Rentas v. Oriental Bank (In re Builders Holding Co.)

617 B.R. 414

IN RE: BUILDERS HOLDING CO., CORP., Debtor.

Noreen Wiscovitch Rentas, Trustee for the Estate of Builders Holding Co., Corp., Plaintiff,

v.Oriental Bank and the Puerto Rico Financing Authority, Defendants.

Mapfre PRAICO Insurance Company and Endurance Assurance, Intervenor-Plaintiff,

v.Oriental Bank, Builders Holding Co., Corp., and the Puerto Rico Financing Authority, Intervenor-Defendants.

Oriental Bank, Counter-Claimant,

v.Builders Holding Co., Corp., and Mapfre PRAICO Insurance Company and Endurance Assurance, Counter-Defendants.

Case No. 16-06443 (EAG)

Adv. Proceeding No. 17-00012

United States Bankruptcy Court, D. Puerto Rico.

Signed March 31, 2020

Fausto David Godreau Zayas, Godreau & Gonzalez Law, Javier Vilarino, Vilarino & Associates LLC, San Juan, PR, for Plaintiffs.

Luis Ramon Ortiz Segura, Oliveras & Ortiz, Daniel Molina Lopez, MCD Law, LLC, Juan Carlos Berrios, San Juan, PR, for Defendants.

Cristina A. Fernandez Rodriguez, MCD Law, LLC, San Juan, PR, for Defendants/Counter-Claimant.

Jose A. Sanchez Girona, Saldana, Carvajal & Velez-Rive, PSC, San Juan, PR, for Intervenor-Plaintiff/Counter-Defendant.

OPINION AND ORDER

Edward A. Godoy, U.S. Bankruptcy Judge

While seeking reorganization under chapter 11, debtor Builders Holding Co., Corp. filed a complaint against the Puerto Rico Financing Authority and Oriental Bank under Puerto Rico law and sections 542, 543, and 547 of the Bankruptcy Code.¹ The complaint prays for judgment directing the Financing Authority to pay again progress-payment money deposited by mistake in the debtor's account at Oriental Bank, but that had to be paid to Mapfre PRAICO Insurance Company and Endurance Assurance Corporation under an agreement of indemnity. The Financing Authority admits to the mistake and attempted to reverse the electronic deposit, but was unable to do so because Oriental Bank setoff most of the money against a secured debt of the debtor under a line of credit. The debtor requested, in the alternative, that the court enter judgment ordering Oriental Bank to return the money it setoff.

The court allowed MAPFRE to intervene in the case since it had an interest in the money at the time of the deposit in the debtor's bank account at Oriental Bank. As a result, MAPFRE filed an intervenor's complaint against the debtor, the Financing Authority, and Oriental Bank, requesting the turnover of the money.

In turn, Oriental Bank counterclaimed against the debtor and MAPFRE claiming it had a valid and enforceable lien over the debtor's accounts receivables under the Puerto Rico Commercial Transactions Act (P.R. Law. Ann. tit. 19 §§ 401-2409) (hereinafter "the CTA") and that it exercised its right to setoff a debt under Puerto Rico law. Oriental contends that in this case the requirements for setoffs under section 553 were met, and that its setoff is not subject to either section 542 or 547.

The debtor eventually moved to convert to chapter 7 and a trustee was appointed to the case.

Pending before the court are four cross-motions for summary judgment: (i)the debtor's, now represented by the chapter 7 trustee, against Oriental Bank and the Financing Authority [Adv. Dkt. Nos. 73, 74 & 75]; (ii) MAPFRE's, against Oriental Bank and the Financing Authority [Adv. Dkt. No. 92]; (iii) the Financing Authority's, against Oriental Bank [Adv. Dkt. No. 93]; and (iv) Oriental Bank's, against MAPFRE and the debtor [Adv. Dkt. Nos. 110, 111, 112 & 114.] The chapter 7 trustee has joined MAPFRE's position. [Adv. Dkt. No. 136.]

For the reasons stated below, the motions for summary judgment filed by MAPFRE [Adv. Dkt. No. 92] and joined by the trustee [Adv. Dkt. No. 136], and the Financing Authority [Adv. Dkt. No. 93] are granted. Oriental Bank is ordered to turn over to MAPFRE and the chapter 7 trustee, jointly, the money it setoff from the debtor's bank account.

I. JURISDICTION

This court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a), Local Civil Rule 83K(a), and the General Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of Puerto Rico dated July 19, 1984 (Torruella, C.J.). While Oriental Bank had argued that this is a non-core proceeding that would exist outside of bankruptcy, it has consented that this court hear the matter and enter final judgment. [Adv. Dkt. No. 9, ¶14.]

II. PROCEDURAL BACKGROUND

On August 20, 2016, debtor Builders Holding Co., Corp. filed a chapter 11 bankruptcy petition, which was docketed as case number 16-06643. [Bankr. Dkt. No. 1.] The debtor commenced, on January 12, 2017, this adversary proceeding against the Financing Authority and Oriental Bank. [Bankr. Dkt. No. 172; Adv. Dkt. No. 1.]

On May 19, 2017, the court held an initial scheduling conference where it granted in open court a pending motion for MAPFRE to intervene in the case. [Adv. Dkt. Nos. 26, 28 & 38.] On May 26, 2017, MAPFRE filed an amended intervenor's complaint against the debtor, the Financing Authority, and Oriental Bank. [Adv. Dkt. No. 39.] On June 2, 2017, Oriental Bank answered the complaint and counterclaimed against the debtor. [Adv. Dkt. No. 43.] On the same date, Oriental bank answered the intervenor's complaint and counterclaimed against MAPFRE. [Adv. Dkt. No. 44.] On June 2, 2017, the Financing Authority answered the debtor's and MAPFRE's complaints. [Adv. Dkt. Nos. 45 & 46.] On June 27, 2017, MAPFRE answered Oriental Bank's counterclaim. [Adv. Dkt. No. 49.] On July 11, 2017, the debtor answered both the counterclaim filed by Oriental and MAPFRE's complaint. [Adv. Dkt. Nos. 51 & 52.]

On November 16, 2017, the debtor moved for summary judgment against the Financing Authority and Oriental Bank. [Adv. Dkt. Nos. 73, 74 & 75.] On November 29, 2017, the debtor supplemented its motion for summary judgment with certified English translations of documents filed at docket number 74. [Adv. Dkt. No. 79.] On April 12, 2018, MAPFRE moved for summary judgment against the debtor, Oriental Bank, and the Financing Authority. [Adv. Dkt. No. 92.] And, on April 13, 2018, the Financing Authority moved for summary judgment against Oriental Bank. [Adv. Dkt. No. 93.] On April 18, 2018, the Financing Authority supplemented its motion for summary judgment with a declaration under penalty of perjury. [Adv. Dkt. No. 97.] On April 19, 2018, Oriental Bank opposed the debtor's motion for summary judgment. [Adv. Dkt. Nos. 99, 100 & 101.]

On April 27, 2018, the debtor moved to convert its chapter 11 case to chapter 7, which the court granted on the same date. [Bankr. Dkt. Nos. 396 & 398.]

On May 4, 2018, Oriental Bank supplemented its response to the debtor's motion for summary judgment with certified translations of supporting documents. [Adv. Dkt. No. 108.] On May 25, 2018, Oriental Bank opposed the motions for summary judgment filed by MAPFRE and the Financing Authority. [Adv. Dkt. Nos. 110, 111 & 112.] On June 14, 2018, MAPFRE replied to Oriental Bank's opposition. [Adv. Dkt. No. 113.] On June 20, 2018, Oriental Bank also supplemented its legal brief filed at docket numbers 101 and 112. [Adv. Dkt. No. 114.]

On July 20, 2018, the court stayed this adversary proceeding pending a report from the trustee given the conversion to chapter 7 of the case. [Adv. Dkt. No. 126.]

On May 1, 2019, MAPFRE and the chapter 7 trustee filed a stipulation in the main bankruptcy case where they agreed that the trustee would prosecute this adversary jointly with MAPFRE until its resolution; that MAPFRE would cover all attorneys' fees and costs incurred in said prosecution; that MAPFRE would pay $25,000 for the benefit of unsecured creditors regardless of the outcome of the case; and that MAPFRE would pay an additional $25,000 if the court rules in favor of MAPFRE and the trustee. [Bankr. Dkt. No. 509.] The court approved the stipulation on May 28, 2019. [Bankr. Dkt. No. 513.]

On August 23, 2019, the court ordered the chapter 7 trustee to state whether she joined MAPFRE's motion for summary judgment at docket numbers 92 and 93.[Adv. Dkt. No. 136.] On September 13, 2019, the trustee filed her motion in compliance with the order and a legal brief. [Adv. Dkt. No. 136.] On September 20, 2019 Oriental Bank filed a motion for leave to reply to the trustee's brief at docket number 136 and submitted its brief. [Adv. Dkt. No. 137.]

III. UNCONTESTED FACTS

The following facts are uncontested pursuant to Rule 56 and Local Civil Rule 56, made applicable to these proceedings by Bankruptcy Rule 7056 and Local Bankruptcy Rules 1001-1(b) and (d), as found in the record of this case and the statements of proposed uncontested facts filed by the parties:

a. Agreement of Indemnity between C.D. Builders and MAPFRE

On August 5, 2010, C.D. Builders, Inc. executed an Agreement of Indemnity with MAPFRE. [Plaintiff's Statement of Proposed Facts ("SUF") ¶ 1, Adv. Dkt. No. 74; Agreement of Indemnity, Adv. Dkt. No. 74, pp. 8-21.]² C.D. Builders promised to exonerate, hold harmless, and indemnify MAPFRE for any and all actual or potential loss as a consequence of the execution of bonds on its behalf. [Plaintiff's SUF ¶ 2, Adv. Dkt. No. 74; Agreement of Indemnity, Adv. Dkt. No. 74, p. 9 at ¶3.]

To comply with its indemnity obligations, C.D. Builders assigned to MAPFRE all rights, title, and interest in all bonded contracts, including its rights to any and all sums due or which may become due under all bonded contracts. [Plaintiff's SUF ¶ 3, Adv. Dkt. No. 74; Agreement of Indemnity, Adv. Dkt. No. 74, p. 10 at ¶4.]

Paragraph 8 of the Agreement of Indemnity provides the following:

All payments received for or on account of any CONTRACT shall be held in a trust fund to assure the payment of obligations incurred or to be incurred in the performance of any CONTRACT and for labor, materials, and services furnished in the prosecution of the work in any CONTRACT or any extension or modification thereof. All moneys due and to become due under any CONTRACT are also trust funds, whether in the

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