In re: Santos Ortega Ramos

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2

3 IN RE: CASE NO. 16-03165 4

5 SANTOS ORTEGA RAMOS CHAPTER 13

6 Debtor(s) FILED & ENTERED ON 12/10/2018 7

9 OPINION & ORDER 10 The matters before the court are Banco Popular de Puerto Rico’s (hereinafter “Banco 11 Popular”) Objection to Claimed Exemption [Dkt. No. 82] and Santos Ortega Ramos’ (hereinafter 12 “Debtor”) Response to Banco Popular’s Objection to Claimed Exemption (DKT. 82) [Dkt. No. 13 14 92]. 15 PROCEDURAL BACKGROUND 16 Debtor filed a chapter 13 bankruptcy petition on April 21, 2016. The Debtor included his 17 residential property in Schedule C which was filed with the voluntary petition [Dkt. No. 1]. The 18 Debtor disclosed in Schedule C that the current value of the residential property was in the amount 19 of $50,000. On May 24, 2016, Debtor filed an Amended Schedule C [Dkt. No. 11], claiming a 20 homestead exemption pursuant to 11 U.S.C. § 522(b) in the amount of $50,000.1 Therefore, the 21 22 time to file an objection to the Debtor’s exemptions would have expired on June 23, 2016. On May 23 26, 2016, Banco Popular filed secured claim number 1-1 (hereinafter “claim”) in the amount of 24 $26,951.60, guaranteed by a first mortgage over the foregoing residential property.2 25

26 1 The exemption was taken under Puerto Rico’s Homestead Protection Act No. 195 enacted on September 13, 2011 (the “Home Protection Act”), 31 L.P.R.A. §§ 1858 et seq., as amended. 27 2 Banco Popular amended the claim on September 8, 2016 [ Claim 1-2]. 1 On April 6, 2017, Debtor filed an adversary proceeding (Adversary Case No. 17-00092- 2 BKT) to challenge the extent of Banco Popular’s lien. Debtor sought an order avoiding and 3 annulling the mortgage lien held by Banco Popular (as assignee of Doral Mortgage Corporation 4 (hereinafter “Doral”)) over the residential real property owned by the Debtor. In addition, Debtor 5 was seeking a determination that the claim filed by Banco Popular was entirely dischargeable as 6 unsecured (Dkt. No.’s 1, 37 Adv. Proc. No. 17-00092 BKT). In the Opinion and Order dated May 7 9, 2018 [Dkt. No. 37 in related Adversary Case 17-00092], the court concluded that Banco Popular 8 9 was an unsecured creditor for bankruptcy purposes due to the lack of successive chain of 10 ownership. In the case before us, now unsecured creditor Banco Popular, submitted an objection 11 to Debtor’s claimed homestead exemption under state law, pursuant to 11. U.S.C. § 522(b)(3) and 12 31 LPRA §§385 (a), 1851-1857. 13 APPLICABLE LAW AND DISCUSSION 14 This controversy brings two distinct issues before the court. The first, whether Banco 15 16 Popular’s objection to the Debtor’s exemption was timely; and second, whether the Debtor’s 17 claimed homestead exemption is sustainable given the successive chain of ownership defects. 18 Before the court can delve into the matter of the claimed homestead exemption, it must first 19 determine whether the creditor’s objection to exemption was timely. 20 While section 522(l) of the Code itself does not specify the time for objecting to a claimed 21 exemption, Federal Rule of Bankruptcy Procedure 4003(b)(1) provides in pertinent part: 22 …a party in interest may file objections to the list of property claimed as exempt 23 within 30 days after the conclusion of the meeting of creditors held under § 341(a) 24 is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. The court may, for cause, extend the time for 25 filing objections if, before the time to object expires, a party in interest files a request for an extension. 26 27 1 The Bankruptcy Code does not directly define the term “party in interest”. However, for purposes 2 of the bankruptcy rules, Norton Bankruptcy Dictionary defines a “party in interest” as the debtor, 3 the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity 4 security holder, or any indenture trustee. Party in Interest, Norton Bankr. L. & Prac. 3d Dict. of 5 Bankr. Terms (3rd ed. 2018). Bankruptcy Rule 9006(b)(3) permits the bankruptcy court to enlarge 6 the time for filing an objection under Bankruptcy Rule 4003(b)(1) if the request is made before 7 the expiration of the objection period.3 Such a request was never made by Banco Popular. 8 9 The timely assertion of objections to the debtor’s claimed exemptions can be important 10 to create or preserve value for creditors. Failure to object, in a timely manner, results in a waiver 11 of the objection and exclusion of the asset from the debtor’s bankruptcy estate, even if the claim 12 of exemption was improper and exceeds the value of the exemption authorized under the 13 Bankruptcy Code. Taylor v. Freeland & Kronz, 503 U.S. 638 (1992); Schwab v. Reilly, 560 U.S. 14 770 (2010). 15 16 Banco Popular argues in its motion that its failure to object within thirty (30) days of the 17 filing of the amended Schedule C, was because at the time Debtor claimed his homestead 18 exemption, “it was a secured creditor of the estate, with priority over any unrecorded homestead 19 exemption or junior lien”. Thus, it was in no position to object Debtor’s homestead exemption 20 claim. Banco Popular’s secured lien was set aside on May 9, 2018. See supra. This resulted in 21 Banco Popular becoming an unsecured creditor of the estate. Accordingly, Banco Popular’s stance 22 is that the grounds and necessity to object Debtor’s homestead exemption claimed in amended 23 24 Schedule C arose on May 9, 2018. 25 26

27 3 See supra, page 1, numbered line 22. 1 Banco Popular supports their position as to the timeliness of their objection by arguing:4 2 27. …the Supreme Court had before its consideration another case regarding an objection to claimed exemptions. In the case of Schwab, supra, the Supreme Court 3 allowed an objection to claimed exemptions filed by the chapter 7 trustee after the 30-day period provided by Rule 4003(b). 4

5 28. The Schwab Court concluded that, in cases where the value of the claimed exemptions are within the limits that the Bankruptcy Code prescribes, an interested 6 party need not object to the exemption claimed.

7 29. In the recent case of In re Massey, 465 B.R. 720 (BAP, 1st Cir. 2012), the Bankruptcy Appellate Panel for the First Circuit discussed the Supreme Court’s 8 decision in Schawb, stating: 9 …Schwab…stands for the…limited proposition that the time limits for 10 objecting to an exemption do not apply if the claimed exemptions is valid on its face…. 11

12 Massey at 727. 13 Banco Popular’s Objection to Claimed Exemption [Dkt. No. 82, pages 5-6] 14 The court disagrees with Banco Popular’s application of the holdings in Schwab and 15 Massey to the particular facts of this case.5 In sum, the Schwab court stands for the proposition 16 that in cases where the value of the claimed exemptions are within the limits that the Code 17 prescribes, an interested party need not object to the exemption claimed, if any amounts listed in 18 19

20 4 The U.S. Supreme Court case Schwab v. Reilly, 560 U.S. 770 (2010), was decided eighteen (18) years after Taylor v. Freeland & Kronz, 503 U.S. 638 (1992), not eight (8) as stated by Banco Popular. 21 5 In Civil Case 17-2345 (ADC), the U.S. District Court for the District of Puerto Rico issued an Opinion and Order on September 27, 2018, wherein it relied on Schwab and determined that the debtor’s 22 …claim of homestead exemption seemed valid on its face when she claimed it in the 23 bankruptcy proceedings by means of an amended Schedule C, for which appellee-creditor was not bound by the 30-day term to file an objection under Rule 4003(b). See Schwab, 24 560 U.S. at 770; In re Massey, 465 B.R. at 726. (emphasis ours).

25 Notwithstanding that the facts are almost identical to the ones presently before the undersigned, this court 26 respectfully disagrees with the conclusion reached in that opinion as to the timeliness of the creditor’s objection to exemption. 27 1 schedule C “…are facially within the limits the Code prescribes and raise no warning flags that 2 warranted an objection.” Id. at 789. Likewise, the court in Massey followed Schwab’s ruling and 3 held that “the time limits for objecting to an exemption do not apply if the claimed exemptions is 4 valid on its face.” Massey at 727. Both Schwab and Massey provide guidance to a party in interest 5 as to the limits of what they are required to examine. The court in Massey affirmed that: 6 The Supreme Court instructed that when deciding whether to object to 7 an exemption, trustees should look at ‘three, and only three, entries’ on Schedule C: the description of the property, the Code provisions 8 governing the claimed exemptions, and the amounts listed in the column 9 titled ‘value of claimed exemption’.

10 Id. 11 Banco Popular filed its notice of appearance in this case on May 17, 2016 [Dkt. No. 10]. 12 That is twenty-six (26) days after Debtor’s first Schedule C was filed, and seven (7) days before 13 the amended Schedule C was filed [Dkt. No.’s 1 and 11, respectively]. Banco Popular filed its 14 claim on May 26, 2016. The documents attached to said claim include a title study dated May 20, 15 16 2016. The title study states that the ‘Owner of Record’ is not the Debtor, but rather Guillermo 17 Morales Rodriguez and Paula Rivera Diaz. The title study goes on to disclose that a sale was made 18 by certain persons to the Debtor on October 4, 2000, but that “[t]he documents that gives sequence 19 to this purchase was note [sic] found.” On the second page of the title study, the information 20 regarding the mortgage appears, which states that the Debtor encumbered the property with a 21 mortgage note payable to Doral in the principle amount of $32,000. A notation below that 22 mortgage note information reveals that “[t]hese documents have been recorded automatically as 23 24 per Law #216.” 25 On or before May 26, 2016, Banco Popular knew or should have known that the property 26 exempted in Debtor’s amended Schedule C was not registered in his name. At that moment, Banco 27 1 Popular had knowledge that due to a missing link in the successive chain of title, its mortgage deed 2 was by virtue invalid, thus making the lien void, and turning the obligation into an unsecured 3 personal one. Roig Commercial Bank v. Dueño, 617 F. Supp. 913, 915 (D.P.R. 1985). Law 216, 4 under which Doral’s mortgage note was recorded, does not save Banco Popular from the inevitable 5 conclusion that there is a defect in the recordation which prevents it from having a valid registered 6 lien on Debtor’s property. In re Ramos, 493 B.R. 355, 367 (Bankr. D.P.R. 2013).6 7 Banco Popular’s assertion in its objection to claimed exemption that their failure to object, 8 9 within thirty (30) days of the filing of the amended Schedule C, was because at the time Debtor 10 claimed his homestead exemption, “it was a secured creditor of the estate, with priority over any 11 unrecorded homestead exemption or junior lien”, is not true. On May 24, 2016, Banco Popular 12 was an unsecured creditor. Following the case law in Schwab and Massey, Banco Popular, by 13 “looking at ‘three, and only three, entries’ on Schedule C7, was in a position to timely object to the 14 Debtor’s exemption by the June 23, 2016 deadline or seek an enlargement of the time as provided 15 16 for in the Rules. 17 Consequently, Banco Popular’s objection to exemption is untimely and is therefore 18 DENIED. Given this determination by the court, that matter of whether the Debtor’s claimed 19 homestead exemption is sustainable given the successive chain of ownership defects is moot. 20 CONCLUSION 21 Banco Popular could have made a timely objection under § 522(l) and Rule 4003 if it had 22 acted within the time frame permitted by the Rules. The court concludes that Banco Popular’s 23 24 25 6 Puerto Rico mortgage law and Law 216, as applied to the parties in this captioned case, are explained in 26 detail in the Opinion and Order in the related adversary case 17-00092 [Dkt. No. 37, pages 4-9]. 27 7 …the description of the property, the Code provisions governing the claimed exemptions, and the amounts listed in the column titled ‘value of claimed exemption’. Massey at 727. 1 || failure to do so prevents it from challenging the validity of the homestead exemption now. For th 2 || reasons stated above, Banco Popular’s Objection to Claimed Exemption [Dkt. No. 82] is denied. ° SO ORDERED In San Juan, Puerto Rico, this 10th day of December, 2018.

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8 Brian K. Tester 9 U.S. Bankruptcy Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 -7-