SEGARRA MIRANDA v. DORAL MORTGAGE CORPORATION et al

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

IN THE MATTER OF
LUZ N. VELEZ ROSADO, : CASE NO. 05-12779 (SEK)

DEBTOR : CHAPTER 13

WILFREDO SEGARRA MIRANDA,
Trustee for The Estate Luz
Nereida Velez,

PLAINTIFF : ADV. NO. 07-00292
VV.
DORAL MORTGAGE CORPORATION; — :
DORAL FINANCIAL CORPORATION, : FILED & ENTERED
DEFENDANTS ; 15 JUL 2008
TEE ; CLERK
U.S. BANKRUPTCY COURT
SAN JUAN, PUERTO Rico

OPINION AND ORDER
Relying on Juarbe Alicea v. Juarbe Auto Sales, Inc.?,

defendants challenge the Trustee’s status as a bona fide
purchaser of debtor’s residence in this action for avoidance of
their mortgage lien over the dwelling, because the pre bankruptcy
“Bill of Entry of Presentation” was not recorded on the
residence as of the date of the commencement of this bankruptcy
case. Although applicable non bankruptcy law allows the
Registrar to correct the recording error, the corrected entry may

not relate back to the date and time the Bill of Entry was

* duarbe Alicea v. Juarbe Auto Sales, Inc., 640 F. Supp.
110 (DCPR 1986).

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presented, if a third party acquires an intervening interest in
the residence. Thus, the underlying and controlling issue here,
is whether the Trustee is a bona fide purchaser/third party who
acquired an intervening interest in the residence that is
superior to Defendants’ mortgage lien as of the commencement of
the case, allowing the Trustee to avoid the Lien under federal
bankruptcy law and the laws of the Commonwealth of Puerto Rico.
For reasons that follow, we rule in favor of the Trustee.
I. Facts of the Case

We draw our factual findings from the undisputed statement
of facts, documents submitted with the Trustee’s motion for
summary judgement and other documents of record. These show
Debtor guaranteed repayment of a $166,500 loan, plus interest and
other charges, expressed in the mortgage deed (“the deed”)
creating an unperfected lien on her residence. The deed was
presented as a “Bill of Entry” in the Registry of the Property of
Puerto Rico on November 10, 2004. The presentation was recorded
in the Registry’s daily book on real property number 31,780,
instead of the residence’s real property number 37,180. We
cannot tell who committed this error. The Registrar corrected
the mistake on February 13, 2007, sixteen months after Debtor
filed for bankruptcy relief.

In January, 2007, the Trustee filed an application to

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appoint a realtor to help sell the residence.” Trustee produced
evidence that demonstrates the book of daily presentations kept
by the Registrar showed the lien was recorded on realty number
31,780, when the residence’s number was 37,180.2 Trustee asked
for time to complete his investigation. Later, he filed this
proceeding followed by the instant request for entry of judgment
summarily.
II. Position of the Parties

The Trustee claims relevant portions of the mortgage law of
Puerto Rico require inscription of the mortgage deed for it to be
perfected and valid against third parties, or “with omnibus
effects” .* The process of inscription begins when the mortgage
deed is presented and recorded in the daily book of
presentations, kept by the Registrar. This entry preserves rank,
as the inscription of the mortgage relates back to the date and
time the Bill of Entry is recorded in the daily books, applying

the principle “prior tempore potior iure”.° Now, if the Bill of

* See docket entry #89.
* See docket entries #s 93, 97 & 102,

* “The Registry of Property of Puerto Rico ... [kleeps
track of title ownership and liens. It also creates rights with
omnibus effects.” Juarbe Alicea v. Juarbe Auto Sales, Inc. 640 F.
Supp. 110, 112 (DCPR 1986).

° We thank the Supreme Court of Puerto Rico for providing
us with an official translation of Part III of Gasolinas de
Puerto Rico Corporation v. Keeler Vaquez, Registrar of the
Property of Caguas, attached as Exhibit A explaining this

3

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Presentation is recorded on the wrong parcel of land, the
inscription relates back to that mistaken entry. “The mortgage
law recognizes the fact that an inscription or recording may not
reflect the real status of the property ... [providing] a process
of rectification of inaccuracies...”. Juarbe Alicea v. Juare Auto
Sales, Inc., 640 F. Supp. 110, 112 (DCPR 1986). Thus, the
mortgage law allows the Registrar to rectify an erroneous entry
in the daily books. 30 Laws of P.R. Ann. §§ 2501-2505.
Specifically applicable to the situation at hand are sections
2502 and 2505 interpreting rectification of errors in daily books
as relating back to date of presentation, explained in Gasolinas
de Puerto Rico Corporation v. Registrador, 155 D.P.R, 652,(2001);
2001 WL1512702 (P.R.).

The Trustee claims he became a bonafide purchaser of the
residence before the Registrar rectified the error. Hence, the
corrected entry could not relate back to the date the Bill of
Entry was mistakenly recorded due to his intervening interest in
the realty acquired under 11 U.S.C. § 544(a) (3). Under local law,
the rectification cannot relate back to the date Bill of Entry
was presented when there is an intervening third party such as a
bona fide purchaser. Therefore, the Trustee argues that he can
avoid the mortgage lien as a nullity pursuant to 11 U.S.c. §

544,

process.

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Defendants claim the Trustee’s strong arm powers under 11
U.S.C. § 544 are limited to actions taken in good faith and with
clean hands. Here, “the Trustee cannot not be deemed a bona fide
purchaser of debtor’s interest in real property because as part
of any real property purchase transaction from the debtors, the
Trustee would have become aware of Doral’s indebtedness and the
mortgage”. Defendants also say that 11 U.S.C. § 546 (b)
authorizes the Registrar to rectify the error, opening the way
for eventual perfection of the mortgage lien on the residence
that would relate to the date of the mistaken recordation in the
books of daily presentation. Consequently, Defendants’ mortgage
would be recorded before entry of the order for relief, and the
Trustee would acquire Debtor’s interest in her residence subject
to the mortgage lien that cannot be avoided under 11 U.S.C. §

544 (a) (3). Defendants distinguish Gasolinas de Puerto Corp. v.
Registrador, 155 D.P.R. 652, 684 (2001), arguing that there the
erroneous recording was caused by the creditor; here, it was
caused by the Registrar. Lastly, Defendants challenge Trustee’ s
claim that he is an intervening third party whose rights over the
residence cannot be affected by the Registrar’s rectification
based on Juarbe Alicea v. Juarbe Auto Sales, supra. Without
elaborating, Defendants state the Trustee is “imputed with
debtor’s knowledge of its debt and voluntary mortgage with Doral,

hence he could not be deemed a third party with legitimate

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rights.” To hold otherwise, would penalize the non negligent
lien holder for the Registrar’s mistakes and provide a windfall
to the estate in bankruptcy.
IV. Discussion

In our discussion we have borrowed freely from Judge
Kenner’s opinion of In re Coletta Bros. of North Quincy, 172 B.R.
159 (Bkrtcy. Mass. 1994), resolving the same issues we face under
facts similar to the ones at hand. We begin by reviewing federal
law to determine the capacity in which the Trustee holds the

residence: does he stand in the shoes of the Debtor as claimed by

the Defendants, or of a bona fide purchaser/third party as stated

by the Trustee.

Upon commencement of this case, ali legal and equitable
interests of the Debtor in her dwelling became property of the
bankruptcy estate. 11 U.S.C. § 541(a) (1). Although this estate
acquired no greater legal or equitable interest in the residence
than the Debtor had at the commencement of the case,
its rights are not limited by § 541(a) (1).° 11 U.S.C. § 541 (a) (3)
&(4) broaden the estate’s property rights to include property
recovered by the Trustee through the exercise of his “strong arm”
powers under 11 U.S.C. § 544{a){3).

Section 544(a) (3) provides the Trustee holds the residence

not as the Debtor held it, but with the rights and powers of a

* 11 0.S.c. § 541(d).

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hypothetical bona fide purchaser who acquired the dwelling from
the Debtor on the date the Debtor filed her petition for
bankruptcy. "Furthermore, the Trustee enjoys these rights and
powers over the residence “‘without regard to any knowledge of
the trustee or of any creditor’. Therefore, it is irrelevant
that the Trustee or any creditor may have had actual or [imputed] -
knowledge of defendant’s loan secured by the mortgage, either by
documents filed in this case or otherwise.” In re Coletta
Bros. of North Quincy, 172 B.R. at 162. Therefore, the Trustee is
deemed to be a bona fide purchaser regardless of any actual or
imputed notice he might have had of Debtor’s loan secured by a
mortgage in favor of Defendants. Ibid.

We know turn to the laws of the Commonwealth of Puerto Rico,
as these define the Trustee’s rights and powers as a hypothetical
bona fide purchaser of Debtor’s dwelling. In re Coletta Bros,
inc., 172 B.R. at 163-164, citing Butner v. United States, 440
U.S. 48, 99 &.Ct. 914, 50 L.Ed.2d 136 and In re Ryan, 80 B.R. 266
(Bktrey. Mass. 1987), aff'd. 851 F.2d 502 (1° Cir. 21988). Both
parties agree that 30 Laws of P.R. Ann. §§ 2502 and 2505 are
applicable to the facts at hand. Section 2502 provides that,

Errors made by the Registrar when making an entry may

be rectified, provided they do not affect the rights of

registered titleholders, either automatically or at the

request of the interested party, provided the interest

that motivated the action is at hand.

When rectification might affect the right of registered

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titleholders, their consent or judicial resolution
ordering the rectification of the entries shall be
required.

Section 2505 states,

Rectification of an error shall become effective on the
date it took place, which date must appear in the
rectification entry itself, without prejudice to the
right which third parties may have to file a suit for
misrepresentation or nullity of the title referred to
in the entry containing the error or in the entry
itself. (Our emphasis).

The rectification may be retroactive if, inter alia, the rights
of an intervening third party are not adversely affected,
Gasolinas de Puerto Rico Corporation v. Registrador, 155 D.P.R.
652, 684 (2001), and Exhibit A.

is the Trustee’s status of hypothetical bona fide purchaser
acquired under federal law equivalent to a third party acting in
good faith under the cited local law? This depends upon whether
Trustee had direct and personal knowledge that Debtor had
obtained the loan secured by the mortgage in favor of Defendants
at the time he acquired his status of hypothetical bona fide
purchaser over the dwelling. Pascual v. Fernandez Sierra, 8
Official Translation, 447, 454-457 (1979); Juarbe Alicea v.
Juarbe Auto Sales, 640 F. Supp. 111-113. The Trustee here was not
a party to the mortgage loan. On the date the bankruptcy case was
commenced the loan was not recorded as an encumbrance over the

residence. The Registry of the Property, the Bankruptcy schedules

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and Defendants’ proof of claim do not reveal the existence of a
mortgage lien over the dwelling.’ Thus, on the filing date the
Trustee had no actual knowledge of the mortgage loan in question.
Defendants allude to the Trustee’s imputed knowledge of the
mortgage loan as if this would somehow defeat the presumed good
faith of the Trustee. As explained by Judge Kenner, imputed
knowledge is a form of constructive knowledge; notice of the
mortgage loan that the Trustee is deemed to have had as a matter
of law, regardless of his actual knowledge. “[A]s a creature of
law, constructive knowledge is effective only to the extent and
under the circumstances prescribed by law”. In re Coletta Bros.
of North Quincy, Inc., 172 B.R. at 163. The Juarbe case, supra,
describes evidence produced to refute the presumption as actual
notice of the existence of the mortgage by a party to the
contract. That opinion does not rely on imputed or constructive
knowledge. Since local law cloathes the Trustee with a

presumption of good faith and here Defendants have not refuted

7 The record reflects the following. Claims registry shows
Defendants filed a proof of claim as secured creditors for the
sum of $165,207.34, attaching a title study that reveals Oriental
Bank and Trust and Banco Santander PR held liens over the
residence. Defendants were not mentioned in this title study, and
the claim has not been amended. Case records show Debtor did not
schedule any liens on her residence valued at $190,000. She
scheduled Doral Bank with a lien described as a “Non Purchase
Money” over the residence with zero value. Debtor filed a
statement of intention, upon conversion of the case to Chapter 7
showing she would continue making mortgage payments due to “Doral
Bank” involving her residence.

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this presumption, without further development of this point by
the Defendants, we do not have to delve into this portion of
their argument. United States v. Zannino, 895 F. 2d 1, 17 (1%
Cir. 1990); Ramalio Bros. Printing, Inc. v. El Dia, Inc., 490
F.3d 86, 90 (1% Cir. 2007). Hence, we conclude that under local
law the Trustee is also bona fide purchaser whose intervening
rights in the dwelling precludes the rectification performed by

the Registrar from relating back to the date of the mistaken

entry.

As to Defendants’ remaining arguments, we say our ruling

here is not intended to penalize anyone. It is intended to uphold
the principle of “fé ptblica registral” which has served us well.
We also say that our ruling does not provide a windfall to the
estate in bankruptcy, as Defendants will receive the largest
distribution from the sale of the residence, and may have other’
undisclosed sources of recoupment.

WHEREFORE, as there are no material facts in dispute and

applicable law favors the Trustee’s position’, we grant the

* We may enter summary judgment if “the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with affidavits, if any, show that there is no genuine
issue as to any material fact and the moving party is entitled to
a judgment as a matter of law.” [cit. omitted]. Garrido, et al.
v. Garrido, et al., 370 B.R. 878, 880 (1% Cir. BAP 2007).

‘Summary judgment’s role is to pierce the pleadings and
to assess the proof in order to see whether there is a

genuine need for trial,’ or whether the evidence is so
one sided that one party must prevail as a matter of

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motion for summary judgment, allowing the Trustee to avoid
Defendants’ lien over Debtor’s residence.
SO ORDERED, in San Juan, Puerto Rico, on July 14, 2008.

; RA DE J fS)
U.S / Bankrup Judge

law. [cit. omitted]

The moving party bears the burden of showing the
absence of evidence to support the nonmoving party’s
position. [cit. omitted] If the moving party has _
properly supported its position, the burden then shifts
to the nonmoving party who must produce sufficient
evidence to demonstrate a genuine issue for trial.

[cit. omitted] In assessing whether summary judgment is
warranted, a reviewing court must view the entire
record in the light most favorable to the nonmoving
party, indulging all reasonable inferences in the
nonmovant’s favor. [cit. omitted]

in re Beaulac, 298 B.R. 31, 33 (Bkrtcy. Mass. 2003).

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