United States Bankruptcy Appellate Panel of the First Circuit
JUAN ENRIQUE CRUZ RIVERA, Debtor.
BANCO POPULAR DE PUERTO RICO, Defendant-Appellee. NOREEN WISCOVITCH-RENTAS, Trustee, Plaintiff-Appellant,
from the United States Bankruptcy Court for the District of
Puerto Rico (Hon. Mildred Cabán, U.S. Bankruptcy
Vilariño, Esq., on brief for Plaintiff-Appellant.
T. Alvarez-Santos, Esq., on brief for Defendant-Appellee.
Feeney, Hoffman, and Cary, United States Bankruptcy Appellate
Hoffman, U.S. Bankruptcy Appellate Panel Judge.
Wiscovitch-Rentas, chapter 7 trustee (the
"Trustee"), appeals from that portion of the
bankruptcy court's August 2, 2018 order (the
"Order") denying her motion for summary judgment on
count I of her complaint and granting the cross-motion of
Banco Popular de Puerto Rico ("BPPR" or "the
bank"). In count I, the Trustee asserted a claim for
relief under Bankruptcy Code §§ 542 and 553,
seeking to recover from BPPR the sum of $31, 434.17-the
amount the bank withdrew, pre-bankruptcy, from the savings
account of the debtor, Juan Enrique Cruz Rivera (the
Trustee asserted that BPPR was not entitled to the seized
funds because it failed to perfect a security interest in the
savings account in accordance with the requirements of the
Puerto Rico Civil Code, and because the funds were not freely
available for withdrawal by the Debtor-a prerequisite to a
bank's ability to exercise a right of setoff. Needless to
say, BPPR disagreed with both the Trustee's assertions.
The bankruptcy court ruled that BPPR enjoyed a perfected
security interest in the savings account. As a result, the
court did not address the Trustee's alternative claim as
to the unavailability of BPPR's setoff rights.
bankruptcy court also granted summary judgment in favor of
BPPR on count II of the complaint, in which the Trustee
asserted a preference claim under § 547. As the Trustee
neither identified that issue in her statement of issues nor
briefed it, she has waived the issue for appeal purposes.
See United States v. Bayard, 642 F.3d 59, 63 (1st
Cir. 2011) (stating an appellant's failure to brief an
issue waives it); City Sanitation, LLC v. Allied Waste
Servs. of Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d
82, 91 (1st Cir. 2011) (stating an issue omitted from the
statement of issues is waived).
we AFFIRM the Order as to count II, and, for
the reasons discussed below, we VACATE the
Order as to count I and REMAND to the
bankruptcy court for further proceedings consistent with this
October 19, 2012, BPPR loaned the Debtor $31, 434.17. In a
loan agreement memorializing this transaction, the Debtor
agreed to make 83 monthly payments of $78.59 each, beginning
on November 19, 2012, and a final lump sum payment of $31,
512.76 on October 19, 2019. The Debtor authorized BPPR to
debit the payments from his BPPR savings account ending in
6280. On the same date, the Debtor also signed a pledge
agreement, whereby he secured his obligations under the loan
agreement with his BPPR savings account ending in 1438 (the
"1438 account"). The pledge agreement was not
Debtor defaulted in his monthly payment obligation to BPPR
for the months of February and March 2015. Consequently, on
April 30, 2015, BPPR debited the 1438 account in the amount
of $31, 434.17, thereby paying off the outstanding balance of
Bankruptcy Court Proceedings
than a week later, on May 5, 2015, the Debtor filed a
petition for relief under chapter 7 of the Bankruptcy Code.
On his schedules accompanying the petition, the Debtor listed
approximately $77, 000.00 in assets, and $185, 000.00 in
April 6, 2017, the Trustee commenced an adversary proceeding
against BPPR. In count I of her complaint, the Trustee
alleged that BPPR's debiting the 1438 account was an
improper setoff because the 1438 account had been pledged to
BPPR as collateral for the loan to the Debtor and was
unavailable to the Debtor, making it "a special purpose
deposit" not subject to setoff under the Puerto Rico
Civil Code. In her prayer for relief, the Trustee
requested an order pursuant to § 542 directing BPPR to
turn over to her the offset amount of $31, 434.17.
BPPR's Answer and the Cross-Motions for Summary
answered the complaint, asserting several affirmative
defenses, including that: (1) its claim was fully secured;
(2) the complaint "was barred by the doctrine of setoff
and/or recoupment"; and (3) the pledge agreement
complied with the provisions of the Puerto Rico Civil Code.
Trustee then followed with a motion for summary judgment
accompanied by a supporting statement of uncontested
facts. She reiterated that the funds in the 1438
account were not subject to setoff because they "were
frozen" and "[un]available for use or for
withdrawal at will." This, the Trustee claimed, made the
1438 account a special purpose account, rather than a general
purpose account. She elaborated: "If [ ] the bank holds
a special purpose deposit like a trust fund, its obligation
is not one of a general debtor, but rather a trustee. The
funds are not owed to the depositor but owned by it[.]"
Under such circumstances, the Trustee argued, the required
mutuality for a right to setoff was absent. To support this
claim, the Trustee relied upon Constructora Maza, Inc. v.
Banco de Ponce, 616 F.2d 573, 579 (1st Cir. 1980)
(stating a "bank's right to set-off is limited to
deposits made in good faith, in the ordinary course of
business, and subject to withdrawal at the will of the
depositor"). The Trustee also raised a new claim.
Asserting her strong arm powers under § 544(a)(1), the
Trustee sought to "avoid" the pledge agreement,
because it was not notarized and thus failed to satisfy the
authentication requirement of P.R. Laws Ann. tit. 31, §
5023, making it unenforceable against third
parties. In support of the asserted notarization
requirement, the Trustee cited, among other authorities,
Fuste v. Eurobank & Tr. Co. (In re Almacenes Gigante,
Inc.), 159 B.R. 638 (Bankr. D.P.R. 1993).
countered with a cross-motion for summary judgment, asking
the court to grant summary judgment in its favor, declare its
claim secured, and deny the Trustee's summary judgment
motion. BPPR included within the cross-motion a
list of uncontested material facts, which essentially
paralleled the Trustee's. Significantly, BPPR
acknowledged that it had "placed a hold on [the 1438
account] for a total amount of $31, 434.17 as [a] guarantee
for the personal loan."
maintained that the pledge agreement satisfied the
requirements for a valid pledge prescribed in Article 1756 of
the Civil Code of Puerto Rico, P.R. Laws Ann. tit. 31, §
5001. Additionally, BPPR pointed to P.R. Laws Ann. tit. 31,
§ 5021, entitled "Requisites of [P]ledge,"
which provides: "Besides the requisites mentioned in
§ 5001 of this title, it is necessary, in order to
constitute the contract of pledge, that the pledge should be
placed in possession of the creditor or of a third party by
common consent." P.R. Laws Ann. tit. 31, § 5021.
BPPR claimed that the "Debtor gave his consent by
signing the loan note and pledge agreement for BPPR to hold
the amount of $31, 434.17 as a guarantee for the approved
personal loan." BPPR argued that the Debtor "could
continue using [the 1438 account] by depositing and
withdrawing monies in excess of the guaranteed amount."
also challenged the Trustee's authentication argument,
asserting that the Supreme Court of Puerto Rico held in
Ramos Mimoso v. Tribunal Superior de P.R., 93 D.P.R.
551 (1966), that a pledge can be oral, without any formality,
provided it satisfied the requirements of Articles 1756 and
1762 of the Civil Code of Puerto Rico.
contrary to its prior argument, BPPR asserted in its
cross-motion that the Commercial Transactions Act of Puerto
Rico (also known as the Puerto Rico Uniform Commercial Code
and hereinafter sometimes the "PR UCC")-and not
Article 1756 of the Civil Code of Puerto Rico-governed the
underlying transaction. BPPR attempted to reconcile the
inherent inconsistency in its position by explaining that it
looked to the Puerto Rico Civil Code merely to supply the
definition of a pledge and then turned to the PR UCC to
establish that it had a perfected security interest in the
1438 account, stating:
Section 2264 of the [PR UCC] establishes that a security
interest in a deposit account is perfected by control of the
collateral. Section 2214(a)(1) establishes that a secured
party has control of a deposit account if the secured party
is the bank with which the deposit account is maintained.
BPPR claimed that it had perfected its security interest in
the 1438 account under the PR UCC by maintaining control over
addition, BPPR defended its right of setoff with a
three-pronged argument: (1) "Section 2367 [of the PR
UCC] establishes that . . . after default, if a secured party
holds a security interest in a deposit account perfected by
control, [it] may apply the balance of the deposit account to
the obligation secured by the deposit account"; (2)
"Section 2290 [of the PR UCC] establishes a right of
[setoff] of a secured party as to a deposit account
maintained with the secured party"; and (3) §
553 of the Bankruptcy Code "protects BPPR's right to
set[ ]off the amounts due."
the bankruptcy court received the motion for summary judgment
and cross-motion, it entered an order directing the parties
"to file opposing [statements of] material facts"
pursuant to Rule 56(c) of the Local Civil Rules for the U.S.
District Court for the District of Puerto Rico. In response,
the Trustee and BPPR filed a "joint motion in
compliance," representing that the cross-motions did
"not require opposing statements since there [were] no
material facts in controversy and the remaining unresolved
dispute [was] primarily legal." Thereafter, the
bankruptcy court, relying on the "stipulated [ ]
salient" facts set forth in the parties' respective
statements of uncontested material facts, and without a
hearing, entered the Order that is the subject of this
appeal. Wiscovitch v. Banco Popular de P.R. (In re Cruz
Rivera), Adv. Pro. No. 17-00093 (MCF), 2018 WL 3702481,
at *1 (Bankr. D.P.R. Aug. 2, 2018).
Order, the bankruptcy court acknowledged that "the
parties filed a motion to indicate that all facts as alleged
in their summary judgment motions [were]
uncontested." Id. at *1 n.4. The court then
ruled that BPPR "had a valid and enforceable lien on the
Debtor's savings account" which was not subject to
avoidance under § 544(a) and, therefore, it was
unnecessary to address the Trustee's request for
turnover. Id. at *6. The bankruptcy court reasoned:
Deposit accounts fall within the scope of personal property
regulated by Puerto Rico's Commercial Transactions Act,
P.R. Laws Ann. tit. 19, § 2219(a). Section 9-109 of the
Commercial Transactions Act specifically states that the
Civil Code of Puerto Rico shall not apply with regard to
security interests in personal property covered by the
Commercial Transactions Act. P.R. Laws Ann. tit. 19, §
2219(e). The Debtor's savings account is within the
Commercial Transactions Act's definition of a
"deposit account." The Commercial Transactions Act
defines a deposit account as ". . . a demand, time,
savings, passbook, or similar account maintained with a
bank." P.R. Laws Ann. tit. 19, § 2212(29).
Therefore, the applicable law for the creation and perfection
of security interests in deposit accounts is the Commercial
Transactions Act of Puerto Rico and not the Civil Code.
A security interest in a deposit account may be perfected by
control, under Sections 9-104 and 9-314(a) of the Commercial
Transactions Act. P.R. Laws Ann. tit. 19, § 2214(a);
P.R. Laws Ann. tit. 19, § 2264. Section 9-314(a)
expressly states that "a security interest in . . .
deposit accounts may be perfected by . . . control under
Section 9-104. P.R. Laws Ann. tit. 19, § 2264. Section
9-104(a)(1) provides the requirements for control of the
collateral; "A secured party has control of a deposit
account if . . . (1) the secured party is the bank with which
the deposit account is maintained . . . [.]" P.R. Laws
Ann. tit. 19, § 2214(a).
Id. at *4 (footnotes omitted).
bankruptcy court rejected the Trustee's reliance on
In re Almacenes Gigante, Inc., supra, and
her assertion that BPPR's security interest in the 1438
account was unperfected due to the pledge agreement's
lacking authentication, stating:
The Trustee's argument omits more than 20 years of
legislation in Puerto Rico regarding liens on personal
property. Puerto Rico's Commercial Transactions Act-to
some extent-adopted the Uniform Commercial Code's
modernization of the law governing commercial transactions,
beginning with Act No. 208 of August 17, 1995. Act No. 21 of
January 17 of 2012 updated the Uniform Commercial Code's
Article 9. Almacenes Gigante's holding regarding
pledges was rendered in 1993 under applicable law at that
time period. Since the new law was enacted, the provisions of
the Civil Code are inapplicable to the case at hand.
Id. at *4 n.6. The bankruptcy court then added:
"[A]ll actual and potential creditors of the debtor are
always on notice that the bank with which the debtor's
deposit account is maintained may a ssert a claim against the
deposit account." Id. at *4 (citation omitted).
Lastly, the court observed that "if the parties have so
agreed, the secured party may 'apply the balance of the
deposit account to the obligation secured by the deposit
account' in case of default." Id. (quoting
P.R. Laws Ann. tit. 19, § 2367(a)(4)).
Positions of the Parties
Trustee asserts that the bankruptcy court erred in concluding
that BPPR held a perfected security interest in the 1438
account under the PR UCC by virtue of its control over the
1438 account. In support, the Trustee raises an argument here
that she did not raise in the bankruptcy court-that the
Debtor's "personal loan agreement" with BPPR
was a consumer transaction, expressly excluded from the scope
of the PR UCC by P.R. Laws Ann. tit. 19, § 2219(d)(13).
The Trustee justifies the consumer transaction
characterization by stating-also for the first time on
appeal-that the Debtor used the loan proceeds to repay a
personal loan, a VISA credit card balance, and other consumer
debts. Thus, the Trustee contends, the underlying loan
transaction falls within the definition of a consumer
transaction under P.R. Laws Ann. tit. 19, § 2212(a)(26)
and is not governed by the PR UCC.
addition, the Trustee maintains that the bankruptcy court
erred in ruling that control alone was sufficient to perfect
BPPR's lien on the 1438 account against third parties.
She argues that Puerto Rico's "authentic document
requirement" is an "absolute rule," and thus,
even if the pledge agreement was valid between BPPR and the
Debtor, it was "not binding on the Trustee" because
it was not notarized. The Trustee bolsters her argument by
citing In re Santos & Nieves, Inc., 814
F.2d 57, 61 (1st Cir. 1987), where the court stated:
The law in Puerto Rico is clear in its statement that
unauthenticated pledges are not effective against third
parties. 31 L.P.R.A. § 5023. . . . An unauthenticated
pledge agreement which is ineffective against third parties
will necessarily be subordinate to the rights of the trustee,
and may be avoided by the trustee pursuant to his powers
under [ ] § 544(a)(1).
argues that: (1) the provisions of the PR UCC, not the Civil
Code of Puerto Rico, govern the creation of its security
interest; (2) the 1438 account is a "deposit
account" as defined in Section 9-102 of the PR UCC; and
(3) BPPR "perfected its security interest through
control" in accordance with the provisions of the PR
UCC. In addition, BPPR asserts that the Trustee waived her
"consumer transaction" argument by failing to raise
it in the proceedings below. During oral argument and in its
supplemental brief filed post-argument, BPPR also asserted
that it had a right of setoff under Puerto Rico law, whether
or not it had perfected its security interest in the 1438
The Trustee's Reply
response to the claim that her consumer transaction argument
is late, the Trustee contends that she consistently argued in
the proceedings below that the "Civil Code and its
pledging provisions are the laws to be applied." In
contrast, the Trustee points out, BPPR "neither raised
an affirmative defense based on the PR UCC nor mentioned its
applicability in the answer to the complaint." Citing
Montalvo v. Gonzalez-Amparo, 587 F.3d 43, 48, 49
(1st Cir. 2009), the Trustee insists that we should exercise
our discretion to consider her consumer transaction argument.
In Montalvo, the court noted the following factors
to consider when deciding whether to permit an exception to
the waiver principle: (1) whether the omission of an issue
has deprived the appellate court of "useful
factfinding"; and (2) whether the omitted argument was
"highly persuasive" or "pivotal."
Id. at 48 (citing Nat'l Ass'n of Soc.
Workers v. Harwood, 69 F.3d 622, 627-28 (1st Cir.
mindful that exceptions to the raise-or-waive rule are
reserved for rare cases. See Villafañe-Neriz v.
F.D.I.C., 75 F.3d 727, 734 (1st Cir. 1996). We note,
however, that whether a contention has or has not been raised
previously is sometimes "a matter of degree."
Montalvo, 587 F.3d at 48. Here and in the court
below, the Trustee has consistently referred to the
underlying transaction as a "personal loan" and has
insisted that the validity of the pledge agreement was
governed by the Civil Code of Puerto Rico rather than the PR
UCC. The common thread running through the
Trustee's arguments, below and on appeal, is that the
pledge agreement is unenforceable under the Civil Code of
Puerto Rico. In addition, as discussed below, the
"consumer transaction" argument may be pivotal to