Scotiabank de Puerto Rico v. Brito (In re The Plaza Resort at Palmas, Inc.)

Summarized by Bodie Colwell , Preti Flaherty LLP
13 years 10 months ago

Citation:

In re The Plaza Resort at Palmas, Inc., No. 09-09980 (B.A.P. 1st Cir. April 25, 2012)

Tag(s):

Ruling:

AFFIRMING the bankruptcy court, the B.A.P. found that both the record on appeal and the law of Puerto Rico amply supported the bankruptcy court’s rejection of the allegations of the complaint and its conclusion that Scotiabank’s lien was subordinated to the ownership interests of the timeshare holders. The B.A.P. agreed with the bankruptcy court that it was indeed “clear from the documents, taken as a whole, that [the Debtor] intended to transfer interests in real property to the purchasers and that the purchasers intended to acquire an interest in real property.”

Procedural context:

Scotiabank de Puerto Rico (“Scotiabank”) appealed from the bankruptcy court judgment dismissing its complaint seeking a declaratory judgment that numerous timeshare owners were general unsecured creditors.

Facts:

The Plaza Resort at Palmas, Inc. (“the Debtor”) established a timeshare regime on property located in Humacao, Puerto Rico. To secure payment of a loan to develop the timeshare regime, it granted a first mortgage on the property to The Bank and Trust of Puerto Rico. The deed contained a subordination provision in which the mortgagee agreed to subordinate its lien in favor of the personal ownership interest of each owner of a timeshare that was sold in the ordinary course the the mortgagor's business. The Debtor issued a Public Offering Statement which stated that the units and timeshare interests were being offered subject to the provisions of "the Puerto Rico Timeshare [and Vacation Club] Act. Owners are entitled to the protective measures afforded by [T]he Puerto Rico Timeshare [and Vacation Club] Act to purchasers of Timeshare Interests." Additionally the Offering Statement included a provision on encumbrances which stated,"There will be two mortgages encumbering the real property. . . . The holder of the first mortgage is the bank that financed the acquisition by the Developer of the real property . . . 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 . . . 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." Ernesto Brito and Marigloria del Valle executed an unrecorded purchase contract for a timeshare unit week. The purchase contract provided that Brite and del Valle purchased the unit week to "hold for an indefinite time," "free and clear of all encumbrances." Unable to sell a sufficient number of timeshare unit weeks, the Debtor filed a voluntary chapter 11 petition. On its Schedule D, it listed numerous timeshare owners as secured creditors, including: Brito and del Valle, Claudio Medina, and Maria Romero (collectively “the Creditors”); Perimetro, Inc., 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 their purchase price. 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 the 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. While the objection was pending as a contested matter, Scotiabank, as R-G’s successor-in-interest, commenced an adversary proceeding against the individual timeshare owners. In its complaint, Scotiabank sought a declaratory judgment under § 506, 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 affirmative defense, alleging that Scotiabank’s mortgage was subordinate to their ownership interest, pursuant to the terms of first mortgage deed and the Offering Statement. Scotiabank filed a motion for summary judgment against the Creditors, arguing chiefly that the subordination clause “did not confer secured status to timeshare owners.” Scotiabank further asserted that pursuant to § 1254(1)(a) of The Timeshare Act, the subordination clause merely required the secured lender to “honor the personal rights of timeshare owners to enjoy the facilities” in the event of foreclosure. Additionally, Scotiabank argued that § 506 requires a “lien” on property of the estate for secured status, and that under Puerto Rico law, a valid lien requires recordation in the Registry of Property. According to Scotiabank, in the absence of recordation, the Creditors held, at best, unsecured claims against the Debtor. Thus, Scotiabank requested an order disallowing the Creditors’ claims as secured, and allowing them only as general, unsecured claims. Brito and del Valle filed an opposition to the summary judgment motion, which included a cross-motion for summary judgment seeking confirmation of their secured status. The bankruptcy court entered judgment, without a hearing, denying the summary judgment motion and granting the cross-motion.

Judge(s):

Haines, Hillman, and Boroff

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