Banco Bilbao Vizcaya Argentari v. Noreen Wiscovitch-Rentas , 625 F.3d 34 ( 2010 )

United States Court of Appeals
For the First Circuit
No. 09-1816
IN RE: MANUEL E. NET-VELÁZQUEZ,
Debtor.
BANCO BILBAO VIZCAYA ARGENTARIA,
Defendant, Appellant,
v.
NOREEN WISCOVITCH-RENTAS, as Trustee for the Estate of
Manuel Enrique Net-Velázquez,
Plaintiff, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Gustavo A. Gelpí, U.S. District Judge]
Before
Torruella and Lipez, Circuit Judges,
and Barbadoro,* District Judge.
María S. Jiménez Meléndez, with whom Wanda I. Luna Martínez
and Montañez & Alicea Law Office were on brief, for appellant.
Noreen Wiscovitch-Rentas, with whom Enrique N. Vela Colón was
on brief, for appellee.
November 2, 2010
*
Of the District of New Hampshire, sitting by designation.
LIPEZ, Circuit Judge. This appeal arises from a
bankruptcy court adversary proceeding challenging Appellant Banco
Bilbao Vizcaya Argentaria's (BBVA) garnishment of funds in the bank
account of a corporation wholly owned by a Chapter 7 debtor and his
wife. BBVA appeals the district court's affirmance of a bankruptcy
court judgment in favor of the bankruptcy trustee, holding that
BBVA's garnishment of funds was a preferential transfer of estate
property avoidable under 11 U.S.C. § 547(b). BBVA seeks to argue
in this court, under a number of theories, that ownership of the
garnished funds was properly vested in the bank and not the debtor.
Because BBVA neglected to squarely raise these arguments before the
bankruptcy court, it has waived them and we therefore affirm.
I.
In 2004, BBVA brought suit in a commonwealth court
against Manuel Enrique Net-Velázquez, his wife, and an associated
business partnership, resulting in an attachment in the amount of
$300,000 on several parcels of real property owned by the couple.
BBVA filed the attachment order in the Puerto Rico Registry of
Property in June 2005.
In August 2005, Net-Velázquez and his wife sold one of
the attached properties, a parcel located in Paseo de la Fuente,
Puerto Rico. As it happened, the purchasers arranged for financing
through BBVA. Though BBVA ordered a title report prior to the
closing, the report omitted (for reasons that are in dispute and
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not material here) BBVA's $300,000 attachment. The personnel in
charge of the financing at BBVA were apparently unaware of the
attachment and remained so until after the closing.
Upon sale of the parcel, BBVA issued a manager's check to
Net-Velázquez and his wife in the amount of $354,373.30, the entire
proceeds of the sale. Net-Velázquez, who admitted at trial that he
was aware of the attachment order, may or may not have been
surprised at the amount of the check and BBVA's failure to withhold
any portion of the proceeds to satisfy its attachment, but he did
not raise the issue with BBVA.1
Net-Velázquez and his wife deposited the check for
$354,373.30 into a newly created bank account at a third-party
bank. The account was opened in the name of Code Inspector and
Management Corp. (Code Inspector), a closely-held corporation
created by the couple in 2004. Net-Velázquez and his wife were the
sole shareholders and officers of Code Inspector, and each had full
control over the funds held in Code Inspector's bank account.
Two weeks after the closing, having belatedly become
aware of the failure to withhold a portion of the Paseo de la
Fuente sales proceeds to satisfy its attachment, BBVA garnished all
1
Net-Velázquez testified at trial that he had previously sold
another parcel subject to an attachment by BBVA, and in that
transaction BBVA and the purchaser had directly negotiated to
reduce the amount of the attachment. Net-Velázquez said that when
he received the check for the full proceeds from the sale of the
Paseo de la Fuente parcel, he believed that some similar
arrangement must have been reached.
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of the available funds in the Code Inspector bank account.2 At the
time, the account contained $351,383.10. BBVA was unaware that the
account was maintained in Code Inspector's name, believing it to be
Net-Velázquez's personal account.3
In December 2005, Net-Velázquez filed a petition for
bankruptcy under Chapter 7 of the Bankruptcy Code. The bankruptcy
schedules accompanying Net-Velázquez's petition listed the Code
Inspector bank account as property of the bankruptcy estate.
II.
The bankruptcy trustee responsible for the Net-Velázquez
estate initiated this adversary proceeding against BBVA in
September 2006, asserting that the bank's garnishment of funds in
the Code Inspector bank account amounted to a preferential transfer
2
The authority by which BBVA garnished the funds is not
clearly disclosed by the record, but it appears that BBVA obtained,
on an expedited basis, an order from a local court.
3
A bank official testified that BBVA traced the account based
upon the endorsed copy of the check returned to BBVA after deposit.
Because Net-Velázquez did not sign the check over to Code Inspector
but merely deposited the check into the corporate account, there
was no indication of the account's ownership.
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under 11 U.S.C. § 547(b).4 The trustee sought to recover the full
$351,383.10 garnished by BBVA.5
The bankruptcy court held a bench trial in May 2008.
After hearing testimony from Net-Velázquez and a representative of
BBVA, the court ordered further briefing on the core issue that
emerged at trial: whether Net-Velázquez had transferred his
interest in the sales proceeds to Code Inspector by depositing them
in Code Inspector's bank account, effectively removing those funds
from the bankruptcy estate. In an opinion and order issued on
October 27, 2008, the court found that Net-Velázquez had retained
ownership of the funds in the Code Inspector account, and therefore
that BBVA's garnishment of funds constituted an avoidable,
preferential transfer of property from the estate.
BBVA appealed to the district court, see 28 U.S.C.
§ 158(a)(1), arguing that the bankruptcy court had erred in finding
4
Section 547(b) grants a bankruptcy trustee the power to
invalidate so-called "preferential transfers" of property from the
bankruptcy estate to a creditor within a ninety-day period prior to
the filing of a bankruptcy petition. The rationale for allowing
such transfers to be recovered is one of fairness, as a creditor
who receives property from the estate prior to bankruptcy may
obtain, at the expense of other creditors, a greater share of
estate property than the creditor would in bankruptcy.
5
For clarity's sake, we note that the amount garnished was
less than the full amount of the check issued by BBVA to Net-
Velázquez ($354,373.30), as the balance of the Code Inspector
account had declined to $351,383.10 at the time of the garnishment.
The garnishment exceeded, however, the amount to which BBVA was
entitled by virtue of the attachment ($300,000); BBVA has conceded
that it had no right to the $51,383.10 garnished in excess of the
$300,000 attachment.
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that the funds in the Code Inspector bank account were owned by
Net-Velázquez. BBVA also raised several new defenses under Puerto
Rico's Negotiable Instruments Law, and argued as well that half of
the proceeds from the sale of the Paseo de la Fuente parcel
belonged to Net-Velázquez's wife and not to the estate. The
district court affirmed, adopting the reasoning of the bankruptcy
court and rejecting BBVA's newly asserted defenses as waived
because BBVA had failed to raise them in the bankruptcy court.
Responding to BBVA's remaining argument, the court held that the
sale proceeds constituted community property of Net-Velázquez and
his spouse and thus were properly included in the bankruptcy
estate.
This timely appeal followed. We review a bankruptcy
court's findings of fact for clear error and its conclusions of law
de novo, granting no special deference to the intermediate decision
of the district court on appeal. See Stornawaye Fin. Corp. v. Hill
(In re Hill), 562 F.3d 29, 32 (1st Cir. 2009).
III.
Under section 547(b) of the Bankruptcy Code, the trustee
of an estate in bankruptcy may avoid "'any transfer of an interest
of the debtor in property' made (1) to a creditor, (2) on account
of an antecedent debt, (3) while the debtor was insolvent, (4)
during the 90-day period preceding the filing of the petition,
which (5) allowed such creditor to receive more than it would have
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under Chapter 7." Advanced Testing Techs., Inc. v. Desmond (In re
Computer Eng'g Assocs.), 337 F.3d 38, 45 (1st Cir. 2003) (quoting
11 U.S.C. § 547(b)). The only contested element in this adversary
proceeding is whether the garnished funds were "an interest of the
debtor in property," that is, whether Net-Velázquez had a property
interest in the funds on deposit in Code Inspector's bank account
when they were garnished by BBVA.
In the proceedings before the bankruptcy court, BBVA
sought to establish that Net-Velázquez had no property interest in
the funds on the theory that the deposit into Code Inspector's bank
account converted the funds from personal property subject to
bankruptcy procedures into corporate property.6 This contention
placed BBVA in the somewhat awkward position of arguing that it had
garnished funds from an entity that owed BBVA no debt. Indeed,
BBVA necessarily conceded that, if its theory of the case were
6
BBVA also argued that $300,000 of the $354,373.30 check
issued to Net-Velázquez was "earmarked" for BBVA to satisfy its
attachment and thus that the garnishment was not a preferential
transfer. The thrust of this "earmarking" argument is that the
transfer to a debtor of funds that are "earmarked" for a third
party does not vest ownership in the debtor; thus, the subsequent
transfer of those funds to the third party for which they are
earmarked will not constitute a preferential transfer of "an
interest of the debtor in property." See Collins v. Greater Atl.
Mortg. Corp. (In re Lazarus), 478 F.3d 12, 15 (1st Cir. 2007). The
bankruptcy court rejected this argument, citing the absence of any
evidence that BBVA had "earmarked" the funds transferred to Net-
Velázquez and his wife. The court found, to the contrary, that
Net-Velázquez had left the closing "cash-in-hand," with no
restrictions on the sales proceeds imposed by BBVA. BBVA has not
challenged this holding on appeal.
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correct, Code Inspector might have a cause of action against BBVA.
The bankruptcy court rejected this ill-advised argument, and BBVA
does not challenge the bankruptcy court's holding here.
In fact, BBVA has wholly abandoned on appeal each of the
arguments it made before the bankruptcy court. Instead of arguing
that Net-Velázquez's deposit of the sales proceeds transferred
ownership to Code Inspector, as it did below, BBVA offers here an
array of new legal arguments contending that a valid property
interest in the funds never even passed from BBVA to Net-Velázquez.
First, BBVA raises a defense it styles "payment by mistake,"
contending that Net-Velázquez never obtained a right to the sale
proceeds because the proceeds were transferred to him due to error
-- namely, that BBVA failed to withhold funds sufficient to satisfy
the attachment because that encumbrance was erroneously omitted
from the title report. In support of this argument BBVA primarily
relies on Article 1795 of the Puerto Rico Civil Code.7 See P.R.
Laws Ann. tit. 31, § 5121.
Second, BBVA offers a somewhat obscure argument under two
sections of the Puerto Rico Civil Code that relate to the
extinguishment of debt owed concurrently by two parties each to the
7
Article 1795 provides: "If 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. BBVA also relies on section 418(b)
of the Negotiable Instruments Law, which extends the foregoing
principle to financial instruments paid or delivered by mistake.
See id. tit. 19, § 668.
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other, referred to by BBVA as "set-off." See P.R. Laws Ann. tit.
31, §§ 3221, 3228. Under this theory, Net-Velázquez's obligation
to BBVA was extinguished by operation of law upon the closing of
the sale of the Paseo de la Fuente parcel, at which moment BBVA and
Net-Velázquez each owed a debt to the other -- Net-Velázquez for
the preexisting attachment, and BBVA, as the purchaser's financing
agent, for the sale price. The thrust of this argument, never
fully elucidated by BBVA, appears to be that the sale proceeds were
automatically applied to the $300,000 attachment, and thus $300,000
of the $354,373.30 check issued to Net-Velázquez and his wife
represented an overpayment to which they had no legal entitlement.
Third, BBVA argues, under several provisions of Puerto
Rico's Negotiable Instruments Law, that BBVA had the right to
rescind the manager's check issued to Net-Velázquez because Net-
Velázquez did not take the instrument in good faith and therefore
did not qualify as a holder in due course. See P.R. Laws Ann. tit.
19, §§ 451, 602, 605, 606. Fourth, BBVA contends that the Paseo de
la Fuente parcel and the proceeds from its sale were "in custodia
legis" (literally, in the custody of the law) at all points
subsequent to the issuance of the attachment order, barring Net-
Velázquez from obtaining a legal interest in the sale proceeds.
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As set forth below, we hold that BBVA has forfeited its
chance to be heard on these arguments never presented to the
bankruptcy court.8
IV.
The proposition is well established that, "absent the
most extraordinary circumstances, legal theories not raised
squarely in the lower court cannot be broached for the first time
on appeal." Teamsters, Chauffeurs, Warehousemen & Helpers Union,
Local No. 59 v. Superline Transp. Co., 953 F.2d 17, 21 (1st Cir.
1992); see also Iverson v. City of Boston, 452 F.3d 94, 102 (1st
Cir. 2006) (collecting cases and describing the circuit's
"echolalic regularity" in applying the waiver rule). Though
sometimes severe in effect, this raise-or-waive rule "is founded
upon important considerations of fairness, judicial economy, and
practical wisdom." Nat'l Ass'n of Soc. Workers v. Harwood, 69 F.3d
622, 627 (1st Cir. 1995).
It is undisputed that three of BBVA's arguments on appeal
were not raised in the bankruptcy court and are subject to waiver:
the "set-off" argument, the argument under Puerto Rico's Negotiable
Instruments Law, and the characterization of the Paseo de la Fuente
8
The fact that portions of the arguments presented here were
raised before the district court has no impact on our analysis.
The bankruptcy court acts as the trial court in bankruptcy
proceedings. Thus, arguments must be presented in the bankruptcy
court to be preserved; the district court acts solely as an
intermediate appellate tribunal. See Evergreen Credit Union v.
Woodman (In re Woodman), 379 F.3d 1, 3 n.1 (1st Cir. 2004).
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parcel as "in custodia legis." BBVA protests, however, that it
properly raised its fourth argument, the "payment by mistake"
defense, by including it in its answer to the adversary complaint.
We have closely examined BBVA's answer and find it, at best,
debatable whether "payment by mistake" was actually raised as a
defense. As it turns out, however, we need not resolve the
question because of BBVA's subsequent inattention to the defense.
A defense or legal theory may not be preserved by bare
reference in a pleading if it is thereafter abandoned until,
freshly discovered on appeal, it is raised anew. Cf. DiMarco-Zappa
v. Cabanillas, 238 F.3d 25, 34 (1st Cir. 2001) ("Simply noting an
argument in passing without explanation is insufficient to avoid
waiver."). Save in exceptional cases, only those issues that are
squarely presented and litigated in the trial court may be raised
on appeal. See Iverson, 452 F.3d at 102 (litigants must "spell out
their legal theories face-up and squarely in the trial court" to
avoid waiver). Indeed, the Rules of Civil Procedure are structured
to winnow the issues presented by the pleadings as a case
progresses, so that only relevant, non-frivolous theories and
defenses reach trial and are preserved for our review. Rule 16 in
particular encourages the parties and the court, through the
pretrial conference process, to "formulat[e] and simplify[] the
issues, and eliminat[e] frivolous claims or defenses." Fed. R.
Civ. P. 16(c)(2)(A). Because the resulting pretrial order issued
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under Rule 16 is "intended to shape the contours of the ensuing
trial by setting forth the legal theories upon which the parties
intend to rely," Correa v. Hosp. San Francisco, 69 F.3d 1184, 1195
(1st Cir. 1995), claims or defenses omitted from the pretrial order
are waived, whether or not properly raised in the pleadings. See
Rodríguez-García v. Miranda-Marín, 610 F.3d 756, 774 (1st Cir.
2010).
Here, the record reflects that BBVA failed to pursue or
even raise the "payment by mistake" defense at any point subsequent
to its answer. The parties' joint pretrial report contained no
mention of BBVA's "payment by mistake" defense, identifying only
two legal theories that BBVA intended to present at trial: first,
that the ownership of the sales proceeds passed to Code Inspector
upon their deposit in its bank account, and second, that the sales
proceeds were "earmarked" for BBVA when transferred to Net-
Velázquez, and thus were outside the action of 11 U.S.C. § 547(b).9
No argument in support of a "payment by mistake" defense was made
at the subsequent trial, nor was one included in BBVA's post-trial
briefing on ownership of the sales proceeds -- which focused solely
on the argument that Code Inspector was the rightful owner of the
funds. Thus, even assuming BBVA did plead the substance of its
"payment by mistake" defense in the answer, such defense was
unambiguously waived for want of prosecution.
9
See supra note 6.
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BBVA's last-ditch argument seeks to cast this appeal as
the "exceptional case" warranting relief from waiver. It is true
that the rule of waiver for arguments not squarely presented below
"is a matter of discretion" and "admits of an occasional
exception." Harwood, 69 F.3d at 627. The bar, however, is high
for such an exercise of discretion; a new argument will be
considered on appeal only when "the equities heavily preponderate
in favor of such a step." Id.We have applied various criteria to aid in identifying
the exceptional case where relief from waiver is appropriate. A
nonexhaustive list of factors relevant to this determination
includes: (1) whether the litigant's failure to raise the issue has
deprived the court of appeals of useful factfinding, or whether the
issue was of a purely legal nature; (2) whether the omitted
argument raises an issue of constitutional magnitude; (3) whether
the argument was highly persuasive and failure to reach it would
threaten a miscarriage of justice; (4) whether considering the
issue would cause prejudice or inequity to the adverse party; (5)
whether the failure to raise the issue was inadvertent and provided
no tactical advantage; and (6) whether the issue implicates
"matters of great public moment," id. at 628. See Montalvo v.
Gonzalez-Amparo, 587 F.3d 43, 48-49 (1st Cir. 2009); Harwood, 69
F.3d at 627-28.
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Of those criteria, a few seem to weigh slightly in BBVA's
favor here. First, BBVA's newly raised arguments are largely legal
in nature, and thus BBVA's failure to raise them below does not
appear to have substantially "deprived the court of appeals of
useful factfinding." Harwood, 69 F.3d at 627. Second, allowance
of the arguments would present "no special prejudice or inequity to
the plaintiffs," other than possibly to further protract litigation
that has now drawn on for over four years. Id. at 628. Third, the
omission of the arguments below appears attributable to
inadvertence rather than a play for tactical advantage by BBVA.
See id.On the other hand, both the number and diversity of legal
theories pressed by BBVA on appeal mark these arguments as the
precise species our waiver rule is designed to deter: transparent
afterthoughts and alternative defenses burnished for appeal after
the defendant's primary arguments failed at trial. It is typically
only in cases involving issues of "great public moment" or
"constitutional magnitude" that we are inclined to disregard our
waiver rule. See id. at 628. There can be no question that the
miscellaneous issues raised in BBVA's appeal are of no such lofty
stature.
Moreover, BBVA has other remedies available, as it filed
a third-party complaint for contribution against the title search
company that prepared the erroneous title report. If the
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contribution claim fails, BBVA will simply end up on equal footing
with other unsecured creditors of the Net-Velázquez estate, and may
yet recover some portion of the $300,000 owed by Net-Velázquez.
While we do not suggest that there is nothing at stake for BBVA
here, the consequences of foreclosing BBVA's tardily raised
arguments fall far short of a miscarriage of justice.
As noted, we will only consider new arguments on appeal
where the "equities heavily preponderate in favor of such a step."
Harwood, 69 F.3d at 627. Having identified and weighed the
criteria we deem most relevant to BBVA's request to have its
arguments heard for the first time on appeal, we conclude that the
equities do not heavily preponderate in favor of allowing these new
arguments. Therefore, we affirm the judgment of the district
court.
So ordered.
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