In re: Marlyn Maldonado Ramirez; Wilfredo Segarra Miranda, Chapter 7 Trustee v. Jesus M. Maldonado Vega; Marlyn Ramirez Acosta and their Conjugal Partnership

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: May 28, 2010
• Docket: 09-00066
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: CASE NO. 09-00517 4 MARLYN MALDONADO RAMIREZ 5 CHAPTER 7 Debtor 6 : 7 ||;WILFREDO SEGARRA MIRANDA : ADVERSARY NO. 09-00066 CHAPTER 7 TRUSTEE : 8 Plaintiff : : FILED & ENTERED 10 JESUS M. MALDONADO VEGA MARLYN RAMIREZ ACOSTA ans 11 TAND THEIR CONJUGAL PARTNERSHIP : aay 2 8 2010 12 Defendants : | A ee U.S. BANKBUPTOY COURT aga He, PUBRTO RIGS 14 OPINION AND ORDER 15 This case is before the court on the motion for summary judgment filed by Wilfredo 16 |/Segarra Miranda (the “Plaintiff” or the “Chapter 7 Trustee”) on September 18, 2009 (Docket No. 17 27) and the reply thereto and request for summary judgment filed by Mr. Jesus Maldonado Vega 18 jland Marlyn Ramirez (the “Defendants’”) on October 26, 2009 (Docket No. 39). On October 30, 19 2009, the Plaintiff filed a sur-reply (Docket No. 40), and a reply to the sur-reply followed on 20 ||November 2, 2009 (Docket No. 41). The Chapter 7 Trustee seeks to avoid an unregistered 21 jItransfer of real property pursuant to 11 U.S.C. § 544(a)(3) as a hypothetical bona fide purchaser of 22 |jsuch property at the time of the filing of the petition. For the reasons set forth below the Chapter 23 |7 Trustee’s motion for summary judgment is hereby granted. 24 BACKGROUND 25 Complaint 26 Ms. Marlyn Maldonado Ramirez (the “Debtor’”) filed a Chapter 7 voluntary petition on 27 January 29, 2009 and Wilfredo Segarra Miranda was appointed the Chapter 7 Trustee. On April 28 2009 the Trustee filed the present adversary proceeding against the Debtor’s parents; the Defendants. The following facts averred in the complaint are uncontested:

1 1. On February 5, 2007 the Debtor executed a deed (the “Deed of Sale’”)' transferring her 2 |linterest in a real property located at lot 19, block H of La Vista Urbanization, in San Juan, Puerto 3 |[Rico (the “Property’’), to her parents, in exchange and payment for an antecedent debt incurred for 4 purchase of a business described as “Coaches”. 5 2. The Deed of Sale was never presented before the Registry of Property for inscription. 6 3. The title search dated March 20, 2009 attached to the complaint shows that the 7 |following deeds are presented and pending inscription: promissory note with mortgage guarantee 8 |lin favor of Popular Mortgage for the amount of $131,000 and state court final judgment entered 9 llon October 10, 2008 in a collection action brought by Banco Popular of Puerto Rico in the amount 10 $19,870.44 plus interest, and the amount of $500 in legal costs. Already registered are two 11 mortgages, one in the amount of $77,469 in favor of RG Mortgage due on December 1, 2005 and 12 another for $50,000 guaranteeing a bearer note, due upon presentment. The title search shows as 13 Property’s title holder the Debtor, Ms. Marlyn Maldonado Ramirez. 14 4. The Debtor did not include the Property in her Schedules as an asset of the estate. 15 5. In Question 14 of the Statement of Financial Affairs (Docket 12, Case No. 09-517) the 16 ||Debtor states that she is in possession of the Property, stating that it is a residential property 17 |lvalued at $350,000, although the property is owned by Mr. Jesus Maldonado, whose address is 18 |idifferent. 19 The Plaintiff prays for the avoidance of the transfer of the Property to the Defendants 20 |[pursuant to 11 U.S.C. §§ 541(a)(1), (3), (4) and 544(a)(3), and for the declaratory judgment that 21 Property is property of the estate. 22 \\Parties’ Arguments 23 The Plaintiff argues that pursuant to 11 U.S.C. § 544, as a hypothetical lien creditor and 24 bona fide purchaser who acquired the property and perfected the transfer at the time of the 25 commencement of the case, he has superior rights to those of the Defendants in accordance with 26 |-—_-— 7 The Plaintiff did not challenge the validity of this Deed of Sale thus it is presumed that within the context herein, the same was executed in compliance with all the requirements for this 28 || legal transaction as set forth by the Civil Code of Puerto Rico.

1 |lstate law. The Plaintiff cites the Puerto Rico Mortgage Law and the Puerto Rico Civil Code in 2 |lsupport of his position, as well as Supreme Court of Puerto Rico and federal bankruptcy cases, 3 |jand concludes that the sale of the Debtor to the Defendants must be set aside in light of 11 U.S.C. 4 544(a)(3) and the applicable provisions of the Puerto Rico Mortgage Law. 5 In turn, the Defendants argue that the Deed of Sale was perfected in accordance with state 6 |law, thus the real property is not part of the estate pursuant to 11 U.S.C. § 541, as the laws of the 7 |Commonwealth of Puerto Rico does not require that the deed be recorded in the Registry of the 8 ||Property in order for it to be perfected. The Defendants argue that the cases cited by Plaintiff are 9 ||inapposite because this case relates to a pre-petition sale of real property and not the avoidance of 10 ja lien or pledge. Furthermore, the Defendants argue that the Plaintiff had prior knowledge of a 11 |ldefect in the Registry of Property; and, therefore, his good faith may be disputed and “annulled”. 12 |The Chapter 7 Trustee learned of the transfer of the title of the Debtor’s residential property 13 |ithrough the Statement of Financial Affairs and later through the testimony given by the Debtor at 14 341 meeting of creditors. After obtaining this information the Chapter 7 Trustee requested a 15 |Ititle study which revealed that the Deed of Sale had not been presented for inscription and it is at 16 |that moment that he found out the defect in the Registry of Property. Defendants conclude that 17 Plaintiff, as purchaser with knowledge of the defect in the Registry, lacks good faith and is not 18 |lprotected by the record of the Registry. 19 The Defendants also argue that the property the Chapter 7 Trustee seeks to recover by 20 |/setting aside the sale, does not benefit the estate because it has no equity to be distributed to the 21 jlunsecured creditors. However, the Plaintiff responds that the value of the property is higher than 22 |ithe total amount of the liens and some of the liens could be potentially avoided and/or reduced.” 23 24 25 26 ° At this time this argument is premature. While it is correct that a chapter 7 trustee may 27 || not sell properties for the sole benefit of secured creditors, the trustee must conclusively know whether the property he seeks to administer is property of the estate, before any attempt to market 28 || the same, negotiate or seek the avoidance of its liens may take place.

1 DISCUSSION 2 |\Summary Judgment Standard 3 Rule 56 of the Federal Rules of Civil Procedure, is applicable to this proceeding by Rule 4 ||7056 of the Federal Rules of Bankruptcy Procedure, provides that summary judgment should be 5 jlentered “if the pleadings, depositions, answers to interrogatories, and admissions on file, together 6 |lwith the affidavits, if any, show that there is no genuine issue as to any material fact and that the 7 |Imoving party is entitled to a judgment as a matter of law.” Fed. R. Bankr. P. 7056; see also, In re 8 |Colarusso, 382 F.3d 51 (1* Cir. 2004), citing Celotex Corp, v. Catrett, 477 U.S. 317, 322-23, 106 9 S.Ct. 2548, 91 L.Ed.2d 265 (1986). “The summary-judgment procedure authorized by Rule 56 is 10 la method for promptly disposing of actions in which there is no genuine issue as to any material 11 or in which only a question of law is involved.” 10A Wright, Miller & Kane, Federal Practice 12 land Procedure 3d§ 2712 at 198. “Rule 56 provides the means by which a party may pierce the 13 |allegations in the pleadings and obtain relief by introducing outside evidence showing that there 14 no fact issues that need to be tried.” Id at 202-203. Summary judgment is not a substitute for 15 trial of disputed facts; the court may only determine whether there are issues to be tried, and it is 16 |limproper if the existence of a material fact is uncertain. Id at 205-206. The moving party must 17 |"show that there is no genuine issue as to any material fact and that the moving party is entitled to 18 ||judgment as a matter of law." Fed. R. Civ. P. 56(c). The court should draw all reasonable 19 jlinferences from the facts in the manner most favorable to the nonmovant. Piccicuto v. Dwyer, 39 20 WF.3d 37, 40 (ist Cir. 1994) citing Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 763 (ist 21 1994). . 22 In this case both parties agree that there are no issues of material fact and only legal 23 |iquestions to be determined. The court concurs that disposition of this matter through summary 24 |ljudgment is thus, appropriate. 25 U.S.C. § 544(a)(3) 26 The outcome of the case hinges upon whether § 544(a)(3) of the Bankruptcy Code allows 27 |\the Chapter 7 Trustee to avoid an unregistered sale of real property. Section 544(a)(3) of the 28 [Bankruptcy Code provides that:

1 The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may 2 avoid any transfer of property of the debtor... that is voidable by- 3 (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the 4 status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists and has perfected such transfer. ° 11 U.S.C. § 544(a)(3). ° Section 544 along with sections 545, 547, 548, 549 and 553 set out the trustee’s power to ’ avoid liens and transfers. 5 Alan N. Resnick and Henry J. Sommer, Collier on Bankruptcy, 544.01 (15" Ed. Rev’d 2009). “These avoiding powers exist to implement the goal of every ° insolvency statute, which is the equal distribution of a debtor’s assets among its general nonpriority creditors.” Id. The trustee’s rights and powers pursuant to 11 U.S.C. § 544 to avoid any transfer or obligation of the debtor that might be avoidable under nonbankruptcy law are commonly referred to as the trustee’s “strong arm” avoidance powers. Subsection 544(a)(3) which grants the trustee the rights and powers of a bona fide purchaser of real property under state law was enacted as recording laws in a number of states “render unrecorded transfers vulnerable only to subsequent bona fide purchasers without notice of the unrecorded interest”. 4 William L. 6 Norton, Norton Bankrutpcy Law and Practice 3d, § 63:6 (Updated Jan 2010). “Taken together "7 with the other portions of Code § 544, the bona fide purchaser status tends toward an express 8 policy that, where recording acts exist and no grace period applicable, transfers not recorded or perfected prior to the petition are avoidable in bankruptcy.” Id. “The trustee stands as a * hypothetical bona fide purchaser without regard to any personal knowledge that the trustee may have of competing interests in the Debtor’s property.” In re Motta, 423 B.R. 393 (Bankr. D. Mass 2010)(citation omitted) Although these “strong arm” rights and powers are conferred to the trustee by federal law, the extent of the trustee’s rights as a bona fide purchaser of real property are determined by the substantive law of the jurisdiction governing the property in question, in this case Puerto Rico. Abboud v. The Ground Round, Inc. (in re The Ground Round, Inc.) 482 F.3d 15, 20 (1st Cir. 2007); In re Santos & Nieves, Inc., 814 F.2d 57 (1st Cir. 1987); see, 5 Collier on Bankruptcy, §

1 544.06. Therefore, the court must examine whether according to the Laws of Puerto Rico, the 2 llsale of the Debtor’s Property to the Defendants would be voidable by a hypothetical bona fide 3 [purchaser of such property at the time of the commencement of the case. 4 Sale Transaction 5 The Defendants contend that the sale transaction was perfected upon the execution of the 6 |[Deed of Sale in accordance with the provisions of the Civil Code of Puerto Rico governing 7 |lcontracts. The Puerto Rico Civil Code provides that “[o]wnership and other property rights are 8 llacquired and transmitted by law, by gift, by testate or intestate succession, and, in consequence of 9 certain contracts, by tradition.” 31 L.P.R.A. § 1931; See also 31 L.P.R.A. § 3012 (establishing 10 |Ithat a creditor has the right to the fruits of a thing from the time the obligation to deliver it arises 11 the acquisition of title of the property thereto arises when the thing has been delivered to it.). 12 Such provision is the basis for the title and tradition doctrine established in the Civil Code. 13 |[Ramirez Quinones v. Soto Padilla, 168 D.P.R. 142, 152 (2006). Title refers to legal transactions 14 |ithe basis of which is the transfer of dominion, such as 2 sales contract, which serves to transfer 15 |\dominion of personal and real property. Id. The title and tradition doctrine implies that a 16 perfected sales contract is not sufficient to transfer title; it generates obligations for the buyer to 17 |lpay and for the seller to transfer the object of the sales contract. Id. Therefore, as we previously 18 IIstated in the case of In re Jose Pascual Hernandez, 244 B.R. 549, 552 (Bankr. D.P.R. 2000) citing 19 ||Valcarcel v. Sancho, Treasury, 61 P.R.R. 207, 210-211 (1942), in accordance with the Civil Code 20 Puerto Rico the perfection of the sales contract arises when the contracting parties agree upon 21 thing which is the subject matter of the contract, and upon the price, even if neither has been 22 |Idelivered. Once this perfection has taken place, the contract is binding on both the buyer and 23 |lseller, entitling the parties reciprocally to demand the fulfillment of the contract, but “ownership 24 jlof the thing sold is not conveyed to the purchaser until she second stage takes place, that is, the 25 ||consummation, which takes place at the time of the delivery of the thing sold.” Id. The Civil 26 ||\Code provides that “[w]hen the sale should be made by means of a public instrument, the 27 llexecution thereof shall be equivalent to the delivery of the thing which is the object of the 28 |lcontract, if in said instrument the contrary Goes not appear or may be clearly inferred.” 31

1 IL.P.R.A. § 3811. Therefore, as a Deed of Sale was executed in this case, the delivery of the 2 ||Property upon its sale, and hence, the consummation of the sale, took place at the time of the 3 llexecution of the Deed of Sale. Valearcel v. Sancho, 61 PRR at 210. 4 Defendants contend that they had a valid and binding contract for the purchase of the 5 Property. This court agrees that the sale was perfected, and it was consummated upon the 6 llexecution of the Deed of Sale when the Property was delivered to the Defendants. Consequently, 7 sale of the Property is binding between the seller; the Debtor, and the buyers; the Defendants. 8 llHowever, because the Deed of Sale was not registered, the issue remains whether under state law 9 trustee, as a bona fide purchaser of this Property which appears in the Registry of Property of 10 Puerto Rico under the name of the Debtor, may avoid t1e transfer of the Property to the 11 Defendants. 12 Bona Fide Purchaser We now turn to the provisions of the Puerto Rico Mortgage Law and Regulations, which 14 govern registration and the rights of bona fide purchasers. The Puerto Rico Mortgage Law 15 provides that: 16 [t]he first registration of each property in the Registry shall be that of ownership. 17 The titleholder of any real right imposed on a property whose owner has not recorded his ownership may request registratior of his right in accordance with the 18 provisions of this subtitle. 19 30 L.P.R.A. § 2302. 20 The Puerto Rico Mortgage Law also provides that: 22 Registered titles shall become effective for thirc. parties from the date of their registration. For all intents and purposes, the registration date, including the 23 determination of the term needed for cancellation of entries, must appear in the registration itself. 24 In order to determine preference between two o- more registrations of the same 25 property, attention shall be given to the date, hcur and presentation number of the respective titles in the Registry. 26 97 L.P.R.A. § 2256. 28 Finally, and of utmost importance to the issue before the court, the Puerto Rico Mortgage

1 |[Law provides protection for third parties, stating that: 2 [dJespite the fact that registration does not valic ate transactions or contracts that 3 are null according to the law, nor does it alter the legal relationship of those intervening as parties in said transactions or cor tracts, a third person who, in good 4 faith and by paying a price, validly acquires a ri zht from a person who according to the Registry, appears with the power to convey t, shall be sustained in his 5 acquisition after he has recorded his right, wher. for any reason the Registry is found to be inaccurate, either because the grantor's title is rescinded, cancelled or 6 annulled for reasons not clearly shown in the Registry itself, or because there are actions or titles of ownership or of other real rights that are not duly recorded. 7 With regard to this, the Registry shall be understood to be all standing entries 8 relating to a property or right, that have not been extinguished as provided in § 2451 of this title, which refer to the liens or rig] ts that do not convey or encumber, 9 in addition to the entry that gives nctice to the r ght of the conveyor. 10 The good faith of a third party shai! always be presumed unless there is proof that the inaccuracy of the Registry was known when the property was acquired. 12 A gratuitous acquirer shall only enjoy the Registry protection corresponding to the predecessors in title or to the conveyors. 13 4 In no case shall rights merely mentioned or the undue r2cording of obligations, affect a third party. 15 130 L.P.R.A. § 2355. 16 The Puerto Rico Mortgage Law incorporates ths Spanish Law principle of the “fe publica registral” or registry’s public faith, pursuant to which the rights of the third parties acquired 18 through a valid legal transaction relying in tne content of the Registry of Property, are protected. 19 Banco Santander v. Rosario Cirino, 126 D.P.R. 591, 6C1 (1990). In accordance with the 20 abovecited section, those who claim the protection of the Registry of Property must comply with 21 ceveral requirements, including being a third party and bona fide purchaser of a registered right 22 over real property. Banco Santander v. Rosario Cirino. 126 D.P.R. at 603-604. As a hypothetical 23 Thona fide purchaser of real property a bankruptcy trustee under § 544(a)(3) “is deemed to have a4 conducted a title search, paid value for the property anc perfected its interest as a legal title holder 25 las of the date of the commencement of the case.” 5 Colber on Bankruptcy, 4 544.06. The Chapter 26 7 Trustee by virtue of § 544(a)(3) has been granted the srotection of the third party bona fide 27 purchaser referred to in this Section 2355 of the Puerto Rico Mortgage Law. Segarra v. Garrido 28

1 ||Pagan (In re Garrido Jimenez), 370 B.R. 878, 881 (B.A.°. Ist Cir. 2007) citing In re Santos & 2 \[Nieves, Inc., 814 F.2d 57, 61 (ist Cir. 1987). 3 The Defendants were required to register their t tle to the Property for it to become 4 lleffective against third parties, and they failed to do so. Thus, as of the commencement of the 5 case, the unrecorded interest was not effective against tae Chapter 7 Trustee as a hypothetical © Ibona fide purchaser under Puerto Rico Law. Therefore, the Chapter 7 Trustee has the power to T llavoid the transfer pursuant to 11 U.S.C. § 544(a)(3). Garrido Jimenez, 370 B.R. at 8 lnrecorded deed was ineffective against the trustee in his strong arm capacity as a hypothetical 9 IIbona fide purchaser). See also In re Sullivan, 387 B.R. 353 (B.A.P. Ist Cir. 2008). Because under 10 Iistate law a third party bona fide purchaser could avoid ‘he transfer of the Property from the Debtor Iho the Defendants, the Chapter 7 Trustee can also avoic it. See, Doral Mortgage Corp./Doral 12 Irinancial Corp. v. Segarra Miranda, 412 B.R. 72, 74 (D.P.R. 2009). 8 The Defendants claim that the Chapter 7 Truste2’s strong arm powers under 11 U.S.C. § 4 544 are limited to actions taken in good faith. They argue that the Chapter 7 Trustee cannot be deemed a third party and a bonafide purchaser of the real property because he was aware of the existence of the Deed of Sales and thus he knew that the Property had been transferred and it did not belong to the Debtor anymore. The Defendants are correct in stating that for a ‘bird party to be protected by the public faith in the Registry of Property or fe publica registral, tac Puerto Rico Mortgage Law requires for this third party to have good faith, that is, fo be unawares of the inaccuracy of the Registry of 59 Property. Banco Santander de Puerto Rico v. Rosario Cirino, 126 D.P.R. at 605. The Puerto Rico 53 Supreme Court has stated that a third party does not en oy good faith when it knows that what the Registry of Property shows is different from the real facts. Ifa third party knows of a lien or transfer that does not appear in the Registry of Property, this third party does not enjoy the good 26 faith required for the protection afforded by the Registry of Property. Pascual v. Fernandez Sierra, 108 D.P.R. 426, 435 ((1979). In Pascual v. Fernandez Sierra a residential property was sold to 2g defendant by the plaintiff. At the closing the defendani executed the deed of sale and a mortgage

1 deed in favor of Berens Mortgage Bankers. The following day another mortgage was executed in 2 |favor of the seller/plaintiff. The seller presented his mortgage before Berens did. The Supreme 3 ||Court of Puerto Rico determined that the plaintiff may 1ot benefit from the laws which benefit the 4 |Ithird parties because he had full knowledge of the inaccuracy of the Registry as he was present 5 |;when the mortgage in favor of Berens was executed. Ic. However, the good faith is required at 6 ||the time the third party acquires his title. Banco Santan ler de Puerto Rico v. Rosario Cirino, 126 7 ||D.P.R. at 607; I Roca Sastre, Derecho Hipotecario, pag? 697 (7th Ed. 1979). The good faith must 8 lexist at the time of the execution of the transfer, and ths purchaser will not lose the protection of 9 |the Registry of Property if after such transfer he gains 11formation regarding the existence of the 10 flinaccuracy of the Registry. [ Roca Sastre, Derecho Hip» tecario, page 697. If before or at the time 11 the transfer the purchaser discovers that the seller is 10t the title holder of the property, then he 12 ||knows he is not purchasing the property from its rightfi:] owner and cannot be protected by the 13 |/Registry. But if he gains the information afterwards, the protection the Registry of Property 14 jlafforded him when the transaction was executed may not be undone. Id. Pursuant to § 544(a)G) 15 ja bankruptcy trustee, becomes a bona fide purchaser as of the commencement of the case. 16 |/Furthermore, the statute provides that the trustee shall lave the rights and powers of a bona fide 17 |[purchaser “without regard to any knowledge of the trus:ce or of any creditor.’ As of the 18 |jcommencement of this case the Chapter 7 Trustee was 10t aware of any inaccuracy in the Registry 19 fof Property. Any knowledge that might be imputed from the schedules and statement of financial 20 jlaffairs could only come after the commencement of the case, and therefore after the Chapter 7 21 |[Trustee gained the status of a bona fide purchaser of rei] property. See, In re Devel, 361 B.R. 22 1509, 514 (B.A.P. 9th Cir. 2006)(holding that a case is commenced by the filing of the petition, 23 |thus, the bankruptcy trustee has the status of a bona fid= purchaser at the instant the petition is 24 fo 25 * This line in the statute refers to “actual notice” not “constructive notice”. For example 6 were may be matters of record giving constructive notic pot the inaccuracy of the Registry such as a ivorce decree, a pending divorce proceeding, a lis pencens, and which preclude the trustee from 27 || using the avoiding powers. 5 Collier on Bankruptcy, 544.03. Open possession of property may constitute constructive notice. McCannon v. Marston, €7 F.2d 13 (3d Cir. 1982). In this case the 28 |) Defendants argue that the Chapter 7 Trustee had actual rotice. 10

1 |filed and whatever the trustee learned from the schedules and statement of financial affairs came 2 late.) Consequently, the trustee may benefit from tlie protection of the Registry of Property as 3 |ja third party bona fide purchaser because he gained this status at the commencement of the case 4 lland any information he obtained afterwards does not cence! or reverse this protection. 5 CONCLUSICN In light of the aforestated, as of the date of the f ling of the petition the Chapter 7 Trustee, ’ as a hypothetical bona fide purchaser of the property, n ay avoid the Debtor’s unregistered transfer of the Property to the Defendants, and recover the prop2rty for the benefit of the estate pursuant to ° 11 U.S.C. § 544(a)(3) and the applicable provisions of he Puerto Rico Mortgage Law. Therefore, the Chapter 7 Trustee’s motion for summary judgment is hereby granted and Defendants’ motion for summary judgment is hereby denied. 12 13 Judgment shall be entered accordingly. 14 SO ORDERED. 15 In San Juan, Puerto Rico, this 28" day of May 2010. 16 17

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