Case Type:
Case Status:
Reversed and Remanded
21-1299 (1st Circuit, Jul 28,2022) Published
A question remains whether the set-off that Oriental Bank asserts here is senior to the secured interest that MAPFRE has in the same collateral under Puerto Rico law, as well as the fact-laden question whether Oriental Bank's set-off was a "mutual debt," 11 U.S.C. § 553(a); see In re Pub. Serv. Co. of N.H., 884 F.2d 11, 14 (1st Cir. 1989).("[A] set[-]off may flourish in bankruptcy proceedings only where mutuality of obligation exists. We vacate the grant of summary judgment against Oriental Bank and the grant of summary judgment in favor of Builders and MAPFRE on Oriental Bank's claims.
Procedural context:
Builder's complaint set forth four claims under §§ 542 and 543. Counts One and Two of Builders's complaint allege, respectively, that under §§ 542 and 543, the Financing Authority is required to turn over the funds Builders alleges that the Financing Authority still owes it for certain construction projects. Builders alleges in those two counts that the Financing Authority did not satisfy its obligations to Builders by directly depositing funds into Builders' Deposit Account because Builders had instructed the Financing Authority to send those funds directly to MAPFRE. Counts Four and Five allege, under §§ 542 and 543 of the Bankruptcy Code, that Oriental Bank is required to return the funds that it took from Builders' Deposit Account as a set-off so that those funds can be delivered to MAPFRE, which the complaint further alleges has a senior claim as to those funds. Count Three of the complaint alleges that "[u]nder Puerto Rico [l]aw[,] the wrongly made payment does not extinguish the obligation" that the Financing Authority has under its construction contract with Builders for the construction projects in Cabo Rojo, such that the Financing Authority still owes Builders a debt under that contract that must be paid. Oriental Bank moved to dismiss Builders' complaint under Federal Rule of Civil Procedure 12(b)(6) on February 6, 2017. The Bankruptcy Court denied the motion. On April 3, 2017, MAPFRE intervened in Builders' adverse action, and on May 26, 2017, MAPFRE filed its own complaint against Builders, the Financing Authority, and Oriental Bank. MAPFRE requested in that complaint, among other things, that Oriental Bank turn over the funds that had been deposited by the Financing Authority in Builders' Deposit Account. Following the Bankruptcy Court's denial of Oriental Bank's motion to dismiss, Oriental Bank answered Builders' complaint on June 2, 2017. As part of the answer, Oriental Bank brought a counterclaim against Builders, in which Oriental Bank alleged that, under Puerto Rico law, it had a valid, enforceable lien against Builders' accounts receivable and Deposit Account.
Builders Holding Company ("Builders"),1 a general contractor, filed for bankruptcy in the United States Bankruptcy Court for the District of Puerto Rico in August 2016. Builders then filed an adverse action against the Puerto Rico Infrastructure Financing Authority ("Financing Authority"), which had hired Builders for construction projects, and Oriental Bank, with which Builders had a deposit account. Builders' surety, MAPFRE PRAICO Insurance Company and Endurance Assurance Corporation ("MAPFRE"), intervened in that adverse action and filed its own claims against Oriental Bank. At the same time, Oriental Bank filed counterclaims in the adverse action against MAPFRE and Builders. All the claims in the adverse action pertained to funds -- totaling more than $450,000 -- that the Financing Authority had directly deposited in Builders' deposit account with Oriental Bank and that Oriental Bank had taken from that account to set off a debt that Builders owed to it. The Bankruptcy Court granted summary judgment against Oriental Bank on all the claims asserted against it.2 Oriental Bank appealed that ruling to the District Court, which affirmed. We vacate and remand the grant of summary judgment against Oriental Bank on all the claims.
USCA, 1st Cir. C.J. Barron, Howard and Gelpi

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