Fonseca v. Government Employees Ass'n (Fonseca)Fonseca v. Government Employees Ass'n (Fonseca)
Rafael Velez Fonseca (the “Debtor”) appeals from the bankruptcy court’s May 7, 2015 Opinion and Order granting the motion for summary judgment filed by Government Employees Association, a/k/a Asociación de Empleados del Estado Libre Asociado de Puerto Rico (“AEELA”), and denying the Debtor’s cross-motion for summary judgment, on the Debtor’s complaint against AEELA for alleged violations of the discharge injunction imposed by § 524(a).
BACKGROUND
AEELA is a “non-profit savings and loan association” established by Puerto Rico Law No. 133 of June 28, 1966, known as the “Puerto Rico Commonwealth Employees Association Act,” P.R. Laws Ann. tit. 3, § 862, et seq. (the “Act”). Asociación de Empleados del Estado Libre Asociado de Puerto Rico v. Unión Internacional de Trabajadores de la Industria de Automóviles, Aeroespacio e Implementos Agrícolas,
The Act requires all permanent government employees to be members of AEE-LA, and mandates a 3% deduction from all members’ salaries to be placed into a savings and loan fund; See P.R. Laws Ann, tit. 3, § 862c and 862g. AEELA is authorized to grant loans to its members from the savings and loan fund under unique favorable terms with competitive rates. See P.R. Laws Ann. tit. 3, § 862f.
The Debtor was a government employee and member of AEELA from 1986 until he retired in December 2012. In May and June of 2012, the Debtor signed two promissory notes for loans from AEELA.
In September 2012, the Debtor filed a petition for retirement, and his retirement became official in December 2012. In the meantime, in November 2012, the bankruptcy court entered an order discharging the Debtor, and closed the case.
On January 9, 2013, AEELA issued a letter to the Municipality of Caguas: (1) requesting the balance of the Debtor’s accumulated vacation and sick leave;
On May 22, 2013, the Debtor asked the bankruptcy court to reopen his bankruptcy case in order to file a complaint against AEELA for alleged violations of the discharge injunction. Although AEELA opposed the request, the bankruptcy court reopened the case on July 8, 2013.
The Debtor then filed a complaint against AEELA seeking damages for alleged violations of the discharge injunction based on the two letters AEELA sent to the Municipality of Caguas, which the Debtor claimed were acts to collect on a pre-petition debt that had been discharged in his chapter 7 case. In its answer, AEE-LA admitted it sent the two letters to the Municipality, but denied that its actions violated the discharge injunction.
Thereafter, AEELA filed a motion for summary judgment, in which it argued that it did not violate the discharge injunction because it sent the letters in question to the Municipality, as required under state law after a member has retired, and not to the Debtor in an attempt to collect a debt from him personally. It also asserted that its claim was secured by a statutory lien that rode through the bankruptcy court unaffected. According to AEELA, the accumulated leave was one of various guarantees that secured the loans it granted to the Debtor, and the statutory lien was perfected when the loans were granted. Accordingly, AEELA argued, although the discharge eliminated “in per-sonam” liability against the Debtor, it did not affect AEELA’s right to proceed “in rem” against its collateral, which included the lump sum payment for the accumulated leave by operation of local law. AEE-LA acknowledged, however, that it was only entitled to payment for pre-petition accumulated leave; payment for any post-petition leave belonged to the Debtor.
The Debtor filed an opposition to AEE-LA’s motion and a cross-motion for summary judgment. The Debtor argued that the two letters AEELA sent to the Municipality of Caguas violated the discharge injunction because AEELA, knew of the discharge order and was trying to collect a pre-petition debt that had been discharged. Although the Debtor acknowledged that the letters were not sent to him personally, he contended that AEELA’s actions prevented him from collecting monies to which he was entitled, i.e., payment for his accumulated leave. The Debtor also acknowledged AEELA’s statutory lien on his savings and dividends accounts, but argued there was no statutory lien encumbering his accumulated leave because there was no such lien at the time of his bankruptcy filing. According to the Debt- or, AEELA’s statutory lien on the accumulated leave did not arise until after his retirement in December 2012, and because the discharge order had already entered at the time of his retirement, there was no existing personal debt to which the lien could attach. Thus, the Debtor contended, once AEELA collected the $18,457.76 in his savings and dividends accounts, the remaining balance did not have any collateral to secure it and was subject to discharge pursuant to § 524.
The bankruptcy court held a hearing on the cross-motions for summary judgment,
Since AEELA has a valid statutory lien that secures the loans provided to the Plaintiff, it is allowed to proceed against the collateral to collect on its claim up to the amount of collateral available. The two letters sent by AEELA to the Municipality of Caguas clearly stated that they were not an attempt to collect on plaintiffs’ [sic] personal debts but to collect against the collateral “in rem.” The fact that AEELA had notice of the entry of discharge is inconsequential since it would not bar AEELA from acting as it did. Therefore, AEELA’s actions did not violate the discharge injunction and it may proceed “in rem” against the collateral that secures its debts but limited to the amounts of its collateral since Plaintiffs personal debts have been discharged.
In re Velez Fonseca,
JURISDICTION
We have jurisdiction to hear appeals from a final judgment of the bankruptcy court. 28 U.S.C. § 158(a)(1). An order granting summary judgment is a final order where no counts against any defendants remain. Desmond v. Raymond C. Green, Inc. (In re Harborhouse of Gloucester, LLC),
STANDARD OF REVIEW
We review a bankruptcy court’s grant of summary judgment de novo. See Harrington v. Simmons (In re Harrington),
DISCUSSION
I. Summary Judgment Standard
Summary judgment is proper only where there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(a); Fed. R. Bankr.P. 7056. The parties agreed that this matter was appropriate for summary judgment disposition as there were no material facts in dispute and one of the parties was entitled to judgment as a matter of law.
II. Violation of the Discharge Injunction
Pursuant to § 727(b), a discharge relieves a debtor from all personal liabilities that arose pre-petition, subject to certain exceptions from discharge included in § 523. Section 524(a) permanently enjoins creditor actions to collect discharged debts, providing that a discharge “operates as an injunction against the commencement or continuation of an action, the em
However, “a bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor in personam — while leaving intact another — namely, an action against the debt in rem.” Johnson v. Home State Bank,
The bankruptcy court determined that-AEELA’s actions did not violate the discharge injunction because AEELA had a statutory lien, as defined by the'Bankruptcy Code, over both the Debtor’s savings and dividends accounts with AEELA and his pre-petition accumulated leave, which passed through the bankruptcy unaffected and, as a result, its actions were not an attempt to collect a debt from the Debtor in personam but to collect against the collateral in rem.
III. Whether AEELA Had a Statutory Lien
The Bankruptcy Code defines the term “statutory lien” as follows:
[A] lien arising solely by force of a statute on specified circumstances or conditions, or hen of distress for rent, whether or not statutory, but does not include security interest or judicial lien, whether or not such interest or lien is provided by or is dependent on a statute and whether or not such interest or lien is made fully effective by statute.
11 U.S.C. § 101(53). “A lien created by statute is limited in operation and extent by the terms of the statute, and can arise and be enforced only in the event and under the facts provided for in the statute.” Fleet Credit Corp. v. TML Bus Sales, Inc.,
The bankruptcy court determined that AEELA had a statutory lien because the loans AEELA provides to its members are secured solely by force of several statutes. The Debtor argues that the bankruptcy court erred in determining that, at the moment the Debtor obtained his prepetition loans from AEELA, a statutory lien attached to the future liquidation of
The Act sets forth AEELA’s powers and authority.
The Board of Directors shall have all the powers that are necessary and convenient to achieve the purposes of the Association, including, without being construed as a limitation, the following: (a) To grant personal loans to the employees and pensioned members at an interest rate approved by the Board of Directors, which shall not exceed seven percent (7%) per annum, with such security and margin, and under such. amortization terms as established by regulations. The Association is also empowered to grant mortgage loans pursuant to the norms and requirements of the secondary mortgage markets of the United States and Puerto Rico, and the applicable federal and local laws, always seeking the best possible financing options for its members. The Association and the retirement systems sponsored by the Government of the Commonwealth of Puerto Rico are hereby empowered to deduct from the savings and contributions of those employees who have been permanently separated from service from any reason, all sums they may owe to the Association, as well as all public employees retirement systems to deduct from the pensions the monthly amortizations to be credited to the loans granted.
In those cases that the employee has a debt with the Association and any retirement system, the savings and contributions that the employee may have in the respective organization shall answer, in the first, place, for outstanding obligations contracted with the respective body. Should the savings and contributions exceed the total amount of said obligations, the balance shall be used to amortize the obligations incurred by the employee with the Association or retirement system, as the case may be.
P.R. Laws Ann. tit. 3, § 862f.
This section authorizes AEELA to grant personal loans to its members, such as the
Although the Debtor does not agree that AEELA had a statutory lien on the $18,457.76 in his savings and dividends accounts at the time of his bankruptcy filing, he concedes that AEELA had a right to set off those funds as partial payment for the debt; he calls this a “contractual set off right.” Thus, those funds are not at issue here, and we do not need to discuss them further. The Debtor alleges, however, that his savings and dividends accounts were the only funds recoverable by AEELA under the statute. He argues, therefore, that after AEELA deducted the funds from his savings and dividends accounts, the remaining debt balance was not secured and was discharged pursuant to § 524. We must consider, therefore, whether the statute provided AEELA with a lien over any other collateral, such as his unliquidated accumulated leave.
Section 863d of the Act addresses the government’s retention and transfer of certain funds to AEELA as payment for any outstanding debt.
Any credit, deposit or surplus, for any reason, in the Commonwealth Government, or in any dependency or instrumentality thereof, [o]n behalf of a member who, having ceased in office, is in debt with the Association, shall be retained by the Secretary of the Treasury of Puerto Rico or the competent officer, if not alienated in the corresponding retirement system, and covered into the funds of the Association, partially or fully to pay the debt pending therewith.
P.R. Laws Ann. tit. 3, § 863d.
Pursuant to this section, any “credit, deposit or surplus” held by the government, not alienated for the member’s retirement system, shall be used to pay off any outstanding debt to AEELA upon a member’s separation from office. Generally, this section allows AEELA to recover any asset held by the government to pay off the debt of its members when the member retires, unless these assets have been earmarked for some other purpose, none of which are applicable in this case. It is evident, therefore, that this section establishes a statutory lien on “any credit, deposit or surplus” held by the government when the member is terminated or retires. The question becomes whether the Debtor’s accumulated leave can be considered a “credit, deposit or surplus” subject to the deductions allowed by this section.
P.R. Laws Ann. tit. 3, § 703, et seq., governs the accumulation of vacation and sick leave by government employees, and their entitlement to a lump sum payment of such leave when they cease employment. See P.R. Laws Ann. tit. 3, § 703a. Section 703a provides, in relevant part:
Every officer or employee of the Commonwealth of Puerto Rico, except the officers of the Executive Branch appointed by the Governor and of the in-strumentalities and public corporations shall be entitled to be paid, and there shall be paid a lump sum of money for the leaves of absence he may have accumulated up to a maximum of sixty (60) working days on his removal from service for any cause; and for sick leave he may have accumulated up to a maximum of ninety (90) working days, on his removal from service in order to availhimself of a retirement, if he is a participant of any retirement system sponsored by the Government and if he is not, on his final removal from service, if he has rendered at least ten (10) years of services. This lump sum for both leaves shall be paid at the rate of the salary earned by the officer or employee at the time of his removal from service, independently of the days he has enjoyed said leaves during the year.
P.R. Laws Ann. tit. 3, § 703a.
This section allows government employees, such as the Debtor, to accumulate up to 60 days of vacation leave and up to 90 days of sick leave contemporaneously with service as an employee. Other than using such accumulated days for paid leave during employment, an employee acquires no right to payment for such accumulated leave until the termination of employment through retirement or otherwise. AEELA likewise acquires no right to receive any payment on account of such credits until such time as the employee acquires a right to a lump sum payment. .
Upon retirement, the leave balances are liquidated into a lump sum payment based on the last salary earned by the retiree. Section 703d, in turn, addresses the issue of using the lump sum payment for vacation and sick leave as payment for loans granted by AEELA to its members. It provides:
The lump payment authorized by §§ 703-703e of this title shall not be subject to deductions by reason of savings and contributions to the retirement systems of government employees, but shall be subject to other deductions authorized by law, such as obligations of [a] taxable nature and those voluntarily incurred by the officer or employee by reason of loans from the Employees Association, the government retirement systems or the credit cooperative associations of public employees or deduction for affiliation fees to employees associations authorized by law.
P.R. Laws Ann. tit. 3, § 703d (emphasis added).
This section clearly provides that an employee’s entitlement to a lump sum payment for accumulated leave is subject to deductions for the payment of AEELA loans obtained by the employee. As previously mentioned, the Act allows for any credit, deposit, or surplus held by the government to be retained and transferred to AEELA for payment of any outstanding debts upon an employee’s retirement. See P.R. Laws Ann. tit. 3, § 863d. It is evident that an employee’s entitlement to a lump sum payment of accumulated leave under § 703d would be considered a credit, deposit, or surplus in the government which could be used to pay off any outstanding debt to AEELA when a member retires pursuant to § 863d. Moreover, the statute specifically provides that the lump sum payment for the liquidation of accumulated leave can be withheld for a member’s unpaid debt with AEELA. Thus, these sections give rise to a statutory lien over the Debtor’s accumulated leave.
The Debtor does not dispute that his right to receive a lump sum payment for accumulated leave is a “credit” for purposes of the Act. He contends, however, that AEELA did not have a perfected statutory lien over such credit at the time of bankruptcy filing because the conditions giving rise to the alleged statutory lien did not occur until after his discharge. According to the Debtor, the transfer to AEELA of any credit held by the government is dependent on three conditions: (1) the member must have ceased employment; (2) the member must owe a debt to AEELA; and (3) the credit, deposit, or surplus must not have been alienated for other purposes as allowed by the law. As
The Debtor is correct that generally a lien can only attach “to property that the debtor owned, or had rights to, at the time of the filing of the bankruptcy petition but does not survive to attach [to] the debtor’s property that is acquired after filing the bankruptcy petition.” Drake v. Mass. Dep’t of Revenue (In re Drake),
Section 541 defines property of the estate and provides that all legal or equitable interests of the debtor in property as of the commencement of the case are property of the estate. See 11 U.S.C. § 541(a). This definition encompasses conditional, future, speculative, and equitable interests of the debtor as of the bankruptcy filing. “[T]he legislative history of [§ 541 of] the Bankruptcy Code makes it clear that Congress intended to include all legally recognizable interests although they may be contingent and not subject to possession until some future time.” Anderson v. Peterson (In re Peterson), A.P. No. 05-6520,
The Debtor further argues that, as of the petition date, his unliquidated leave constituted future, post-petition wages, and that AEELA’s claimed lien could not attach to his future wages. In support, he cites In re Miranda Soto,
The Debtor also relies on several other decisions to support his argument that AEELA’s statutory lien was not perfected because the statute’s conditions were not met at the time of the bankruptcy filing. See, e.g., McEwen v. Westphal (In re Pierce),
As the bankruptcy court pointed out below, the Debtor also failed to acknowledge that in those decisions applicable state law required additional steps in order for the respective liens to attach to the collateral. AEELA’s lien was effective by operation of law and the Debtor has not presented any legal authority requiring any further act by AEELA for its statutory lien to attach to any credit, deposit, or surplus other than disbursing the loan itself. The fact that the liquidation of some accumulated benefits cannot take place until after retirement does not mean that AEELA’s claim is not secured by those credits, deposits, or surpluses until the employee is separated from work. As the bankruptcy court stated, “[t]his is a public policy measure undertaken for the benefit of AEELA
Based on the foregoing, the bankruptcy court did not err in concluding that AEE-LA had a valid statutory lien in the Debt- or’s pre-petition accumulated leave, and, as a result, it was allowed to proceed against the lump sum proceeds of the collateral due to the Debtor upon the termination of his employment to recover the balance due on its claim. As such, the two letters sent by AEELA to the Municipality of Caguas were not an attempt to collect a debt from the Debtor in personam, but to collect against the collateral in rem. Therefore, AEELA’s actions did not violate the discharge injunction.
CONCLUSION
For the reasons set forth above, we AFFIRM the decision of the bankruptcy court.
Notes
.Unless expressly stated otherwise, all references to “Bankruptcy Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. §§ 101, et seq.
. The parties agreed that there were no material facts in dispute.
. There is no evidence in the record that the Debtor executed any other documents, such as a security agreement, in connection with the loans from AEELA. In a sworn statement
.The letter refers in Spanish to "licencias de vacaciones y enfermedad.” The parties and the bankruptcy court translated these terms to vacation and sick leave “licenses.” As the certified translation of this letter included in the record refers to these terms as “sick and vacation leave,” we will use the latter translation.
. In a sworn statement submitted to the bankruptcy court in connection with AEELA’s summary judgment motion, Sandra Santiago, supervisor of the Bankruptcy Section of AEE-LA’s Collection Department, stated that these communications were part of the inter-agency notification process required by Puerto Rico law and Department of Treasury regulations when a government employee retires.
. The bankruptcy court explained as follows: "AEELA alleges that it holds a statutory lien over Plaintiff’s pre-petition vacation and sick leave []. The 13 day excess in relation to vacation days and the 8 day excess in relation to sick days correspond to the post-petition vacation leave and sick leave accumulated from the date of the filing of the Chapter 7 bankruptcy on August 3, 2012, until the day that Plaintiff retired on December 31, 2012.” Velez Fonseca v. Gov’t Employees Ass'n (AEELA) (In re Velez Fonseca),
. Although the Debtor signed promissory notes in connection with the AEELA loans, there is no evidence in the record that he signed a security agreement which would have given rise to a consensual lien or security interest as defined by § 101(51) (defining the term "security interest” as a "lien created by an agreement”). Moreover, the parties agreed at oral argument that AEELA did not have a consensual lien. Thus, the appropriate question is whether AEELA had a statutory lien.
. The Debtor also argues that the bankruptcy court improperly shifted the burden of proof, requiring him to prove that AEELA's claimed statutory lien against his accumulated leave was different from a lien against the savings and dividends accounts deposited with AEE-LA. According to the Debtor, the bankruptcy court determined that he could not properly distinguish the two liens and, as a result, held that AEELA had a statutory lien in the accumulated leave. We do not agree that the bankruptcy court based its ruling on the Debt- or’s failure to distinguish between the two types of collateral and, therefore, the Debtor's argument requires no further discussion. Moreover, despite the Debtor’s assertions to the contrary, the bankruptcy court examined each of the relevant sections of the applicable statute and its analysis was comprehensive and well-articulated.
. Puerto Rico Law No. 9 of April 9, 2013, known as the “New Puerto Rico Commonwealth Employees Association Act,” repealed the Act. However, the relevant facts of this case all occurred prior to the enactment of the New Puerto Rico Commonwealth Employees Association Act on April 9, 2013, and, therefore, the Act is the applicable statute. Moreover, although the sections and numbers were reorganized in the new act, the substance of the relevant sections are substantially the same.