Puerto Rican Motion to Dismiss Clawbacks Hinges On Court’s Interpretation of PR Mortgage Foreclosure Law

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July 19, 2022, US Bankruptcy Court for Puerto Rico – Perfect Price, Inc.; Latin Investment Corp. et al. (“Defendants”) file a motion to dismiss the complaint of BLD Realty, Inc. (“Debtor”) under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The complaint seeks damages for alleged violation of automatic stay and to avoid and recover alleged preferential and fraudulent transfers. 

By background, BLD Realty had taken two loans from Banco BBVA Vizcaya Argentina by mortgaging two lots of land located at Barrio Espinoza in Vega Alta Puerto Rico. On the Debtor’s default, a consent judgment was entered in favor of BBVA establishing that the mortgaged properties would be executed in favor of BBVA. In 2021, these loans were purchased by Defendant Latin Investment Corp. which immediately moved to foreclose on the mortgaged properties and for the public sale of the same. Latin Investment used the BBVA judgment lien to acquire the mortgaged properties at the public sale.

BLD Realty alleges that Defendant Latin Investment Corp. is a “shell corporation”, directly related to the owners of Defendants Perfect Price, Inc. and La Perfecta Corp. The allegations include that the Defendants are all related and “under the veil of corporate entities”, have allegedly “colluded” against the Debtor to take title of the property. BLD Realty seeks to clawback the mortgaged properties from the Defendants as alleged preference and fraudulent transfers.

The complaint is based on the Debtor’s averment that the mortgaged properties constitute a part of the Debtor’s estate. Debtor BLD Realty claims that as of the bankruptcy filing date, BLD Realty had an interest in the mortgaged properties because the sale of the properties had not been approved by the Puerto Rico Court of First Instance. The Defendants attempt to counter this claim by citing Puerto Rico Bankruptcy Court’s decision in In re Diana I. Lagares Santana on January 24, 2020. The Defendants claim that the Puerto Rico law does not consider confirmation order of the sale of mortgaged assets as a prerequisite to the execution of the public transfer deed between the marshal and the buyer. The Defendants claim that the Puerto Rico law considers the execution of the transfer deed as equivalent to the transfer of title in the concerned assets.

The Defendants allege that the chronology of events favors their arguments. The judicial sale of the mortgaged properties was held on March 15, 2022, the transfer deed was executed on March 23, 2022, and the bankruptcy petition was filed on March 24, 2022. Since the transfer deed was executed pre-petition, the Defendants contend that BLD Realty cannot avoid the said transfer. The Defendants claim that after the execution of transfer deed, the mortgaged properties do not constitute a part of the Debtor’s estate.

The Defendants also allege that the confirmation order entered on March 28, 2022 was not a violation of the automatic stay, claiming that the Mortgage Law of Puerto Rico does not intend the requirement of confirmation order to halt the sale or transfer of the property. 

The Defendants also deny the allegations of “collusion” and “fraud” claiming that the complaint fails the requirements of Rule 9(b) of the Federal Rules of Civil Procedure, being allegedly devoid of particularity as to the circumstances constituting fraud against all co-defendants which could warrant piercing of the corporate veil.

BLD Realty, Inc. v. Perfect Price, Inc. (In re BLD Realty, Inc.), AP No. 22-00034, US Bankruptcy Court for the District of Puerto Rico.

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