600 B.R. 132
1st Cir. BAP2019Background
- Debtor borrowed $31,434.17 from Banco Popular de Puerto Rico (BPPR) on Oct. 19, 2012 and signed a loan agreement and a (non-notarized) pledge agreement purporting to secure the loan with a BPPR savings account (the 1438 account).
- BPPR placed a hold and, after default, debited the 1438 account for $31,434.17 on Apr. 30, 2015 to pay the loan.
- Debtor filed Chapter 7 on May 5, 2015; Trustee sued BPPR seeking turnover under 11 U.S.C. §§ 542/553 (Count I) and a preference under § 547 (Count II).
- Trustee argued the pledge was unenforceable against third parties because it lacked notarization (Puerto Rico "authentic document" rule) and that the 1438 funds were a special-purpose deposit, barring setoff. BPPR argued its security interest was perfected by control under Puerto Rico's UCC (Article 9) and alternatively asserted setoff rights.
- Bankruptcy court granted BPPR summary judgment, holding Revised Article 9 applied, BPPR (as the bank maintaining the account) had control and a perfected security interest, and therefore the Trustee could not avoid the pledge; Trustee appealed. Count II (preference) was affirmed on waiver grounds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether BPPR perfected a security interest in the 1438 account | Pledge unenforceable against Trustee under Puerto Rico Civil Code because pledge not notarized (authentic-document rule); Trustee also invoked § 544(a) strong-arm | BPPR says Revised Article 9 governs; deposit accounts are perfected by control and BPPR, as depositary bank, had control so interest was perfected | Vacated as to Count I and remanded: panel concluded record insufficient—court must consider Savings Clause and whether transaction was consumer (excluded from Article 9) or commercial; cannot affirm bankruptcy court's Article 9 ruling without further proceedings |
| Whether the transaction is a consumer transaction excluded from Article 9 | Trustee: loan was a personal/consumer loan (used for personal debts), so Article 9 deposit-account rules don't apply and Civil Code/authentication controls | BPPR: Trustee waived the consumer-transaction argument below; Article 9 applies and BPPR perfected by control | Panel exercised discretion to consider the argument and remanded for factual/legal development to determine whether consumer exclusion applies |
| Whether BPPR could set off the 1438 account against the loan | Trustee: funds were "frozen"/special-purpose deposit (trust-like), not withdrawable at will, so mutuality lacking and setoff is impermissible under Puerto Rico law | BPPR: had contractual/right-of-setoff and, if secured, Article 9 remedies permit applying the deposit to the obligation after default | Panel held BPPR could not exercise setoff because parties conceded the funds were unavailable to debtor (special-purpose account) — Trustee was entitled to summary judgment on setoff, but outcome depends on security-interest avoidance analysis |
| Whether Count II (preference) error was preserved | Trustee argued preference below | BPPR: Trustee did not brief or preserve the argument on appeal | Count II affirmed on appeal as waived by Trustee |
Key Cases Cited
- In re Almacenes Gigante, Inc., 159 B.R. 638 (Bankr. D.P.R. 1993) (unenforced, unauthenticated pledge ineffective against third parties under Puerto Rico law)
- Santos & Nieves, Inc. v. [sic] (In re Santos & Nieves, Inc.), 814 F.2d 57 (1st Cir. 1987) (authentic-document rule: pledges must be evidenced by authentic document to be effective against third parties)
- Constructora Maza, Inc. v. Banco de Ponce, 616 F.2d 573 (1st Cir. 1980) (bank setoff limited to deposits made in good faith, in ordinary course, and withdrawable at depositor's will)
- In re Calore Exp. Co., 288 F.3d 22 (1st Cir. 2002) (right of setoff is not a security interest)
- In re Supermercados San Juan, Inc., 575 F.2d 8 (1st Cir. 1978) (defining "authentic document" and notarization requirement under Puerto Rico law)