Oriental Bank v. Builders Holding Co., Corp.

United States Court of Appeals
For the First Circuit
No. 21-1299
IN RE: BUILDERS HOLDING CO., CORP.,
Debtor.
ORIENTAL BANK,
Appellant,
v.
BUILDERS HOLDING CO., CORP.; MAPFRE PRAICO INSURANCE COMPANY;
ENDURANCE ASSURANCE CORPORATION; PUERTO RICO FINANCING
AUTHORITY; NOREEN WISCOVITCH-RENTAS, TRUSTEE,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Francisco A. Besosa, U.S. District Judge]
Before
Barron, Chief Judge,
Howard and Gelpí, Circuit Judges.
Cristina A. Fernández Rodríguez, with whom MCD Law LLC was on
brief, for appellant.
José A. Sánchez Girona, with whom Saldaña, Carvajal & Vélez-
Rivé, PSC was on brief, for appellees MAPFRE PRAICO Insurance
Company and Endurance Assurance Corporation.
Jeannette López de Victoria, with whom Luis R. Ortiz Segura
and Oliveras & Ortiz, PSC were on brief, for appellee Puerto Rico
Financing Authority.
July 28, 2022
BARRON, Chief Judge. Builders Holding Company
("Builders"),1 a general contractor, filed for bankruptcy in the
United States Bankruptcy Court for the District of Puerto Rico in
August 2016. Builders then filed an adverse action against the
Puerto Rico Infrastructure Financing Authority ("Financing
Authority"), which had hired Builders for construction projects,
and Oriental Bank, with which Builders had a deposit account.
Builders's surety, MAPFRE PRAICO Insurance Company and Endurance
Assurance Corporation ("MAPFRE"), intervened in that adverse
action and filed its own claims against Oriental Bank. At the
same time, Oriental Bank filed counterclaims in the adverse action
against MAPFRE and Builders. All the claims in the adverse action
pertained to funds -- totaling more than $450,000 -- that the
Financing Authority had directly deposited in Builders's deposit
account with Oriental Bank and that Oriental Bank had taken from
that account to set off a debt that Builders owed to it.
The Bankruptcy Court granted summary judgment against
Oriental Bank on all the claims asserted against it.2 Oriental
Bank appealed that ruling to the District Court, which affirmed.
1 References to Builders throughout the opinion refer to the
Builders Holding Company and its predecessor entities.
2 The Bankruptcy Court also granted summary judgment in favor
of the Financing Authority as to Builders's claims against it.
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We vacate and remand the grant of summary judgment against Oriental
Bank on all the claims.
I.
Builders offers general-contractor services for
construction projects. It entered into an indemnification
agreement with MAPFRE on August 5, 2010.
The agreement provided that MAPFRE would issue surety
bonds to guarantee the payment of labor and materials for
Builders's construction projects and that Builders would hold
MAPFRE harmless and indemnify MAPFRE against any and all loss from
the surety bonds that it issued. The agreement further provided
that Builders would assign "all payments received for or on account
of any contract" to a trust that would "inure to the benefit of
[the] surety for any liability or loss it may have or sustain under
any bond" (capitalization adjusted).
MAPFRE registered the agreement as a financing statement
at the Puerto Rico Department of State pursuant to Puerto Rico
law. The parties do not dispute that MAPFRE's registration of the
agreement perfected MAPFRE's security interest in Builders's
accounts receivable.
A number of years passed, and, on November 14, 2013,
Builders executed a Cash Management Agreement with Oriental Bank.
The agreement enabled Builders to use an existing charge account
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at Oriental Bank as its operational account for business income
and expenses ("Deposit Account").
On December 26, 2014, Builders opened two lines of credit
for business operational expenses with Oriental Bank pursuant to
a Line of Credit Agreement. One line of credit was for $675,000.
The other was for $500,000.
The lines of credit were secured by Builders's accounts
receivable and Deposit Account.3 Oriental Bank recorded its
security interest in this collateral on December 30, 2014.
In September 2015, the Financing Authority contracted
with Builders for construction projects in the town of Cabo Rojo.
MAPFRE acted as surety for this contract and issued performance
and payment bonds. The bonds had a maximum of $3,070,480. The
Financing Authority was named as obligee on the bonds and Builders
was named as the principal.
Builders's lines of credit with Oriental Bank matured
approximately three months later. Thus, as of December 26, 2015,
Builders was required to repay Oriental Bank the entirety of the
sum due on the lines of credit, which was more than $450,000.
Then, on February 16, 2016, MAPFRE sent a letter to the
Financing Authority. The letter informed the Financing Authority
3 Builders represented to Oriental Bank that the accounts
receivable were not otherwise encumbered -- even though the
accounts receivable were subject to MAPFRE's security interest.
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that MAPFRE had received claims from contractors on Builders's
projects for payment for the cost of labor or materials under the
surety bonds that MAPFRE had issued for Builders's projects with
the Commonwealth. The letter further informed the Financing
Authority that, per the terms of MAPFRE's indemnification
agreement with Builders, payments from the Financing Authority for
the costs of Builders's construction projects in Cabo Rojo were to
be sent to MAPFRE and made payable jointly to Builders and MAPFRE.
Approximately one week later, Builders also informed the Financing
Authority that it should send all future payments for Builders's
work on the construction projects in Cabo Rojo to MAPFRE and that
the payments should be made out jointly to MAPFRE and Builders.
Notwithstanding these instructions, the Financing
Authority on May 23, 2016, deposited $537,924.18 directly into
Builders's Deposit Account at Oriental Bank. The Financing
Authority did not in doing so make any payment to MAPFRE. At the
time of the Financing Authority's deposit of the more than $500,000
into Builders's Deposit Account, Builders had yet to repay in full
the amount that it owed to Oriental Bank on its lines of credit.
Under Puerto Rico law, a bank with "a security interest
in a deposit account perfected by control . . . may apply the
balance of the deposit account to the obligation secured by the
deposit account." P.R. Laws Ann. tit. 19, § 2367(a)(4). Acting
pursuant to that provision, Oriental Bank applied $464,757.60 from
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the balance deposited into Builders's Deposit Account against the
outstanding balance on Builders's lines of credit.
The following day, the Financing Authority
unsuccessfully attempted to reverse the deposit that it had made
to Builders's Deposit Account with Oriental Bank. Moreover, the
Financing Authority sent Oriental Bank a letter the following week
that explained its error in not making any payment to MAPFRE and
instead making the deposit directly into Builders's Deposit
Account. Oriental Bank did not return the money that it had taken
from Builders's Deposit Account to use as a set-off in connection
with the debt that Builders owed it.
The Financing Authority followed up with another letter
to Oriental Bank on December 12, 2017, in which the Financing
Authority again requested that the funds in question be turned
over to MAPFRE. Oriental Bank again did not do so.
MAPFRE sent its own letter to Oriental Bank on July 1,
2016, in which it requested that Oriental Bank send to MAPFRE the
money that it had taken from Builders's Deposit Account as a set-
off of Builders's debt to Oriental Bank. Builders sent a similar
letter of its own. Oriental Bank did not take the action requested
in either letter.
Builders filed for bankruptcy under Chapter 11 of the
Bankruptcy Code on August 20, 2016. Builders then brought an
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adverse action against the Financing Authority and Oriental Bank
on January 12, 2017.
The complaint set forth four claims under §§ 542 and 543
of the Bankruptcy Code. Those provisions of the Code require all
the debtor's property to be delivered to the trustee.4
Counts One and Two of Builders's complaint allege,
respectively, that under §§ 542 and 543, the Financing Authority
is required to turn over the funds Builders alleges that the
Financing Authority still owes it for the construction projects in
Cabo Rojo. Builders alleges in those two counts that the Financing
Authority did not satisfy its obligations to Builders by directly
depositing funds into Builders's Deposit Account because Builders
had instructed the Financing Authority to send those funds directly
to MAPFRE. Counts Four and Five allege, under §§ 542 and 543 of
the Bankruptcy Code, that Oriental Bank is required to return the
funds that it took from Builders's Deposit Account as a set-off,
4 11 U.S.C. § 542(a) provides that:
[A]n entity, other than a custodian, in
possession, custody, or control . . . of
property that the trustee may use, sell, or
lease under [§] 363 of this title, or that the
debtor may exempt under [§] 522 of this title,
shall deliver to the trustee, and account for,
such property or the value of such property,
unless such property is of inconsequential
value or benefit to the estate.
11 U.S.C. § 543(b) provides similarly for "custodians" of
such property.
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so that those funds can be delivered to MAPFRE, which the complaint
further alleges has a senior claim as to those funds. Count Three
of the complaint alleges that "[u]nder Puerto Rico [l]aw[,] the
wrongly made payment does not extinguish the obligation" that the
Financing Authority has under its construction contract with
Builders for the construction projects in Cabo Rojo, such that the
Financing Authority still owes Builders a debt under that contract
that must be paid.
Oriental Bank moved to dismiss Builders's complaint
under Federal Rule of Civil Procedure 12(b)(6) on February 6, 2017.
The Bankruptcy Court denied the motion.
On April 3, 2017, MAPFRE intervened in Builders's
adverse action, and on May 26, 2017, MAPFRE filed its own complaint
against Builders, the Financing Authority, and Oriental Bank.
MAPFRE requested in that complaint, among other things, that
Oriental Bank turn over the funds that had been deposited by the
Financing Authority in Builders's Deposit Account.
Following the Bankruptcy Court's denial of Oriental
Bank's motion to dismiss, Oriental Bank answered Builders's
complaint on June 2, 2017. As part of the answer, Oriental Bank
brought a counterclaim against Builders, in which Oriental Bank
alleged that, under Puerto Rico law, it had a valid, enforceable
lien against Builders's accounts receivable and Deposit Account
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and thus that it was entitled under 11 U.S.C. § 553 to set off the
amount that Builders owed to it on Builders's lines of credit.5
That same day, Oriental Bank answered MAPFRE's
intervenor complaint and brought a counterclaim against MAPFRE.
Oriental Bank's counterclaim alleged that Oriental Bank's secured
interest in Builders's accounts receivable and Deposit Account was
senior to that of MAPFRE, such that Oriental Bank was entitled to
keep the funds that it had taken from Builders's Deposit Account
as a set-off of the debt owed to it by Builders.
The Financing Authority answered Builders's and MAPFRE's
complaints on June 2, 2017. MAPFRE answered Oriental Bank's
counterclaim on June 26, 2017. And, finally, on July 11, 2017,
Builders answered both Oriental Bank's counterclaim as well as
MAPFRE's intervenor complaint.
Thereafter, motions for summary judgment were filed, and
Builders moved to convert its Chapter 11 bankruptcy petition to a
Chapter 7 petition. The Bankruptcy Court granted that motion on
5 11 U.S.C. § 553(a) provides, with a few exceptions that are
not relevant to this appeal, that:
[The Bankruptcy Code] does not affect any
right of a creditor to offset a mutual debt
owing by such creditor to the debtor that
arose before the commencement of the case
under this title against a claim of such
creditor against the debtor that arose before
the commencement of the case.
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April 27, 2018, and a trustee was appointed. The trustee elected
to join the summary judgment motion that MAPFRE had filed.
In response to the summary judgment motions, the
Bankruptcy Court on March 31, 2020, granted summary judgment to
MAPFRE and the trustee on their claims against Oriental Bank,
granted summary judgment in favor of MAPFRE and the trustee on the
claims that Oriental Bank asserted against those parties, and
granted summary judgment in favor of the Financing Authority as to
the claims asserted against it by Builders and MAPFRE. See
Rentas v. Oriental Bank (In re Builders Holding Co.), 617 B.R.
414, 428-29 (Bankr. D.P.R. 2020). In so ruling, the Bankruptcy
Court held that Oriental Bank's set-off was not permitted under
the Bankruptcy Code because the Financing Authority had made a
payment to Builders that was a payment in error under Article 1795
of the Puerto Rico Civil Code, P.R. Laws Ann. tit. 31, § 5121,6
and Oriental Bank was thus required to return the funds mistakenly
paid to Builders's Deposit Account to the payor, the Financing
Authority, which had been instructed by MAPFRE and Builders to
make the payment directly to MAPFRE. In re Builders Holding Co.,
617 B.R. at 427-28.
6 Article 1795, translated, states that "[i]f 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.
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On April 14, 2020, Oriental Bank filed a motion for
reconsideration with the Bankruptcy Court. The Bankruptcy Court
denied the motion on November 5, 2020. See In re Builders Holding
Co., Ch. 11 Case No. 16-06643, Adv. No. 17-00012, 2020 WL 6538587,
at *2 (Bankr. D.P.R. Nov. 5, 2020).
Oriental Bank then appealed the Bankruptcy Court's
rulings against it to the United States District Court for the
District of Puerto Rico. The District Court affirmed the
Bankruptcy Court's grants of summary judgment on March 4, 2021,
finding that the Bankruptcy Court correctly applied Article 1795.
See Oriental Bank v. Builders Holding Co., 626 B.R. 1, 11-12
(D.P.R. 2021). Oriental Bank timely appealed from that ruling.7
II.
The Bankruptcy Court held that 11 U.S.C. § 553 did not
permit Oriental Bank to use the funds that the Financing Authority
had deposited into Builders's Deposit Account as a set-off for the
debt that Builders owed to it. In re Builders Holding Co., 617
B.R. at 427-28. The Bankruptcy Court explained that this was so
because, under § 553(a), a creditor may set off funds owed to it
7 We note that the parties appear to treat the Bankruptcy
Court as having granted summary judgment in favor of the Financing
Authority on claims against it by Oriental Bank. It does not
appear, however, that Oriental Bank brought any such claims. In
addition, we note, MAPFRE and the trustee have not appealed the
rulings granting summary judgment in favor of the Financing
Authority on its claims against that entity.
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by a debtor in bankruptcy if the creditor would have been able to
do so if the debtor had not filed for bankruptcy. And, the
Bankruptcy Court concluded, if Builders had not filed for
bankruptcy, Oriental Bank would not have had any right under Puerto
Rico law, given Article 1795, to the funds that the Financing
Authority had deposited directly in Builders's Deposit Account.
Id. It was on that basis, and that basis alone, that the Bankruptcy
Court granted summary judgment against Oriental Bank on all the
claims at issue in the adverse action that involved Oriental Bank.
The District Court rejected Oriental Bank's challenge to that
ruling.
Litigants in a bankruptcy proceeding ordinarily "must
first appeal to the district court" and then "courts of appeals
are . . . available as a second tier of appellate review," but,
"[d]espite this sequencing, we cede no special deference to the
determinations made by the first-tier tribunal . . . [and] assess
the bankruptcy court's decision directly." City Sanitation, LLC
v. Allied Waste Servs. Mass., LLC (In re Am. Cartage, Inc.), 656
F.3d 82, 87 (1st Cir. 2011). We thus review the Bankruptcy Court's
grant of summary judgment de novo. See Desmond v. Varrasso (In re
Varrasso), 37 F.3d 760, 763 (1st Cir. 1994).8
8MAPFRE contends that we should review the Bankruptcy Court's
determination that the set-off here was not permissible under the
Bankruptcy Code for an abuse of discretion. Notwithstanding
whether that would be the appropriate standard of review in some
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In challenging the grant of summary judgment to the
Financing Authority, Oriental Bank argues to us that "the Financing
Authority did not show or prove the requirements to establish a
cause of payment made in error." See P.R. Laws Ann. tit. 31,
§ 5126 ("The proof of payment is incumbent upon the person who
claims to have made the same. He shall also be obliged to prove
the error under which he made it."). For that reason, Oriental
Bank contends, the Bankruptcy Court erred in ruling that Oriental
Bank was obligated to return the money that it had set off against
Builders's debt to it.
According to the Supreme Court of Puerto Rico,
Article 1795 applies when: (1) a "payment [is] produced for the
purpose of extinguishing an obligation;" (2) "the payment made
does not have a just cause, that is, that there is no legal
obligation between the payer and the receiver, or if the obligation
exists, that it [is] for less than the amount paid;" and (3) "the
payment was made by mistake and not out of sheer generosity or any
other reason." Puerto Rico v. Crespo Torres, 180 P.R. Dec. 776,
circumstances when § 553 is at issue, here, we conclude that the
Bankruptcy Court's application of the payment-in-error doctrine
was legally incorrect. As such, even if the standard were abuse
of discretion, we would still reverse the Bankruptcy Court's grant
of summary judgment and remand for further proceedings. See
Saka v. Holder, 741 F.3d 244, 250 (1st Cir. 2013) ("Any error of
law is, inherently, an abuse of discretion.").
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793-94 (2011).9 Thus, given how the Supreme Court of Puerto Rico
has construed Article 1795, we must identify the "receiver" of the
"payment" from the "payer."
The complication for the Financing Authority here is
that it is not claiming that, under Article 1795, Builders is
required to return a "payment" that Builders "received" from the
Financing Authority. The Financing Authority is claiming that,
under that doctrine, Oriental Bank is required to return a
"payment" that Oriental Bank "received" from the Financing
Authority.
The Financing Authority did not make a "payment" to
Oriental Bank in its own right, however. The Financing Authority
made a "payment" to Builders, which had a deposit account with
Oriental Bank, by transferring its funds directly into that
account. Thus, strictly speaking, only Builders made a "payment"
that Oriental Bank itself "received" (though Builders made the
payment to Oriental Bank only because Builders received funds
through the payment that it had received from the Financing
Authority).
The consequence of this chain of transactions -- and the
party from which the Financing Authority is seeking recoupment --
9 The Supreme Court of Puerto Rico's opinion in this case was
written in Spanish. Oriental Bank thus submitted a certified
translation of this case in its briefing to us, and it is that
translation that we quote in this opinion.
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is that the question presented here is whether Article 1795 applies
even when there is this level of remove between the "payer" and
the "receiver," Crespo Torres, 180 P.R. Dec. at 793-94; see Phoung
Luc v. Wyndham Mgmt. Corp., 496 F.3d 85, 88 (1st Cir. 2007) (When
"apply[ing] the state's law on substantive issues[,] . . . 'we are
bound by the teachings of the state's highest court.'" (quoting N.
Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35, 37–38 (1st Cir.
2001))); Carrasquillo-Serrano v. Municipality of Canovanas, 991
F.3d 32, 40 (1st Cir. 2021) (explaining that for purposes akin to
ours' here, "Puerto Rico is the functional equivalent of a
state[,] . . . [and] an on-point decision of the Puerto Rico
Supreme Court normally will control" (quoting Gonzalez Figueroa v.
J.C. Penney P.R., Inc., 568 F.3d 313, 318 (1st Cir. 2009))). It
is not at all natural, however, to refer to a third party to a
transfer of funds -- as Oriental Bank is here, given that the
transfer, at least initially, was only between the Financing
Authority and Builders -- as the "receiver" of the funds from that
transfer by the "payer." Yet, neither MAPFRE nor the Financing
Authority develops an argument to us as to how we may construe
Article 1795 to apply to situations like this one beyond merely
asserting (unpersuasively) that the face of the statute compels
the conclusion. Nor does either the Bankruptcy Court or the
District Court explain why such a construction would be correct.
We thus conclude that the Bankruptcy Court was wrong to find that
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Article 1795 compelled the return of funds Oriental Bank set off
against Builders's debt to it. See S. Commons Condo. Ass'n v.
Charlie Arment Trucking, Inc., 775 F.3d 82, 91 (1st Cir. 2014)
(noting that plaintiffs, "having chosen a federal forum to seek
relief that depends at least in part on the meaning of state law,
should not 'expect the federal court to steer state law into
unprecedented configurations'" (quoting Santiago v. Sherwin
Williams Co., 3 F.3d 546, 549 (1st Cir. 1993))); see also Phoung
Luc, 496 F.3d at 88 ("As a federal court, we will not create new
rules or significantly expand existing rules. We leave those tasks
to the [Commonwealth] courts.").10
That said, there remains a question whether the set-off
that Oriental Bank asserts here is senior to the secured interest
that MAPFRE has in the same collateral under Puerto Rico law, as
well as the seemingly fact-laden question (to the extent that it
is contested) as to whether Oriental Bank's set-off was a "mutual
debt," 11 U.S.C. § 553(a); see In re Pub. Serv. Co. of N.H., 884
F.2d 11, 14 (1st Cir. 1989) ("[A] set[-]off may flourish in
10 We note that neither MAPFRE nor the Financing Authority
asks us to certify this question to the Supreme Court of Puerto
Rico, even though the Financing Authority identifies no Puerto
Rico court case in which Article 1795 has been applied in a
circumstance in which the party relying on the payment-in-error
doctrine seeks to recover funds that were paid to a third party
pursuant to a transfer that was otherwise valid when made (as is
seemingly the case with the transfer from Builders to Oriental
Bank).
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bankruptcy proceedings only where mutuality of obligation exists:
a prepetition debt, i.e., a debt which arose prior to commencement
of the bankruptcy case, is owed by Creditor A to Debtor, while at
the same time Creditor A has some claim against Debtor which
likewise arose prior to commencement of the bankruptcy case.").
In addition, § 553 of the Bankruptcy Code remains available only
if Oriental Bank's set-off is otherwise valid under Puerto Rico
law, which may implicate other doctrines such as the doctrine of
unjust enrichment. See Gov't of Puerto Rico v. Carpenter Co., 442
F. Supp. 3d 464, 476-77 (D.P.R. 2020) (describing the "civil law
equity doctrine" of unjust enrichment as recognized by Puerto
Rico). We thus remand this case to the Bankruptcy Court, see
Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 36 (1st Cir.
1994), for further proceedings in which those questions may be
addressed, including by determining whether the proper course may
be to certify to the Supreme Court of Puerto Rico any question of
Puerto Rico law that may be implicated by what remains to be
decided.
III.
For these reasons, we vacate the grant of summary
judgment against Oriental Bank as to the claims asserted against
it that are at issue in this appeal and the grant of summary
judgment in favor of Builders and MAPFRE on Oriental Bank's claims
against those parties. We remand for further proceedings
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consistent with this opinion. The parties shall bear their own
costs.
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