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In re Rivera

United States Bankruptcy Appellate Panel of the First Circuit

April 30, 2019

BANCO POPULAR DE PUERTO RICO, Defendant-Appellee. NOREEN WISCOVITCH-RENTAS, Trustee, Plaintiff-Appellant,

          Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Mildred Cabán, U.S. Bankruptcy Judge)

          Javier Vilariño, Esq., on brief for Plaintiff-Appellant.

          Maria T. Alvarez-Santos, Esq., on brief for Defendant-Appellee.

          Before Feeney, Hoffman, and Cary, United States Bankruptcy Appellate Panel Judges.

          Hoffman, U.S. Bankruptcy Appellate Panel Judge.

         Noreen 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, [1] 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 "Debtor").

         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.

         The 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).

         Accordingly, 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 opinion.


         I. Pre-bankruptcy Events

         On 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 notarized.

         The 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 the loan.

         II. Bankruptcy Court Proceedings

         Less 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 liabilities.

         A. The Complaint

         On 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.[3] 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.

         B. BPPR's Answer and the Cross-Motions for Summary Judgment

         BPPR 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.

         The Trustee then followed with a motion for summary judgment accompanied by a supporting statement of uncontested facts.[4] 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, [5] 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.[6] 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).

         BPPR 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.[7] 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."

         BPPR 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."

         BPPR 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.[8]

         Then, 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 the account.

         In 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";[9] and (3) § 553 of the Bankruptcy Code "protects BPPR's right to set[ ]off the amounts due."

         C. The Order

         After 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).

         In the 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."[10] 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).

          The 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)).

         THE APPEAL

         I. Positions of the Parties

         A. The Trustee

         The 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.

         In 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).

         B. BPPR

         BPPR 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 account.

         C. The Trustee's Reply

         In 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. 1995)).

         We are 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.[11] 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 the ...

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