VAZQUEZ LABOY et al v. DORAL MORTGAGE CORPORATION, JOHN DOE AND RICHARD R

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: :
:
LUIS G. VAZQUEZ LABOY, : Case No. 00-00852 (GAC)
CARMEN D. GARCIA CALDERON, :
:
Debtors : Chapter 7
___________________________________:
:
LUIS G. VAZQUEZ LABOY, :
CARMEN D. GARCIA CALDERON, :
:
v. : Adv. No. 01-0077
:
DORAL MORTGAGE CORP., EDGARDO :
CANALES IDRACH, D/B/A CANALES :
LAW OFFICES, ANGEL ROLAN PRADO, :
JOHN DOE and the conjugal :
partnership formed with EDGARDO :
CANALES IDRACH, :
___________________________________:
DECISION AND ORDER
The debtors filed this adversary proceeding on August 22,
2001, seeking a determination that Doral Mortgage Corporation
(“Doral”) violated the automatic stay by registering and perfecting
a mortgage deed post-petition. The debtors requested that Doral be
ordered to withdraw the deed and to surrender it for cancellation.
Doral sought dismissal of the complaint.
The Court entered a Decision and Order on August 29, 2003,
dismissing this adversary proceeding (dkt. #87). The pertinent
background facts, outlined by the Court in the initial Decision and
Order, are that the debtors purchased property on December 17, 1996
and presented a conveyance deed to the Registry of Property on
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December 30, 1996. Subsequently on February 15, 1997, less than
sixty days after the presentation of the conveyance deed, the
debtors borrowed $25,000.00 from Doral and subscribed a first
mortgage in its favor, which was presented to the Registry of
Property. The debtors were notified of deficiencies in the
conveyance deed and on May 5, 1997, the conveyance deed was
withdrawn by them.
The Court concluded that the mortgage deed could not be
registered because the conveyance deed was withdrawn. The Court
found that Doral was not aware that its mortgage was unrecorded
until after the filing of the debtors’ bankruptcy petition, on
January 31, 2000, and thus that it was unable to perfect its
security interest prepetition. Doral presented the mortgage deed
again on December 1, 2000, and its security interest ultimately
became perfected as of that date. The Court concluded that Doral’s
perfection would have become effective against previously acquired
rights in the property, but for the debtors wrongful act in
withdrawing the conveyance deed without notifying Doral or Canales
Law Offices, the firm that notarized the mortgage deed. Likewise,
the Court concluded that the postpetition acts of Doral and Canales
Law Offices were excepted from the automatic stay by 11 U.S.C. §
362(b)(3).
On September 8, 2003, within ten days of the issuance of the
Decision and Order, the debtors filed a motion for reconsideration
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to amend or alter the judgment (dkt. #88), a motion submitting
certified translations (dkt. #89) and a motion to amend and make
additional findings of fact (dkt. #90). The debtors submitted
additional translations on September 12, 3003 (dkt. #92). Doral
opposed the debtors’ motions (dkt. #94). The matter was scheduled
for an evidentiary hearing on April 1, 2004.
Prior to the hearing, in the legal case, the undersigned
recused himself (legal dkt. #80) and the case and adversary
proceeding were reassigned to Judge Deasy, sitting in Puerto Rico
by designation. On March 10, 2005, Judge Deasy disqualified
himself (legal dkt. #124) and the case was reassigned to Judge de
Jesus (legal dkt. #127). On November 15, 2005, the case was
assigned back to this Court, since the reasons for the original
disqualification no longer existed (legal dkt. #129).
During the period of the reassignments, with leave of court,
the parties filed various motions related to this matter. Doral
filed a second opposition to plaintiff’s motion for reconsideration
(dkt. #107). The debtors replied (dkt. #112). Doral filed a sur-
reply (dkt. #117) and Canales Law Offices filed a sur-reply (dkt.
#120).
The debtors contend that the Court erred in finding that the
debtors’ conduct in withdrawing the conveyance deed from the
Registry of Property was wrongful. The debtors argue that they
were only able to withdraw the conveyance deed because the
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conveyance deed and the mortgage deed presentations had expired.
Likewise, the debtors allege that the deficiencies that prevented
the original registration of the deeds were corrected post-petition
without the debtors’ assistance. Moreover, the debtors contend
that the Court erred in determining that Doral was unaware that its
mortgage deed was not registered until after the bankruptcy was
filed. The debtors argue that Doral was aware that its mortgage
was unrecorded at least since the summer of 1999. The debtors
filed their bankruptcy petition on January 31, 2000 and Doral’s
mortgage was not presented for the second time until December 1,
2000, or ten months after the filing of the petition. Finally, the
debtors argue that the Court erred in its legal conclusion that the
presentation of the mortgage deed and the perfection of Doral’s
lien post petition were excepted from the automatic stay.
Doral opposes the debtors’ motion to amend and make additional
findings of fact, contending that the debtors are attempting to
present new evidence that could have been presented prior to the
entry of the Decision and Order. Doral also argues that the
Court’s ruling was based on an unopposed motion for summary
judgment filed by Canales Law Offices. Finally, Doral contends
that the Court’s decision was not clearly erroneous.
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DISCUSSION
As a preliminary matter, the Court concludes that it did not
specifically rule on the motion for summary judgment filed by
Canales Law Offices (dkt. #48). The Court dismissed the adversary
proceeding pursuant to Doral’s motion to dismiss. Thus, the Court
finds it unnecessary to discuss the effect of an unopposed motion
for summary judgment and whether the debtors were excused from
answering the motion for summary judgment, prior to Doral’s
compliance with the discovery requests, as discussed at the hearing
of June 24, 2003. See minutes, dkt. #85.
The First Circuit Court of Appeals has stated that relief from
judgment under Federal Rule of Civil Procedure Rule 60(b) is an
extraordinary remedy and that motions seeking to invoke that rule
should be granted sparingly. Gonzalez-Pina v. Rodriguez, 407 F.3d
425, 433 (1st Cir. 2005)(citing Karak v. Bursaw Oil Corp., 288 F.3d
15, 19 (1st Cir. 2002)). The debtors, however, seek to alter or
amend the judgment pursuant to Federal Rule of Bankruptcy Procedure
9023, which makes Federal Rule of Civil Procedure 59 applicable.
This Rule states that “[a]ny motion to alter or amend a judgment
must be filed no later than 10 days after entry of the judgment.”
Fed. R. Civ. P. 59(e). In seeking reconsideration under Federal
Rule of Civil Procedure 59(e), “the moving party must ‘either
clearly establish a manifest error of law or must present newly
discovered evidence.’” Marie v. Allied Home Mortgage Corp., 402
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F.3d 1, 7 n. 2 (1st Cir. 2005)(quoting Pomerleau v. W. Springfield
Pub. Sch., 362 F.3d 143, 146 n. 2 (1st Cir. 2004)). In Marie, the
First Circuit also cited a leading treatise, noting four grounds
for granting a motion for reconsideration under Federal Rule of
Civil Procedure 59(e). These are “manifest errors of law or fact,
newly discovered or previously unavailable evidence, manifest
injustice, and an intervening change in controlling law.” Marie v.
Allied Home Mortgage Corp., 402 F.3d at 7 n. 2 (citing 11 C. Wright
et al., Federal Practice & Procedure § 2810.1 (2d ed.1995)).
The debtors largely failed to present evidence in opposition
to Doral’s motion to dismiss until after the Court had entered the
Decision and Order. In spite of this, the Court concludes that the
Decision and Order contains manifest errors and that it must be
vacated. Factually, the Court found that Doral was unaware that
its mortgage was unrecorded until after the filing of the
bankruptcy petition. Actually, Doral was aware that its mortgage
deed was not properly recorded prior to the filing of the petition.
Doral admits that it became aware that the deeds were not
registered in the summer of 1999, well before the filing of the
bankruptcy petition on January 31, 2000 (dkt. #107 at p. 15, n. 5).
Moreover, in its answer to interrogatories, Doral more specifically
admits that it became aware that its mortgage was unrecorded on or
about July 29, 1999, more than six months prior to the filing of
the bankruptcy petition. (Appendix to dkt. #88 at p. 35 and dkt.
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The Court notes that Canales Law Offices and their	1
client, Doral, should have been aware of the deficiency
preventing the recording of Doral’s mortgage prior to the
expiration of the presentation in April of 1997. While Canales
Law Offices denies that it has any records regarding notification
from the Registry of Property regarding the mortgage deed, the
mortgage law required the Registrar to notify any flaw or
deficiency to the notary of the deed. 30 L.P.R.A. § 2272.
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#89). Clearly, Doral could have taken corrective action prior to
the filing of the debtors’ petition. Thus, any equitable	1
consideration that the Court gave Doral, based on the understanding
that Doral did not know that its mortgage was not properly recorded
until after the filing of the petition, was not warranted.
Legally, the Court concludes that withdrawal of the conveyance
deed was not wrongful, since it was withdrawn after the
presentation had expired. Nothing in the mortgage law required the
debtors to notify Doral or the notary of the mortgage deed as to
deficiencies in the conveyance deed. Moreover, the letter from the
Registry of Property informing the debtors of deficiencies in the
conveyance deed, makes no mention of the mortgage deed. See dkt.
#89.
As Doral itself argues in the opposition to the debtors’
motion for reconsideration, because the presentation of the
mortgage deed expired prior to the withdrawal of the conveyance
deed, the Property Registrar had no legal obligation to notify
Doral of the withdrawal of the conveyance deed (dkt. #107 at p.
13). As indicated previously, the debtors were only allowed to
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withdraw the conveyance deed because the mortgage deed presentation
had expired. See 30 L.P.R.A. § 2254. Moreover, according to the
deposition of Attorney Edgardo Canales Ydrach, of Canales Law
Offices, correcting the deficiencies did not require any assistance
from the debtors. See appendix to dkt. #88, p. 8-9. Thus, the
Court erred in concluding that withdrawal of the conveyance deed
was wrongful.
Further, and more importantly, the Court concludes that the
postpetition registration of the deeds by Doral and Canales Law
Offices was not excepted from the automatic stay by 11 U.S.C. §
362(b)(3). In the Decision and Order, the Court properly cited the
statutory law and jurisprudence regarding the automatic stay and
the exception related to perfection of a security interest,
stating:
The automatic stay prohibits “any act to
create, perfect, or enforce any lien against
property of the estate.” 11 U.S.C. §
362(a)(4). The automatic stay also prohibits
“any act to create, perfect, or enforce
against property of the debtor any lien to the
extent that such lien secures a claim that
arose before the commencement of the case . .
.” 11 U.S.C. § 362(a)(5). Notwithstanding,
the filing of a bankruptcy petition does not
operate as a stay “under subsection [362](a) .
. . of any action to perfect, or to maintain
or continue the perfection of, an interest in
property to the extent that the trustee’s
rights and powers are subject to such
perfection under section 546(b) of this title
. . .” 11 U.S.C. § 362(b)(3). The trustee’s
avoiding powers are limited by “any generally
applicable law that – (A) permits perfection
of an interest in property to be effective
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against an entity that acquires rights in such
property before the date of perfection . . .”
11 U.S.C. § 546(b)(1).
“Thus, simply stated, if a creditor
possesses a prepetition interest in property,
and state law establishes a time period for
perfection of a lien based upon that interest,
the ‘lien does not lose its preferred standing by reason of the fact that it [is] not
perfected until after the commencement of the bankruptcy so long as
it is perfected within the time period established by state law.”
In re Parr Meadows Racing Assn., 880 F.2d 1540, 1546 (2nd Cir.
1989), cert. denied, 493 U.S. 1058 (1990)(quoting Poly Industries,
Inc. v. Mozley, 362 F.2d 453, 457 (9th Cir.), cert. denied, 385
U.S. 958 (1996)). “The purpose of section 546(b) is to ‘protect,
in spite of the surprise intervention of a bankruptcy petition,
those who state law protects by allowing them to perfect their
liens or interests as of an effective date that is earlier than the
date of perfection.’” 229 Main St. Ltd. P’ship v. Mass. Dep’t of
Envtl. Prot. (In re 229 Main St. Ltd. P’ship), 262 F.3d 1, 10 (1st
Cir. 2001)(quoting H.R. Rep. No. 95-595, at 371-72 (1978),
reprinted in 1978 U.S.C.C.A.N. 6327). To qualify for the
exception, a creditor must satisfy three elements: “(1) the
creditor must act pursuant to a law of general applicability; (2)
that law must allow the creditor to perfect an interest in
property; and (3) such perfection must be effective against
previously acquired rights in the property.” Id.
Decision and Order (dkt. #87 at pp. 2-4). Thus, the automatic stay
does not apply to an action to perfect an interest in property, if
local law establishes a grace period for perfection that would
allow the perfection to relate back to a date prior to the filing
of the bankruptcy petition.
Likewise, in the Decision and Order, the Court cited the laws
of Puerto Rico regarding perfection of a security interest. The
Court stated:
The Laws of Puerto Rico do not limit the
time for presenting a mortgage deed for
recording. The Laws of Puerto Rico do provide
that a request for registration be made in the
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Registry of Property. See 30 L.P.R.A. § 2251.
When a request for registration is made, the
Registrar makes a notation that the deed was
presented for registration. 30 L.P.R.A. §
2253. Deeds must then be recorded within 60
days of their presentation, or after
correcting any errors that are pointed out.
30 L.P.R.A. § 2255. The deed would then
become effective against third parties from
the initial date of presentation. 30 L.P.R.A.
§ 2256. Generally, the entry of the
presentation expires 60 days after
notification of a defect, unless the defect is
corrected or other allowed action is taken.
30 L.P.R.A. § 2255. If the entry of the
presentation expires before the defects are
corrected, the deed must be presented again
and becomes effective from the date of the new
entry. 30 L.P.R.A. § 2275.
Decision and Order (dkt. #87 at p. 4).
Because the presentation of Doral’s mortgage deed expired
prior to the correction of the defects in the conveyance deed,
Doral had to present the deed again and it became effective from
the date of the new entry. See 30 L.P.R.A. § 2275. The
presentation of the mortgage deed to the Registry of Property on
December 1, 2000 was an act to perfect a lien against property of
the estate and prohibited by the automatic stay of 11 U.S.C. §
362(a)(4). The perfection was not excepted from the automatic stay
pursuant to 11 U.S.C. § 362(b)(3). For the Court to permit a
creditor with an unrecorded mortgage to present the deed at any
time after the bankruptcy filing and allow the lien to become
effective and take precedence over all other unsecured creditors
would be contrary to the Bankruptcy Code.
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Accordingly, the Court concludes that because of manifest
errors, the Decision and Order must be vacated and judgment must
enter in favor of the debtors.
ORDER
WHEREFORE IT IS ORDERED that the Court’s order of August 29,
2003, is vacated. Doral is hereby ordered to withdraw the mortgage
deed and to surrender it to the debtors for cancellation.
SO ORDERED.
San Juan, Puerto Rico, this 21st day of September, 2006.
S/ Gerardo A. Carlo
_________________________
GERARDO A. CARLO
Chief, U.S. Bankruptcy Judge
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