In re: Armando A. Diaz Cruz and Leida M. Bula Lopez v. P.R. Treasury Department, et al.

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: : CASE NO. 10-11393 (ESL) : 4 ARMANDO A. DIAZ CRUZ : CHAPTER 13 LEIDA M. BULA LOPEZ : 5 Debtors : ____________________________________: 6 ARMANDO A. DIAZ CRUZ : ADV. PROC. NO. 11-00263 (ESL) LEIDA M. BULA LOPEZ : 7 Plaintiffs : : 8 vs. : : 9 P.R. TREASURY DEPARTMENT, ET AL. : Defendants : 10 ____________________________________: 11 OPINION AND ORDER 12 This case is before the court upon the Plaintiffs’ Motion for Reconsideration of Order to 13 Clarity Status of Security Interest Over Real Property and Request for Order Cancelling Lien (the 14 “Motion for Reconsideration”, Docket No. 59) and the Response thereto (Docket No. 63) filed by 15 defendant Puerto Rico’s Department of Treasury (“PR Treasury”). The Plaintiffs move the court 16 to reconsider its Order entered on April 4, 2013 (Docket No. 57) dismissing the instant case as moot 17 arguing that there are still remedies to be adjudicated, such as their request for an order to cancel PR 18 Treasury’s lien on their principal residence at the Property Registry so that a mortgage modification 19 can be registered. PR Treasury reiterates that the instant adversary proceeding is moot and request 20 the court to deny the Motion for Reconsideration (Docket No. 63). For the reasons stated below, 21 the Motion for Reconsideration is hereby denied. 22 Procedural Background 23 The Plaintiffs filed their Chapter 13 Petition on December 3, 2010 (Lead Case Docket No. 24 1). 25 On April 20, 2011, PR Treasury filed a Proof Claim in the secured amount of $42,226.69 and 26 an unsecured amount of $2.20 (Claims Register No. 10-1). 27 On June 5, 2011, the Plaintiffs filed a Motion Objecting Claim 10 Filed by the PR 28 Department of Treasury (Lead Case Docket No. 49) averring that the supporting documents filed by PR Treasury in its Proof of Claim failed to state how the creditor calculated the amounts claimed 1 as penalties, interest and late charges pursuant to Local Bankruptcy Rule 3002-1 and that the 2 computer print-out attached thereto stated that the penalties, interest and late charges were calculated 3 up to October 9, 2014, which did not allow for the precise corroboration of the amounts due as to 4 the filing of the bankruptcy petition. On July 8, 2011, the court entered an Order granting the 5 Plaintiff’s Objection (Lead Case Docket No. 57). 6 On August 12, 2011, PR Treasury filed an amended Proof Claim in the secured amount of 7 $33,624.02 and an unsecured amount of $2.20 (Claims Register No. 10-2). 8 On December 6, 2011, the Plaintiffs filed their original Complaint (Docket No. 1) requesting 9 an order to allow the registration of a modified mortgage in favor of co-defendant Banco Popular 10 de Puerto Rico (“BPPR”) on the Debtors’ residential property and to direct the Guaynabo Property 11 Registrar to maintain the tax lien in favor of PR Treasury as a junior lien. 12 On December 13, 2011, Plaintiffs filed Motion for Leave to File Amended Complaint 13 (Docket No. 8) and an Amended Complaint (Docket No. 9) to set forth a more detailed and clear 14 exposition of the remedies requested for which relief was sought. 15 On February 3, 2012, BPPR filed a Motion to Dismiss under Fed. R. Civ. P. 12(b)(6) (Docket 16 No. 17) arguing that the Plaintiffs had failed to state a claim upon which relief could be granted 17 against it. 18 On February 15, 2012, the court issued an Order (Docket No. 23) granting the Plaintiffs 21 19 days to show cause as to why the Amended Complaint should not be dismissed against BPPR 20 (Docket No. 18) for the reasons stated in its Motion to Dismiss (Docket No. 17). 21 On March 5, 2012, PR Treasury filed its Answer to the Complaint (Docket No. 23) sustaining 22 that the Plaintiffs failed to state a cognizable claim upon which relief may be granted under any 23 applicable federal or state statue and that PR Treasury has acted at all times within the established 24 legal and regulatory framework. 25 On April 2, 2012, the Plaintiffs filed another Motion for Leave to File Amended Complaint 26 (Docket No. 24) alleging that in preparation for the pretrial conference, counsels for the Plaintiffs 27 and BPPR met in compliance with the Local Rules and in that meeting the parties exchanged new 28 evidence and information not previously available to counsel for the Plaintiffs, which allowed for 2 1 the simplification of controversies in the instant case, including eliminating BPPR as a defendant. 2 On April 5, 2012, the Plaintiffs filed a Second Amended Complaint (Docket No. 25) only 3 against PR Treasury, eliminating the previous cause of action for declaratory judgment for a 4 determination of the extent of liens pursuant to Sections 506 and 522(f) of the Bankruptcy Code. 5 They also submitted as Exhibit B an appraisal report of the property in the amount of $320,000.00 6 and sustain that because they claimed a homestead exemption in the amount of $43,250.00 on that 7 property under 11 U.S.C. § 522(d)(1), the value of PR Treasury’s secured interest in said property 8 is zero after the deduction of the balance of the BPPR’s first mortgage and therefore, PR Treasury 9 is an unsecured creditor pursuant to Section 506 of the Bankruptcy Code. Consequently, the 10 Plaintiffs allege that PR Treasury’s lien is worthless and request the court to enter judgment to 11 determine: (a) that the value of PR Treasury’s collateral at $320,000.00; (b) that the extent of PR 12 Treasury’s lien over the Plaintiffs’ principal residence is zero; (c) that the extent of PR Treasury’s 13 claim number 10 filed on August 12, 2011 be deemed allowed as unsecured claim; and (d) enter any 14 additional order or judgment the court may deem just and proper. 15 On April 9,2012, Plaintiffs and co-defendant BPPR jointly filed a Stipulation for Entry of 16 Dismissal with Prejudice as to Defendant, Banco Popular de Puerto Rico whereby the Plaintiffs 17 voluntarily dismissed the instant adversary proceeding against BPPR with each party bearing their 18 own costs, expenses and attorneys’ fees (Docket No. 28). The court approved the Stipulation on 19 May 11, 2012 (Docket No. 32) and Partial Judgment was entered on May 21, 2012 (Docket No. 34). 20 After a series of procedural events (Docket Nos. 39, 40 and 42), on September 10, 2012 PR 21 Treasury filed its Answer to Amended Complaint (Docket No. 45) reiterating that the Plaintiffs failed 22 to state a cognizable claim upon which relief may be granted under any applicable federal or state 23 statue and that PR Treasury has acted at all times within the established legal and regulatory 24 framework. 25 On February 11, 2013, Plaintiffs filed a Motion for Summary Judgment (Docket No. 51) 26 requesting the entry of an order to: (a) determine that PR Treasury’s claim is a wholly unsecured 27 28 3 1 claim in the instant case; (b) determine the avoidance of tax lien levied upon Plaintiff’s residence1; 2 (c) enter any additional order or judgment the court may deem just and proper. 3 On February 13, 2013, the court entered an Order (Docket No. 53) for PR Treasury to reply 4 to the Plaintiff’s Motion for Summary Judgment within 30 days to show cause why the same should 5 not be granted. 6 On March 13, 2013, PR Treasury filed an amended Proof of Claim in the unsecured 7 nonpriority amount of $33,626.22 and an unsecured priority claim of $25.09 (Claims Register No. 8 10-3). 9 On March 18, 2013, PR Treasury filed a Motion to Dismiss (Docket No. 55) arguing that 10 because it had amended its proof of claim to reclassify it as completely unsecured (Claims Register 11 No. 10-3), the Second Amended Complaint (Docket No. 25) had become moot and thus the instant 12 adversary proceeding should be dismissed with prejudice. 13 On April 4, 2013, the Plaintiffs filed a Request for Entry of Order Granting Summary 14 Judgment in Favor of Plaintiffs and Opposition to Motion to Dismissed Filed by Defendant [PR 15 Treasury] (Docket No. 56) arguing that PR Treasury did not dispute the facts established in the 16 Motion for Summary Judgment nor did it show cause why judgment should not be entered in the 17 instant case. They also aver that PR Treasury did not set forth any grounds upon which this court 18 should dismiss the instant case. 19 On April 5, 2013, the court entered an Order (Docket No. 57) ruling that PR Treasury’s 20 Amended Proof of Claim (Claims Register No. 10-3) has mooted the instant controversy in favor 21 of Plaintiffs as it recognizes that PR Treasury’s claim is unsecured. Therefore, the court ordered the 22 dismissal of the adversary proceeding as moot. 23 On April 9, 2013, Plaintiff filed the Motion for Reconsideration (Docket No. 59) under both 24 Fed. Rs. Civ. P. 59 and 60 arguing that although PR Treasury amended its Proof of Claim to a 25 wholly unsecured claim, the lien registered at the Property Registry is still encumbering their 26 27 1 The court notes that this particular relief was requested by the Plaintiffs for the very first time in their Motion for Summary Judgment, as it was not plead in the Complaint (Docket No. 1), the Amended Complaint 28 (Docket No. 9) or the Second Amended Complaint (Docket No. 25). 4 1 principal residence. They further submit that the Second Amended Complaint specifically requested 2 a remedy as to this registered lien2 and that PR Treasury’s amended proof of claim does not solve 3 the matter of the registered lien at the Property Registry. Thus, in view of the request for 4 reconsideration, the Plaintiffs request an order to the Property Registrar for the cancellation of PR 5 Treasury’s lien that encumbers their real property. 6 On April 30, 2013, PR Treasury filed a Sur Reply to Debtor’s Motion in Request for 7 Reconsideration (Docket No. 63) reiterating that the instant case is moot inasmuch it is no longer 8 pursuing a secured credit, which disposes of the Plaintiffs’ request under 11 U.S.C. § 506(a). PR 9 Treasury also opposes the Plaintiffs’ request to cancel its lien arguing that just because it amended 10 its proof of claim to declare its debt as unsecured (Claims Register No. 10-3) does not mean that its 11 registered lien must be cancelled before the closing of the bankruptcy petition. It further avers that 12 an order from the court to cancel its lien before the closing of the bankruptcy case could result in 13 a failure to justice if Plaintiffs fail to comply with the payment plan, making an otherwise secured 14 creditor lose its rank in the Registry of Property. In addition, PR Treasury sustains that pursuant to 15 11 U.S.C. § 350(a) and Puerto Rico’s Mortgage Law, the cancellation of the lien will take place once 16 the court enters a discharge order and closes the case. 17 On May 13, 2013, Plaintiffs filed a Reply to PR Department of Treasury’s Sur Reply... 18 (Docket No. 64-1) restating that if PR Treasury’s lien is left encumbering their principal residence 19 in spite of the fact that a request for the cancellation of such lien has been made3 and that PR 20 Treasury has filed an unsecured proof of claim in this case would result in a failure of justice 21 because an unsecured creditor would have a lien encumbering a property of the bankruptcy estate. 22 Legal Analysis & Discussion 23 (A) Standard for Motions for Reconsideration 24 Plaintiffs seek reconsideration under Fed. Rs. Civ. P. 59 and 60 (Docket No. 59, p. 3). They 25 contend that although PR Treasury is now a wholly unsecured creditor, its lien at the Property 26 27 2 See footnote no. 1, supra. 28 3 See footnote no. 1, supra. 5 1 || Registry is still encumbering their principal residence, which impedes the registration of a mortgage 2 || modification with BPPR. They further submit that the Second Amended Complaint specifically 3 || requested a remedy as to this registered lien* and that PR Treasury’s amended proof of claim 4 || (Claims Register No. 10-3) does not solve the matter of the registered lien at the Property Registry. 5 || Thus, the Plaintiffs reiterate their request for an order to the Property Registrar for the cancellation 6 || of PR Treasury’s lien. 7 “Motions to reconsider are not recognized by the Federal Rules of Civil Procedure or the 8 || Federal Rules of Bankruptcy Procedure in haec verba.” In re Lozada Rivera, 470 B.R. 109, 112 9 |) (Bankr. D.P.R. 2012), citing Jimenez v. Rodriguez (In re Rodriguez), 233 B.R. 212, 218-219 (Bankr. 10 || D.P.R. 1999), conf?'d 17 Fed. Appx. 5 (1* Cir. 2001); Van Skiver v. United States, 952 F.2d 1241, 11 || 1243 (10" Cir. 1991); Lavespere v. Niagara Mach. & Tool Works Inc., 910 F.2d 167, 173 (5 Cir. 12 || 1990), cert. denied 510 U.S. 859, abrogated on other grounds by Little v. Liquid Air Corp., 37 F.3d 13 || 1069, 1075-76 (5" Cir. 1994), Rather, federal courts have considered motions so denominated as 14 || either a motion to “alter or amend” under Fed. R. Civ. P. 59(e) or a motion for relief from judgment 15 || under Fed. R. Civ. P. 60(b). See Fisher v. Kadant, Inc., 589 F.3d 505, 512 (1* Cir. 2009) (noting 16 || a motion for reconsideration implicated either Fed. R. Civ. Pro. 59(e) or 60(b)); Equity Security 17 || Holders’ Committee v. Wedgestone Financial (In re Wedgestone Financial), 152 B.R. 786, 788 (D. 18 || Mass. 1993). “These two rules are distinct; they serve different purposes and produce different 19 || consequences. Which rule applies depends essentially on the time a motion is served. If a motion 20 || is served within [fourteen*] days of the rendition of judgment, the motion ordinarily will fall under 21 |} Rule 59(e). If the motion is served after that time, it falls under Rule 60(b).” In re Lozada Rivera, 22 || 470 B.R. at 113, quoting Van Skiver, 952 F.2d at 1243. Also see Universal Ins. Co. v. DOJ, 866 F. 23 || Supp. 2d 49, 73 (D.P.R. 2012) (“A motion is characterized pursuant to [Fed. R. Civ. P.] 59(e) or 24 || [Fed. R. Civ. P.] 60(b) based upon its filing date.”) “The substance of the motion, not the 25 * See footnote no. 1, supra. 27 * See the most recently amended version of Fed. R. Bankr. P. 9023, which makes Fed. R. Civ. P. 59 28 || applicable to bankruptcy cases.

1 || nomenclature used or labels placed on motions, is controlling.” In re Lozada Rivera, 470 B.R. at 113. 3 Because in the instant case, the Plaintiffs filed their Motion for Reconsideration within the 4 14 days provided in Fed. R. Bankr. P. 9023, it will be entertained under Fed. R. Civ. P. 59(e). 5 Fed. R. Civ. P. 59(e) itself does not state the grounds on which relief under the rule may be 6 || granted. Therefore, trial courts have considerable discretion in deciding whether to grant or deny 7 || a motion to alter or amend under Fed. R. Civ. P. 59(e). See ACA Fin. Guar. Corp. v. Advest, Inc., 8 || 512 F.3d 46, 55 (2008) (“[Trial] courts enjoy considerable discretion in deciding [Fed. R. Civ. P.] 9 || 59(e) motions, subject to circumstances developed in the case law.”); Venegas-Hernandez v. 10 || Sonolux Records, 370 F.3d 183, 190 (1* Cir. 2004), citing Edward H. Bohlin Co. v. Banning Co., 11 | 6 F.3d 350, 355 (5" Cir. 1993); Robinson v. Watts Detective Agency, 685 F.2d 729, 743 (1* Cir. 12 || 1982). 13 Generally, in order for a motion for reconsideration to proceed under Fed. R. Civ. P. 59(e), 14 || the movant must clearly establish a manifest error of law or present newly discovered evidence that 15 || could not have been diligently found during the case. See Schwartz v. Schwartz (In re Schwartz), 16 || 409 B.R. 240, 250 (B.A.P. 1* Cir. 2008), citing In re Rodriguez, 233 B.R. at 219. The Court of 17 || Appeals for the “First Circuit has explained that a motion for reconsideration brought under Fed. R. 18 || Civ. P. 59(e) must be based upon newly discovered evidence or a manifest error of law or fact.” 19 || Banco Bilbao Vizcaya Argentaria P.R. v. Vazquez (In re Vasquez), 471 B.R. 752, 760 (B.A.P. 1* 20 || Cir. 2012), citing Aybar v. Crispin-Reyes, 118 F.3d 10, 16 (1* Cir. 1997). “To meet the threshold 21 || requirements ofa successful [Fed. R. Civ. P.] 59(e) motion, the motion must demonstrate the reason 22 || why the court should reconsider its prior decision and must set forth facts or law of a strongly 23 || convincing nature to induce the court to reverse its earlier decision.” Id. at219 (quotations omitted). 24 “A motion under [Fed. R. Civ. P.] 59(e) also is appropriate if the court in the original 25 || judgment failed to give relief on a certain claim.” Charles Wright, Arthur Miller & Mary Kane, 11 26 || Federal Practice and Procedure § 2810.1 at pp.154-155 (West 2012). Also see Continental Casualty 27 || Co. v. Howard, 775 F.2d 876, 883 (7" Cir. 1985). 28 In the instant case, the Plaintiffs are entitled to have their Motion for Reconsideration

1 entertained under the scope of Fed. R. Civ. P. 59(e). Because the Plaintiffs move the court to grant 2 them relief on a certain claim that they allege was sought in their Second Amended Complaint, the 3 court will consider the Motion for Reconsideration on its merits. 4 (B) Amending Reliefs in Motions for Summary Judgments 5 Initially, the Plaintiffs filed the instant adversary proceeding seeking an order to allow the 6 registration of a modified mortgage in favor of co-defendant BPPR on their residential property and 7 to direct the Guaynabo Property Registrar to maintain the tax lien in favor of PR Treasury as a junior 8 lien. See the original Complaint (Docket No. 1). The Plaintiffs later amended the complaint to 9 elaborate a more detailed exposition of the remedies requested for which relief was sought. See the 10 Amended Complaint (Docket No. 9). None of the remedies sought in the Amended Complaint 11 included an order from the court to the Property Registrar (Docket No. 9, p. 7) to cancel PR 12 Treasury’s lien. Subsequently, the Plaintiffs filed a Second Amended Complaint requesting the court 13 to enter judgment to determine: (a) that the value of PR Treasury’s collateral at $320,000.00; (b) that 14 the extent of PR Treasury’s lien over the Plaintiffs’ principal residence is zero; (c) that the extent 15 of PR Treasury’s claim number 10 filed on August 12, 2011 be deemed allowed as unsecured claim; 16 and (d) enter any additional order or judgment the court may deem just and proper (Docket No. 25, 17 p. 24). The Second Amended Complaint is currently the controlling set of pleadings in the instant 18 case. Notwithstanding, it was not until the Motion for Summary Judgment that the Plaintiffs moved 19 the court, for the very first time6, to “determine the avoidance of tax lien [sic] upon Plaintiffs’ 20 residence” (Docket No. 51, p. 7). 21 The facts in the instant case are similar to those in Cole v. Cortner (In re Cortner Container 22 & Concrete Co.), 2007 Bankr. LEXIS 264, 2007 WL 269854 (Bankr. E.D. Mo. 2007). In that case, 23 the Chapter 7 Trustee, James S. Cole, sued defendants, the part owners of debtor corporation and 24 another company, on several counts. The Chapter 7 Trustee moved for summary judgment as to 25 counts I and II of the complaint, claiming that the owner received a preference in contravention of 26 11 U.S.C. § 547(b). The Chapter 7 Trustee also moved for summary judgment on count IV of the 27 28 6 See footnote no. 1, supra. 8 1 || complaint in regards to alleged fraudulent transfers. The court granted the plaintiff's motion for 2 || summary judgment on counts I and II, but because he failed to properly plead count IV in his 3 || original complaint under Fed. R. Bankr. P. 7008(a), it was denied. The court ruled that although the 4 || “[Chapter 7] Trustee allege[d] that he [was] entitled to judgment as a matter of law as to count IV 5 || of the Complaint ... he failed to properly plead [the] same in his original complaint under [Fed. R. 6 || Bankr. P.] 7008(a).” 2007 Bankr. LEXIS 264 at **6-7, 2007 WL 269854 at *2. Thus, the court 7 || determined that “Count IV [was] not properly before the court and [would] not be considered for 8 || summary judgment.” Id. The Cortner court reasoned that “while ... the pleading requirements under 9 || the Federal Rules are relatively permissive, they do not entitle parties to manufacture claims...” Id., 10 || quoting N. States Power Co. v. Fed. Transit Admin., 358 F.3d 1050, 1057 (8" Cir. 2004). Also see 11 || Rodgers v. City of Des Moines, 435 F.3d 904, 910 (8" Cir. 2006) (“While we recognize that the 12 || pleading requirements under the Federal Rules are relatively permissive, they do not entitle parties 13 || to manufacture claims, which were not pled, late into the litigation for the purpose of avoiding 14 || summary judgment.”); Puglisi v. Town of Hempstead, 2012 U.S. Dist. LEXIS 133281 at *29, 2012 15 || WL 4172010 at * 10 (E.D.N.Y. 2012) (refusing to consider the plaintiff's claim for promissory 16 || estoppel in a motion for summary judgment because he did not plead it in the complaint). Likewise, 17 || the “liberal pleading standard for civil complaints under Federal Rule of Civil Procedure 8(a) ... does 18 || not afford plaintiffs with an opportunity to raise new claims at the summary judgment stage.” 19 || Gilmour v. Gates, McDonald & Co., 382 F.3d 1312, 1314 (11" Cir. 2004). Thus, courts have 20 || routinely held that a party cannot seek summary judgment for himself on a new claim that has not 21 || been pled in his complaint. See Crow v. Fabian, 2010 U.S. Dist. LEXIS 17480 at*58, 2010 WL 22 || 2464865 at *18 (D. Minn. 2010); White v. McHughes, 2011 U.S. Dist. LEXIS 118010 at *5 (W.D. 23 |} Ark. 2011) (“[nJewly asserted claims are not proper for consideration in a motion for summary 24 || judgment or a response thereto”); Satchel v. Sch. Bd. of Hillsborough Cnty., 2007 U.S. Dist. LEXIS 25 || 11696 at *22, 2007 WL 570020 at *7 (M.D. Fla. 2007) (denying a plaintiff's motion for summary 26 || judgment on a claim that was “not clearly pled in her complaint,” ruling that “plaintiff cannot now 27 || raise this claim for the first time in a motion for summary judgment”); cf. Bonenfant v. Kewer, 2007 28 || Dist. LEXIS 64104 at*20, 2007 WL 2492030 at *6 (D. Conn. 2007) (refusing to address a

1 || claim that was “nowhere in [the] complaint” and raised for the first time in an opposition to a motion 2 || for summary judgment); Spann v. Word of Faith Christian Ctr. Church, 589 F. Supp. 2d 759, 771 3 || n.8 (S.D. Miss. 2008) (same); Roofers Local No. 20 Health & Welfare Fund v. Mem’! Hermann 4 || Hosp. Sys., 2007 U.S. Dist. LEXIS 34089 at *18, 2007 WL 1407058 at *6 (W.D. Mo. 2007) (“a 5 || party cannot amend its pleadings through its response to a motion for summary judgment”). 6 Because the Plaintiffs in this case intend to raise a new claim at the summary judgment stage 7 || that was not included in the Complaint, the Amended Complaint or the Second Amended Complaint, 8 || the new remedy sought in the Motion for Summary Judgment is denied. Moreover, the remedies 9 | sought in the Complaint, the Amended Complaint or the Second Amended Complaint became moot 10 || upon PR Treasury’s filing of the unsecured proof of claim (Claims Register No. 10-3) as ruled in 11 |} the Order entered on April 5, 2013 (Docket No. 57). 12 Conclusion 13 In view of the foregoing, the Plaintiffs’ Motion for Reconsideration is hereby denied on its 14 || merits under Fed. R. Civ. P. 59(e). 15 SO ORDERED. 16 In San Juan, Puerto Rico, this 19" day of June, 2013. 17

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