Court Opinion

ID: 2965959
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:46:51.802511+00
Date Added: 2024-06-11T11:43:08.119293
License: Public Domain

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<pre>                 United States Court of Appeals <br>                     For the First Circuit <br> <br> <br> <br>No. 98-2273 <br> <br>          IN RE:  COLONIAL MORTGAGE BANKERS CORPORATION, <br>                                  <br>                             Debtor. <br>                            __________ <br> <br>                      CREFISA INCORPORATED, <br> <br>                       Plaintiff, Appellee, <br> <br>                                v. <br> <br>                  WASHINGTON MUTUAL BANK, F.A., <br> <br>                      Defendant, Appellant. <br>                            __________ <br> <br>                   HANS LOPEZ-STUBBE, TRUSTEE, <br> <br>                            Appellant. <br>                                  <br> <br> <br>           APPEAL FROM THE UNITED STATES DISTRICT COURT <br> <br>                 FOR THE DISTRICT OF PUERTO RICO <br> <br>        [Hon. Carmen Consuelo Cerezo, U.S. District Judge] <br> <br> <br> <br>                              Before <br> <br>                    Selya, Boudin and Lipez, <br>                                 <br>                        Circuit Judges. <br>                                 <br>                                 <br>                                 <br>     Ivan R. Fernandez-Vallejo with whom Rodriguez & Fernandez, <br>Jorge Souss and Goldman Antonetti & Cordova, P.S.C. were on brief <br>for appellants. <br>     Luis R. Montanez-Aviles with whom Montanez & Alicea Law <br>Offices was on brief for appellee. <br> <br> <br> <br> <br>August 2, 1999 <br> <br> <br> <br>  BOUDIN, Circuit Judge.  This appeal is taken from a <br>decision of the United States District Court for the District of <br>Puerto Rico reversing a decision of the federal bankruptcy court.  <br>In substance, the district court sustained a claim by Crefisa, <br>Inc., requiring the bankruptcy trustee of Colonial Mortgage Bankers <br>Corporation ("Colonial") to pay over approximately $557,000 <br>comprising security for a note held by Crefisa.  The background <br>events are somewhat complicated. <br>  In the 1980s, Colonial was engaged in the business of <br>servicing mortgages.  One of its clients was the Bowery Savings <br>Bank ("Bowery") (Washington Mutual Bank has now been substituted <br>for Bowery but it simplifies matters to refer only to Bowery).  By <br>agreement, Colonial collected mortgage payments due to Bowery and <br>deposited them into Colonial accounts--in trust for Bowery--in two <br>different Puerto Rico banks:  Financiero and Banco Santander.  The <br>president of Colonial was Milton J. Ra. <br>  In 1980, Ra began a set of transactions that led to the <br>present case by requesting a $500,000 loan from Caguas Central <br>Federal Savings Bank ("Caguas"), a bank with which Colonial, Ra, <br>or both had had past dealings.  The loan to Ra, which may have <br>been irregular, involved Ra's execution on November 26, 1986, of <br>a promissory note due on demand for $500,000 in favor of Caguas.  <br>On November 28, 1986, the loan was completed through the following <br>transactions: <br>    Caguas made a $500,000 deposit representing <br>  the loan into Ra's personal checking account <br>  in the bank; <br>     <br>    Ra opened a new savings account at the bank <br>  called a Golden Passbook account with a <br>  $500,000 check drawn on his checking account; <br>  <br>    Ra made a written pledge of the Golden <br>  Passbook account as collateral to secure his <br>  $500,000 promissory note and any other current <br>  or future debts to Caguas. <br> <br>  The Golden Passbook account--the treasure trove in this <br>case--was opened as a personal savings account of Ra, but the <br>passbook bore the legend "Colonial Mortgage Bank, B.S.B., Corp." <br>(the "B.S.B." apparently standing for Bowery Savings Bank) and the <br>passbook was later shown to Bowery auditors to persuade them that <br>the account held funds in Colonial's name belonging to Bowery.  <br>There is some indication that Ra later sought to transfer <br>ownership of the Golden Passbook account to Colonial but that <br>Caguas rejected this effort on the ground that it did not maintain <br>savings accounts for corporations. <br>  In December 1987, Colonial filed for bankruptcy giving <br>rise to the present case.  Puerto Rico financial authorities later <br>concluded that Colonial and Ra had diverted millions of dollars <br>from trust accounts that Colonial had managed and had channeled the <br>money into accounts at the Caguas bank where the funds were <br>expended for the benefit of Colonial and Ra.  In all events, in <br>the same month as the Colonial bankruptcy, Bowery brought suit in <br>the district court seeking to recover from Colonial, Caguas, Ra <br>and Ra's wife about $1,000,000 in diverted Bowery funds.  Bowery <br>Savings Bank v. Colonial Mortgage Bankers Corp., 87-874-RLA <br>(D.P.R.) <br>  In April 1988, the bankruptcy court entered an order at <br>the behest of Colonial's bankruptcy trustee, Hans Lopez-Stubbe, <br>requiring Caguas to turn over the funds in the Golden Passbook <br>account to the trustee.  The trustee's theory, it appears, was <br>that the funds, being held in the Golden Passbook account with a <br>passbook bearing Colonial's name, properly belonged to Colonial's <br>estate.  In November 1989, Caguas paid over to the trustee <br>approximately $557,000 pursuant to the bankruptcy court order, the <br>amount representing the original principal of $500,000 plus <br>accumulated interest. <br>  In 1990, Caguas failed, and the Resolution Trust <br>Corporation ("RTC") was appointed, initially as conservator for <br>Caguas and later as its receiver.  Thereafter, the RTC on December <br>21, 1990, endorsed Ra's promissory note in favor of Caguas to <br>Banco Santander.  The note was later re-endorsed by Banco Santander <br>to Crefisa, which is apparently a wholly owned subsidiary of Banco <br>Santander.  The endorsement was part of a multi-million dollar sale <br>of Caguas' assets by the RTC to Banco Santander pursuant to a <br>purchase and sale agreement.  But the question whether the terms of <br>the purchase and sale agreement are properly considered in this <br>case is one of the contested issues on this appeal. <br>  On October 6, 1991, Crefisa brought an adversary <br>proceeding in the Colonial bankruptcy case asserting a security <br>interest in the Golden Passbook account; the claim was based on the <br>pledge of the Golden Passbook account that Ra had made to Caguas <br>on November 28, 1986, to secure his promissory note.  Since the <br>funds in the Golden Passbook account had been turned over to the <br>trustee pursuant to the bankruptcy court's earlier order, the <br>relief sought by Crefisa was an order from the bankruptcy court <br>requiring the trustee to transfer the proceeds to Crefisa. <br>  The bankruptcy trustee, supported by Bowery, opposed <br>Crefisa's request that the funds derived from the Golden Passbook <br>account be transferred to Crefisa and filed a discovery request to <br>identify the basis for Crefisa's claim to a security interest in <br>the account.  In April 1994, Crefisa produced Ra's promissory note <br>to Caguas, whose markings showed that it had been endorsed <br>successively by the RTC to Banco Santander and by Banco Santander <br>to Crefisa.  The trustee then moved to dismiss Crefisa's adversary <br>proceeding or for summary judgment; he asserted that Crefisa had <br>not established any interest in the Golden Passbook account since <br>the promissory note made no reference to any security and Crefisa <br>had provided no other evidence to support its claim to the <br>security. <br>  After additional filings but no further pertinent <br>evidence from Crefisa, the bankruptcy court on January 25, 1995, <br>issued a decision in favor of the trustee and dismissed Crefisa's <br>complaint.  In a nutshell, the bankruptcy court ruled that the <br>promissory note's transfer was governed by Puerto Rico's Negotiable <br>Instruments Law, which did not provide for automatic transfer of <br>the security for an assigned note, rather than by the Civil Code, <br>P.R. Laws Ann. tit. 31,  1 et seq.; and even if the Civil Code <br>were applicable to the transfer, its requirements for an automatic <br>transfer of a security interest had not been met as to third <br>parties, see P.R. Laws Ann. tit. 31,  3941.  Since the promissory <br>note made no mention of security, Crefisa had not shown that it had <br>obtained Caguas' security interest in the account.  The bankruptcy <br>court entered judgment against Crefisa, and Crefisa appealed to the <br>district court on March 3, 1995. <br>  Three days later, on March 6, 1995, Crefisa filed a <br>motion in the bankruptcy court to amend the judgment, tendering <br>portions of the purchase and sale agreement dated December 21, <br>1990, between the RTC and Banco Santander for the sale of the <br>Caguas assets to Banco Santander.  The bankruptcy judge later <br>denied the motion on the ground that it lacked jurisdiction because <br>of the then-pending Crefisa appeal to the district court.  The <br>trustee also moved in the district court to strike the agreement <br>from the record on appeal, but in various orders in the spring of <br>1996, the district court denied the motion to strike and asked <br>Crefisa to submit a complete copy of the purchase and sale <br>document.  Crefisa filings in June 1996 and November 1996 purported <br>to comply with this request and to add further information about <br>the RTC-Banco Santander transaction. <br>  In July 1996, the trustee and Bowery moved to "dismiss <br>the appeal" to the district court, essentially arguing the merits <br>of the appeal and defending the bankruptcy court's decision. On <br>August 27, 1996, Crefisa opposed the motion but also argued the <br>merits, urging that the bankruptcy judge had erred.  On September <br>14, 1998, the district court released a decision and judgment <br>reversing the bankruptcy court and determining that Crefisa was <br>entitled to claim a security interest in the Golden Passbook <br>account. <br>  In its decision, the district court found that the <br>purchase and sale agreement between RTC and Banco Santander <br>confirmed the intent of the parties to effect a transfer of the <br>security interest.  Alternatively, the court ruled that Caguas' <br>security interest in the Golden Passbook account had been <br>transferred by operation of law under the Civil Code by virtue of <br>transfer of Ra's promissory note from Caguas, through the RTC and <br>Banco Santander, to Crefisa; in the court's view the Negotiable <br>Instruments Law governed the transfer of the note and the Civil <br>Code provided for an automatic transfer of the security interest. <br>  The trustee and Bowery now appeal, asking that we <br>reinstate the bankruptcy court's ruling and confirm the trustee's <br>right to the Golden Passbook account proceeds.  Their first <br>argument is that as a procedural matter, the district court had no <br>business considering the purchase and sale agreement because it had <br>not been offered in evidence in the bankruptcy court; and their <br>second argument is that the district court's alternative reliance <br>on the Civil Code to effect an automatic transfer of the security <br>misreads the substantive law.  (A third argument merely repeats <br>fragments of the first two.) <br>  On the procedural issue, we sympathize with the district <br>court's desire to know the full story of the transfer but agree <br>with the trustee that the district court was not entitled to <br>consider the purchase and sale agreement.  In an appeal from the <br>bankruptcy court, the district court sits in an appellate capacity, <br>Fed. R. Bankr. P. 8001; and, just as a circuit court is limited to <br>the district court record, 16A Wright, Miller & Cooper, Federal <br>Practice and Procedure  3956.2, at 337 (3d ed. 1999), so the <br>district court is normally limited to the evidentiary record <br>compiled in the bankruptcy court, Crawford v. Lamantia, 34 F.3d 28, <br>31 (1st Cir.), cert. denied, 514 U.S. 1032 (1995); In re Armorflite <br>Precision, Inc., 48 B.R. 994, 997 (D. Me. 1985). <br>  In rejecting the trustee's motion to strike, the district <br>court said in substance that the purchase and sale agreement was <br>material to the dispute.  This is at least arguably so.  But when <br>a party that has favorable evidence fails to proffer it before the <br>trial court decides a matter, the fact that the evidence would have <br>been material if offered does not mean that it can be considered on <br>the appeal.  The reason is obvious: the procedures used on <br>appellate review are not designed to vet new evidence or allow an <br>effective evidentiary response to it. <br>  When the bankruptcy judge decided the trustee's motion to <br>dismiss or for summary judgment, the purchase and sale agreement <br>was not considered because Crefisa failed to submit it in <br>opposition to the trustee's motion.  On review, the question for <br>the district court was whether the bankruptcy judge reached the <br>right decision on the record made by the parties.  Crefisa is <br>mistaken in arguing that the district court was entitled to <br>consider the purchase and sale agreement as evidence of the <br>transfer of the security interest simply because the agreement was <br>physically annexed to Crefisa's later motion to amend the judgment.  <br>See Kirshner v. Uniden Corp., 842 F.2d 1074, 1077 (9th Cir. 1988). <br>  Of course, Crefisa could have sought review in the <br>district court of the bankruptcy judge's post-decision refusal to <br>enlarge the record.  For that purpose, the agreement would be <br>available to the district court, like an offer of proof, for the <br>purpose of determining whether that refusal was error (but only for <br>that purpose).  However, Crefisa makes no claim in this court that <br>the bankruptcy judge erred in denying the post-decision motion to <br>amend the judgment and there is no indication that that denial was <br>even appealed to the district court. <br>  Limiting the evidence to that properly before the trier <br>of fact is not some ritual or formality.  If Crefisa had offered <br>the agreement in the bankruptcy court in timely fashion, the <br>trustee would have been entitled to dispute the validity or <br>significance of the agreement or offer counter-evidence of his own.  <br>The trustee lists for us some of his objections to the agreement, <br>saying inter alia that the document was incomplete, lacked a <br>signature page, is only an agreement for a future transaction, and- <br>-being between RTC and Banco Santander--does not transfer anything <br>to Crefisa.  But a party objecting to evidence newly tendered on <br>appeal is not obliged to show unfair prejudice:  the point is that <br>new evidence, which could have been offered in the trial court, is <br>not supposed to be proffered for the first time in an appellate <br>setting. <br>  There are qualifications to every general rule.  See 16A <br>Wright, Miller & Cooper, supra,  3956.4, at 349-50.  Occasions <br>exist on which appellate panels do need to consider facts not <br>before the trial court (e.g., on claims of mootness), and <br>procedures exist for reopening judgments to consider newly <br>discovered evidence.  Fed. R. Civ. P. 60(b)(2).  But Crefisa has <br>pointed us to no exception or extraordinary circumstance that might <br>embrace the purchase and sale document submitted in this case--a <br>document that ought to have been known to Crefisa from the outset <br>and whose completeness and significance are open to substantial <br>questions. <br>  This brings us to the trustee's attack on the district <br>court's alternative ground for its decision, namely, the court's <br>ruling that even apart from the agreement, the admitted endorsement <br>of the note by the RTC to Banco Santander and then by it to Crefisa <br>carried the security interest with it by operation of law.  It is <br>common ground that the Negotiable Instruments Law, which provides <br>for the transfer of the note merely by endorsement, says nothing <br>about the transfer of security interests.  The bankruptcy judge <br>took the view that Crefisa could not "pick and choose," using the <br>Negotiable Instruments Law to effect the assignment of the note and <br>the Civil Code to transfer the security. <br>  But we read the Negotiable Instruments Law as inviting <br>supplementation wherever it is itself silent:  "In any case not <br>provided for in this title [the Negotiable Instruments Law] the <br>rules of the Law Merchant, Civil Law and Equity shall govern."  <br>P.R. Laws Ann. tit. 19,  386; see also P.R. Laws Ann. tit. 31,  <br>12.  Only if there is a conflict with respect to a negotiable <br>instrument does "this title" automatically prevail.  E.g., Pars v. <br>Canety, 73 P.R.R. 386, 388 (1952).  And nothing in the Negotiable <br>Instruments Law forbids a transfer of a security interest incident <br>to the endorsement of a note. <br>  The next question, then, is whether Puerto Rico law does <br>provide that the assignment of a debt transfers a security interest <br>in property pledged to secure the debt.  Crefisa relies directly on <br>the Civil Code provision, codified at P.R. Laws Ann. tit. 31,  <br>3943, which says that "[t]he sale or assignment of a credit [i.e., <br>the right to collect a debt] includes that of all the accessory <br>rights, such as the security, mortgage, pledge, or privilege."  The <br>district judge took section 3943 as providing an alternative ground <br>for upholding Crefisa's right to the security interest at issue in <br>this case. <br>  It appears to be true that section 3943, in providing for <br>automatic transfer of security interests, has been treated without <br>much discussion as applying to negotiable notes.  Credito Y Ahorro <br>Ponceno v. Gorbia, 25 F.2d 817 (1st Cir. 1928); Caguas Co., Inc. v. <br>Lopez, 59 P.R.R. 263, 271 (1941).  However, the same subdivision of <br>the Civil Code containing section 3943 also contains a companion <br>provision, which reads:  "The assignment of a credit, right, or <br>action shall produce no effect against a third person but from the <br>time the date is considered fixed, in accordance with sections 3273 <br>and 3282 of this title."    P.R. Laws Ann. tit. 31,  3941.  <br>  Sections 3273 and 3282 are primarily evidence provisions <br>somewhat awkwardly adopted by section 3941 for substantive <br>purposes.  One deals with proof of public instruments and the other <br>with proof of private instruments.  Public instruments are <br>primarily those that have been notarized, P.R. Laws Ann. tit. 31, <br> 3271, and there is no indication in this record that the note was <br>transferred by a notarized document.  Accordingly, the endorsed <br>note in this case appears to qualify (at best) as a private <br>instrument, as to which section 3282 provides in pertinent part:   <br>    The date of a private instrument shall be <br>  considered, with regard to third persons, only <br>  from the date on which it may have been filed <br>  or entered in a public registry, from the <br>  death of any of those who signed it, or from <br>  the date on which it may have been delivered <br>  to a public official by virtue of his office. <br> <br>  Thus, coupling sections 3941 and 3282 together, the <br>language of the two provisions indicates that the transfer of "the <br>credit" embodied in the promissory note could have "no effect" <br>under the Civil Code against a third party until some document <br>evidencing the assignment of the debt was filed in a public <br>registry or delivered to a public official.  So far as the record <br>shows, this has never occurred.  And if the assignment of the debt <br>is not effective against a third party so far as the Civil Code is <br>concerned, it is hard to see how an automatic transfer of a <br>security interest incident to the transfer of the debt can be <br>effective under the Civil Code against a third party. <br>  The district court recognized the objection based on <br>sections 3273, 3282, and 3941 but said that these sections dealt <br>with the effect of the assignments of credits "against a third <br>party," and had no "applicability" in this case.  But the trustee <br>is formally a third party vis  vis the assignment of the note <br>and/or security interest, and section 3941 is manifestly a <br>limitation on section 3943.  While the transfer of the note <br>remains valid under the Negotiable Instruments Law regardless of <br>section 3282, it is hard to see how the transfer of a security <br>interest under section 3943 can be given effect based on an <br>assignment of a debt that is not allowed under section 3941 to <br>affect a third person unless and until the assignment is <br>registered.  If there is an answer to this objection, neither the <br>district court nor Crefisa has supplied it. <br>  There is a possible answer.  It is fairly easy to guess <br>why section 3941 was framed:  without notice of a transfer, a third <br>party could easily be prejudiced by the private transfer of a debt <br>or by the automatic transfer of an ancillary security interest <br>designed to secure a debt.  Seemingly, section 3941 is designed to <br>secure such notice, at least constructively, by a requirement of <br>public filing of the assignment.  Of course, a negotiable <br>instrument is designed to be transferred without notice to third <br>parties; but the transfer of a security interest, not mentioned in <br>the note, presents the same danger as the transfer of any property <br>other than a negotiable instrument. <br>  One might reasonably argue that even if the language of <br>section 3941 supports the trustee, its rationale does not apply to <br>him in this instance.  After all, the trustee did not take any <br>action (except for litigation expenses) in reliance on Caguas' <br>"ownership" of the security interest.  This is far from a case in <br>which the trustee purchased an object from a prior owner only to be <br>faced with a claim that the owner had previously made a secret <br>assignment or sale to another.  Thus, one could argue that the <br>trustee should not be able to invoke section 3941 even though <br>literally read it appears to shield him from the effect of section <br>3943. <br>  This policy argument has not been made by Crefisa and it <br>may or may not be valid.  Sometimes statutes are read in accordance <br>with their rationale even in the teeth of statutory language, but <br>other times they do enact rules not perfectly fitted to their <br>rationale.  See Level 3 Communications, Inc. v. Federal Ins. Co., <br>168 F.3d 956, 958 (7th Cir. 1999) (Posner, C.J.).  Puerto Rico <br>precedent in this case is at best obscure.  Cf. Hernandez v. <br>Iglesias, 58 P.R.R. 406 (1941).  And needless to say, we have not <br>had the benefit of any research by the parties on this issue.  <br>Crefisa has forfeited the policy argument by failing to make it.  <br>Executive Leasing Corp v. Banco Popular, 48 F.3d 66, 67-68 & n.3 <br>(1st Cir. 1995). <br>  About the best we can say in this instance is that we find <br>the policy argument plausible but not compelling.  In these <br>circumstances, we are not going to rescue the district court's <br>judgment on a ground that was not argued to us and may or may not <br>be correct.  We have mentioned this possible escape hatch only to <br>be sure that our opinion is not taken to foreclose such an argument <br>if made by the parties in a similar case in the future.  Since the <br>problem arises primarily from language in the Civil Code, the <br>replacement of the Negotiable Instrument Law is no assurance against <br>a recurrence of this issue. <br>  For the reasons stated, we conclude that on the record <br>before it the bankruptcy court correctly dismissed Crefisa's <br>adversary petition and that the district court erred in reversing <br>the bankruptcy court.  Accordingly, the judgment of the district <br>court is reversed.</pre>

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