purchase contract ("the Purchase Contract") together, whereby they purchased a timeshare Unit Week for the sum of $18,200.00. The Purchase Contract provided that Brito and del Valle purchased the Unit Week to "hold for an indefinite time," "free and clear of all encumbrances," except taxes and assessments.

II. Post-Petition Events

Unable to sell a sufficient number of timeshare unit weeks, the Debtor filed a voluntary petition for chapter 11 relief in November 2009. On its Schedule D, it listed numerous timeshare owners as secured creditors, including: Brito and del Valle, Claudio Medina ("Medina"), and Maria Romero ("Romero") (collectively "the Creditors"); Perimetro, Inc. ("Perimetro"), the corporate owner of over one hundred timeshare units; and R-G. The Creditors filed proofs of claim, asserting their secured status as owners of timeshare rights. Brito and del Valle appended the Purchase Contract as an exhibit to their proof of claim, and indicated that their claim was secured by real estate worth $18,200.00.

R-G also filed a proof of secured claim, which it subsequently transferred to Scotiabank. In addition to its proof of claim, R-G filed an objection to Schedule D, asserting that the timeshare owners did not hold secured claims and requesting an order directing the Debtor to remove them from Schedule D.*fn4

In November 2010, while the objection was pending as a contested matter ("the contested matter"), Scotiabank, as R-G's successor-in-interest, commenced an adversary proceeding against the individual timeshare owners.*fn5 In its complaint, Scotiabank sought a declaratory judgment under § 506,*fn6 as well as provisions of The Timeshare Act, that the defendant timeshare owners did not possess valid liens. The Creditors filed answers to the complaint, in which they objected to the entry of a declaratory judgment. Additionally, Brito and del Valle asserted an ...


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