In re Manuel Mediavilla, Inc.

505 B.R. 94

In re MANUEL MEDIAVILLA, INC., Debtor. In re Manuel Mediavilla & Maydin G. Melendez, Debtors.

No. 13–2800 (MCF).

United States Bankruptcy Court, D. Puerto Rico.

Jan. 14, 2014.

Carmen D. Conde Torres, Luisa S. Valle Castro, C Conde & Associates, San Juan, PR, for Debtor.

AMENDED OPINION AND ORDER

MILDRED CABAN FLORES, Bankruptcy Judge.

Before the Court are cross motions for summary judgment and oppositions thereto in relation to PRLP 2011 Holdings L.L.C.'s (hereinafter “PRLP”) Motion for Entry of Order Prohibiting the Use of its Cash Collateral by the corporate debtor, Manuel Mediavilla Inc. (hereafter “MMI”), and individual debtors, Manuel Mediavilla and Maydín Meléndez (hereafter the “Mediavillas”) (all three jointly referred to as “Debtors”).

Two main issues have to be addressed in order to determine whether several collateral assignment of rents provide PRLP a right to cash collateral under § 363 of the Bankruptcy Code.¹ First, does a creditor need to perfect a pre-petition rent assignment, according to state law, in order to extend its security interest post-petition? Second, if such pre-petition perfection is necessary, how are rent assignments perfected according to Puerto Rico Law? As to the first issue, the Court determines that § 552 of the Bankruptcy Code does require a valid pre-petition interest in order to extend a security interest post-petition and such pre-petition interest is created in accordance to state law requirements. In regards to the second issue, an assignment of rents is perfected when it is considered to have a fixed date, according to the Puerto Rico Civil Code ² (“Civil Code”) as interpreted by the Puerto Rico Supreme Court. Since duly notarized assignment of rents are considered authentic documents with a fixed date, the various collateral assignment of rent agreements executed between the parties pre-petition were duly perfected. As a result, PRLP has a valid security interest over all the rental proceeds generated by Debtors' commercial properties.

For the reasons expressed below, the Court Grants PRLP's Motion for Summary Judgment, Denies Debtors' Motion for Summary Judgment and consequently grants PRLP's Motion Prohibiting the Use of its Cash Collateral.

I–JURISDICTION

The Court has jurisdiction to hear this case, pursuant to 28 U.S.C. § 157(a) and the general order of the United States District Court dated July 19, 1984, which refers title 11 proceedings to the Bankruptcy Court (Torruellas, C.J.). This is a core proceeding, pursuant to 28 U.S.C. § 157(b).

II–MOTION FOR SUMMARY JUDGMENT

By agreement of the parties, this matter is appropriate for summary judgment disposition as there are no material facts in dispute and one of the parties is entitled to judgment as a matter of law, pursuant to Fed.R.Civ.P. 56(c), as made applicable to these proceedings by virtue of Fed. R. Bankr.P. 7056. Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)); Vega–Rodriguez v. Puerto Rico Tel. Co., 110 F.3d 174, 178 (1st Cir.1997).

III–UNDISPUTED MATERIAL FACTS

1. PRLP is a corporation incorporated under the laws of the Commonwealth of Puerto Rico.

2. MMI is a corporation incorporated under the laws of the Commonwealth of Puerto Rico.

3. The Mediavillas are the personal and joint guarantors of MMI's obligations to PRLP.

4. Debtors are the owners of six commercial properties that are currently leased to nine different tenants.³

5. Prior to the filing of the bankruptcy petitions, Debtors entered into several commercial transactions with Banco Popular de Puerto Rico (“BPPR”) between 2006 and 2011.

6. The commercial transactions between BPPR and Debtors underwent several amendments in order

to enhance the collateral provided to BPPR and to extend the maturity period of the loans.

7. Debtors and BPPR executed several Collateral Assignment of Lease Agreements whereby all the rent proceeds of Debtors' properties would serve as collateral in favor of BPPR.

8. Every assignment of rent agreement executed by the parties was duly authenticated by a notary public through an affidavit.

9. BPPR filed financing statement # 2011001744 in the Puerto Rico Department of State (“Department of State”) in relation to the collateral assignment of MMI's commercial leases for the properties located at Font Martelo # 148 and # 150, Humacao, Puerto Rico.

10. No financing statement has been filed in relation to Debtors' remaining collateral assignment of lease agreements in favor of BPPR.

11. Assignment of rent clauses are not included in any recorded mortgages encumbering Debtors' properties.

12. On September 29, 2011, BPPR transferred its claims to PRLP as part of purchase of credits agreement between the two entities.⁴

13. On September 19, 2012, BPPR commenced a civil action against Debtors for foreclosure of mortgages and collection of money in the Puerto Rico Court of First Instance, Humacao Section.

14. On March 8, 2013, the Local Court issued an order of attachment on Debtors' personal property, including all rents produced by Debtors' real properties.

15. On March 25, 2013, Debtors filed a Certiorari before the Puerto Rico Court of Appeals.

16. On April 11, 2013, before the Court of Appeals resolved the matter, Debtors filed for bankruptcy under Chapter 11 and the Local Court case was stayed.

17. The MMI and Mediavilla cases were administratively consolidated on May 23, 2013.

18. On June 28, 2013, PRLP filed a motion to prohibit the use of cash collateral and requesting the tender of the rent proceeds from the Debtors' properties.

19. On July 11, 2013, PRLP filed Proof of Claim Number 9 for $2,635,138.28.

20. On July 15, 2013, Debtors objected to the request for the prohibition of the use of cash collateral.

21. Debtors are making monthly payments of $7,200 to PRLP in relation to the two properties (Font Martelo # 148 and # 150) recorded in the Department of State.

IV–PARTIES' CONTENTIONS

PRLP filed a motion objecting to Debtors' use of its alleged cash collateral without its consent and without providing adequate protection for the diminution of the value of its collateral. PRLP proffers that it has valid perfected pre-petition and post-petition liens over all of Debtors' rents by virtue of several duly notarized assignment of rent agreements. PRLP argues that its pre-petition liens on Debtors' rents had been duly perfectedas required by state law pursuant to the applicable provisions of the Civil Code as interpreted by the Puerto Rico Supreme Court. As such, the prepetition liens extend to post-petition rent proceeds as provided by § 552 of the Bankruptcy Code.

Debtors assert that they are making proper cash collateral payments to PRLP on the two properties for which creditor holds a valid perfected lien on Debtors' rents. They also assert that for the leases with unperfected liens a cash collateral payments is unnecessary and Debtors are allowed to keep such proceeds to further their reorganization purposes. Debtors allege that since an assignment of rent is a personal right it cannot gain access into the Registry of Property. Therefore, by default, it can only be perfected when it is recorded in the Department of State which is the only other public registry available for commercial transactions that provides notice to third parties. Debtors explain that Article 9–104(j) ⁵ of the Commercial Transactions Act ⁶ (the “Commercial Transactions Act”) is inapplicable to our Civil Law tradition and the more general provision found in Article 9–102 ⁷ regarding assignment of credits should be applied. Furthermore, Debtors allege that the leading case law from the Supreme Court of Puerto Rico regarding assignment of rents and the applicability of the Civil Code pre-dates the enactment of the Commercial Transactions Act and is not applicable to the present circumstances. Finally, Debtors allege that the Civil Code does not provide for a private assignment to be perfected and enforceable against third parties by establishing a date certain since no public notice of the agreement is provided.

PRLP rejects the necessity of recordation of a financing statement in the Department of State since the text of Article 9–104(j) of the Puerto Rico Secured Commercial Transactions Act specifically excludes assignment of rents from the statute's application.⁸ Alternatively, if this Court deems that PRLP did not have a perfected pre-petition lien on rents, PRLP purports that the Bankruptcy Code by virtue of § 552(b)(2) grants post-petition security without the need to comply with state law pre-petition perfection requirements. It concludes that Congress' intent when it added § 552(b)(2) to the Bankruptcy Code was to exempt holders of security agreements from having to comply with varying state law perfection requirements in order to obtain a valid post-petition interest on rents.

It is undisputed that the parties entered into several assignment of rent agreements which would constitute PRLP's cash collateral if perfected in accordance to § 552(b).⁹ Although rents typically constitute cash collateral under § 363(a), the rents must be subject to a security interest as provided in § 552.¹⁰ To this effect, Debtors are tendering the corresponding cash collateral payments for the lease assignments that have been registered in the Department of State. Payments are not being tendered for the rents of the remaining lease assignments not registered in the Department of State. We must, therefore, determine whether Debtors' leases are subject to a security interest under § 552(b) that may warrant the prohibition of the use of cash collateral.

A hearing was held on July 17, 2013, to consider PRLP's request for the prohibition of use of cash collateral and Debtors' response. Subsequently, cross-motions for summary judgments and corresponding replies were filed and an oral argument was held on August 22,...