587 B.R. 224
Bankr. D.P.R.2018Background
- Debtor Eduardo Rivera Mercado executed a mortgage deed in May 2014 in favor of Metro Island Mortgage (later transferred to Banco Popular) on real property in Orocovis, Puerto Rico; the mortgage deed was never recorded in the Puerto Rico Property Registry.
- Debtor filed Chapter 7 on December 15, 2015; the Chapter 7 Trustee filed an adversary complaint seeking to avoid the unrecorded mortgage under 11 U.S.C. § 544(a)(3) and to preserve it for the estate under § 551.
- Trustee moved for judgment on the pleadings under Fed. R. Civ. P. 12(c); Banco Popular opposed, arguing Puerto Rico law treats unrecorded mortgages as nonexistent and cited local precedents rejecting avoidance.
- The core legal question was whether an unrecorded mortgage in Puerto Rico constitutes a “transfer” of an interest in property that a trustee can avoid and then preserve under §§ 544 and 551.
- The court applied the Rule 12(c)/12(b)(6) standard (accepting well-pleaded facts and drawing inferences for the nonmovant) and analyzed avoidance under federal bankruptcy law against Puerto Rico property-law principles.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an unrecorded mortgage is a "transfer" avoidable under 11 U.S.C. § 544(a)(3) | Trustee: § 544 lets trustee avoid the unrecorded mortgage and step into a bona fide purchaser's rights | Banco Popular: Under Puerto Rico law a mortgage is not a lien or transferable interest until recorded, so no prepetition transfer occurred | Held: No — under Puerto Rico law an unrecorded mortgage does not create a transferable interest, so § 544 does not permit avoidance |
| Whether an avoided unrecorded mortgage can be preserved for the estate under § 551 | Trustee: If avoided, § 551 preserves the lien for the estate (relying on In re Traverse) | Banco Popular: Since no transfer existed, there is nothing to preserve; local law controls property interests | Held: No — because no transfer occurred, § 551 cannot preserve a nonexistent lien |
| Whether the Trustee could instead avoid as a post-petition transfer under § 549 | Trustee: In the alternative, § 549 might apply | Banco Popular: Mortgage was executed prepetition; § 549 is inapplicable | Held: Not applicable — the mortgage was prepetition, so § 549 does not apply |
Key Cases Cited
- In re Traverse, 753 F.3d 19 (1st Cir. 2014) (trustee avoided an unrecorded mortgage under Massachusetts law and preserved the lien for the estate)
- Soto-Rios v. Banco Popular de Puerto Rico, 662 F.3d 112 (1st Cir. 2011) (discussing requirements for valid mortgages under Puerto Rico law)
- Butner v. United States, 440 U.S. 48 (1979) (property interests in bankruptcy are created and defined by state law)
- Antilles Cement Corp. v. Fortuño, 670 F.3d 310 (1st Cir. 2012) (Puerto Rico law treated as the functional equivalent of state law for federal analysis)
- Rivera-Gomez v. de Castro, 843 F.2d 631 (1st Cir. 1988) (standard that courts accept well-pleaded factual averments on motions to dismiss)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (complaint must state a plausible claim to survive dismissal)