Soto-Rios v. Banco Popular de Puerto Rico

Luis A. Soto-Rios and Brenda Tosada-Arbelo v. Banco Popular De Puerto Rico, United States Court of Appeals for the First Circuit, Appeal No. 10-227 (unpublished)
The United States Court of Appeals, First Circuit (J. Howard) ("First Circuit") found that a mortgagee and purported secured creditor held an "interest in property" as that term is used in both 11 U.S.C. sec. 362(b)(3) and 11 U.S.C. sec. 546(b)(1)(A) even though the mortgage deeds executed by the debtors were not recorded as of the date of the debtors' bankruptcy filing due to backlog at the Puerto Rico Registry. The First Circuit first observed that it had previously held that an "interest in property" is a broader term than "lien." Then, as Puerto Rico's civil code provides that the act of presentment of a mortgage for recording is sufficient to put third-parties on notice of the existence of the mortgage - an act with legal significance - the First Circuit was convinced that the mortgagee held an interest in the debtors' property when the mortgages were presented for recording. The First Circuit also observed that Puerto Rico's statutory "relation back" doctrine provides that the point a mortgage is presented to the Registry determines the priority of the mortgage over liens recorded in the intervening period between presentment and recording. Hence it held that under Section 546(b)(1)(A), the debtors' strong-arm powers could not be used to avoid the un-recorded mortgages - a bona-fide purchaser of the debtors' property would take the property subject to the mortgagee's interest in the debtors' property. Likewise, the mortgagee's actions in perfecting its mortgages during the post-petition period would be excepted from the automatic stay by virtue of 11 U.S.C. sec. 362(b)(3). Finally, the First Circuit ruled that the debtors could not avoid the mortgages as preferential transfers since the mortgages were presented for recording well outside of the 90 day preference period of 11 U.S.C. sec. 547(b).
Procedural context:
During their bankruptcy case, the debtors brought an adversary proceeding ("Litigation") asserting the right to avoid Banco Popular's three mortgage dees under 11 U.S.C. sec. 362(a)(5), sec. 544(a), and sec. 547(b). The United States Bankruptcy Court granted Banco Popular's motion for summary judgment, dismissing the Litigation. The debtors appeal to the the United States District Court, District of Puerto Rico was unsuccessful. On appeal, the First Circuit too affirmed the Bankruptcy Court's order dismissing the Litigation summarily.
In 2004 and 2005, the debtors executed three mortgage deeds to secure two loans obtained from Banco Popular (the "Bank"). The Bank timely presented the three mortgage documents ("Mortgages") to the Puerto Rico Registry ("Registry") for recording. Some three years later, the debtors initiated their joint Chapter 11 case. As of the filing, however, the Mortgages had not been recorded by the Registry due to widespread "administrative backlog." The Bank nonetheless filed a claim secured by the Mortgages. The debtors took the position that the Bank held a mere unsecured claim given that the Mortgages were not recorded as of the petition date. During their case, the debtors filed an adversary proceeding against the Bank seeking to avoid the Mortgages using the "strong-arm" powers of 11 U.S.C. sec. 544(a)(3) and asserting status as a "bona-fide purchaser" of the property allegedly securing the Bank's claim. The debtors also sought a determination that 362(b)(3) could not be invoked to permit the Bank to "perfect" its interest in the debtors' property during the post-petition period. In the alternative, the debtors sought to avoid the Mortgages as preferential "transfers" under 11 U.S.C. 547(b). At the crux of the debtors' appeal was their position that the Bank, as the holder of unrecorded mortgages, did not hold an "interest in property" as that term is used in both Section 362(b)(3) and Section 546(b). The debtors claimed that the recordation of a mortgage deed is so essential to its validity under Puerto Rico mortgage law that even when a mortgage is presented to the Registry for recording, no property interest vests until the time of recording. The Bank countered that under Puerto Rico's "relation back" doctrine, the act of presentment of the Mortgages for recording was enough to vest it with an interest in the debtors' real property. On appeal, the primary focus of the First Circuit was whether Banco Popular gained a "pre-petition property interest in substance and scope that is superior to that of a bona fide purchaser of a judicial lien holder in accord with sections 362(b)(3) and 546(b)(1)(A) and as informed by the laws of Puerto Rico." The First Circuit observed that the law of Puerto Rico provides that a mortgage is not "validly constituted" until recorded. Nonetheless, as other portions of the civil code clearly provide that the original date a mortgage deed is presented to the Registry for recording establishes priority between competing registrations, the First Circuit was convinced that the Bank had created a sufficient "interest in property" before the debtors' petition was filed. It followed that since the Bank had obtained "priority" well before the debtors' obtained their hypothetical status of bona fide purchasers (or judicial lien holders) under Section 544, Section 546(b)(1)(A) would serve to prevent the debtors from using their "strong-arm" powers to avoid the Mortgages. The First Circuit also ruled that no "transfer" occurred during the 90 day preference period for purposes of Section 547(b) since the "interest" held by the Bank was obtained several years before the debtors' bankruptcy filing. No relief, therefore, was available to the debtors through the Litigation.
Judges Lipez, Ripple and Howard, Circuit Judges.

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