Court Opinion

ID: 178567
Source: CourtListenerOpinion
Date Created: 2010-11-02 15:35:22+00
Date Added: 2024-06-11T17:25:45.180083
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 09-1816

                    IN RE: MANUEL E. NET-VELÁZQUEZ,

                                Debtor.

                   BANCO BILBAO VIZCAYA ARGENTARIA,

                         Defendant, Appellant,

                                  v.

     NOREEN WISCOVITCH-RENTAS, as Trustee for the Estate of
                  Manuel Enrique Net-Velázquez,

                         Plaintiff, Appellee.

             APPEAL FROM THE UNITED STATES DISTRICT COURT
                    FOR THE DISTRICT OF PUERTO RICO

             [Hon. Gustavo A. Gelpí, U.S. District Judge]

                                Before

                  Torruella and Lipez, Circuit Judges,
                    and Barbadoro,* District Judge.

     María S. Jiménez Meléndez, with whom Wanda I. Luna Martínez
and Montañez & Alicea Law Office were on brief, for appellant.
     Noreen Wiscovitch-Rentas, with whom Enrique N. Vela Colón was
on brief, for appellee.

                           November 2, 2010

     *
         Of the District of New Hampshire, sitting by designation.
          LIPEZ,   Circuit   Judge.    This   appeal   arises   from   a

bankruptcy court adversary proceeding challenging Appellant Banco

Bilbao Vizcaya Argentaria's (BBVA) garnishment of funds in the bank

account of a corporation wholly owned by a Chapter 7 debtor and his

wife. BBVA appeals the district court's affirmance of a bankruptcy

court judgment in favor of the bankruptcy trustee, holding that

BBVA's garnishment of funds was a preferential transfer of estate

property avoidable under 11 U.S.C. § 547(b).     BBVA seeks to argue

in this court, under a number of theories, that ownership of the

garnished funds was properly vested in the bank and not the debtor.

Because BBVA neglected to squarely raise these arguments before the

bankruptcy court, it has waived them and we therefore affirm.

                                 I.

          In 2004, BBVA brought suit in a commonwealth court

against Manuel Enrique Net-Velázquez, his wife, and an associated

business partnership, resulting in an attachment in the amount of

$300,000 on several parcels of real property owned by the couple.

BBVA filed the attachment order in the Puerto Rico Registry of

Property in June 2005.

          In August 2005, Net-Velázquez and his wife sold one of

the attached properties, a parcel located in Paseo de la Fuente,

Puerto Rico. As it happened, the purchasers arranged for financing

through BBVA.   Though BBVA ordered a title report prior to the

closing, the report omitted (for reasons that are in dispute and

                                 -2-
not material here) BBVA's $300,000 attachment.           The personnel in

charge of the financing at BBVA were apparently unaware of the

attachment and remained so until after the closing.

           Upon sale of the parcel, BBVA issued a manager's check to

Net-Velázquez and his wife in the amount of $354,373.30, the entire

proceeds of the sale. Net-Velázquez, who admitted at trial that he

was aware of the attachment order, may or may not have been

surprised at the amount of the check and BBVA's failure to withhold

any portion of the proceeds to satisfy its attachment, but he did

not raise the issue with BBVA.1

           Net-Velázquez     and   his    wife   deposited   the    check   for

$354,373.30 into a newly created bank account at a third-party

bank.    The account was opened in the name of Code Inspector and

Management   Corp.   (Code   Inspector),     a   closely-held      corporation

created by the couple in 2004.      Net-Velázquez and his wife were the

sole shareholders and officers of Code Inspector, and each had full

control over the funds held in Code Inspector's bank account.

           Two weeks after the closing, having belatedly become

aware of the failure to withhold a portion of the Paseo de la

Fuente sales proceeds to satisfy its attachment, BBVA garnished all

     1
      Net-Velázquez testified at trial that he had previously sold
another parcel subject to an attachment by BBVA, and in that
transaction BBVA and the purchaser had directly negotiated to
reduce the amount of the attachment. Net-Velázquez said that when
he received the check for the full proceeds from the sale of the
Paseo de la Fuente parcel, he believed that some similar
arrangement must have been reached.

                                    -3-
of the available funds in the Code Inspector bank account.2      At the

time, the account contained $351,383.10. BBVA was unaware that the

account was maintained in Code Inspector's name, believing it to be

Net-Velázquez's personal account.3

           In December 2005, Net-Velázquez filed a petition for

bankruptcy under Chapter 7 of the Bankruptcy Code.      The bankruptcy

schedules accompanying Net-Velázquez's petition listed the Code

Inspector bank account as property of the bankruptcy estate.

                                  II.

           The bankruptcy trustee responsible for the Net-Velázquez

estate   initiated   this   adversary   proceeding   against   BBVA   in

September 2006, asserting that the bank's garnishment of funds in

the Code Inspector bank account amounted to a preferential transfer

     2
       The authority by which BBVA garnished the funds is not
clearly disclosed by the record, but it appears that BBVA obtained,
on an expedited basis, an order from a local court.
     3
       A bank official testified that BBVA traced the account based
upon the endorsed copy of the check returned to BBVA after deposit.
Because Net-Velázquez did not sign the check over to Code Inspector
but merely deposited the check into the corporate account, there
was no indication of the account's ownership.

                                  -4-
under 11 U.S.C. § 547(b).4         The trustee sought to recover the full

$351,383.10 garnished by BBVA.5

               The bankruptcy court held a bench trial in May 2008.

After hearing testimony from Net-Velázquez and a representative of

BBVA, the court ordered further briefing on the core issue that

emerged      at     trial:   whether    Net-Velázquez   had    transferred   his

interest in the sales proceeds to Code Inspector by depositing them

in Code Inspector's bank account, effectively removing those funds

from the bankruptcy estate.              In an opinion and order issued on

October 27, 2008, the court found that Net-Velázquez had retained

ownership of the funds in the Code Inspector account, and therefore

that       BBVA's    garnishment   of    funds   constituted    an   avoidable,

preferential transfer of property from the estate.

               BBVA appealed to the district court, see 28 U.S.C.

§ 158(a)(1), arguing that the bankruptcy court had erred in finding

       4
       Section 547(b) grants a bankruptcy trustee the power to
invalidate so-called "preferential transfers" of property from the
bankruptcy estate to a creditor within a ninety-day period prior to
the filing of a bankruptcy petition. The rationale for allowing
such transfers to be recovered is one of fairness, as a creditor
who receives property from the estate prior to bankruptcy may
obtain, at the expense of other creditors, a greater share of
estate property than the creditor would in bankruptcy.
       5
       For clarity's sake, we note that the amount garnished was
less than the full amount of the check issued by BBVA to Net-
Velázquez ($354,373.30), as the balance of the Code Inspector
account had declined to $351,383.10 at the time of the garnishment.
The garnishment exceeded, however, the amount to which BBVA was
entitled by virtue of the attachment ($300,000); BBVA has conceded
that it had no right to the $51,383.10 garnished in excess of the
$300,000 attachment.

                                         -5-
that the funds in the Code Inspector bank account were owned by

Net-Velázquez.   BBVA also raised several new defenses under Puerto

Rico's Negotiable Instruments Law, and argued as well that half of

the proceeds from the sale of the Paseo de la Fuente parcel

belonged to Net-Velázquez's wife and not to the estate.         The

district court affirmed, adopting the reasoning of the bankruptcy

court and rejecting BBVA's newly asserted defenses as waived

because BBVA had failed to raise them in the bankruptcy court.

Responding to BBVA's remaining argument, the court held that the

sale proceeds constituted community property of Net-Velázquez and

his spouse and thus were properly included in the bankruptcy

estate.

          This timely appeal followed.      We review a bankruptcy

court's findings of fact for clear error and its conclusions of law

de novo, granting no special deference to the intermediate decision

of the district court on appeal.   See Stornawaye Fin. Corp. v. Hill

(In re Hill), 562 F.3d 29, 32 (1st Cir. 2009).

                               III.

          Under section 547(b) of the Bankruptcy Code, the trustee

of an estate in bankruptcy may avoid "'any transfer of an interest

of the debtor in property' made (1) to a creditor, (2) on account

of an antecedent debt, (3) while the debtor was insolvent, (4)

during the 90-day period preceding the filing of the petition,

which (5) allowed such creditor to receive more than it would have

                                -6-
under Chapter 7."   Advanced Testing Techs., Inc. v. Desmond (In re

Computer Eng'g Assocs.), 337 F.3d 38, 45 (1st Cir. 2003) (quoting

11 U.S.C. § 547(b)).   The only contested element in this adversary

proceeding is whether the garnished funds were "an interest of the

debtor in property," that is, whether Net-Velázquez had a property

interest in the funds on deposit in Code Inspector's bank account

when they were garnished by BBVA.

          In the proceedings before the bankruptcy court, BBVA

sought to establish that Net-Velázquez had no property interest in

the funds on the theory that the deposit into Code Inspector's bank

account converted the funds from personal property subject to

bankruptcy procedures into corporate property.6    This contention

placed BBVA in the somewhat awkward position of arguing that it had

garnished funds from an entity that owed BBVA no debt.     Indeed,

BBVA necessarily conceded that, if its theory of the case were

     6
       BBVA also argued that $300,000 of the $354,373.30 check
issued to Net-Velázquez was "earmarked" for BBVA to satisfy its
attachment and thus that the garnishment was not a preferential
transfer. The thrust of this "earmarking" argument is that the
transfer to a debtor of funds that are "earmarked" for a third
party does not vest ownership in the debtor; thus, the subsequent
transfer of those funds to the third party for which they are
earmarked will not constitute a preferential transfer of "an
interest of the debtor in property." See Collins v. Greater Atl.
Mortg. Corp. (In re Lazarus), 478 F.3d 12, 15 (1st Cir. 2007). The
bankruptcy court rejected this argument, citing the absence of any
evidence that BBVA had "earmarked" the funds transferred to Net-
Velázquez and his wife. The court found, to the contrary, that
Net-Velázquez had left the closing "cash-in-hand," with no
restrictions on the sales proceeds imposed by BBVA. BBVA has not
challenged this holding on appeal.

                                -7-
correct, Code Inspector might have a cause of action against BBVA.

The bankruptcy court rejected this ill-advised argument, and BBVA

does not challenge the bankruptcy court's holding here.

           In fact, BBVA has wholly abandoned on appeal each of the

arguments it made before the bankruptcy court.         Instead of arguing

that Net-Velázquez's deposit of the sales proceeds transferred

ownership to Code Inspector, as it did below, BBVA offers here an

array of new legal arguments contending that a valid property

interest in the funds never even passed from BBVA to Net-Velázquez.

First, BBVA raises a defense it styles "payment by mistake,"

contending that Net-Velázquez never obtained a right to the sale

proceeds because the proceeds were transferred to him due to error

-- namely, that BBVA failed to withhold funds sufficient to satisfy

the attachment because that encumbrance was erroneously omitted

from the title report.     In support of this argument BBVA primarily

relies on Article 1795 of the Puerto Rico Civil Code.7               See P.R.

Laws Ann. tit. 31, § 5121.

           Second, BBVA offers a somewhat obscure argument under two

sections   of   the   Puerto   Rico   Civil   Code   that   relate    to   the

extinguishment of debt owed concurrently by two parties each to the

     7
       Article 1795 provides: "If a thing is received when there
was no right to claim it and which, through an error, has been
unduly delivered, there arises an obligation to restore the same."
P.R. Laws Ann. tit. 31, § 5121. BBVA also relies on section 418(b)
of the Negotiable Instruments Law, which extends the foregoing
principle to financial instruments paid or delivered by mistake.
See id. tit. 19, § 668.

                                      -8-
other, referred to by BBVA as "set-off."     See   P.R. Laws Ann. tit.

31, §§ 3221, 3228.   Under this theory, Net-Velázquez's obligation

to BBVA was extinguished by operation of law upon the closing of

the sale of the Paseo de la Fuente parcel, at which moment BBVA and

Net-Velázquez each owed a debt to the other -- Net-Velázquez for

the preexisting attachment, and BBVA, as the purchaser's financing

agent, for the sale price.     The thrust of this argument, never

fully elucidated by BBVA, appears to be that the sale proceeds were

automatically applied to the $300,000 attachment, and thus $300,000

of the $354,373.30 check issued to Net-Velázquez and his wife

represented an overpayment to which they had no legal entitlement.

          Third, BBVA argues, under several provisions of Puerto

Rico's Negotiable Instruments Law, that BBVA had the right to

rescind the manager's check issued to Net-Velázquez because Net-

Velázquez did not take the instrument in good faith and therefore

did not qualify as a holder in due course.    See P.R. Laws Ann. tit.

19, §§ 451, 602, 605, 606.   Fourth, BBVA contends that the Paseo de

la Fuente parcel and the proceeds from its sale were "in custodia

legis" (literally, in the custody of the law) at all points

subsequent to the issuance of the attachment order, barring Net-

Velázquez from obtaining a legal interest in the sale proceeds.

                                 -9-
               As set forth below, we hold that BBVA has forfeited its

chance to be heard on these arguments never presented to the

bankruptcy court.8

                                     IV.

               The proposition is well established that, "absent the

most       extraordinary   circumstances,      legal   theories    not   raised

squarely in the lower court cannot be broached for the first time

on appeal."        Teamsters, Chauffeurs, Warehousemen & Helpers Union,

Local No. 59 v. Superline Transp. Co., 953 F.2d 17, 21 (1st Cir.

1992); see also Iverson v. City of Boston, 452 F.3d 94, 102 (1st

Cir.       2006)   (collecting   cases   and    describing   the     circuit's

"echolalic regularity" in applying the waiver rule).                     Though

sometimes severe in effect, this raise-or-waive rule "is founded

upon important considerations of fairness, judicial economy, and

practical wisdom." Nat'l Ass'n of Soc. Workers v. Harwood, 69 F.3d

622, 627 (1st Cir. 1995).

               It is undisputed that three of BBVA's arguments on appeal

were not raised in the bankruptcy court and are subject to waiver:

the "set-off" argument, the argument under Puerto Rico's Negotiable

Instruments Law, and the characterization of the Paseo de la Fuente

       8
       The fact that portions of the arguments presented here were
raised before the district court has no impact on our analysis.
The bankruptcy court acts as the trial court in bankruptcy
proceedings. Thus, arguments must be presented in the bankruptcy
court to be preserved; the district court acts solely as an
intermediate appellate tribunal.    See Evergreen Credit Union v.
Woodman (In re Woodman), 379 F.3d 1, 3 n.1 (1st Cir. 2004).

                                     -10-
parcel as "in custodia legis."        BBVA protests, however, that it

properly raised its fourth argument, the "payment by mistake"

defense, by including it in its answer to the adversary complaint.

We have closely examined BBVA's answer and find it, at best,

debatable whether "payment by mistake" was actually raised as a

defense.       As it turns out, however, we need not resolve the

question because of BBVA's subsequent inattention to the defense.

              A defense or legal theory may not be preserved by bare

reference in a pleading if it is thereafter abandoned until,

freshly discovered on appeal, it is raised anew. Cf. DiMarco-Zappa

v. Cabanillas, 238 F.3d 25, 34 (1st Cir. 2001) ("Simply noting an

argument in passing without explanation is insufficient to avoid

waiver.").     Save in exceptional cases, only those issues that are

squarely presented and litigated in the trial court may be raised

on appeal.     See Iverson, 452 F.3d at 102 (litigants must "spell out

their legal theories face-up and squarely in the trial court" to

avoid waiver). Indeed, the Rules of Civil Procedure are structured

to   winnow    the   issues   presented    by   the   pleadings   as   a   case

progresses, so that only relevant, non-frivolous theories and

defenses reach trial and are preserved for our review.            Rule 16 in

particular encourages the parties and the court, through the

pretrial conference process, to "formulat[e] and simplify[] the

issues, and eliminat[e] frivolous claims or defenses."                 Fed. R.

Civ. P. 16(c)(2)(A).      Because the resulting pretrial order issued

                                    -11-
under Rule 16 is "intended to shape the contours of the ensuing

trial by setting forth the legal theories upon which the parties

intend to rely," Correa v. Hosp. San Francisco, 69 F.3d 1184, 1195

(1st Cir. 1995), claims or defenses omitted from the pretrial order

are waived, whether or not properly raised in the pleadings.            See

Rodríguez-García v. Miranda-Marín, 610 F.3d 756, 774 (1st Cir.

2010).

            Here, the record reflects that BBVA failed to pursue or

even raise the "payment by mistake" defense at any point subsequent

to its answer.      The parties' joint pretrial report contained no

mention of BBVA's "payment by mistake" defense, identifying only

two legal theories that BBVA intended to present at trial: first,

that the ownership of the sales proceeds passed to Code Inspector

upon their deposit in its bank account, and second, that the sales

proceeds    were   "earmarked"   for   BBVA   when   transferred   to   Net-

Velázquez, and thus were outside the action of 11 U.S.C. § 547(b).9

No argument in support of a "payment by mistake" defense was made

at the subsequent trial, nor was one included in BBVA's post-trial

briefing on ownership of the sales proceeds -- which focused solely

on the argument that Code Inspector was the rightful owner of the

funds.     Thus, even assuming BBVA did plead the substance of its

"payment by mistake" defense in the answer, such defense was

unambiguously waived for want of prosecution.

     9
         See supra note 6.

                                   -12-
             BBVA's last-ditch argument seeks to cast this appeal as

the "exceptional case" warranting relief from waiver.                         It is true

that the rule of waiver for arguments not squarely presented below

"is    a   matter    of    discretion"        and    "admits      of     an   occasional

exception."       Harwood, 69 F.3d at 627.            The bar, however, is high

for   such   an     exercise    of   discretion;       a    new    argument     will   be

considered on appeal only when "the equities heavily preponderate

in favor of such a step."            Id.

             We have applied various criteria to aid in identifying

the exceptional case where relief from waiver is appropriate.                          A

nonexhaustive       list   of   factors      relevant       to    this    determination

includes: (1) whether the litigant's failure to raise the issue has

deprived the court of appeals of useful factfinding, or whether the

issue was of a purely legal nature; (2) whether the omitted

argument raises an issue of constitutional magnitude; (3) whether

the argument was highly persuasive and failure to reach it would

threaten a miscarriage of justice; (4) whether considering the

issue would cause prejudice or inequity to the adverse party; (5)

whether the failure to raise the issue was inadvertent and provided

no    tactical    advantage;     and       (6)    whether   the    issue      implicates

"matters of great public moment," id. at 628.                          See Montalvo v.

Gonzalez-Amparo, 587 F.3d 43, 48-49 (1st Cir. 2009); Harwood, 69

F.3d at 627-28.

                                           -13-
             Of those criteria, a few seem to weigh slightly in BBVA's

favor here. First, BBVA's newly raised arguments are largely legal

in nature, and thus BBVA's failure to raise them below does not

appear to have substantially "deprived the court of appeals of

useful factfinding."       Harwood, 69 F.3d at 627.          Second, allowance

of the arguments would present "no special prejudice or inequity to

the plaintiffs," other than possibly to further protract litigation

that has now drawn on for over four years.           Id. at 628.      Third, the

omission     of     the   arguments     below     appears     attributable     to

inadvertence rather than a play for tactical advantage by BBVA.

See id.

             On the other hand, both the number and diversity of legal

theories pressed by BBVA on appeal mark these arguments as the

precise species our waiver rule is designed to deter: transparent

afterthoughts and alternative defenses burnished for appeal after

the defendant's primary arguments failed at trial. It is typically

only   in   cases    involving   issues      of   "great    public   moment"   or

"constitutional magnitude" that we are inclined to disregard our

waiver rule.       See id. at 628.      There can be no question that the

miscellaneous issues raised in BBVA's appeal are of no such lofty

stature.

             Moreover, BBVA has other remedies available, as it filed

a third-party complaint for contribution against the title search

company     that    prepared   the    erroneous    title    report.      If    the

                                      -14-
contribution claim fails, BBVA will simply end up on equal footing

with other unsecured creditors of the Net-Velázquez estate, and may

yet recover some portion of the $300,000 owed by Net-Velázquez.

While we do not suggest that there is nothing at stake for BBVA

here,    the    consequences   of   foreclosing   BBVA's   tardily   raised

arguments fall far short of a miscarriage of justice.

               As noted, we will only consider new arguments on appeal

where the "equities heavily preponderate in favor of such a step."

Harwood, 69 F.3d at 627.            Having identified and weighed the

criteria we deem most relevant to BBVA's request to have its

arguments heard for the first time on appeal, we conclude that the

equities do not heavily preponderate in favor of allowing these new

arguments.       Therefore, we affirm the judgment of the district

court.

               So ordered.

                                     -15-