Court Opinion

ID: 7374908
Source: CourtListenerOpinion
Date Created: 2022-07-28 22:00:44.2956+00
Date Added: 2024-06-11T16:21:04.129800
License: Public Domain

United States Court of Appeals
                     For the First Circuit

No. 21-1299

               IN RE: BUILDERS HOLDING CO., CORP.,

                             Debtor.

                         ORIENTAL BANK,

                           Appellant,

                               v.

  BUILDERS HOLDING CO., CORP.; MAPFRE PRAICO INSURANCE COMPANY;
     ENDURANCE ASSURANCE CORPORATION; PUERTO RICO FINANCING
          AUTHORITY; NOREEN WISCOVITCH-RENTAS, TRUSTEE,

                           Appellees.

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

         [Hon. Francisco A. Besosa, U.S. District Judge]

                             Before

                       Barron, Chief Judge,
                Howard and Gelpí, Circuit Judges.

     Cristina A. Fernández Rodríguez, with whom MCD Law LLC was on
brief, for appellant.
     José A. Sánchez Girona, with whom Saldaña, Carvajal & Vélez-
Rivé, PSC was on brief, for appellees MAPFRE PRAICO Insurance
Company and Endurance Assurance Corporation.
     Jeannette López de Victoria, with whom Luis R. Ortiz Segura
and Oliveras & Ortiz, PSC were on brief, for appellee Puerto Rico
Financing Authority.
July 28, 2022
            BARRON,   Chief   Judge.      Builders    Holding     Company

("Builders"),1 a general contractor, filed for bankruptcy in the

United States Bankruptcy Court for the District of Puerto Rico in

August 2016.    Builders then filed an adverse action against the

Puerto   Rico   Infrastructure    Financing    Authority    ("Financing

Authority"), which had hired Builders for construction projects,

and Oriental Bank, with which Builders had a deposit account.

Builders's surety, MAPFRE PRAICO Insurance Company and Endurance

Assurance   Corporation   ("MAPFRE"),    intervened   in   that   adverse

action and filed its own claims against Oriental Bank.             At the

same time, Oriental Bank filed counterclaims in the adverse action

against MAPFRE and Builders.     All the claims in the adverse action

pertained to funds -- totaling more than $450,000 -- that the

Financing Authority had directly deposited in Builders's deposit

account with Oriental Bank and that Oriental Bank had taken from

that account to set off a debt that Builders owed to it.

            The Bankruptcy Court granted summary judgment against

Oriental Bank on all the claims asserted against it.2             Oriental

Bank appealed that ruling to the District Court, which affirmed.

     1 References to Builders throughout the opinion refer to the
Builders Holding Company and its predecessor entities.
     2 The Bankruptcy Court also granted summary judgment in favor
of the Financing Authority as to Builders's claims against it.

                                 - 3 -
We vacate and remand the grant of summary judgment against Oriental

Bank on all the claims.

                                      I.

              Builders    offers     general-contractor          services    for

construction      projects.     It   entered      into    an    indemnification

agreement with MAPFRE on August 5, 2010.

              The agreement provided that MAPFRE would issue surety

bonds    to   guarantee   the   payment      of   labor   and    materials   for

Builders's construction projects and that Builders would hold

MAPFRE harmless and indemnify MAPFRE against any and all loss from

the surety bonds that it issued.           The agreement further provided

that Builders would assign "all payments received for or on account

of any contract" to a trust that would "inure to the benefit of

[the] surety for any liability or loss it may have or sustain under

any bond" (capitalization adjusted).

              MAPFRE registered the agreement as a financing statement

at the Puerto Rico Department of State pursuant to Puerto Rico

law.    The parties do not dispute that MAPFRE's registration of the

agreement     perfected   MAPFRE's    security      interest     in   Builders's

accounts receivable.

              A number of years passed, and, on November 14, 2013,

Builders executed a Cash Management Agreement with Oriental Bank.

The agreement enabled Builders to use an existing charge account

                                     - 4 -
at Oriental Bank as its operational account for business income

and expenses ("Deposit Account").

          On December 26, 2014, Builders opened two lines of credit

for business operational expenses with Oriental Bank pursuant to

a Line of Credit Agreement.    One line of credit was for $675,000.

The other was for $500,000.

          The lines of credit were secured by Builders's accounts

receivable and   Deposit   Account.3     Oriental Bank recorded its

security interest in this collateral on December 30, 2014.

          In September 2015, the Financing Authority contracted

with Builders for construction projects in the town of Cabo Rojo.

MAPFRE acted as surety for this contract and issued performance

and payment bonds.     The bonds had a maximum of $3,070,480.     The

Financing Authority was named as obligee on the bonds and Builders

was named as the principal.

          Builders's lines of credit with Oriental Bank matured

approximately three months later.      Thus, as of December 26, 2015,

Builders was required to repay Oriental Bank the entirety of the

sum due on the lines of credit, which was more than $450,000.

          Then, on February 16, 2016,     MAPFRE sent a letter to the

Financing Authority.    The letter informed the Financing Authority

     3 Builders represented to Oriental Bank that the accounts
receivable were not otherwise encumbered -- even though the
accounts receivable were subject to MAPFRE's security interest.

                                - 5 -
that MAPFRE had received claims from contractors on Builders's

projects for payment for the cost of labor or materials under the

surety bonds that MAPFRE had issued for Builders's projects with

the Commonwealth.       The letter further informed the Financing

Authority    that,   per   the     terms    of   MAPFRE's    indemnification

agreement with Builders, payments from the Financing Authority for

the costs of Builders's construction projects in Cabo Rojo were to

be sent to MAPFRE and made payable jointly to Builders and MAPFRE.

Approximately one week later, Builders also informed the Financing

Authority that it should send all future payments for Builders's

work on the construction projects in Cabo Rojo to MAPFRE and that

the payments should be made out jointly to MAPFRE and Builders.

            Notwithstanding       these     instructions,    the    Financing

Authority on May 23, 2016, deposited $537,924.18 directly into

Builders's   Deposit    Account    at     Oriental   Bank.    The   Financing

Authority did not in doing so make any payment to MAPFRE.              At the

time of the Financing Authority's deposit of the more than $500,000

into Builders's Deposit Account, Builders had yet to repay in full

the amount that it owed to Oriental Bank on its lines of credit.

            Under Puerto Rico law, a bank with "a security interest

in a deposit account perfected by control . . . may apply the

balance of the deposit account to the obligation secured by the

deposit account."      P.R. Laws Ann. tit. 19, § 2367(a)(4).           Acting

pursuant to that provision, Oriental Bank applied $464,757.60 from

                                    - 6 -
the balance deposited into Builders's Deposit Account against the

outstanding balance on Builders's lines of credit.

            The     following       day,    the      Financing    Authority

unsuccessfully attempted to reverse the deposit that it had made

to Builders's Deposit Account with Oriental Bank.             Moreover, the

Financing Authority sent Oriental Bank a letter the following week

that explained its error in not making any payment to MAPFRE and

instead    making   the   deposit    directly     into   Builders's   Deposit

Account.   Oriental Bank did not return the money that it had taken

from Builders's Deposit Account to use as a set-off in connection

with the debt that Builders owed it.

            The Financing Authority followed up with another letter

to Oriental Bank on December 12, 2017, in which the Financing

Authority again requested that the funds in question be turned

over to MAPFRE.     Oriental Bank again did not do so.

            MAPFRE sent its own letter to Oriental Bank on July 1,

2016, in which it requested that Oriental Bank send to MAPFRE the

money that it had taken from Builders's Deposit Account as a set-

off of Builders's debt to Oriental Bank.            Builders sent a similar

letter of its own.    Oriental Bank did not take the action requested

in either letter.

            Builders filed for bankruptcy under Chapter 11 of the

Bankruptcy Code on August 20, 2016.               Builders then brought an

                                    - 7 -
adverse action against the Financing Authority and Oriental Bank

on January 12, 2017.

            The complaint set forth four claims under §§ 542 and 543

of the Bankruptcy Code.      Those provisions of the Code require all

the debtor's property to be delivered to the trustee.4

            Counts   One   and   Two   of   Builders's   complaint   allege,

respectively, that under §§ 542 and 543, the Financing Authority

is required to turn over the funds Builders alleges that the

Financing Authority still owes it for the construction projects in

Cabo Rojo. Builders alleges in those two counts that the Financing

Authority did not satisfy its obligations to Builders by directly

depositing funds into Builders's Deposit Account because Builders

had instructed the Financing Authority to send those funds directly

to MAPFRE.    Counts Four and Five allege, under §§ 542 and 543 of

the Bankruptcy Code, that Oriental Bank is required to return the

funds that it took from Builders's Deposit Account as a set-off,

     4   11 U.S.C. § 542(a) provides that:
            [A]n entity, other than a custodian, in
            possession, custody, or control . . . of
            property that the trustee may use, sell, or
            lease under [§] 363 of this title, or that the
            debtor may exempt under [§] 522 of this title,
            shall deliver to the trustee, and account for,
            such property or the value of such property,
            unless such property is of inconsequential
            value or benefit to the estate.

     11 U.S.C. § 543(b) provides similarly for "custodians" of
such property.

                                   - 8 -
so that those funds can be delivered to MAPFRE, which the complaint

further alleges has a senior claim as to those funds.                 Count Three

of the complaint alleges that "[u]nder Puerto Rico [l]aw[,] the

wrongly made payment does not extinguish the obligation" that the

Financing   Authority     has    under    its     construction   contract    with

Builders for the construction projects in Cabo Rojo, such that the

Financing Authority still owes Builders a debt under that contract

that must be paid.

            Oriental Bank moved to              dismiss   Builders's    complaint

under Federal Rule of Civil Procedure 12(b)(6) on February 6, 2017.

The Bankruptcy Court denied the motion.

            On   April    3,    2017,    MAPFRE    intervened    in    Builders's

adverse action, and on May 26, 2017, MAPFRE filed its own complaint

against Builders, the Financing Authority, and Oriental Bank.

MAPFRE requested in that complaint, among other things, that

Oriental Bank turn over the funds that had been deposited by the

Financing Authority in Builders's Deposit Account.

            Following the Bankruptcy Court's denial of Oriental

Bank's   motion   to     dismiss,   Oriental       Bank   answered     Builders's

complaint on June 2, 2017.          As part of the answer, Oriental Bank

brought a counterclaim against Builders, in which Oriental Bank

alleged that, under Puerto Rico law, it had a valid, enforceable

lien against Builders's accounts receivable and Deposit Account

                                        - 9 -
and thus that it was entitled under 11 U.S.C. § 553 to set off the

amount that Builders owed to it on Builders's lines of credit.5

          That   same    day,   Oriental   Bank   answered   MAPFRE's

intervenor complaint and brought a counterclaim against MAPFRE.

Oriental Bank's counterclaim alleged that Oriental Bank's secured

interest in Builders's accounts receivable and Deposit Account was

senior to that of MAPFRE, such that Oriental Bank was entitled to

keep the funds that it had taken from Builders's Deposit Account

as a set-off of the debt owed to it by Builders.

          The Financing Authority answered Builders's and MAPFRE's

complaints on June 2, 2017.       MAPFRE answered Oriental Bank's

counterclaim on June 26, 2017.     And, finally, on July 11, 2017,

Builders answered both Oriental Bank's counterclaim as well as

MAPFRE's intervenor complaint.

          Thereafter, motions for summary judgment were filed, and

Builders moved to convert its Chapter 11 bankruptcy petition to a

Chapter 7 petition.     The Bankruptcy Court granted that motion on

     5 11 U.S.C. § 553(a) provides, with a few exceptions that are
not relevant to this appeal, that:
          [The Bankruptcy Code] does not affect any
          right of a creditor to offset a mutual debt
          owing by such creditor to the debtor that
          arose before the commencement of the case
          under this title against a claim of such
          creditor against the debtor that arose before
          the commencement of the case.

                                - 10 -
April 27, 2018, and a trustee was appointed.       The trustee elected

to join the summary judgment motion that MAPFRE had filed.

          In   response   to   the   summary   judgment   motions,   the

Bankruptcy Court on March 31, 2020, granted summary judgment to

MAPFRE and the trustee on their claims against Oriental Bank,

granted summary judgment in favor of MAPFRE and the trustee on the

claims that Oriental Bank asserted against those parties, and

granted summary judgment in favor of the Financing Authority as to

the claims asserted against it by Builders and MAPFRE.               See

Rentas v. Oriental Bank (In re Builders Holding Co.), 617 B.R.

414, 428-29 (Bankr. D.P.R. 2020).        In so ruling, the Bankruptcy

Court held that Oriental Bank's set-off was not permitted under

the Bankruptcy Code because the Financing Authority had made a

payment to Builders that was a payment in error under Article 1795

of the Puerto Rico Civil Code, P.R. Laws Ann. tit. 31, § 5121,6

and Oriental Bank was thus required to return the funds mistakenly

paid to Builders's Deposit Account to the payor, the Financing

Authority, which had been instructed by MAPFRE and Builders to

make the payment directly to MAPFRE.      In re Builders Holding Co.,

617 B.R. at 427-28.

     6 Article 1795, translated, states that "[i]f 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.

                                - 11 -
           On April 14, 2020, Oriental Bank filed a motion for

reconsideration with the Bankruptcy Court.               The Bankruptcy Court

denied the motion on November 5, 2020.           See In re Builders Holding

Co., Ch. 11 Case No. 16-06643, Adv. No. 17-00012, 2020 WL 6538587,

at *2 (Bankr. D.P.R. Nov. 5, 2020).

           Oriental      Bank   then    appealed   the    Bankruptcy   Court's

rulings against it to the United States District Court for the

District   of   Puerto    Rico.        The   District    Court   affirmed   the

Bankruptcy Court's grants of summary judgment on March 4, 2021,

finding that the Bankruptcy Court correctly applied Article 1795.

See Oriental Bank v. Builders Holding Co., 626 B.R. 1, 11-12

(D.P.R. 2021).    Oriental Bank timely appealed from that ruling.7

                                       II.

           The Bankruptcy Court held that 11 U.S.C. § 553 did not

permit Oriental Bank to use the funds that the Financing Authority

had deposited into Builders's Deposit Account as a set-off for the

debt that Builders owed to it.           In re Builders Holding Co., 617

B.R. at 427-28.    The Bankruptcy Court explained that this was so

because, under § 553(a), a creditor may set off funds owed to it

     7 We note that the parties appear to treat the Bankruptcy
Court as having granted summary judgment in favor of the Financing
Authority on claims against it by Oriental Bank.      It does not
appear, however, that Oriental Bank brought any such claims. In
addition, we note, MAPFRE and the trustee have not appealed the
rulings granting summary judgment in favor of the Financing
Authority on its claims against that entity.

                                   - 12 -
by a debtor in bankruptcy if the creditor would have been able to

do so if the debtor had not filed for bankruptcy.               And, the

Bankruptcy   Court   concluded,    if   Builders   had   not   filed   for

bankruptcy, Oriental Bank would not have had any right under Puerto

Rico law, given Article 1795, to the funds that the Financing

Authority had deposited directly in Builders's Deposit Account.

Id. It was on that basis, and that basis alone, that the Bankruptcy

Court granted summary judgment against Oriental Bank on all the

claims at issue in the adverse action that involved Oriental Bank.

The District Court rejected Oriental Bank's challenge to that

ruling.

          Litigants in a bankruptcy proceeding ordinarily "must

first appeal to the district court" and then "courts of appeals

are . . . available as a second tier of appellate review," but,

"[d]espite this sequencing, we cede no special deference to the

determinations made by the first-tier tribunal . . . [and] assess

the bankruptcy court's decision directly."         City Sanitation, LLC

v. Allied Waste Servs. Mass., LLC (In re Am. Cartage, Inc.), 656

F.3d 82, 87 (1st Cir. 2011).   We thus review the Bankruptcy Court's

grant of summary judgment de novo.      See Desmond v. Varrasso (In re

Varrasso), 37 F.3d 760, 763 (1st Cir. 1994).8

     8MAPFRE contends that we should review the Bankruptcy Court's
determination that the set-off here was not permissible under the
Bankruptcy Code for an abuse of discretion.        Notwithstanding
whether that would be the appropriate standard of review in some

                                  - 13 -
          In challenging the grant of summary judgment to the

Financing Authority, Oriental Bank argues to us that "the Financing

Authority did not show or prove the requirements to establish a

cause of payment made in error."          See P.R. Laws Ann. tit. 31,

§ 5126 ("The proof of payment is incumbent upon the person who

claims to have made the same.      He shall also be obliged to prove

the error under which he made it.").        For that reason, Oriental

Bank contends, the Bankruptcy Court erred in ruling that Oriental

Bank was obligated to return the money that it had set off against

Builders's debt to it.

          According   to   the    Supreme    Court   of   Puerto   Rico,

Article 1795 applies when: (1) a "payment [is] produced for the

purpose of extinguishing an obligation;" (2) "the payment made

does not have a just cause, that is, that there is no legal

obligation between the payer and the receiver, or if the obligation

exists, that it [is] for less than the amount paid;" and (3) "the

payment was made by mistake and not out of sheer generosity or any

other reason."   Puerto Rico v. Crespo Torres, 180 P.R. Dec. 776,

circumstances when § 553 is at issue, here, we conclude that the
Bankruptcy Court's application of the payment-in-error doctrine
was legally incorrect. As such, even if the standard were abuse
of discretion, we would still reverse the Bankruptcy Court's grant
of summary judgment and remand for further proceedings.        See
Saka v. Holder, 741 F.3d 244, 250 (1st Cir. 2013) ("Any error of
law is, inherently, an abuse of discretion.").

                                 - 14 -
793-94 (2011).9        Thus, given how the Supreme Court of Puerto Rico

has construed Article 1795, we must identify the "receiver" of the

"payment" from the "payer."

            The complication for the Financing Authority here is

that it is not claiming that, under Article 1795, Builders is

required to return a "payment" that Builders "received" from the

Financing Authority.          The Financing Authority is claiming that,

under    that    doctrine,     Oriental    Bank   is   required    to   return   a

"payment"       that   Oriental   Bank     "received"     from    the   Financing

Authority.

            The Financing Authority did not make a "payment" to

Oriental Bank in its own right, however.               The Financing Authority

made a "payment" to Builders, which had a deposit account with

Oriental    Bank,      by   transferring   its    funds   directly      into   that

account.     Thus, strictly speaking, only Builders made a "payment"

that Oriental Bank itself "received" (though Builders made the

payment to Oriental Bank only because Builders received funds

through the payment          that it had received from            the Financing

Authority).

            The consequence of this chain of transactions -- and the

party from which the Financing Authority is seeking recoupment --

     9 The Supreme Court of Puerto Rico's opinion in this case was
written in Spanish.    Oriental Bank thus submitted a certified
translation of this case in its briefing to us, and it is that
translation that we quote in this opinion.

                                     - 15 -
is that the question presented here is whether Article 1795 applies

even when there is this level of remove between the "payer" and

the "receiver," Crespo Torres, 180 P.R. Dec. at 793-94; see Phoung

Luc v. Wyndham Mgmt. Corp., 496 F.3d 85, 88 (1st Cir. 2007) (When

"apply[ing] the state's law on substantive issues[,] . . . 'we are

bound by the teachings of the state's highest court.'" (quoting N.

Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35, 37–38 (1st Cir.

2001))); Carrasquillo-Serrano v. Municipality of Canovanas, 991

F.3d 32, 40 (1st Cir. 2021) (explaining that for purposes akin to

ours'   here,   "Puerto   Rico    is   the   functional   equivalent   of   a

state[,] . . . [and] an on-point decision of the Puerto Rico

Supreme Court normally will control" (quoting Gonzalez Figueroa v.

J.C. Penney P.R., Inc., 568 F.3d 313, 318 (1st Cir. 2009))).                It

is not at all natural, however, to refer to a third party to a

transfer of funds -- as Oriental Bank is here, given that the

transfer, at least initially, was only between the Financing

Authority and Builders -- as the "receiver" of the funds from that

transfer by the "payer."         Yet, neither MAPFRE nor the Financing

Authority develops an argument to us as to how we may construe

Article 1795 to apply to situations like this one beyond merely

asserting (unpersuasively) that the face of the statute compels

the conclusion.     Nor does either the Bankruptcy Court or the

District Court explain why such a construction would be correct.

We thus conclude that the Bankruptcy Court was wrong to find that

                                   - 16 -
Article 1795 compelled the return of funds Oriental Bank set off

against Builders's debt to it.       See S. Commons Condo. Ass'n v.

Charlie Arment Trucking, Inc., 775 F.3d 82, 91 (1st Cir. 2014)

(noting that plaintiffs, "having chosen a federal forum to seek

relief that depends at least in part on the meaning of state law,

should not 'expect the federal court to steer state law into

unprecedented   configurations'"     (quoting   Santiago   v.   Sherwin

Williams Co., 3 F.3d 546, 549 (1st Cir. 1993))); see also Phoung

Luc, 496 F.3d at 88 ("As a federal court, we will not create new

rules or significantly expand existing rules. We leave those tasks

to the [Commonwealth] courts.").10

          That said, there remains a question whether the set-off

that Oriental Bank asserts here is senior to the secured interest

that MAPFRE has in the same collateral under Puerto Rico law, as

well as the seemingly fact-laden question (to the extent that it

is contested) as to whether Oriental Bank's set-off was a "mutual

debt," 11 U.S.C. § 553(a); see In re Pub. Serv. Co. of N.H., 884

F.2d 11, 14 (1st Cir. 1989) ("[A] set[-]off may flourish in

     10 We note that neither MAPFRE nor the Financing Authority
asks us to certify this question to the Supreme Court of Puerto
Rico, even though the Financing Authority identifies no Puerto
Rico court case in which Article 1795 has been applied in a
circumstance in which the party relying on the payment-in-error
doctrine seeks to recover funds that were paid to a third party
pursuant to a transfer that was otherwise valid when made (as is
seemingly the case with the transfer from Builders to Oriental
Bank).

                              - 17 -
bankruptcy proceedings only where mutuality of obligation exists:

a prepetition debt, i.e., a debt which arose prior to commencement

of the bankruptcy case, is owed by Creditor A to Debtor, while at

the same time Creditor A has some claim against Debtor which

likewise arose prior to commencement of the bankruptcy case.").

In addition, § 553 of the Bankruptcy Code remains available only

if Oriental Bank's set-off is otherwise valid under Puerto Rico

law, which may implicate other doctrines such as the doctrine of

unjust enrichment.     See Gov't of Puerto Rico v. Carpenter Co., 442

F. Supp. 3d 464, 476-77 (D.P.R. 2020) (describing the "civil law

equity doctrine" of unjust enrichment as recognized by Puerto

Rico).     We thus remand this case to the Bankruptcy Court, see

Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 36 (1st Cir.

1994), for further proceedings in which those questions may be

addressed, including by determining whether the proper course may

be to certify to the Supreme Court of Puerto Rico any question of

Puerto Rico law that may be implicated by what remains to be

decided.

                                       III.

            For    these   reasons,    we     vacate   the   grant   of   summary

judgment against Oriental Bank as to the claims asserted against

it that are at issue in this appeal and the grant of summary

judgment in favor of Builders and MAPFRE on Oriental Bank's claims

against    those    parties.     We     remand     for   further     proceedings

                                      - 18 -
consistent with this opinion.   The parties shall bear their own

costs.

                            - 19 -