López-Stubbe v. Rua (In re Colonial Mortgage Bankers Corp.)

228 B.R. 516, 1999 Bankr. LEXIS 8
CourtBankruptcy Appellate Panel of the First Circuit
DecidedJanuary 8, 1999
DocketBAP No. PR 97-020
StatusPublished
Cited by3 cases

This text of 228 B.R. 516 (López-Stubbe v. Rua (In re Colonial Mortgage Bankers Corp.)) is published on Counsel Stack Legal Research, covering Bankruptcy Appellate Panel of the First Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
López-Stubbe v. Rua (In re Colonial Mortgage Bankers Corp.), 228 B.R. 516, 1999 Bankr. LEXIS 8 (bap1 1999).

Opinion

VOTOLATO, Chief Judge.

The Chapter 7 trustee, Hans López-Stubbe, appeals a December 17, 1996 Judgment of the Bankruptcy Court for the District of Puerto Rico, denying the Trustee’s Motion for Summary Judgment and dismissing his crossclaim against Milton J. Rúa, et al. In said order the Bankruptcy Judge ruled that the crossclaim was barred by: (1) the applicable statute of limitations; and (2) the doctrine of transactional res judicata. On December 26, 1996, the Trustee filed a timely motion to alter or amend the Judgment, which was denied on February 12, 1997, and he also seeks appellate review of that order. For the reasons discussed below, we reverse as to both orders, and remand.

This appeal is timely filed, see Fed. R. Bankr.P. 8002(b), and the Bankruptcy Appellate Panel has jurisdiction pursuant to 28 U.S.C. § 158. The “clearly erroneous” standard is applied in reviewing the bankruptcy court’s findings of fact, and conclusions of law are reviewed de novo. See Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int’l, Inc.), 132 F.3d 104, 107-108 (1st Cir.1997); Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir.1994); In re SPM Mfg. Corp., 984 F.2d 1305, 1310-11 (1st Cir.1993).

BACKGROUND

The travel of this case consumes volumes of files, spans over a decade of litigation with numerous appeals and remands, and has severely tested the endurance of a very patient Bankruptcy Judge. The stage for this ease was first set in May 1975, when Bowery Savings Bank entered into a mortgage servicing agreement with Lincoln Financial Mortgage Corporation, and later in 1983, when Milton J. Rúa purchased 100% of the outstanding shares of Lincoln. Later that year, Rúa formed Colonial Mortgage Bankers Corporation and named himself president and a director of Colonial. Colonial succeeded to the interests of Lincoln and continued to do business with Bowery under the Colonial name. Pursuant to its mortgage servicing arrangement, Colonial collected mortgage payments and deposited them in its corporate account at Banco Popular de Puerto Rico. Thereafter, the funds would be transferred to accounts at Banco Financiero de Puerto Rico and Banco Santander de Puerto Rico “in trust” for Bowery, and Colonial would make disbursements to Bowery in accordance with the mortgage servicing agreement.

Sometime in 1986 Colonial began to withdraw and use funds from the Bowery trust accounts in violation of the mortgage servicing agreement. Bowery first learned of these misdeeds in December 1987, when six checks totaling $324,403 drawn by Colonial to the order of Bowery were returned for insufficient funds. When confronted, Rúa admitted using over a million dollars from the Bowery trust accounts to pay personal debts, Colonial debts, and to cover a Colonial loan which was in default.

On December 22,1987, Bowery filed suit in the United States District Court for the District of Puerto Rico against Colonial, Milton Rúa, his spouse and their conjugal partnership (the “Rúa Defendants”), and several banks, alleging inter alia breach of the mortgage servicing agreement. Eight days later, on December 30, 1987, Colonial filed for relief under Chapter 11 of the Bankruptcy Code, and on February 2, 1988, by consent, Hans López Stubbe was appointed Chapter 11 Trustee. In 1991, the ease was converted to Chapter 7 and Lopez Stubbe was appointed Chapter 7 Trustee.

THE LITIGATION

A. Colonial I:

Within three months of his appointment as Chapter 11 Trustee, on May 11, 1988, Lopez Stubbe commenced Adversary Proceeding No. 88-0060 in the bankruptcy court against the Rúa Defendants, seeking:

[518]*518(1) turnover of cash advances made by Colonial to Rúa, totaling $186,116, and listed in Colonial’s books and records as outstanding debt;
(2) an order directing the Rúa Defendants to provide an accounting of all property belonging to Colonial and received by them since March 1,1984;
(3) an injunction restraining the Rúa Defendants from encumbering or selling their real estate and furnishings at 4 Cerezo Street, San Patricio, Guaynabo, Puerto Rico; and
(4) an injunction restraining the Rúa Defendants from disposing of any assets without prior Court approval.

On May 13, 1988, the bankruptcy court held an emergency hearing on the Trustee’s request for a temporary restraining order and entered an order enjoining the Rúa Defendants from alienating or in any way disposing of or encumbering their personal residence at 4 Cerezo Street, San Patricio, Guaynabo, Puerto Rico. On September 15, 1988, the bankruptcy court held the preliminary healing and, finding no credible evidence that the Rúa Defendants were attempting to dispose of their property, denied the request for an injunction.

The bankruptcy court heard the matter on the merits on December 14, 1988, and on April 12, 1989, filed its opinion, containing, inter alia, as findings that:

1. The debtor, Colonial, made numerous and substantial advances to Rúa;
2. Colonial paid monies to banks on account of debts of Rúa;
3. Colonial paid off Rúa’s second mortgage on his personal residence;
4. Rúa caused Colonial to make payments of $47,000 to remodel his personal residence;
5. Rúa caused Colonial to make payments, through debits on its operating account, on loans of Rúa;
6. Rúa received checks from Colonial drawn from origination accounts established for disbursement of mortgage loan closmg proceeds; and
7.Colonial paid $58,152.16 on one of Rúa’s loans during the last quarters of 1986 and 1987.

Stubbe v. Rua (In re Colonial Mortgage Bankers Corp.), BK No. 87-03026, A.P. No. 88-0060, slip op. at 3-9 (Bankr.D.P.R. April 12, 1989).

Based on these findings the bankruptcy court concluded that there was ample evidence of commingling of funds and property by the Rúa Defendants, and granted the Trustee’s request for an accounting. The court went on to explain that the objective of the accounting was to uncover what other injuries may have been inflicted upon Colonial, and so far creatively concealed from the view of the Trustee. The court also stated:

Mr. Milton J. Rúa, Jr., as president of the debtor corporation, may be liable to Colonial for any deficiencies as a result of these activities, inasmuch as an officer of the corporation, he owed the debtor a duty of using reasonable care to ascertain that the balance in the bank accounts were sufficient to cover any transactions.... To such effects an accounting is needed.
Mr. Milton J. Rúa, Jr. has not accounted for his transactions as President of Colonial to the appointed trustee. Mr.

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228 B.R. 516, 1999 Bankr. LEXIS 8, Counsel Stack Legal Research, https://law.counselstack.com/opinion/lopez-stubbe-v-rua-in-re-colonial-mortgage-bankers-corp-bap1-1999.