Opinion ID: 617777
Heading Depth: 3
Heading Rank: 3

Heading: Pre-petition Interest in Property Informed by Puerto Rico Law

Text: In general, a mortgage comprises a conveyance or retention of an interest in real property executed for the benefit of the mortgagee to secure payment of a debt. See generally Restatement (Third) of Property: Mortgages § 1.1 (1997); 54A Am.Jur. 2d Mortgages §§ 1, 138 (2009); see also Liechty v. Descartes Sauri, 9 P.R. Offic. Trans. 660, 109 D.P.R. 496 (1980) (holding that mortgage encompasses a property right). Some jurisdictions subscribe to the so-called title theory in which a mortgage effects a conditional conveyance vesting in the mortgagee legal title of the property, which title is defeated once the mortgage debt is paid. See generally 54A Am.Jur. 2d Mortgages §§ 1, 136 (2009); Restatement (Third) of Property: Mortgages § 4.1, cmt. a(1) (1997). Others follow the lien theory, under which the mortgage is mere security for the debt, creating a lien interest without divesting the mortgagor of legal title during the period of debt repayment. See generally 54A Am.Jur.2d Mortgages §§ 1, 137; Restatement (Third) of Property: Mortgages § 4.1, cmt. a(2). Under either system, the act of recording, rather than marking the inception of the mortgage interest itself, impacts the strength of the mortgagee's security interest in the property relative to other persons or entities claiming a competing interest. See generally 55 Am.Jur. 2d Mortgages §§ 278-81 (2009); Restatement (Third) of Property: Mortgages § 7.1, cmt. a (1997). In some jurisdictions even defectively executed mortgage documents may give rise to a security interest in the property and be enforced as, for instance, an equitable mortgage. See generally 54A Am.Jur. 2d Mortgages §§ 10-11, 13, 82; 55 Am.Jur. 2d Mortgages § 301; see, e.g., In re Williams, 213 W.Va. 780, 584 S.E.2d 922 (2003); Citizens Nat'l Bank in Zanesville v. Denison, 165 Ohio St. 89, 133 N.E.2d 329 (1956). In their briefing, both parties use nomenclature suggesting that Puerto Rico is a lien theory jurisdiction. But they focus on different provisions of Puerto Rico law to reach opposite conclusions on the critical issues. The debtors assert that recordation of a mortgage deed is so essential to its validity under Puerto Rico mortgage law that even when such a deed is presented to the registry for recording, no property interest vests until the deed is actually recorded by the registrar. According to the debtors, because the mortgage deeds were unrecorded at the time the bankruptcy petition was filed, they were no more than unsecured personal obligations and did not confer a pre-petition property interest on Banco Popular. Meanwhile, Banco Popular stands on Puerto Rico's relation back doctrine to contend that a bona fide third party who acquires rights in real property after a mortgage security interest in the same property has been presented and is pending recordation acquires the property interest subject to the perfection of the first-in-time security interest. Thus, according to Banco Popular, the execution of the mortgage deeds along with the acts of presentment sufficiently vested in it a pre-petition interest in the real property which the Bankruptcy Code allows to continue to perfection. After review of the relevant local law, along with the instruction of 229 Main Street, we agree with Banco Popular's position that it attained a pre-petition interest in property within the meaning of sections 362(b)(3) and 546(b)(1)(A) of the Bankruptcy Code. In Puerto Rico, the nature and effect of mortgages is governed by the Commonwealth's Mortgage and Property Registry Act of 1979 and portions of its Civil Code. See P.R. Laws Ann. tit. 30, § 2001 et seq. (2005); P.R. Laws Ann. tit. 31, § 5001 et seq. (1991). The mortgage law provides: A mortgage directly and immediately binds an estate and the rights on which it is imposed, whoever its owner or titleholder may be, to the fulfillment of the obligation for the security of which it was constituted. Recorded mortgages shall be strictly real encumbrances, permitting mortgage loans to be made regardless of any subsequent right that is acquired on the same property or mortgage rights.... P.R. Laws Ann. tit. 30, § 2551; see also P.R. Laws Ann. tit. 31, § 5043 (effect of mortgage on property); P.R. Laws Ann. tit. 30, § 2601 (defining voluntary mortgages). The civil code sets forth the essential requisites of a mortgage contract, including that a mortgage be constituted to secure the fulfillment of a principal obligation. P.R. Laws Ann. tit. 31, §§ 5001, 5002. Additionally, the civil code prescribes that it is indispensable, in order that the mortgage may be validly constituted, that the instrument in which it is created be entered in the registry of property. P.R. Laws Ann. tit. 31, § 5042. A companion statute under the mortgage law also provides that [i]n order for voluntary mortgages to be validly constituted the mortgage must be stipulated in a deed and must be recorded in the Property Registry. P.R. Laws Ann. tit. 30, § 2607. While recording is a necessary prerequisite to valid constitution, the original date a mortgage deed is presented to the registry for recording establishes priority between competing registrations. Pursuant to P.R. Laws Ann. tit. 30, § 2256: Registered titles shall become effective for third parties from the date of their registration. For all intents and purposes, the registration date, including the determination of the term needed for cancellation of entries, must appear in the registration itself. In order to determine preference between two or more registrations of the same property, attention shall be given to the date, hour and presentation number of the respective titles in the Registry. The debtors would have us conclude the analysis here. They take the cut-and-dried position that a foundational prerequisite for valid constitution was not in place and therefore Banco Popular enjoyed no more than a personal obligation, not an interest in property, at the time the bankruptcy proceedings commenced. To support their stance, the debtors point to several decisions of the Puerto Rico Supreme Court and those of federal courts interpreting Puerto Rico law. See, e.g., Rosario Perez v. Registrador, 15 P.R. Offic. Trans. 644, 115 D.P.R. 491 (P.R.1984); Roig Commercial Bank v. Dueno, 617 F.Supp. 913 (D.P.R.1985); In re Las Colinas, Inc., 426 F.2d 1005 (1st Cir.1970). Without doubt, the debtors' cases set forth the fairly unremarkable position that recordation is a constitutive act through which the security produces real effects and becomes operative erga omnes [that is, toward all] in the sphere of real rights. Rosario Perez, 15 P.R. Offic. Trans. 644, 115 D.P.R. 491. [3] Some do appear to suggest that an unrecorded mortgage deed provides a lender with no more than an unsecured personal debt under Puerto Rico law. See, e.g., Roig Commercial Bank, 617 F.Supp. at 915. The cases, however, do not address the precise question before usnamely, whether a creditor that has done essentially all that it can by timely presenting otherwise valid mortgage deeds for recording has obtained an interest in the property identified in the mortgage deed. For example, in Rosario Perez the Supreme Court of Puerto Rico faced the question of whether the registry had properly refused to record a mortgage deed that had been presented for recording after the presentment of a writ of attachment barring alienation of the same property. Rosario Perez, 15 P.R. Offic. Trans. 644, 115 D.P.R. 491. The propriety of the registrar's decision depended on application of a local statute that precluded recordation of a dispositive act against property once a judicial order barring alienation was presented, but provided that dispositive acts executed prior to the entry are not affected. Id. In affirming the registry, the court determined that no dispositive act had occurred relative to the mortgage deed prior to the entry of the writ because the mortgage had not been recorded and, therefore, the real security of the mortgage had not been constituted. Id. This case offers us virtually no guidance, however, because unlike the creditor in Rosario Perez, Banco Popular actually presented mortgage deeds to the registry for recording well before the debtors obtained their hypothetical status of bona fide purchasers or judicial lien holders. Rosario Perez simply does not speak to the legal effect of a creditor's prior presentment. To cite one more example, in Roig Commercial Bank the United States District Court for the District of Puerto Rico faced the question of whether a mortgagee was a party in interest with a right to redeem property that the Internal Revenue Service had seized and then sold at public auction. Roig Commercial Bank, 617 F.Supp. at 914. The creditor originally had presented the mortgage deed for recording before the tax seizure, but had withdrawn the document. After the tax sale, the creditor presented the deed for recording a second time and it was later recorded. The court determined that the creditor did not have a pre-seizure lien because [r]ecording is essential to the validity of a mortgage, and thus, a mortgage must be recorded in order to exist. Id. at 915. Additionally, it ruled that the lender did not have a pre-seizure interest in real property because [f]ailure to promptly record the mortgage deed turned the promissory note into a personal obligation, unsecured, solely enforceable against the maker. Id. at 915. Again, this case offers us no real help because the creditor did not claim a property interest or a lien based on a prompt presentment of an otherwise valid mortgage deed which was filed with the registry before a later-in-time interest developed. [4] At the same time, at a minimum Puerto Rico law regards presentment to be a legally significant act that initiates the certifying role of the registrar, begins the process of registration, and as previously noted, operates as the decisive point for resolving any competing registrations in the same property. See P.R. Laws Ann. tit. 30, § 2256. Generally, once presented, the registrar must pass judgment on the documents within sixty days, or some just cause period thereafter, and then either act to record them or alert the applicant to any defect. See P.R. Laws Ann. tit. 30, §§ 2255, 2267, 2270-72. Indeed, the registrar must keep detailed records to memorialize the very moment of presentation by entering the exact time of day into the day book (filing entry). See P.R. Laws Ann. tit. 30, §§ 2152, 2154, 2253. Such precision is required, of course, because the filing entry is intimately linked to the registry principle called rank or priority; the first filing entry prevails. Gasolinas, P.R. v. Registrador, 155 P.R. Dec. 652, 675 (P.R.2001). Puerto Rico law also circumscribes whether and how presented documents may be withdrawn before recording occurs, requiring notarized consent of the person entitled to withdraw if other documents may be affected adversely by the withdrawal. P.R. Laws Ann. tit. 30, § 2254. The most pointed statutory clue is the relation back provision establishing the moment of presentment as the priority marker. P.R. Laws Ann. tit. 30, § 2256; Gasolinas, 155 P.R. Dec. at 675 ([Presentment's] purpose is to acknowledge, in a precise manner, the exact point or time of such filing, inasmuch as same guarantees the filing party his turn, according to order of arrival.). In other words, [a] filing of an entry is an implicit advisement to everyone, until the document is actually registered. A deed, once filed and deemed recordable, retains all the effects of stated registration. Id. (citing to and parenthetically quoting Flores v. Arroyo, 43 P.R. Dec. 282, 283 (1932)); see also generally P.R. Laws Ann. tit. 30, §§ 2101, 2152. To diffuse the importance of presentment, the debtors contend that for the relation back doctrine to be activated, an act to record must be undertaken by the [registry], yet such an act is clearly stayed by the automatic stay provision. They also argue that [r]ecordation cannot be presumed upon the presentation of documents for inscription with the Registrar because the registrar has a legal duty to review and qualify the documents presented for inscription before the act of recording can take place. We recognize that the relation back provision speaks of competing registrations, P.R. Laws Ann. tit. 30, § 2256, and that the registrar bears the legal obligation of passing judgment on presented documents to determine whether to record them, P.R. Laws Ann. tit. 30, § 2267. We further acknowledge that under Puerto Rico law recording is a constitutive act for a mortgage, and without the existence of a mortgage, a creditor only has an unsecured personal obligation regarding the underlying debt. See Rosario Pérez, 15 P.R. Offic. Trans. 644, 115 D.P.R. 491; Roig Commercial Bank, 617 F.Supp. at 915. These rules do not, however, preclude the conclusion that presentment, though arguably falling short of creating a valid mortgage lien, could create an interest in the real property superior to a later-in-time bona fide purchaser or judicial lien holder. As we held in 229 Main Street, interest in property is a broader term than lien. 229 Main St., 262 F.3d at 7. We also concluded that a creditor had obtained a pre-petition interest in property under circumstances in which it had incurred a debt, had a present right to create and record a lien, and had affirmatively pursued that right via administrative channels. Id. Thus, our task is to consider whether the amalgam of circumstances, informed by all relevant aspects of Puerto Rico law, sufficed to satisfy [the Bankruptcy Code's] `interest in property' requirement. Id.; see The Ground Round, Inc., 482 F.3d at 17 (emphasizing that the label that state law affixes to a particular [property] interest in certain contexts is not always dispositive.). We find that they do. Banco Popular presented the latest mortgage deed for recording two years before the debtors' bankruptcy filing. There is no claim that the mortgagee dawdled in doing so. In the normal course of events anticipated by the statutory scheme, there is a fair certainty that, absent noticed and uncured defects, recording of the three mortgage deeds would have occurred well before the debtors filed for bankruptcy. And the record is devoid of any suggestion that the documents were defective in any manner or that Banco Popular bears any responsibility for the lengthy delay. Indeed, the explanatory statement prefacing the new Property Registry Facilitation Act indicates that registrar delay has been widespread in Puerto Rico for quite some time without the fault of applicants. See 2010 P.R. Laws No. 216. Moreover, the local statutes give no indication that mere passage of time caused by registrar delay somehow nullifies or expires the filing entry or its priority rank. Cf. P.R. Laws Ann. tit. 30, § 2255 (entry of presentation expires where notified defect is not seasonably corrected). Like the Commonwealth of Massachusetts as the creditor in 229 Main Street, Banco Popular obtained a concrete, pre-petition debt owed to it by the property owner. See 229 Main St., 262 F.3d at 7 (holding that debtor was liable to the Commonwealth for past and future clean-up costs). Even more than Massachusetts, though, Banco Popular had acted to secure this right to payment by actually presenting all three executed mortgage deeds to the registrar for recording years before the bankruptcy proceeding commenced. See id. (the Commonwealth had a present right to record a lien on the Property). Presentment, as the decisive act for securing rank, provided notice to the public, including to any bona fide purchaser, of the parties' mortgage transaction and the acts to preserve priority. See Gasolinas, 155 P.R. Dec. at 675. Banco Popular thereby took all possible administrative steps in its power to effectuate due recording. See 229 Main St., 262 F.3d at 7 (the Commonwealth notif[ied] the debtor of its intentions and participat[ed] vigorously in the administrative hearing process). Ultimately, in our view, this amalgam provided Banco Popular with an interest in property. To accept the debtors' narrow view would, in effect, place Banco Popular in the same position as a creditor who, before a bankruptcy petition was filed, either never presented executed mortgage deeds, withdrew presented deeds or failed to correct known defects. This view, however, does not comport with Puerto Rico law, because the act of presenting a mortgage deed itself has legal significance. Moreover, the approach urged by the debtors does not accord with the federal bankruptcy principles that are in play. This is not a situation in which a creditor is jockeying for an undue advantage over other creditors or engaging in harassing debt collection conduct in the midst of bankruptcy proceedings. See Mann v. Chase Manhattan Mortg. Corp., 316 F.3d 1, 3 (1st Cir. 2003) (noting that automatic stay provision is designed to forfend against the disorderly, piecemeal dismemberment of the debtor's estate outside the bankruptcy proceedings); 229 Main St., 262 F.3d at 9-10 (reviewing policy for exception to trustee strong arm power). After considering the circumstances through the prisms of both federal bankruptcy law and Puerto Rico law, we are satisfied that Banco Popular enjoyed a pre-petition interest in property within the meaning of sections 362(b)(3) and 546(b)(1)(A). Accordingly, we conclude that the debtors have failed to demonstrate that the bankruptcy court erred in ruling that the exceptions to the automatic stay and the trustee's strong arm power apply in this case. See Butner, 440 U.S. at 56, 99 S.Ct. 914 (a federal bankruptcy court should take whatever steps are necessary to ensure that the mortgagee is afforded in federal bankruptcy court the same protection he would have under state law if no bankruptcy ensued).