599 B.R. 406
1st Cir. BAP2019Background
- Debtor executed a mortgage in 2014 in favor of Metro Island (held by Banco Popular de P.R. (BPPR)), but the mortgage was never presented to the Puerto Rico Property Registry for recording.
- Debtor filed Chapter 7 in December 2015; Trustee later filed an adversary complaint (Nov. 2017) seeking to avoid and preserve the unrecorded mortgage for the estate under 11 U.S.C. §§ 544, 549 and 551.
- Trustee argued alternatively the mortgage was (a) a post‑petition transfer avoidable under § 549 because it could be presented for recording at any time, and (b) an unperfected lien avoidable under § 544 and preservable under § 551, relying on Traverse (First Circuit) and Matienzo Lopez.
- BPPR admitted the mortgage was unrecorded but contended Puerto Rico law treats an unrecorded mortgage as a nullity (no lien), so the Trustee could not avoid or preserve any interest; BPPR relied on Schwarz Reitman and other D.P.R. decisions.
- Bankruptcy court denied Trustee’s Rule 12(c) motion and sua sponte dismissed the complaint under Rule 12(b)(6), holding that under Puerto Rico law an unrecorded mortgage creates no transferable lien or interest (so §§ 544/551 inapplicable) and that § 549 did not apply because the mortgage was executed prepetition.
- Trustee appealed; Panel reviewed de novo and affirmed the dismissal, concluding state law (Puerto Rico lien theory and recording/constitutive rules) controls and forecloses Trustee’s avoidance/preservation claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can an unrecorded Puerto Rico mortgage be avoided under § 544 and preserved under § 551? | Trustee: An unrecorded mortgage is an unperfected lien avoidable under § 544 and preservable under § 551 (citing Traverse). | BPPR: Puerto Rico law makes an unrecorded mortgage a nullity; no lien or transferable interest exists to avoid or preserve. | Held: No—under Puerto Rico law an unrecorded mortgage creates no lien/transferable interest, so §§ 544 and 551 do not apply. |
| Can the unrecorded mortgage be avoided as a post‑petition transfer under § 549? | Trustee: Because the mortgage could be presented for recording at any time, recording later would constitute a post‑petition transfer subject to § 549. | BPPR: Mortgage was executed prepetition and was never presented/recorded; § 549 requires an actual post‑petition transfer. | Held: No—§ 549 inapplicable because the mortgage was executed prepetition and no post‑petition transfer occurred; speculative future recording does not create § 549 transfer. |
| Was the bankruptcy court’s sua sponte Rule 12(b)(6) dismissal improper for lack of notice or amendment opportunity? | Trustee: Argued error in dismissal (but did not press due‑process/amendment issues on appeal). | BPPR: No reversible error; dismissal appropriate because claims failed as a matter of law. | Held: Waived—Trustee did not raise due process/amendment arguments on appeal; dismissal under Rule 12(b)(6) affirmed on the merits. |
| Was Traverse controlling despite different state law? | Trustee: Traverse applies and supports avoidance/preservation. | BPPR: Traverse applies Massachusetts law (title theory); Puerto Rico is lien‑theory with constitutive recording rules—distinct result. | Held: Traverse distinguished and not controlling; different substantive state law yields different outcome. |
Key Cases Cited
- Traverse, 753 F.3d 19 (1st Cir.) (trustee may avoid and preserve an unperfected lien under §§ 544 and 551 under Massachusetts law)
- Soto‑Rios v. Banco Popular de Puerto Rico, 662 F.3d 112 (1st Cir.) (Puerto Rico recording is constitutive for mortgages; unrecorded mortgage is ineffective)
- Butner v. United States, 440 U.S. 48 (1979) (property interests are defined by state law)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard applied to complaints)