CARDONA FIGUEROA et al v. BANCO BILBAO VIZCAYA PUERTO RICO

OCR transcription for search; preserved printed pages are authoritative

Case:04-00063-GAC Doc#:18 Filed:01/25/06 Entered:01/25/06 15:05:37 Desc: Main
Document Page 1 of 7

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUBRTO RICO

In re:

WILFREDO CARDONA FIGUEROA, : Case No. 99-16712 (GAC)
ELBA IRIES AQUINOC VEGA, :

Debtors : Chapter 7

WILFREDO CARDONA FIGUEROA,
ELBA IRIS AQUINO VEGA and their
conjugal partnership,

Plaintiffs
Vv. : Adv. No. 04-00063
BANCO BILBAO VIACAYA-PUERTO RICO,

Defendants

DECISION AND ORDER

The debtors filed a petition under Chapter 13 on December 9,
1999, The schedules listed the “net cash value” of $6,000.00 in an
insurance policy with John Hancock Insurance Co., Policy No.
066753093, as property of the estate. The debtors claimed the
policy as exempt and did not list any creditors as having a
security interest in the policy. The debtors scheduled Banco
Bilbao Vizcaya~Puerto Rico (“BBV”) as having an unsecured claim in
the amount of $173,238.50. Prior to the claims bar date, the
debtors converted to Chapter 7.

The notice of the Chapter 7 bankruptcy case directed creditors
not to file proofs of claim because it did not appear that there

was any property available to pay creditors (dkt. #13). The notice

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

Case:04-00063-GAC Doc#:18 Filed:01/25/06 Entered:01/25/06 15:05:37 Desc: Main
Document Page 2 of 7

also indicated that if it later appeared that assets were
available, creditors would be sent another notice with a deadline
for the filing of proofs of claim. BBV did not file a proof of
claim. On March 31, 2000, the Chapter 7 trustee filed a report of
no distribution (dkt. #21). The debtors received their discharge
on June 9, 2000 (dkt. #26), the trustee was discharged and the
estate was closed (dkt. #27).

On May 12, 2004, the debtors filed this adversary proceeding,
claiming that in September of 2004, the debtors filed the cash
surrender form with John Hancock, requesting the cancellation of
Policy No. 066753093 and payment of the liquidation value. The
debtors learned that John Hancock had paid the $15,860.24 cash
surrender value of the policy to BBV. The debtors indicated that
they had no recollection of assigning the policy to BBV. The
debtors request that BBV be ordered to turnover the proceeds
pursuant to 11 U.S.C. § 524(a} (2).

BBV filed a motion for summary judgment (dkt. #6) and a
memorandum of law in support of the motion (dkt. #5), claiming that
the debtors had pledged the policy to it to secure a financial
obligation (dkt. #5). BBV claims that it was a secured creditor
and that it had a right to set off its debt against the proceeds of
the policy. BBV also filed a statement of uncontested facts in
support of its motion (dkt. #7).

The debtors filed an answer to the motion for summary judgment

Case:04-00063-GAC Doc#:18 Filed:01/25/06 Entered:01/25/06 15:05:37 Desc: Main
Document Page 3 of 7

contending that BBV did not have a valid security interest in the

collateral because the loan documents did not specifically list the
name of the insurance company and the number of the policy
guaranteeing the loan. The debtors contend that the pledge was not
properly identified in the loan contract. ‘The debtors also argue
that because BBV did not file a proof of claim, they did not have
the opportunity to challenge its alleged secured status. The
debtors indicate that BBV was scheduled as an unsecured creditor
and that the policy was claimed as exempt. The debtors recognized
that they were limited to exempting $8,625.00 of any unmatured life
insurance contract pursuant to 11 U.S.C. § 522 (d) (8).

At the pre-trial hearing in the adversary, the Court reopened

the légal case (dkt. #11). The parties informed that no hearing

Was necessary and the Court took the matter under advisement.
Thereafter, the Court entered an order requiring BBV to submit
translations of the documents submitted in support of its motion
for summary judgment (dkt. #12). BBV filed a motion submitting
translations of the documents (dkt. #17).

The documents submitted by BBV show that the debtor, Wilfredo
Cardona Figueroa (“Cardona”) was the President of a corporation,
Good Luck Auto Sales, Inc. (*GLAS”). Cardona entered into a loan
agreement with BBV on May 10, 1995 for a line of credit in the
amount of $300,000.00. As collateral for the loan, Cardona and his

spouse, the co-debtor in this case, pledged a certificate of

Case:04-00063-GAC Doc#:18 Filed:01/25/06 Entered:01/25/06 15:05:37 Desc: Main
Document Page 4 of 7

deposit, their personal guarantees and life insurance over the life
of Cardona for the amount of $200,000.00 endorsed in favor of BBV.
No particular policy is identified in the loan agreement. On the
same date, Cardona executed a letter of continuous guarantee. On
May 24, 1995, Cardona made a collateral assignment of John Hancock
life insurance Policy No. 66753093 in favor of BBV. The collateral
assignment clearly indicates that Cardona is pledging the policy as
security for a loan.

On January 3, 1997, by letter, BBV approved additional credit
facilities to restructure the loan for GLAS. This includes as
collateral, life insurance of Cardona for the total risk, without
identifying a particular policy. The letter indicates that it is
the formalization of the commercial loan and the letter was signed
as accepted by Cardona. On March 24, 1997, John Hancock issued a
letter to BBV stating that Policy No. 066753093 was current and
endorsed in favor of BRV.

DISCUSSTON

A contract of pledge in Puerto Rico requires the following
essential requisites:

(1) That they be constituted to secure the
fulfillment of a principal obligation.
(2) That the thing pledged or mortgaged is owned by

the person who pledges or mortgages it.

(3) That the persons who constitute the pledge or
mortgage have the free disposition of their property,

and, should they not have it, that they are legally

authorized for that purpose.

31 L.P.R.A. § 5001. Moreover, “it is necessary, in order to

Case:04-00063-GAC Doc#:18 Filed:01/25/06 Entered:01/25/06 15:05:37 Desc: Main
Document Page 5 of 7

constitute a contract of pledge, that the pledge should be placed
in possession of the creditor or of a third person by common
consent.” 31 L.P.R.A. § 5021.

In the present case, the requisites for a contract of pledge
were satisfied prepetition. The pledge of Policy No. 66753093 in
favor of BBV was constituted to secure the fulfillment of a loan to
Cardona and GLAS. Cardona was the owner of Policy No. 66753093 and
he does not dispute that he had the free disposition of the
property to pledge it to BBV. Finally, the life insurance policy
remained in the possession of John Hancock with the recognition
that it was pledged to BBV. The Court finds it irrelevant that the
loan agreements listed life insurance over the Life of Cardona as
collateral, without specifically identifying the collateral, which
Cardona actually pledged after the signing of the initial loan
agreement. Thus, the Court concludes that BBV had a security
interest in the life insurance policy. Because BBV was owed the
amount of $173,238.50, which exceeded the $15,860.24 cash value of
the policy, BBV had a secured claim against Policy No. 66753093 in
the amount of $15,860.24,

The discharge injunction of 11 U.S.C. § 524(a) (2) specifically
enjoins only actions seeking to enforce the debtor’s personal
liability. Stated another way, “a discharge extinguishes only in
personam claims and generally has no effect on in rem claims

against property.” Cadie Company v. Schlictmann, 267 F.3d 14 (1st

Case:04-00063-GAC Doc#:18 Filed:01/25/06 Entered:01/25/06 15:05:37 Desc: Main
Document Page 6 of 7

Cir. 2001) (citing Doral Mortgage Corp. V. Echevarria, 212 B.R. 185

(B.A.P. lst Cir. 1997)). Thus, a preexisting lien on property,
remains enforceable against the property even after the

individual’s liability has been discharged. See Dewsnup v. Timm,

502 U.S. 410 (1992); Johnson v. Home State Bank, 501 U.S. 78

(1991).
*“[N]othing in the Bankruptcy Code imposes an affirmative duty
on a lienholder to assert its in rem rights prior to the debtor’s

securing of a discharge.” Arruda v. Sears, Roebuck & Co,, 310 F.3d

13, 21 (1%* Cir. 2002). In order to extinguish or modify a lien
during the bankruptcy process, the debtor must take the proper
steps to avoid the lien. Id. (citation omitted). See also Doral

Mortgage Corp. v. Echevarria, 212 B.R. at 187 (citation omitted).

“Creditors who hold valid liens not avoided in the bankruptcy case
are free to enforce those liens against their collateral after the

debtor’s personal liability has been discharged.” Pratt v. General

Motors Acceptance Corp. (In re Pratt), 324 B.R. 1, 6 (Bankr.D.Me.

2005).

In the present case, although the debtors scheduled BBV as an
unsecured creditor, BBV was not obligated to file a proof of claim.
The case was converted to Chapter 7 prior to the Chapter 13 claims
bar date and the notice to creditors in the Chapter 7 case directed
them not to file proofs of claim because it did not appear that

they would receive a distribution. The debtors took no affirmative

Case:04-00063-GAC Doc#:18 Filed:01/25/06 Entered:01/25/06 15:05:37 Desc: Main
Document Page 7 of 7

action to avoid BBV’s lien. Thus, BBV’s lien against Policy No.
066753093 remained enforceable against the policy even after the
debtors’ personal liability had been discharged. Therefore, BBV
did not violate the discharge injunction when it set off the debt
against the policy after the bankruptcy case was concluded.

This result is not changed through the debtors’ claim of
exemption in the property. With certain exceptions not applicable
here, the Bankruptcy Code provides that property claimed as exempt
is not liable for a prepetition debt, except when a debt is secured
by a lien. 11 U.S.C, § 522(c) (2). Thus, the Bankruptcy Code
protects a secured creditor from losing its secured status through
a debtor merely claiming an exemption in property subject to a
lien.

Accordingly, there being no violation of the discharge
injunction of 11 U.S.C. § 524(a) (2),

IT IS ORDERED that BBV’s motion for summary judgment (dkt. #5)
shall be, and it hereby is GRANTED. This adversary complaint is
DISMISSED.

SO ORDERED,

San Juan, Puerto Rico, this 25th day of January, 2006.

s/ Gerardo A. Carlo

GERARDO A. CARLO
Chief, U.S. Bankruptcy Judge