Petition for Writ of Certiorari — Banco Cooperativo de Puerto Rico v. Federal Deposit Insurance Corp., 114 S. Ct. 1054 (1994) (No. 93-822)

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93-822 FILED

NOV 23 1993

No. Opinion BLE RK

In The

Supreme Court of the Hnited States

BANCO COOPERATIVO DE PUERTO RICO,

Petitioner,

VS.

FEDERAL DEPOSIT INSURANCE CORPORATION,

Respondent.

Petition for a Writ of Certiorari to the United States Court of

Appeals for the First Circuit

PETITION FOR WRIT OF CERTIORARI

PLINIO PEREZ MARRERO

Counsel of Record

JOSE A. RODRIGUEZ JIMENEZ

Attorneys for Petitioner

Banco Cooperative Plaza

623 Ponce Leon Avenue — 9th Floor

Hato Rey, Puerto Rico 00917

(809) 674-2100

Fax (809) 764-2944

4454

wz (800) 3 APPEAL + (800) 5 APPEAL + (800) BRIEF 21

BE nnices, inc.

QUESTIONS PRESENTED FOR REVIEW

1. Is it proper, ethical and legal for a government agency

(Federal Savings & Loan Insurance Corporation, and its successor,

Federal Deposit Insurance Corporation) to avail themselves of

questionable tactics to gain priority in an attachment, and the

federal court system assist them, let them get away with it, and

validate their actions?

2. Is the Puerto Rico Civil Code Article 1824(4)(b) which

gives preference to judgment credits among themselves according

to the priority of their dates, to be totally disregarded by the

posterior levying of an attachment, no matter the ways used to get

it?

LIST OF PARTIES TO THE PROCEEDING

Petitioner:

Banco Cooperativo de Puerto Rico

Respondents:

Prudential Bache Securities, Inc.

Federal Deposit Insurance Corporation

Miguel Serrano Arreche*

Municipality of Ponce*

Shearson-American Express*

United States Solicitor General**

Sec

* Miguel Serrano Arreche, Municipality of Ponce and Shearson-American

Express were in the original case but did not intervene in any of the incidents having to

do with this dispute in the District Court nor in the Court of Appeals. Federal Deposit

Insurance Corporation substituted the Federal Savings & Loan Insurance Corporation.

LARA A A A OI ais tle ay te aa ilataallt aati

tn A hte a gee

** Included per Rule 29.4 of the Rules of the Supreme Court.

iii

TABLE OF CONTENTS

Page

Questions PresentedforReview .................... i

List of Parties to the Proceeding ..................... ii

I Ca wi w'n dae e000 64 ¥dsddeccccece<, lii

IE Gb bab ssc cvcdcccscciccceccicecec iii

Ee 2

Statement of Jurisdiction .......................... 2

eae eine 6s cess docdectacacceccce, 3

Statement of the Case ............................. 3

Reasons for Granting the Writ ...................... 5

NSS Pete ua dak ane oosneueesaececsccene, 23

TABLE OF CITATIONS

Cases Cited:

Auffant v. Succession of Manuel de J. Ramos et al., 23

an A a ee 14

Empresas Capote, Inc. v. Tribunal Sup., 3 P.R. Sup. Ct.,

Official Translations, 1067 (1975) ............ 12, 18, 19, 20

Heirs of Garriga v. O’Meara & Co., 28 PR.R. 332 (1920) .16,17

Contents

Page

Oronoz & Co. v. Alvarez, 23 P.R.R. 497 (1916) .........

Létuekedeeeknea beaeeenaaeaee 12, 13, 15, 17, 18, 19, 20, 23

P.R. Bedding Mfg. Corp. v. Herger, 91 P.R.R. 503 (1964)

hs Edi pn waNdsnddvedbucevetiawenanaee 12, 16, 17, 19,20

Rodriguez v. Solivellas & Co., 49 P.R.R. 618 (1936)

ntsnedacehdbsekeeehiledesiens inde 20, 21, 22, 23

Velez etal. v. Rosello Hermanos etal.,26P.R.R.192 .... 16

Wholesalers Chamber of Commerce v. Superior Court.,

Sucesores de Esmoris & Co., Inc., 2 P.R. Supreme Court

ee) i ee eee ee ee ee ae

CRRRGNNE SUMIEIIOD, BO oc cceccccccccccsccsecs 23

Statutes Cited:

Act of March 3, 1891,c.517, 26 Stat. 826,§6 ......... 2

Act of February 13, 1925, 43 Stat.936 ................ 2 |

Puerto Rico Civil Code Chapter 399, 31 LPRA § 5191- |

pT . erees SP eereeerer ere? passim

Puerto Rico Civil Code,31 PRLA§S5and14........... 14

PEE dacaekbadnetesnesscsetseskammnens 2

SE bc cncnervendanseasnsnenenens 2

eas NEED Nok nn ken ced neaddacancesncbas 2

ee |

Contents

Page

Rules Cited:

Supreme Court Rule 10.1 .......... occ ccc cece cece 8

Supreme Court Rule 13.1 ..............ccccccceccee 2

Other Authorities Cited:

UM MEM I oo dicckboeGaaecdccksi unas 9

Scaevola, Comentarios al Codigo Civil Espanol ...... 21,22, 23

APPENDIX

Appendix A— Order Denying Petition for Rehearing Filed

CRs WE 6h 6 Fak docd cha kacd ci Se la

Appendix B — Judgment and Order of the United States

Court of Appeals for the First Circuit Filed June 24,

SOUS wWWaig kash RddvesxPeudidevanee ona 3a

Appendix C — Opinion and Order of the United States

District Court for the District of Puerto Rico Filed

ce Sg OES PT Peper PTS. Perr eerre 28a

Appendix D— Request forPermissiontoIntervene .... 42a

48a

Appendix E— Relevant Statutes ...................

No.

In The

Supreme Court of the Anited States

ee -

October Term, 1993

BANCO COOPERATIVO DE PUERTO RICO,

Petitioner,

vs.

FEDERAL DEPOSIT INSURANCE CORPORATION,

Respondent.

Petition for a Writ of Certiorari to the United States Court of

Appeals for the First Circuit

PETITION FORA WRIT OF CERTIORARI

Petitioner, Banco Cooperativo de Puerto Rico, hereby

respectfully petitions for a writ of certiorari to be issued to the

United States Court of Appeals for the First Circuit, so that this

Court may review their decision affirming and awarding

preference to an attachment made by the respondent. Banco had a

prior judgment and a prior attachment order which it could not

execute because respondent improperly instigated judicial

proceedings before the federal District Court to prevent Banco

Cooperativo from executing the same. Even though the court

stated that “nobody is waiving any right” when preventing

Banco’s attachment, and had ruled its previous order void, that

same court later issued another attachment order on behalf of the

Federal Deposit Insurance Corporation (hereinafter “FDIC”) and

turned the monies over to them. In so doing, a specific statute of the

Puerto Rico Civil Code was ignored.

OPINIONS BELOW

The United States District Court for the District of Puerto Rico

decided for FDIC by Opinion and Order dated March 6, and filed

March 11, 1992, in case No.84-758, captioned FSLIC v. Shearson-

American Express, Inc. (Appendix, infra, 28a). Jurisdiction was

based on 28 U.S.C. § 345.

The United States Court of Appeals. for the First Circuit

affirmed said judgment by Opinion dated June 24, 1993 (3a). The

Order denying the request for rehearing was issued on August 27,

1993. (1a).

STATEMENT OF JURISDICTION

The judgment sought to be reviewed was issued by the Court

of Appeals for the First Circuit on June 24,1993. A timely Petition

for Rehearing and suggestion that the case be heard en banc was

filed on July 21, 1993, and petition and suggestion were denied by

Order dated August 27, 1993. (1a).

The discretionary jurisdiction of this Honorable Court is

invoked under the authority of the Act of March 3, 1891, c.517, 26

Stat. 826, § 6; Act of February 13, 1925, 43 Stat. 936, 938-9;

Judicial Code, 28 U.S.C.A. §§ 1254(1) and 2101(c) and Rule 13.1

of the Rules of the Supreme Court. Section 2101(c), supra, allows

ninety days after the entry of judgment to apply for the writ.

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STATUTES INVOLVED

Puerto Rico Civil Code Chapter 399, 31 LPRA § 5191 to

§ 5195, Articles 1821 to 1825 (48a), about Credit Preference

provides “for their graduation and payment in the order and

manner specified in this chapter.” Articles 1822 to 1825 establish

the order of classification for all credits. Article 1824 states that

“(w)ith regard to all other personal property of the debtor

[excluding the ones covered in Articles 1822 to 1823] preference

shall be given to:

4. Indebtedness which without a special

privilege appear:

(a) Ina public instrument.

(b) Ina final judgment, should they

have been the object of litigation.

These credits shall have preference among

themselves according to the priority of dates of

the instruments and of the judgments.

STATEMENT OF THE CASE

Banco Cooperativo de Puerto Rico sued Miguel Serrano

Arreche and since December 1986 tried to attach certain shares of

Serrano, but was prevented by the Federal Savings & Loan

Insurance Corporation (later FDIC) and the federal District Court

from doing it. Banco was threatened with contempt proceedings;

the District Court took custody of the shares, forbade any

attachment on the shares, and stated that everybody’s rights were

preserved. Banco believed the court’s assurance, filed the

attachment papers in the case and waited.

Two years later the court decided that FDIC’s opposition to

the attachment was baseless but by that time Serrano was under the

protection of the Bankruptcy Court, Banco was still without a

remedy. The delay afforded by the federal court was enough time

for FDIC to get their own judgment against Serrano, on October

16,1989 — over two years later than Banco’s September 15, 1987

judgment.

On May 16, 1990 the Bankruptcy Court in open court

announced the dismissal in 20 days of Serrano’s petition, granting

creditors 11 days from notice of the order “to express their

positions as to the disposal of the funds” (the shares had been sold).

That same day the FDIC attorneys did two things: first, agreed with

the attorneys for the other creditors to meet two days later — the

18th —to discuss the distribution of the funds to be released, as per

the court’s suggestion and, second, went to another federal district

judge and applied for a Writ of Attachment.

The next day, May 17, FDIC hushedly served the Writ of

Attachment on the Bankruptcy Court clerk. Next day, at the start of

the meeting, the attorney for the FDIC announced that the funds

had been already attached, making the meeting moot. The funds

were turned over to the District Court and despite the opposition of

Banco and Bache, eventually turned over to the FDIC.

The court, based on FDIC’s prior attachment, awarded the

funds to them. Banco claimed from the beginning — contrary to the

Circuit Court’s conclusion [see 42a and our footnote No. 7], that

FDIC acted in bad faith in impeding Banco from attaching first.

The District Court, perhaps unwittingly, aided FDIC in its scheme

and, more important, gave false assurances to Banco that its rights

were preserved, as “nobody was waiving anything”. Later, the

court’s ruling makes Banco “waive everything”. Banco also claims

that by virtue of Article 1824(4)(b) of the Civil Code, Banco’s

judgment should have preference, independently of the

attachment.

RS oa

REASONS FOR GRANTING THE WRIT

Regarding the first Question Presented, on February 12, 1987

Banco obtained an attachment order against Serrano ina local suit:

three years three months later, on May 17, 1990, FDIC also obtained

an attachment order against said Serrano. The FDIC and the District

Court prevented Banco from executing the attachment, and granted

the monies to FDIC, because they attached first. (3a, 28a).

If Banco’s attachment order was issued almost three years

before the FDIC got his, why was FDIC’s attachment done prior to

Banco’s? Was Banco marked by neglect? Not so. What happened

was that even before FDIC got its judgment, in early 1987, FDIC

threatened Banco with contempt of court proceedings and

successfully moved the federal District Court to order Banco to

abstain from attaching the property now under litigation. (Docket

No. 501, Vol. I, pp. 66 to 70, Exhs. 1 to 4). FDIC succeeded in

having the court assume custody of the property, which at the time

consisted of some 32,000 shares. The shares were placed under the

custody of the court clerk “for safekeeping” and the judge stated he

did not want anyone (Banco nor Bache) attaching the property,

assuring Bache and Banco that their rights would be preserved by

the Court. “Nobody waives nothing”, was his statement at the time.

(Docket No. 502, Vol. I, Exhs. I, J, K, L, M., pp. 120 to 134).

Banco’s big mistake was believing said assurance. It was not true!

What was the basis for FDIC’s action at that time, if they did

not have a judgment? Their mistaken notion that the property that

Banco was trying to attach was subject to a restitution order issued

against Serrano in an unrelated criminal case. They argued that

Banco’s proposed attachment was a violation of the restitution

order. (Docket No. 502, Exh. H, p. 116). The court, although

apparently not going along totally with that argument — otherwise

the shares would have been seized — ordered the shares deposited

“under the custody” of the court clerk, and prohibited Banco from

attaching them. (Docket No. 502, Exhs. L, M, pp. 124, 125). That

was round one, and with a couple of daring moves (a contempt

motion based on an inapplicable restitution order and a court’s

order and promise that nobody waives nothing), FDIC was granted

the round.

In an effort to preserve its rights, Banco filed a motion on

September 9, 1987, — still two years prior to FIDC’s judgment and

three years prior to their attachment — wherein Banco’s attachment

order was made a part of the case file. The motion stated:

(s)aid attachment has not been executed out of

comity from the insular court and Banco

Cooperativo since this Honorable Court —

Judge Pieras, Jr.— decided that the stock would

be kept by the court’s clerk and that no

attachment would ensue. As a matter of record

and as evidence of the interest of Banco

Cooperativo to attach either the shares or the

proceeds if they are released by the Court,

copies of the attachment papers are hereby

included with the request that they be made

part of the record.

(Docket No. 501, Vol. I, Exh. 4, pp.67-68).

Attorneys for FDIC replied that the reason the attachment was

not executed was not comity, as “any attempt by Banco

Cooperativo to attach the shares would have been in violation of

the July 24, 1985 Order Appointing Trustee entered in Cr. 84-381

(JP)”. (Docket No. 506, Vol. I, par. 5, pp.246-247). That was a mere

repetition of the “low blows” of round one, and they took round

two, also.

And they were probably right. More than comity it was fear of

the threat of contempt proceedings they had used against Banco.

But, the fear they instilled then and over which they gloated in their

motion should be duly noted by this Court. The fact remains that

they impeded Banco from executing a valid attachment order, with

the aid of the court, without any legal basis for their actions, in

what could be termed an abuse of legal proceedings.

On September 1987, Serrano applied for bankruptcy and the

criminal file and the shares were transferred to the Bankruptcy

Court, where they were converted into cash. Much later — March

23, 1989 — the District Court determined that the contempt motion

was not well taken, as the restitution order invoked by FDIC, and

under which custody of the shares was taken, did not apply to the

shares. (Docket No. 502, Vol. I, Exh. O, p. 157). It is a shame that

this statement was not made before Serrano applied for

bankruptcy, when Banco could attach the shares. But Banco was

not as lucky in the federal District Court as FDIC was. Anyway, as

the proceeds from the sale were by then under the custody of the

Bankruptcy Court due to Serrano’s bankruptcy petition, Banco was

still barred by law, for a second time, from attaching them. Third

round goes to FDIC.

Now, how FDIC managed to squeeze in its attachment in order

to gain priority over Banco, is another chapter. The Bankruptcy

Court judge announced in open court on Wednesday May 16, 1990,

near noon, that Serrano’s Chapter 11 petition was going to be

dismissed and requested that within the next 11 days the parties

advise her as to the disposition of the funds. (Docket No. 502, Vol.

I, Exh. I, p. 186). Attorneys for the main creditors (FDIC,

Prudential Bache, Puerto Rico Treasury Department, Banco

Cooperativo, Serrano’s attorney and possibly others)! met in the

1. The attorney for FDIC, with a very straight face, agreed on the meeting

around noon. But the same day (May 16) at 4:02 p.m. he had already prepared

and filed a four page motion requesting an attachment, duly sworn, an

attachment order project, designated a process server and early next day had

secured the order and executed the attachment. Thus, FDIC was ready for the

meeting of the 18th.

halls of the court building right after the May 16 hearing and agreed

to hold a meeting in the law offices of one of them on the 18th, to

discuss the disbursal and possible distribution of the funds in an

equitable manner among all the creditors. The agreed meeting was

confirmed by telecopier on May 17, to all parties. (Docket No.

502, Vol. I, Exh. V, pp. 191-192).

Come May 18 and in said meeting an attorney for FDIC

announced that they had secured an attachment order the day

before (the 17th) and had served the papers on the Bankruptcy

Court clerk, thereby the meeting was superfluous. (Docket No.

491-2-4, Vol. I, pp. 23-32). It is not unreasonable to conclude that

the stealthiness of their action was their previous knowledge of

Banco’s judgment and attachment which they had prevented

before and wanted again to prevent from being executed. If it is

morally and ethically wrong it can not be legally right. You cannot

use the legal system to spring traps. And they did in this case more

than three times.

Acting under the attachment order the funds were transferred

to the clerk of the federal District Court and shortly afterwards

FDIC requested that the funds be disbursed to them. By this time

they must have had an inkling that Banco was probably interested

in the funds and could have something to say about the requested

disbursement, but they did not notify Banco of their motion. Bache

was not notified either. Neither was any disclosure made to the

judge issuing the attachment order of what had transpired. And that

is the story of how FDIC attached first.

Rule 10.1 of the Rules of the Supreme Court states that a

review on a writ of certiorari is not a matter of right, but of judicial

discretion. Under subsection (a) it is suggested that the writ might

be issued when a United States court of appeals “has so far

departed from the accepted and usual course of judicial

proceedings, or sanctioned such a departure by a lower court, as to

BA A as ast s lb alla et

call for an exercise of this Court’s power of supervision”. We

consider the actions of FDIC deplorable; the approval of said

course of action by our district and appeals court lamentable and

disheartening. We should expect more from attorneys, parties and

the courts in our judicial system in their true essence as guardians

of what is fair, true, moral and legal.

Did the FDIC act in good faith? Is what the FDIC did and the

court approved, “the accepted and usual course of judicial

proceedings”? The ethical, straightforward way lawyers should

litigate in our courts? Especially government agencies? Is the way

this situation has been handled by the lower courts (ignored) a role

model of what the system allows? Is winning all?

Black”s Law Dictionary says what every self-respecting

professional knows, defining good and bad faith, thus:

Good faith is an intangible and abstract quality

with no technical meaning or statutory

definition, and it encompasses, among other

things, . . . the absence of design to defraud or

to seek an unconscionable advantage; honesty

of intention, and freedom from knowledge of

circumstances which ought to put the holder

upon inquiry. An honest intention to abstain

from taking any unconscientious advantage of

another, even through technicalities of law,

together with absence of all information,

notice, or benefit or belief of facts which render

transaction unconscientious. [At 623].

Bad faith [implies] a design to mislead or

deceive another; it is different from the

negative idea of negligence in that it

contemplates a state of mind affirmatively

operating with furtive design or ill will. [At

127).

Why did FDIC fiercely oppose Banco’s legitimate efforts to

attach the funds of Serrano, threatening Banco and Bache with

contempt proceedings? Why did they want the court to take

custody of the property, when at the time they did not have a

judgment against Serrano? Why did they agree on a meeting of all

the attorneys representing Banco, Bache, the local Treasury

Department, and other creditors? Why did they wait until their

appearance at the meeting to say that they had procured and served

an attachment order? Why was the attachment procured so

furtively? Why wasn’t the judge who issued their attachment order

advised that there had been a previous attachment order issued?

Was he told that the federal court had prevented said attachment;

did somebody tell him that it was the FDIC who moved the court to

prevent said attachment; was he alerted by the FDIC that said

attachment was made a part of the file where the monies were

deposited? Was there an obligation to make a full disclosure of the

facts surrounding the remedy that was being requested?

Somebody must answer these rhetorical questions. The inquiry is

open. The only way to get the answers is by issuing the writ

requested. And let somebody do some very good explaining.”

The second Question Presented concerns the Puerto Rico

Civil Code (52a). Article 1824(4)(b) states that if holders of two

final judgments are trying to collect from the same debtor, the older

2. All of the facts set out in this brief were averred by Banco in the

memoranda and documents filed at the District Court. The lower court, in

deciding without a hearing, (saving FDIC the embarassment of an explanation)

stated it was ruling “based exclusively on the memoranda and documents filed

by the three interested parties”. It means our factual averments were taken as

true. If such were not the case, we suggest the case be remanded for an

evidentiary hearing.

judgment shall have priority over the later. The statute is that

simple. In this case Banco Cooperativo and the FDIC had two final

judgments and both were trying to collect from the same funds.

Banco has the oldest judgment — September 15, 1987; FDIC the

newest — October 16, 1989. Consequently, Banco should have

preference over FDIC to collect his credit. Yet, the lower courts

ruled otherwise.’

The Puerto Rico Civil Code clearly states that preference

among judgment creditors shall be determined exclusively by the

dates of the judgments. The Code devotes Chapter 399, 31 LPRA

§§ 5191 to 5195, Articles 1821 to 1825 (48a-52a) to Credit

Preference,‘ providing “for their graduation and payment in the

order and manner specified in this chapter.” Article 1821.

Articles 1822 to 1825 establish the order of classification for

all credits. Article 1824 states that “(w)ith regard to all other

personal property of the debtor [excluding the ones covered in

Articles 1822 to 1823] preference shall be given to:

... 4. Indebtedness which without a special

privilege appear:

(a) Ina public instrument.

(b) Ina final judgment, should they have

been the object of litigation.

3. The lower courts misnamed Banco’s claim as “of a lien”. Such is not the

case. Banco claims “preference”, which is what the statute clearly grants.

4. Copy of Chapter 399 of the Civil Code, 1930 ed., on Classification of

Credits (Official Translation) is included. (48a-52a). Said sections are

equivalent to Articles 1821 to 1825 of the Civil Code. Cases prior to 1930 refer to

our 1902 edition of the Code, Articles 1822 to 1826, with the same text. In the

Spanish Civil Code they are numbered from 1921 to 1925, with the exact same

text.

These credits shall have preference among

themselves according to the priority of dates of

the instruments and of the judgments.

If the Article means what it says, the credits of FDIC and

Banco “shall have preference among themselves according to the

priority of dates . . . of the judgments”, i.e., the earliest over the

latest, i.e., Banco’s over FIDC’s, and not the other way around.

The simplicity of the article leaves little room for

interpretation. This is our substantive law and has been interpreted

repeatedly by our local Supreme Court, our federal District Court

and all Civil Code commentators in the only obvious sensible way

that it can be interpreted. It should be added that attachments are

only procedural measures, under our system.

As the lower courts based their decisions on a supposedly

prior attachment and its reading of a dictum of a local case dating

from 1916, which we claim is whoily inapplicable to the factual

situation of this case (during the three quarters of a century since

the dictum it has never been quoted on the subject but once, and

that to explain it away) we must take a look at the cases quoted.

Both lower courts cite the cases of Oronoz & Co. v. Alvarez, 23

P.R.R. 497 (1916) (Wolf, J.); P. R. Bedding Mfg. Corp. v. Herger, 91

P.R.R. 503, 507 (1964); and Empresas Capote, Inc. v. Tribunal

Sup. 3 P.R. Sup. Ct., Official Translations 1067, 1078-79 (1975),

and based their decisions — against the grain of the law — mainly on

their interpretation of the Oronoz case. That interpretation is

flawed in several aspects, mostly in not realizing what a common

creditor is under our Classification of Credits’ system. Let’s see

the case in some detail.

Oronoz & Co., and Alvarez were both common creditors of

Santiago. Oronoz & Co. sued Santiago and attached certain goods

Of course, the corporation did not have a judgment at the time.

Alvarez also sued Santiago in an independent action, and attached

and sold the goods which Oronoz & Co., had attached. A Mr.

Oronoz, from Oronoz & Co., was the depository of the attached

goods and he relinquished the goods to the marshals attaching for

Alvarez. When Alvarez obtained his judgment, he collected his

credit from the proceeds.

When Oronoz & Co. realized it had nowhere to collect its

judgment from the debtor Santiago, they sued Alvarez. The lower

court decided for Alvarez, and the Supreme Court (Wolf, J.),

affirmed the judgment, basing his decision on the fact that Oronoz

& Co. had abandoned the attachment when their depository

(Oronoz) relinquished the goods they had attached.

The ratio decidendi of the case is that if you place an

attachment over certain goods and you relinquish the goods, the

attachment is gone, caput, finished, and you cannot entertain an

action against the second “attacher” to recover from him what you

should have recovered from the attached goods (unless you had a

lien over the property).

The part quoted by the lower court in its Opinion is obiter

dicta. This is obvious from reading the case. Justice Wolf himself

sums up the allegations of the appellants thus:

The appellants would have us infer that they

had a valid subsisting lien and that hence the

subsequent attachment and sale thereunder

were made subject to that lien.

As when Oronoz finally got his judgment the property had

been already sold and Alvarez paid, as he had no lien, he could not

go after the property. He was out of luck and without a remedy.

Not only is the opinion quoted dicta but it is also inapplicable

to this case. Furthermore, it is conceptually wrong; an equivocal

exposition of the law. And confuses the terms “lien” and

“preference”. We copy the part quoted by the lower court:

We have recently decided that the mere priority

in judgment gives the prior creditor no lien.

Auffant v. Succession of Manuel de J. Ramos et

al., (23 P.R.R. 385 (1916)]. An attachment or

other similar step is necessary to give the

judgment a priority and as between judgment

creditors the first to attach has the priority. It is

a race of diligence. The priority of payments to

which sections 1822 et seg. of the Civil Code

relate has no application to attachments.

The first sentence (“mere priority in judgment gives the prior

creditor no lien) is absolutely true and nobody can argue with it.’

But if one is quoting that sentence and extrapolating it to “mere

priority in judgment gives the prior creditor no preference” then

one runs into a problem with § 1824 of the Civil Code — that has

nothing to do with liens — and says directly the opposite; mere

priority in judgment gives the prior judgment creditor preference.

Oronoz & Co., precisely was claiming some sort of lien (p. 498 of

the decision) by virtue of his prior attachment over the goods that

had already been sold and disbursed to Alvarez, and his request

was rightfully denied. We see that the differentiation between

“lien” and “preference” is crucial.

But both lower courts incorrectly characterized Banco’s claim

5. The case of Auffant, supra, has to do with a real lien created by an

attachment made via registration in the Property Registry. Its inapplicability is

obvious to anybody slightly aware of our Registry system. Apparently Justice

Wolf (a Columbia University graduate from Washington, D. C. [see 57 P.R.R.

XXXV] — with all due respect — was not.

as of a lien. Once our claim is characterized as a lien-claim, which

it is not, the denial of the claim follows. However, the claim of

preference should stand. And, the preference of a judgment granted

by Article 1824 does not need the prerequisite of an attachment.

The law itself does not require it and it can not be “legislated” by

the courts.

The decision of the Appeals Court, with its “silence argument”

of page 26 (24a) denotes confusion of the Code symmetry. The

Chapter goes from the specific to the general. And, on the

unspecified “all other personal and real property of the debtor”, of

course there can be no lien. But, that does not mean “no

preference”. Nor does it means that the only way to enforce the

preference is by attachment or that an attachment defeats the

preference. There is no law to that effect in the whole Civil Code.

The procedure of choice to enforce the preference is the “terceria”

if you do it timely, before the property is disposed of, while still

under custody of the court, as it was in this case.

The assertion that the priority in judgment creates no lien

cannot be extended to mean that for a judgment to have priority, an

attachment “or other similar step” is necessary. The statement is

incorrect as it seems to equate priority with attachments, brushing

aside the whole Chapter 399.

The Oronoz case went on to state, in what is an obvious obiter

dictum, and an incorrect expression of the law, that“... between

judgment creditors the first to attach has the priority.” What the

court meant to say was that between common — not judgment —

creditors the first to attach has the priority. Common creditors are

Article 1825 creditors. Please bear in mind that is what the court

was deciding; out of two common creditors, Oronoz & Co., and

Alvarez, Oronoz & Co., had priority as it attached first, but lost it

when it voluntarily relinquished the attached goods to Alvarez,

who attached second, sold the goods and collected.

It is in this limited context (among common creditors the first

to attach prevails) that the Oronoz case is quoted again in Velez et

al. v. Rosello Hermanos et al., 26 P.R.R. 192. And the second time

it was ever mentioned is in Heirs of Garriga v. O’Meara & Co., 28

P.R.R. 332 (1920). There the court merely said that Oronoz is

inapplicable where the case “refers to the preference of claims by

virtue of certain statutory rights”, just as in the present case, as it

was limited to “the question. . . regarding the preference of rights

derived from certain attachments levied. . .”

Both lower courts cite P.R. Bedding, supra, to the effect that

“(t)here is no question that among common creditors the first one

who attaches has preference over the others. . .” But they failed to

notice the legal connotation of the word “common” as the type of

creditor to which the case refers, or failed to note that Banco is nota

common creditor. And the rest of the paragraph was ignored.

Once one reads the whole paragraph one realizes that the

Bedding case does not favor FDIC at all. After the Supreme Court

pointed out that, like in this case, the preference claimed by the

attaching plaintiff flows just from the attachment itself, the court

added:

Thus, we have held that the mere levy of an

attachment at the instance of a COMMON

CREDITOR is not sufficient to place the

attached property beyond the operation of Art.

#1822 of the Civil Code, under which

preference, in connection with certain property

of the debtor, is given to creditors for the

purchase price of the attached property.

Gonzalez v. Alonso, 33 P.R.R. 66 (1924).

It should be noted that, as in the Bedding case, the preference

claimed by the FDIC “flows from the attachment itself.” Also, that

such “preference” in itself does not defeat the application of

1 wea +s: De ok we

Articles having to do with preference, such as Articles 1822 et seq.

That is the holding in the Bedding case. As to dispel any further

doubt, the court added:

The provisions of the Civil Code on

concurrence and preference of credits . . . are

the source to which resort must be had. . . See

Heirs of Garriga v. O’Meara & Co., 28 P.R.R.

332 (1920).

It follows that if “the mere levy of an attachment” — which is

what FDIC did — “by a common creditor” — which is what FDIC

claims —“‘is not sufficient to place the attached property beyond the

operation of Article #1822”, just the same, it will not place the

attached property beyond the operation of Articles 1823, and 1824,

when applicable.

We are saying that FDIC claims FDIC and Banco are

“common creditors” (which they are not) because that is the only

way they can claim preference by virtue of the attachment, or can

claim the applicability of Oronoz. As neither is acommon creditor,

but both are Article 1824(4)(b) creditors, the attachment can not

determine preference. The preference is granted — as per the law —

by Article 1824(4)(b). And as FDIC was stopped before it

converted the funds, the preference holds.

Please note that Bedding had the prior attachment. It won the

race against Sealy. Did it also win the case? No. Even though

Sealy did not have an attachment and did not even try to get one, it

prevailed with its statutory preference.

Our Supreme Court did not explain in the Oronoz case what

appeared to be a statement that went against the application of

Article 1824, at least not during the same court term. But they did

four (4) years later, in the case of Heirs of Garriga v. O’Meara, 28

P.R.R. 332 (1920), .

In that case O’ Meara had a judgment against a debtor and he

made an attachment. Heirs had a credit against the same debtor for

which they claimed preference based on Article 1823 (now 1822).

But they did not have an attachment. So, O’Meara had the prior

attachment. He won the race. Did he also win the case? Was prior

tempore portior jure applied? No. Was Oronoz applied? No. Even

though Heirs had no attachment, the court ruled for them based on

the preference of their credit granted by Chapter 399. Most

important, they explained the Oronoz case, thus:

The case of Oronoz & Co. v. Alvarez, 23 P.R.R.

497, is not applicable. There the question was

regarding the preference of rights derived from

certain attachments levied, while the present

case refers to the preference of claims by virtue

of certain statutory rights.

Where did the court find those statutory rights? In our Chapter

399, which — said the court — contains rules of law of general

application to cases “like the present . . . in which a controversy

has arisen between two citizens regarding preference in the

collection of their claims out of certain properties of a common

debtor.””®

The other case mentioned in the Opinion on this matter, is the

Empresas Capote case, supra. It is cited as saying that, based on the

axiom “prior tempore portior jure” among common creditors, the

first who attaches has a preference over the others. Of course, said

axiom applies when common creditors are concerned.

And if the case is examined, one will find that Empresas,

holder of the “prior tempore” attachment (from 1969, and the

6. It should be . »ted that Judge Wolf was still a member of the court.

A TSE TONS Siu LEI

other creditors from 1971) did not end with the “portior jure” but

with peior jure. Why was that so? Because, like Banco, the 1971

creditor was not acommon one, but a preferred creditor by virtue

of the contract and Article 1489 of our Civil Code. And the

complete quote adds that the preference of the first who attaches

does not go beyond the right which the debtor — or others, we add —

may have over the property attached, be it via lien or via

preference. That’s what the Empresas Capote case decided.

We must realize that Latin maxims may carry weight only if

there is not a statutory right involved.’ And, the classification of

judgment creditors “according to the priority of dates of the...

judgments” is just a codification of the maxim “prior tempore

potior iure”. But in this situation — between judgment creditors —

we do not have to apply the maxim, but just the statutory rights

created by the Code.

To solve the raison d’etre of the apparent confusion of FDIC,

and the lower couris, we must look to that final, short, apparently

innocuous Article 1825. It reads:

Credits of any other kind or for any other

consideration not included in the preceding

sections, shall have no preference.

This article defines the common creditor to which Oronoz,

Bedding, Capote, and other cases having to do with classification

and preference of credits refer. He (the common creditor) is the one

who, having no preference over any of the properties of the debtor

7. Maxims are but attempted general statements of a rule or a truth. The

written law prevails over maxims. Puerto Rico Civil Code states that: (a) a law

(Article 1824, i. e.) can only be repealed by the legislature, and ( b) when the text

of the law is clear and free of ambiguity it should be followed. Articles 5 and 14,

31 P.R.L.A. §§ 5 and 14.

nor over any other credit against said debtor, has to run and attach

whatever he can, for him to be able to collect from the debtor. His

preference will only extend over other common creditors with no

attachment whatsoever (Bedding), or with subsequent attachments

(Empresas), unless the prior attacher, if there is one, relinquishes

his attachment (Oronoz).

One last, but most important case. Rodriguez v. Solivellas &

Co., 49 P.R.R. 618 (1936) is one where our Supreme Court had to

decide — applying Article 1824(4)(a) — whether a prior attachment

had priority over the preference said section grants to an

indebtedness in a public instrument. This is a similar situation as

ours. In both cases the judgment and the instrument predate the

attachment, but neither the judgment nor the instrument holder

made an attachment.

The court decided that as the date of the instrument

(equivalent in the article to a judgment) was prior to the

attachment, and the attachment only gives priority over claims of

an equal nature contracted on a date subsequent to that of the

attachment, the attacher has no priority over the instrument holder,

in spite of the precedence of the attachment.

The Court of Appeals misread the Rodriguez case,' and ruled it

inapplicable, saying it “held that a prior mortgage on certain

property had priority over a cautionary notice of attachment on the

property! Quite the opposite, the holding of the court was against

the existence of the mortgage. The court said: “That a valid sub-

mortgage was not constituted in favor of the intervenor by the deed

of July, 19, 1932, can not be disputed. The intervenor itself so

8. The court dismissed by footnote the claim of bad faith against FDIC,

saying “it was not raised in a timely fashion”. The record shows otherwise. (See

42a-47a). On the other hand, FDIC never pled res judicata which is an

affirmative defense. The Appeals Court motu proprio raised it.

acknowledges . . .” That’s why the case was decided under Article

1824(4)(a) and why it is applicable to the situation, under section

(b). The court said, applying Article 1824(4)(a) to the instant case,

that as “it must be concluded that as whatever preferential right that

the plaintiff might invoke must be with regard to claims of equal

nature contracted on a date subsequent to that of the attachment,

and as the claim of the intervenor was previously acknowledged in

an authentic manner in a public instrument,” not a mortgage “ such

right has no priority over said claim.”

The court quoted as authority section 1824 of the Civil Code

and added:

And even if that provision were not applicable

in the present case, the latter should always be

decided in favor of the intervenor, in

accordance with the principle of law “Quit

prior est tempore potior est jure,” in regard to

which the Supreme Court of Spain, in a

judgment of May 10, 1881, held as follows:

“Where ordinary personal claims are involved,

that which is prior in time should be

reimbursed first, and failure to do so is an

infringement of the juridical principle: qui

prior est tempore potior est jure.

Scaevola, Civil Code, Vol. 2, Appendix, p. 192.

As stated in the Rodriguez case, the prior tempore refers to the

substantive right itself, not to the procedural attachment, as they

have no priority over “the claim of the intervenor previously

acknowledged in an authentic manner in a (judgment or) public

instrument.”

Allow me to make two short quotes from Spanish

commentators to the Civil Code. Scaevola, Vol. 31, page 702 in his

Comentarios al Codigo Civil states that attachments in the

Registry do not improve the condition of the credit except in

relation to those subsequent to the annotation and those prior that

have no preference. And that is not even the attachment FDIC

made. He further adds, on page 661:

According to the above, it can be said the

public instrument and the final judgment

confer the credits therein embodied with

preferential effects that transcend the initial

inter-parties relation, as they can be opposed to

other creditors who were not parties to the

transaction of the document nor the judicial

process, and said “reflection” effect gives them

the right due to the guarantee afforded by the

judicial certificate.

The “reflection effect” applies to public instruments and

judgments equally. He adds that the only object of the third party

intervention is the comparison of the titles to determine priority

and subsequent preference between the two credits in dispute. And

if the intervention is made before “such balance ha(s) not been

disposed of . . . (but) it had merely been attached at the time the

intervenor’s claim was filed” its preference must be recognized.

Rodriguez, supra.

Manresa states that:

any additional creditor, besides the

attaching creditor and the debtor whose

property has been attached, may by third claim

of a better right contest the preference his

credit has over the one that is being collected

... and such has been constantly allowed by

the Courts, and in said instances they must

apply the rules of preference of Title XVII, Book

IV of the Code.

Comentarios al Codigo Civil Espanol, page 737 (1951).

Finally, in 1974 the case of Wholesalers Chamber of

Commerce v. Superior Court, Sucesores de Esmoris & Co. Inc., 2

P.R. Supreme Court Official Translations, 838 was decided. The

court said in a footnote that “it will be the judgment, and not the

attachment, what gives preference to the credit. Article 1824 of the

Civil Code, infra.”

CONCLUSION

We submit the following affirmations as legitimate, according

to our reading of the Civil Code, court decisions and

commentators:

(i) The Oronoz case applies only to attachments performed by

common creditors. Between them the first to attach is the first to

collect; (ii) Creditors accorded preference by statute — Articles

1822 to 1824(a) and (b) collect according to the quality of their

preference; (iii) Aprior attachment by acommon creditor does not

invalidate the credit preference awarded by statute. Rodriguez v.

Solivellas & Co., supra, Wholesalers, supra; (iv) FDIC and Banco

are judgment creditors. As to judgment creditors, the one with the

prior judgment (dates) has preference over the one with the

subsequent judgment; (v) FDIC did not act with clean hands in

preventing Banco from legally performing its attachment in 1987,

nor by sub rosa, squeezing its attachment in 1990, trying unfairly

to get a priority it did not have; (vi) Banco’s prior judgment has

priority for its “graduation and payment” over FDIC’s subsequent

judgment as stated by our classification of credits articles.

WHEREFORE, petitioner respectfully requests that this

Court issue a writ of certiorari to the United States Court of

Appeals, First Circuit, to review the judgment of August 27, 1993,

and grant priority to Banco’s attachment and judgment. Should

conclusions of fact be deemed necessary for the proper

adjudication of this case, it is suggested the case be remanded to the

Drstrict Court for an evidentiary hearing on the facts, which

evidentiary hearing was never granted, though requested.

Respectfully submitted,

PLINIO PEREZ MARRERO

Counsel of Record

JOSE A. RODRIGUEZ JIMENEZ

Attorneys for Petitioner

Banco Cooperative Plaza

623 Ponce Leon Avenue - 9th Floor

Hato Rey, Puerto Rico 00917

(809) 764-2100

Fax (809) 764-2944

APPENDIX A — ORDER DENYING PETITION FOR

REHEARING FILED AUGUST 31, 1993

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

No. 92-1651

FEDERAL DEPOSIT INSURANCE CORPORATION,

Cross-Plaintiff, Appellee,

SHEARSON-AMERICAN EXPRESS, INC., ETAL.,

Cross-Defendants.

BANCO COOPERATIVO DE PUERTO RICO,

Intervenor-Appellant.

No. 92-1652

FEDERAL DEPOSIT INSURANCE CORPORATION,

Cross-Plaintiff, Appellee,

SHEARSON-AMERICAN EXPRESS, INC., ETAL..,

Cross-Defendants

PRUDENTIAL BACH SECURITIES, INC.,

Intervenor-Appellant.

Appendix A

BEFORE

BREYER, Chief Judge,

Campbell, Senior Circuit Judge,

*, Selya, Cyr, Boudin, Stahl, Circuit Judges,

SKINNER, ** Senior District Judge.

ORDER OF COURT

Entered; August 27, 1993

The panel of judges that rendered the decision in these cases

having voted to deny the petition for rehearing submitted by Banco

Cooperativo De Puerto Rico and the suggestion for the holding of a

rehearing en banc having been carefully considered by the judges

of the Court in regular active service and a majority of said judges

not having voted to order that the appeal be heard or reheard by the

Court en banc,

It is ordered that the petition for rehearing and the suggestion

for rehearing en banc be denied.

By the Court:

FRANCIS P. SCIGLIANO

Clerk

[cc: Messrs. Fernandez-Bared, Perez-Marrero and Peral]

* Judge Torruella has recused himself.

** Of the District of Massachusetts, sitting by designation.

coe Laka, Dab as ca

Pin nO tae A RAT 608 ONE SAN ATI

JL “eta etn anata

APPENDIX B — JUDGMENT AND ORDER OF THE

UNITED STATES COURT OF APPEALS FOR THE FIRST

CIRCUIT FILED JUNE 24, 1993

United States Court of Appeals

For the First Circuit

No. 92-1651

FEDERAL DEPOSIT INSURANCE CORPORATION,

Cross-Plaintiff, Appellee,

Vv.

SHEARSON-AMERICAN EXPRESS, INC., ETAL.,

Cross-Defendants.

BANCO COOPERATIVO DE PUERTO RICO,

Intervenor, Appellant.

No. 92-1652

FEDERAL DEPOSIT INSURANCE CORPORATION,

Cross-Plaintiff, Appellee,

Vv.

SHEARSON-AMERICAN EXPRESS, INC., ETAL.,

Cross-Defendants.

PRUDENTIAL BACHE SECURITIES, INC.,

Intervenor, Appellant.

Appendix B

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

{[Hon. Raymond L. Acosta, U.S. District Judge]

Before

Stahl, Circuit Judge,

Campbell, Senior Circuit Judge, and Skinner,* Senior District

Judge.

Manuel Fernandez-Bared and Ramon Coto-Ojeda with whom

Nestor M. Mendez-Gomez and McConnel Valdes Kelley Sifre

Griggs & Ruiz-Suria were on brief for intervenor, appellant

Prudential Bache Securities, Inc.

Plinio Perez Marrero for intervenor, appellant Banco

Cooperativo De Puerto Rico.

Enrigue Peral with whom Munoz Boneta Gonzalez Arbona

Benitez & Peral, Ann S. Duross, General Counsel, Colleen B.

Bombardier, Senior Counsel, Jaclyn C. Taner, Counsel, and

Richard Schwartz were on brief for cross-plaintiff, appellee.

June 24, 1993

* Ofthe District of Massachusetts, sitting by designation.

Appendix B

CAMPBELL, Senior Circuit Judge. In these appeals, two

creditors challenge appellee’s rights to the assets of the

mastermind of a multimillion dollar fraud, each creditor claiming

that it has a superior claim to the money.

Miguel Serrano Arreche (“Serrano”), a former Puerto Rico

stockbroker, was indicted and convicted in 1985 of wire fraud,

mail fraud, and other violations of federal criminal statutes.

Serrano’s misdeeds have been extensively chronicled elsewhere.

See, e.g., United States v. Serrano, 870 F.2d 1, 3-5 (Ist Cir. 1989).'

The primary victim of Serrano’s fraud was Home Federal Savings

and Loan Association (“Home Federal”), a Puerto Rico bank

which collapsed partly from losses caused by Serrano. United

States v. Serrano, 870 F.2d at 4. The Federal Savings and Loan

Insurance Corporation (“FSLIC”) took control in 1985 and,

thereafter, the appellee Federal Deposit Insurance Corporation

(“FDIC”) became Home Federal’s successor in interest pursuant to

the Financial Institutions Recovery, Reform, and Enforcement Act

of 1989. See 12 U.S.C. § 182laetseg.

The present action was brought in 1984 in the United States

District Court for the District of Puerto Rico by the Municipality of

Ponce, against defendants that included Home Federal, Serrano,

Shearson Lehman Brothers, Inc., and Shearson Lehman Brothers,

1. See also United States v. Tormos-Vega, 959 F.2d 1103 (ist Cir.), cert.

denied, 113 S. Ct. 191 (1992); FDIC v. CNA Casualty of Puerto Rico, 786 F. Supp.

1082 (D.P.R. 1991); United States v. Serrano, 680 F. Supp. 58 (D.P.R. 1988),

modified, 870 F.2d 1 (Ist Cir. 1989); FSLIC v. Shearson- American Express, Inc., 658

F. Supp. 1331 (D.P.R. 1987); United States v. Tormos-Vega, 656 F. Supp. 1525

(D.P.R. 1987), aff'd, United States v. Boscio, 843 F.2d 1384 (1st Cir.), cert. denied,

488 U.S. 848 (1988); United States v. Serrano, 637 F.Supp. 12(D.P.R. 1985); United

States v. Serrano, 622 F. Supp. 517 (D.P.R. 1985).

Appendix B

Inc. (Puerto Rico) (collectively “Shearson”). Home Federal filed

cross-claims against Serrano, Shearson, and others. Both the

Municipality of Ponce and Shearson settled and left the case. On

October 16, 1989, the district court entered a default judgment for

the FDIC (now representing Home Federal) on its cross-claims

against Serrano, finding Serrano liable to the FDIC for

$44,265,241. Thereafter, on May 17, 1990, the FDIC secured from

the district court an order attaching Serrano’s assets to enforce the

foregoing judgment.

This appeal stems from efforts by two other creditors,

appellants Prudential-Bache Securities, Inc. (“Prudential”) and

Banco Cooperativo (“Banco”), to intervene in the same district

court action after certain of Serrano’s assets were transferred to the

district court pursuant to the FDIC’s attachment. Prudential and

Banco asked the district court to withdraw its order authorizing

disbursement of Serrano’s funds to the FDIC, and are appealing

from its refusal to do so.

To understand the present dispute, it is necessary to realize

that in September 1987, Serrano had petitioned for bankruptcy in

the United States Bankruptcy Court for the District of Puerto Rico,

triggering the automatic stay of 11 U.S.C. § 362. The FSLIC sought

and received partial relief from the stay on January 13, 1989,

permitting the instant action to continue in the district court until

entry of judgment. Serrano’s only significant assets were 32,400

shares of Bayamén Federal Savings Bank stock, which at one time

had been held in a trading account at Prudential.? By order of the

bankruptcy court, the stock was sold for approximately $700,000

2. Earlier in 1987 Prudential had delivered the stock to the United States

District Court pursuant to a court order in United States v. Serrano, Crim. No. 84-

381(JP).

Appendix B

in April 1989 and the proceeds were deposited with the bankruptcy

court as property of the estate. On November 17, 1988, Prudential

filed its own claim in the bankruptcy proceeding. On October 16,

1989, as we have said, the district court entered a judgment for the

FDIC in its cross-claims against Serrano.

On May 16, 1990, the bankruptcy court issued an order

dismissing Serrano’s bankruptcy case, but expressly retaining

jurisdiction to decide how to dispose of all funds held for Serrano.

The bankruptcy court gave all creditors, which included

Prudential, eleven days to express their positions as to the disposal

of these funds, indicating that unless otherwise ordered, they

would be returned to Serrano. See 11 U.S.C. § 349(b)(3). That

same day, after entry of the bankruptcy petition dismissal, the

FDIC moved in the district court for a writ of attachment and

execution, to be served upon the bankruptcy court and any

custodian of Serrano’s funds in that court, attaching Serrano’s

funds after payment of administrative expenses and directing their

transfer to the district court for application to the FDIC’s judgment.

The district court allowed the motion on May 17, 1990, ordering

the bankruptcy court within twenty days to deliver to the district

court clerk the remaining funds belonging to Serrano subsequent to

the payment of the administrative expenses, and directing that

Serrano refrain from collecting the funds. A copy of this

attachment was shown to Prudential’s counsel on May 18, 1990, at

a meeting of creditors called by Prudential at its offices to discuss

disposition of the bankruptcy funds. Prudential made no effort in

the bankruptcy court to challenge the validity of the attachment nor

to argue that its own claim should be paid from the bankruptcy

funds in preference to the FDIC’s claim.

On June 27, 1990, the bankruptcy court issued its order

disposing of all the assets in Serrano’s case. The bankruptcy court

Appendix B

clerk, after paying various fees, expenses and a child support

claim, was directed by the bankruptcy court to deliver the

remainder to the district court clerk in compliance with the

attachment, said funds to remain subject to any liens as per the

bankruptcy court’s previous order of sale of the stock. Pursuant to

this order, the bankruptcy clerk paid over more than $560,000 to

the clerk of the district court. On August 10, 1990, the district court

ordered the funds disbursed to the FDIC.

Five days after the district court had entered its disbursement

order, Prudential made its first appearance in this action. On

August 15, 1990, Prudential moved the district court to allow it to

intervene in the instant action and stay the scheduled disbursement

to the FDIC, alleging that it had a lien on the attached funds that

had priority over the FDIC’s attachment. See Fed. R. Civ. P. 24.’

3. Federal Rule of Civil Procedure 24 provides, in relevant part:

(a) Intervention of Right. Upon timely application

anyone shall be permitted to, intervene in an action: ...

(2) when the applicant claims an interest relating to the

property or transaction which is the subject of the action

and the applicant is so situated that the disposition of the

action may as a practical matter impair or impede the

applicant’s ability to protect that interest, unless the

applicant’ s interest is adequately represented by existing

parties.

(b) Permissive Intervention. Upon timely application

anyone may be permitted to intervene in an action: .. . (2)

when an applicant’s claim or defense and the main action

have a question of law or fact in common... . In

exercising its discretion the court shall consider whether

the intervention will unduly delay or prejudice the

adjudication of the rights of the original parties.

Aenea Pre err ears a

Appendix B

The district court stayed the disbursement pending ruling on

Prudential’s motion to intervene. On August 20, 1990, Banco

Cooperativo, which also had never before been a party to this

action, moved to intervene, asserting that it had a priority claim to

the attached funds.‘

On March 11, 1992, the district court, after considering the

parties’ motions and exhibits submitted in support of their claims

(and without specifically indicating whether it was ruling on the

motions to intervene or on the merits), denied Prudential’s and

Banco’s claims and lifted the stay of the disbursement of the funds

to the FDIC. Prudential and Banco appealed separately from the

district court’s final order. We consolidated their appeals, and now

affirm.?

4. Appellee FDIC does not contest the existence of the appellants’ purported

claims against Serrano. Banco Cooperativo claims that it sued Prudential in a Puerto

Rico court in 1984, seeking damages for embezzlement by Serrano during his tenure,

in 1980, as an officer of Prudential’ s Institutional Department. In 1985, Prudential

filed a third-party complaint against Serrano in that case, asking that Serrano be held

liable for the amount of any judgment which may be entered against Prudential in the

action brought by Banco Cooperativo.

Banco claims that it eventually received a judgment against Serrano in the

amount of $295,000 plus interest. (Banco does not explain how it obtained a judgment

against Serrano when it had sought damages only from Prudential.) At the time

Prudential filed its motion to intervene, its claim against Serrano was still contingent,

as final judgment had not yet been rendered in its third-party action.

5. The district court had jurisdiction over this action pursuant to 28 U.S.C.

§ 1331, because the original plaintiff, Municipality of Ponce, brought federal claims

against the defendants. This court has jurisdiction over the appeals pursuant to 28

U.S.C. § 1291. |

10a

Appendix B

No. 92-1652 — Prudential

Appellant Prudential raises three issues on appeal. The first,

discussed in Section A below, concerns the validity of the FDIC’s

attachment, an issue implicitly decided by the bankruptcy court’s

order to release Serrano’s funds in compliance with the

attachment. We hold, infra, that res judicata bars Prudential from

raising the issue anew.

The other two issues raised by Prudential, discussed in

Sections B and C below, concern the priority of its alleged lien

relative to the FDIC’s attachment. The questions of priority among

liens on Serrano’s property and of the validity of Prudential’s lien

— unlike the validity of the FDIC’s attachment — formed.no part

of the bankruptcy court’s decision and so are not barred from being

raised now. The bankruptcy court, when it ordered the funds to be

turned over in compliance with the FDIC’s attachment, made clear

that “said funds remain subject to any liens as per our order of

sale.” The bankruptcy court’s order of sale, dated April 27, 1989,

approved the liquidation of the stock shares “provided the

proceeds from the surrender of the shares are to be deposited with

the Clerk of the United States Bankruptcy Court for the District of

Puerto Rico, in an interest bearing account with liens, if and,

attaching to said Proceeds ... .” (emphasis added). The court

dismissed the bankruptcy petition before ever adjudging the

validity of Prudential’s alleged secured claim on the proceeds and

without deciding whether the FDIC’s attachment took priority over

other liens on the proceeds. Res judicata, therefore, does not bar

Prudential from now raising those questions, and we address them

on their merits.

lla

Appendix B

A. Validity of FDIC’s Attachment

Prudential’s first argument is that the district court should

have declared the FDIC’s attachment null and void because it was

obtained in violation of the automatic stay allegedly still in effect

in Serrano’s bankruptcy case. See 11 U.S.C. § 362. It is

Prudential’s theory that Fed. R. Civ. P. 62(a), applying by force of

Bankruptcy Rules 7062 and 9014, extended the automatic stay of

11 U.S.C. § 362 for ten days after the bankruptcy court had

dismissed Serrano’s bankruptcy petition. This argument has met

with little success in other cases involving similar circumstances.

See In re de Jesus Daez, 721 F.2d 848, 851-52 (Ist Cir. 1983); In re

Weston, 101 B.R. 202, 203-06 (Bankr. E.D. Cal. 1989), aff’d, 967

F.2d 596 (9th Cir. 1992), cert. denied, 113 S. Ct. 973 (1993).

Prudential’s standing to challenge an alleged violation of the

automatic stay is also problematic. See In re Pecan Groves of

Arizona, 951 F.2d 242, 245 (9th Cir. 1991) (“Language from many

cases indicates that, if the trustee does not seek to enforce the

protections of the automatic stay, no other party may challenge acts

purportedly in violation of the automatic stay.”). We do not pass on

these issues, however, as we are satisfied, infra, that Prudential is

barred by res judicata from raising the automatic stay as a bar.° We

add that it would be difficult to pass on the merits of the automatic

stay issue from the record now before us, which does not include a

full report of the bankruptcy proceedings and, in particular, omits

much information relevant to the stay and to orders issued lifting

the stay in respect to the district court proceeding in question.

6. Although the district court did not rely upon the grounds of res judicata, and

the parties ignored this theory on appeal, we may do so as we need not limit ourselves

to the exact grounds for decision utilized below. Watterson v. Page, 987 F.2d 1,7n.3

(Ist Cir. 1993); Aunyx Corp. v. Canon U.S.A., Inc., 978 F.2d 3, 6 (Ist Cir. 1992), cert.

denied, 113 S.Ct. 1416(1993).

12a

Appendix B

This court recently explained:

The doctrine of res judicata bars all parties and

their privies from relitigating issues which

were raised or could have been raised in a

previous action, once a court has entered a final

judgment on the merits in the previous action.

United States v. Alky Enterprises, Inc., 969

F.2d 1309, 1314 (Ist Cir. 1992). The essential

elements of res judicata, or claim preclusion,

are (1) a final judgment on the merits in an

earlier action; (2) an identity of parties or

privies in the two suits; and (3) an identity of

the cause of action in both the earlier and later

suits. Kale v. Combined Insurance Co. of

America, 924 F.2d 1161, 1165 (Ist Cir.), cert.

denied, __U.S.__, 112 S. Ct. 69, 116 L. Ed. 2d

44 (1991).

Aunyx Corp. v. Canon U.S.A., Inc., 978 F.2d 3, 6 (Ist Cir. 1992),

cert. denied, 113 S. Ct. 1416 (1993) (emphasis in original). “The

normal rules of res judicata and collateral estoppel apply to the

decisions of the bankruptcy courts.” Katchen v. Landy, 382 U.S.

323, 334 (1966); Chicot County Drainage Dist. v. Baxter State

Bank, 308 U.S. 371, 375-78 (1940); Turshen v. Chapman, 823 F.2d

836, 839 (4th Cir. 1987); see generally 1B James Wm. Moore et ai.,

Moore’s Federal Practice { 0.419[3] (2d ed. 1993). Orders,

judgments and decrees of the bankruptcy court from which an

appeal is not timely taken are final, 1 Collier on Bankruptcy

{ 3.03[4], at 3-179 (Lawrence P. King ed., 15th ed. 1993), even if

erroneous. Union Joint Stock Land Bank v. Byerly, 310 U.S. 1, 7-8

(1940); Van Huffel v. Harkelrode, 284 U.S. 225, 227 (1931). While

actions taken in violation of the automatic stay are often

13a

Appendix B

characterized as void and without effect, orders of the bankruptcy

court modifying the stay or finding no violation, even if erroneous,

are entitled to respect and are not subject to collateral attack. See

Union Joint Stock Land Bank, 310 U.S. at 7-8 (“The District Court

did not lose jurisdiction by erroneously construing or applying

provisions of the statute under which it administered the bankrupt

estate. Its order was voidable, but not void, and was not to be

disregarded or attacked collaterally . . . .”); IB Moore’s Federal

Practice { 4.19[3-.2], at 635.

All the elements of res judicata are met here. First, by its final

order on June 27, 1990, transferring Serrano’s funds in compliance

with the attachment, the bankruptcy court rendered a final

judgment that the attachment was valid. After dismissing Serrano’s

bankruptcy case, the bankruptcy court had retained jurisdiction to

determine whether to return the debtor’s funds to him or to another,

and gave all the creditors, of whom Prudential was one, eleven

days to “express their positions as to the disposal of these funds.”

Prudential’s counsel appeared at the hearing in the bankruptcy

court directly before issuance of the order dismissing the

bankruptcy case, at which time the court indicated that that order

was contemplated and said that it intended to grant the creditors ten

or eleven days to “let me know what I should do with these funds.”

In fact, on May 17, 1990, Prudential’s counsel invited the attorneys

for other creditors, including the FDIC’s counsel, to a meeting at

Prudential’s offices to discuss the disposition of the funds. This

meeting took place on May 18, 1990, at which time the FDIC’s

counsel showed to Prudential a copy of the attachment order it had

just obtained in the district court. Notwithstanding the foregoing,

Prudential never advised the bankruptcy court of its present

contention that the FDIC’S attachment was invalid, being in

supposed violation of the automatic stay, nor did it urge the

bankruptcy court to refuse to honor the attachment. Prudential’s

inaction is in notable contrast to that of another creditor, Shearson

14a

Appendix B

Lehman, which, on June 5, 1990, moved the bankruptcy court to

declare the attachment null and void in violation of the automatic

stay — the very same contention Prudential belatedly raises now.

Shearson Lehman’s contention was expressly denied by the

bankruptcy court on June 27, 1990, in its final order. In that same

order, the bankruptcy court disposed of the balance of the funds in

express compliance with the attachment, after first ordering the

payment of certain fees, expenses and other items. The bankruptcy

court’s June 27 order constituted an appealable final judgment. Jn

re Parque Forestal, Inc., 949 F.2d 504, 508-09 (Ist Cir. 1991).

However, Prudential took no appeal.

Second, Prudential does not deny that, as one of Serrano’s

creditors, it. was a party to the bankruptcy proceedings, nor that it

was fully cognizant on May 16-18, 1990, of the bankruptcy court’s

dismissal of Serrano’s case, of its retention of jurisdiction, and of

the FDIC’s attachment. Nor can Prudential deny that it knew of the

bankruptcy court’s invitation to all creditors to express their

positions as to the future disposition of the funds.

Despite this, Prudential complains that since it received no

formal notice from the district court of the FDIC’s attachment, it

was not a party to the dispute over the attachment. We cannot see,

for purposes of any act Prudential might have taken in the

bankruptcy court, that the absence of notice from the district court

was material. Prudential was fully cognizant that the bankruptcy

court intended to take action in June on the question of disposal of

Serrano’s assets, including the effect of the attachment. Yet

Prudential took no steps to pursue the matter before the bankruptcy

judge, including — in particular — to raise the bankruptcy-related

issue of the effect of the automatic stay on the validity of the

attachment. We are satisfied that Prudential was a party to the

proceedings in the bankruptcy court over the ultimate disposition

of Serrano’s assets — proceedings that ended with the bankruptcy

NAA) ae ame ho

15a

Appendix B

court’s recognition of the FDIC’s district court attachment and its

direction to turn over the assets in compliance therewith.

Finally, Prudential’s current challenge to the attachment

based on the automatic stay implicates the very same underlying

issue resolved by the bankruptcy court when it gave effect to the

attachment. The bankruptcy court’s final order of June 27, 1990

necessarily required it to have determined whether or not the

FDIC’s attachment was valid so as to be entitled to effect. The

bankruptcy court clearly had jurisdiction to make that

determination and, in particular, had jurisdiction to adjudicate any

claim of invalidity based on purported violation of the automatic

stay. See 11 U.S.C. § 105(a) (authorizing bankruptcy court to

“issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title.”); 11 U.S.C.

§ 362(d), (f) (authorizing court to grant relief from stay); 1 Collier

on Bankruptcy { 362.01[1], at 362-9 (“[T]}he bankruptcy court, as a

court of equity exercising in rem jurisdiction over assets in its

custody and control, can protect its jurisdiction by injunction,

whether or not such power is expressly set forth .. . .”); see

generally In re Continental Air Lines, 61 B.R. 758 (S.D. Tex. 1986)

(discussing jurisdiction of bankruptcy court over enforcement of

automatic stay).

As already noted, another creditor, Shearson Lehman, moved

in the bankruptcy court to have the attachment declared null and

void for precisely the same reasons Prudential now advances, viz.,

that the FDIC had allegedly violated the automatic stay when it

sought and received an order from the district court attaching

bankruptcy assets within one day after the bankruptcy cour? had

dismissed Serrano’s petition.’ The bankruptcy court included in its

7. The text of Prudential’ s current brief on this issue matches verbatim whole

portions of Shearson’s motion on this issue before the bankruptcy court.

16a

Appendix B

June 27, 1990 order a specific denial of Shearson Lehman’s

motion, indicating by that ruling its absence of doubt concerning

the existence of jurisdiction to adjudicate the claimed bar of the

automatic stay.

Prudential never made a similar motion nor in any way

challenged the attachment in the bankruptcy court, nor did it

appeal from the bankruptcy court’s order recognizing the FDIC’s

attachment. Instead, after the bankruptcy court had acted and the

attachment had been fully executed, Prudential petitioned to

intervene in the attaching district court for the purpose of arguing,

post hoc, that the bankruptcy automatic stay had invalidated the

attachment.® By the time of its petition, a final judgment giving

effect to the attachment was in effect in the bankruptcy court. As

res judicata now bars a collateral attack on the bankruptcy court’s

judgment, we treat the FDIC’s attachment as valid.

B. Pledge Agreement

Prudential says that, even assuming the FDIC had a valid

attachment on the stock proceeds, Prudential holds a superior lien

on the proceeds by virtue of a form signed by Serrano to open a

brokerage account at Prudential (the “Customer Agreement”).’

8. While Prudential was not formally noticed as to the attachment, it learned

about it from the FDIC’ s counsel on May 18, 1990, and, as an additional course, could

have promptly sought to intervene in the district court in hopes of quashing the

attachment before it was executed in the bankruptcy court. Instead, Prudential waited

for nearly three months, until well after execution of the attachment, before doing

anything.

9. The Customer Agreement provided, in part:

I [Serrano] agree, as follows, with respect to all the

(Cont'd)

17a

Appendix B

Prudential contends that the Customer Agreement operated, under

Puerto Rico law, as a “pledge” of any securities held in the

brokerage account. By virtue of this pledge, Prudential reasons, it

acquired a lien over the Bayamén Federal stock shares and their

proceeds prior to the FDIC’s attachment because the stock was, up

until 1987, held in Serrano’s account at Prudential.

The district court correctly rejected Prudential’s argument.

Puerto Rico law provides, “A pledge shall not be effective against a

third person, when evidence of its date is not shown by authentic

documents.” 31 L.P.R.A. § 5023. The Supreme Court of Puerto

Rico has stated: “An authentic document is a legalized document,

which is publicly attested, which is legally valid by itself.” Ramos

Mimoso v. Tribunal Superior, 93 P.R.R. 538, 540 (1966). A private

agreement or writing is not an authentic document; a document

verified before a notary public is an authentic document. Jn re

Santos & Nieves, Inc., 814 F.2d 57, 60 (Ist Cir. 1987); Ramos

Mimoso, 93 P.R.R. at 541. The record here supports the district

court’s finding that no notarized or other properly authenticated

(Cont'd)

accounts in which I have an interest alone or with others,

which I have opened or open with you [Prudential] for

the purchase and sale of securities and commodities:

Any and all credit balances, securities, or contracts

relating thereto and all other property of whatever kind

belonging to me or in which I have an interest held by

you or carried for my accounts shall be subject to a

general lien for the discharge of my obligations to you

(including unmatured and contingent obligations)

however arising ....

18a

Appendix B

document evidenced the date of Serrano’s alleged pledge of the

stock shares. The only document alleging to show the date of the

supposed pledge is the Customer Agreement, which is merely

signed by the parties and not notarized.

Prudential concedes that no notarized or otherwise

“authentic” document exists to evidence the date of the pledge, but

argues that it is sufficient that the purpose of the authentic

document requirement was fulfilled. Prudential filed a copy of the

Customer Agreement in 1987 with the clerk of a court in which

criminal proceedings against Serrano were being conducted, and

now argues that this filing satisfies the policy behind 31 L.P.R.A.

§ 5023. However, the authentic document rule is “a formal and

absolute rule” that is strictly construed. Jn re Supermercados San

Juan, Inc., 575 F.2d 8, 12 (ist Cir. 1978); Trueba v. Zalduondo, 34

P.R.R. 713, 716 (1925). Neither section 5023 nor any cases

interpreting it support Prudential’s theory that the authentic

document requirement can be fulfilled simply by filing a copy of an

unnotarized document in court.

Prudential attempts to analogize this case to Trueba v.

Zalduondo, 34 P.R.R. 713 (1925), in which the Supreme Court of

Puerto Rico held that a transfer of corporate stocks as collateral for

a loan that was recorded in the corporations’ official records was

valid against later-attaching third parties, even though the transfer

did not comply with the authentic document rule codified in the

predecessor statute to 31 L.P.R.A. § 5023. However, Trueba

expressly held that section 13 of the Private Corporations Act,

(now codified as 14L.P.R.A. § 1509), and not the predecessor to 31

L.P.R.A. § 5023, governed under those circumstances. The Trueba

decision “was based on the fact that stock so transferred would be

authenticated by the public and formal records of the corporation

as a transfer of a security interest.” Jn re Supermercados San Juan,

19a

Appendix B

Inc., 575 F.2d at 12. The Trueba court did not create an exception to

section 5023 and, in fact, reiterated that the authentic document

rule “is a rigid rule.” Trueba, 34 P.R.R. at 716. Because Prudential

does not contend that the Private Corporations Act, as opposed to

31 L.P.R.A. § 5023, governs this case, Trueba is inapposite."

The district court correctly held that Prudential’s purported

pledge agreement did not comply with the authentic document

requirement of 31 L.P.R.A. § 5023 and thus was not valid against

the FDIC as a pledge.

C. Puerto Rico Agency Law

Prudential argues that it acted as Serrano’s agent for the

purchase and sale of securities and, as such, acquired a statutory

lien on all securities held on behalf of Serrano, including the

Bayam6n Federal stock. Prudential points to a Puerto Rican statute

providing that, “The agent may retain the things which are the

objects of the agency in pledge until the principal pays the

indemnity and reimbursement referred to in the two preceding

sections [§§ 4462, 4463].” 31 L.PR.A. § 4464. Prudential

misinterprets the statute, however. Even if Prudential were

Serrano’s agent, section 4464 does not give it a lien on the stock

proceeds superior to the FDIC’s attachment because Prudential did

not “retain the things,” viz., the Bayamén Federal stock

10. Prudential’s citation of Jn re Las Colinas, Inc., 294 F. Supp. 582 (1968),

vacated and remanded, 426 F.2d 1005 (ist Cir. 1970), is similariy unhelpful. Even if

parts of it remain good law, the relevant issue in that case was whether certain

collateral, transferred after a pledge agreement was notarized and signed, constituted

a valid pledge of that collateral. /d. at 602-03; see also Omega Int’! Corp. v. Interstate

Steel de Puerto Rico, Inc., 590 F. Supp. 844, 850 (D.P.R. 1984) (explaining Jn re Las

Colinas). Here, Prudential concedes that there was no notarized pledge agreement.

20a

Appendix B

certificates. The stock was transferred to a court in 1987 pursuant

to a court order, and was subsequently liquidated. We find no

authority for the proposition that section 4464 creates statutory

liens on things, let alone their proceeds, which are not retained by

the agent. For this reason alone, the district court’s ruling that

Prudential does not have a lien over the stock pursuant to Puerto

Rico agency law was plainly correct."

The district court did not err in finding that Prudential had no

lien with priority over the FDIC’s attachment and in dismissing

Prudential’s claims over the funds attached by the FDIC."

No. 92-1652 — Banco Cooperativo

Appellant Banco Cooperativo says that it obtained a judgment

and award of damages against Serrano on September 15, 1987

from a Puerto Rico court in a civil action. Banco never executed the

judgment, attached the funds that are the subject of this appeal, or

otherwise obtained a lien on any of Serrano’s property. Banco also

concedes that the FDIC obtained a valid judgment against Serrano

on October 16, 1989, and properly executed the judgment by

11. The district court also found that section 4464 was inapplicable because

Serrano’s alleged liability to Prudential is unrelated to the stock shares previously

held in his account and because the liability was merely contingent, not due and

payable. See I-II Jose Puig Brutau, Fundamentos de Derecho Civil 545-46 (2d ed.

1976).

12. Prudential also makes various arguments based on New York law. We do

not consider any of them as Prudential makes no argument on appeal that the district

court erred in determining that Puerto Rico law, not New York law, governs this case.

See Fed. R. App. P. 28(a)(3), (5).

2la

Appendix B

attaching the funds at issue on May 17, 1990. Banco contends,

nonetheless, that Puerto Rico law gives its claim on Serrano’s

assets priority over the FDIC’s.

We agree with the district court that the statute on which

Banco relies, 31 L.P.R.A. § 5194, does not apply here. The first

provision of Title 31, Chapter 399 provides: “Credits shall be

classified for their graduation and payment in the order and manner

specified in this chapter.” 31 L.P.R.A. § 5191.31 L.P.R.A. § 5194

provides in part:

With regard to all other personal and real

property of the debtor, preference shall be

givento:...

(4) Indebtedness which without a special

privilege appear:

(a) Ina public instrument.

(b) In a final judgment, should they

have been the object of litigation.

These credits shall have preference among

themselves according to the priority of dates of

the instruments and of the judgments.

Banco interprets section 5194(4) to mean that its claim to the funds

has “preference” over the FDIC’s claim because Banco obtained

its judgment two years before the FDIC was awarded its judgment.

Under Banco’s interpretation, section 5194(4) makes irrelevant the

fact that the FDIC attached the property in dispute and Banco did

not.

22a

Appendix B

The Supreme Court of Puerto Rico has consistently held

otherwise, finding that 31 L.P.R.A. § 5194 does not supplant the

standard rule that, as between two judgment creditors without

other liens, the first creditor to attach has priority. In Oronoz & Co.

v. Alvarez, 23 P.R.R. 497 (1916), the Court rejected the argument

that a creditor always has priority if it has a judgment antedating

the judgment of other creditors. Jd. at 500. The Court explained:

We have recently decided that mere priority in

judgment gives the prior creditor no lien.

Auffant v. Succession of Manuel de J. Ramos et

al., (23 P.R.R. 385 (1916)]. An attachment or

other similar step is necessary to give the

judgment a priority and as between judgment

creditors the first to attach has the priority. It is

a race of diligence. The priority of payments to

which sections 1822 et seq. of the Civil Code

[31 L.P.R.A. § 5191 ef seq.] relate has no

application to attachments.

Id. The Court reaffirmed the first-to-attach rule in Puerto Rico

Bedding Mfg. Corp. v. Herger, 91 P.R.R. 503 (1964), writing that,

“There is no question that among common creditors the first one

who attaches has preference over the others... .” Id. at 507. The

Court clarified that the preference created by attachment “does not

go beyond the right which the debtor may have over the property

attached,” meaning that valid liens already on the property when

attached cannot be defeated by an attachment. Jd. In Empresas

Capote, Inc. v. Superior Court, 3 PR. Sup. Ct. Off’1 Translations

1067 (1975), the Supreme Court of Puerto Rico reiterated, “It

should be remembered that, grounded on the axiom prior tempore

portior jure, even among common creditors, ’. . . the first one who

attaches has preferences over the others, but such prezerence does

23a

Appendix B

not go beyond the right which the debtor may have over the

property attached.’ ” Jd. at 1078-79 (quoting Puerto Rico Bedding

Mfg. Corp. v. Herger, 91 P.R.R. 503, 507 (1964)).

Some provisions of Chapter 399 other than 31 L.P.R.A. § 5194

create statutory preferences, a concept equivalent to statutory

liens, on certain types of property. These statutory preferences take

priority over attachments even if the preference holder does not

formally attach the property. For example, 31 L.P.R.A. § 5 192(1)

creates, in essence, a seller’s lien “for the amount of the sale of

[the] personal property which may be in possession of the debtor to

the extent of the value of the same.” 31 L.P.R.A. § 5192(1); see In

re Jack's Club & Hotel, 138 F. Supp. 620, 622 (D.P.R. 1956). Thus,

the credit of a manufacturer who was not paid for mattresses and

bed frames it sold to a retail store had priority over the credit of

another creditor who attached the items in the store. Puerto Rico

Bedding Mfg. Corp., 91 P.R.R. at 507-09. While the attachment

created a preference, or lien, in favor of the attaching creditor,

“such preference does not go beyond the right which the debtor

may have over the property attached.” Jd. at 507-08. That is, 31

L.P.R.A. § 5192, without the need for execution or attachment,

gives the seller an interest in the property sold that diminishes the

debtor’s interest in the property and that cannot be defeated by

attaching creditors. See also Heirs of Garriga v. O’Meara, 28

P.R.R. 332, 334-35 (1920) (discussing priority of the statutory

preferences created by 31 L.P.R.A. § 5192 over attachments).

In contrast, 31 L.P.R.A. § 5194(4) does not create a seller’s

lien or any other type of statutory lien on property of the debtor. It

does not refer to specific property of the debtor or specific

transactions between the creditor and debtor. Compare 31 L.P.R.A.

§ 5192(3) (creating lien for the costs of transportation on goods

transported by creditor) and 31 L.P.R.A. § 5192(6) (creating lien

on fruit crops in favor of creditor who provided seeds) with 31

2Aa

Appendix B

L.P.R.A. § 5194(4) (referring to no specific property). The silence

of § 5194(4) implies that a general judgment creditor must execute

its judgment by attaching property, such as the debtor’s cash or

stock certificates, before it can claim any sort of “lien” on that

property.

Here, the FDIC and Banco were both judgment creditors, but

the FDIC, by attaching the stock proceeds, obtained a lien on those

proceeds which has priority over Banco’s unexecuted judgment

against the debtor. Banco had no lien or other legally-recognized

property interest in Serrano’s assets at the time of the attachment.

All it had was an unsecured credit in its favor as the result of a court

judgment. Thus, the FDIC’s attachment reached ail of the funds

released by the bankruptcy court and is not subject to a claim by

Banco.

For these reasons, the district court did not err in determining

that 31 L.P.R.A. § 5194(4) does not give Banco, which did not

execute its judgment, priority over the FDIC, which obtained a

valid attachment of the funds." Therefore, the district court

properly dismissed Banco Cooperativo’s claim. '*

13. We have considered and found no merit in Banco’s myriad other

arguments. For example, we do not have the authority to declare Oronoz & Co. to be

wrongly decided by the Puerto Rico Supreme Court or mistranslated by the official

court translator, as Banco urges us todo. The case of Rodriguez v. Solivellas & Co., 49

P.R.R. 618 (1936), which discussed 31 L.P.R.A. § 5194, held that a prior mortgage on

certain property had priority over a cautionary notice of attachment on the property. It

did not hold, as appellant maintains, that attachments have no effect on the rights of

judgment creditors with prior claims, but relied instead upon the same principle

discussed above, that “[an] attachment is valid only as regards any balance left after

cancelling the former security.” Jd. at 623.

14. Banco complains that the district court should have “reprobated” or

(Cont'd)

25a

Appendix B

Ii.

In conclusion, we find no error and so affirm the district

court’s order in Appeal No. 92-1652, dismissing the claims of

Prudential, and in Appeal No. 92-1651, dismissing the claim of

Banco Cooperativo to the funds held by the court.

Affirmed. Costs to appellee.

(Cont'd)

sanctioned the FDIC for acting in bad faith when it obtained its attachment. Banco did

notraise this issue in a timely fashion, waiting until it moved for reconsideration of the

district court’s Opinion and Order to bring the issue to the court’s attention.

Consequently, we will not consider it on appeal. See Brown v. Trustees of Boston

Univ., 891 F.2d337, 352 (Ist Cir. 1989), cert. denied, 496 U.S. 937 (1990). Moreover,

we find no evidence in the record to support Banco’ s allegations of bad faith on the

FDIC's part.

26a

Appendix B

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

No. 92-1651

FEDERAL DEPOSIT INSURANCE CORPORATION,

Cross-Plaintiff, Appellee,

SHEARSON-AMERICAN EXPRESS, INC., ETAL.,

Cross-Defendants.

BANCO COOPERATITVO DE PUERTO RICO,

Intervenor-Appellant.

No. 92-1652

FEDERAL DEPOSIT INSURANCE CORPORATION,

Cross-Plaintiff, Appellee,

SHEARSON-AMERICAN EXPRESS, INC., ETAL.,

Cross-Defendants.

PRUDENTIAL BACHE SECURITIES, INC.,

Intervenor-Appeliant.

TUDGMENT

Entered: June 24, 1993

27a

Appendix B

These causes came on to be heard on appeal from the United

States District Court for the District of Puerto Rico, and were

argued by counsel.

Upon consideration whereof, It is now here ordered, adjudged

and decreed as follows: The judgment of the District Court is

affirmed.

By the Court:

DANIEL F. LOUGHRY

Clerk

[cc: Messrs. Fernandez-Bared, Perez-Marrero and Peral]

28a

APPENDIX C— OPINION AND ORDER OF THE UNITED

STATES DISTRICT COURT FOR THE DISTRICT OF

PUERTO RICO FILED MARCH 11, 1992

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

CIVIL NO. 84-758 (RLA)

FEDERAL SAVINGS & LOAN INSURANCE CORPORATION

Cross-Plaintiff,

SHEARSON-AMERICAN EXPRESS, INC., et al.

Cross-Defendants.

OPINION AND ORDER

Before the Court are various motions filed by intervenors

Prudential Bache Securities, Imc. (“Prudential”), Banco

Cooperativo de Puerto Rico (“Banco Cooperativo”) and the

Federal Deposit Insurance Corporation as Manager of the Federal

Savings and Loan Insurance Corporation Resolution Fund

(“FDIC”), a cross-claimant in this case. Prudential and Banco

Cooperativo claim liens over the funds which stand attached in

favor of the FDIC and which are undeer the custody of the Clerk of

this Court.

29a

Appendix C

I. PROCEDURAL BACKGROUND

In March of 1985 the Federal Savings and Loan Insurance

Corporation (“FSLIC”)! made its first appearance in this case in a

motion seeking to be substituted for Home Federal Savings & Loan

Association of Puerto Rico (“Home Federal”) in cross-claims filed

by Home Federal on September 14, 1984 against Shearson Lehman

Brothers, Inc. (“Shearson”) and Shearson Lehman Brothers, Inc.

(Puerto Rico) (“Shearson P.R.”), collectively identified as the

Shearson Companies, Miguel Serrano Areche (“Serrano”), and

Ponce M.A. Developers, Inc. (“PDI”). On December 10, 1985 the

FSLIC filed amended cross-claims against the Shearson

Companies, Serrano, PDI and others (Docket No. 128).

In November of 1988, the FSLIC and the Shearson Companies

reached a settlement on their claims. Thereafter, the FSLIC

continued to pursue its claims in this case against cross-defendant

Serrano and others. On April 7, 1989, default was entered on the

FSLIC’s amended cross-claims against Serrano. (Docket No. 455).

On August 22, 1989 a default hearing on damages was held

concerning, among other matters, the FSLIC’s amended cross-

claims against Serrano. On October 16, 1989, judgment was

entered in this case adjudging Serrano liable to the FDIC in the

amount of $44,265,241.00.

1. Upon passage of the Financial Institutions Recovery, Reform and

Enforcement Act of 1989 (“FIRREA”), Pub. L. No. 101-73, 103 Stat. 183, Section

215 of FIRREA, 12 USC § 1821 A et seq., the FDIC became the successor in interest

of the FSLIC in these proceedings. Since the motions under consideration relate to the

rights of the FDIC over the attached funds, reference in this order will sometimes be

made to the FDIC.

30a

Appendix C

In September of 1987, Serrano filed a bankruptcy petition

under Chapter 11 of the U.S. Bankruptcy Code? [Case No. 87-

02169(SEK)]. On May 16, 1990, the U.S. Bankruptcy Court,

acting upon a motion to dismiss filed by the FSLIC, dismissed

Serrano’s Chapter 11 bankruptcy petition. Upon the dismissal of

the bankruptcy petition on May 16, 1990, the FDIC filed with this

Court a Motion for Attachment and Writ of Execution for

satisfaction of its judgment against Serrano (Docket No. 491). On

May 17, 1990, this Court issued a Writ of Attachment and

Execution ordering that upon expiration of a 20 day period after the

dismissal of Serrano’s Chapter 11 bankruptcy petition, any funds

belonging to Serrano were to be delivered to a process server

appointed by the Court by means of acheck payable to the Clerk of

this Court.

On July 10, 1990, in compliance with the Writ of Attachment

and Execution, Mr. Rafael Villanueva, the designated process

server, filed a motion tendering a check payable to the Clerk of this

Court in the amount of $557,862.65.’ On July 13, 1990, the FDIC

filed its Motion for Disbursement of Attached Funds (Docket No.

497). And on August 10, 1990, this Court issued an Order

Authorizing Withdrawal of Funds (Docket No. 498) in favor of the

FDIC.

2. On November 18, 1988, the FSLIC filed a motion for lift of the automatic

stay in order to continue prosecution its cross-claims against Serrano in this case. On

January 13, 1989 the U.S. Bankruptcy Court ordered the stay lifted permitting the

FSLIC to continue pursuing its claims in this case against Serrano until entry of

judgment.

3. Anadditional $5,886.65 were deposited on February 1, 1991.

3la

Appendix C

On August 15, 1990, Prudential filed an Urgent Motion for

Intervention (Docket No. 499) alleging it had a preferential lien

over the funds attached by the FDIC and requesting a period of 15

days in which to submit a brief in support of its claim over the

funds. On August 15, 1990, before the funds were disbursed to the

FDIC, the Court issued an Order (Docket No. 500) staying its

previous Order Authorizing Withdrawal of Funds of August 10,

1990 until further order. On August 20, 1990, Banco Cooperativo

filed a Request for Permission to Intervene in this case. (Docket

No. 501).

Thereafter, the parties have set forth their respective positions

concerning the attached funds in multiple motions and briefs

(Docket Nos. 502 through 528).

II. PRUDENTIAL’S CLAIM OF PREFERENTIAL LIEN

In its intervention in this case Prudential claims to have a

preferential lien over the funds attached by the FDIC. Prudential

alleges that its claim over the funds derives from an action filed by

Banco Cooperativo against Prudential in the Superior Court of

Puerto Rico.‘ In that action Banco Cooperativo essentially alleged

that on or about the year 1980, Serrano, who was then employed as

director of Prudential’s Institutional Trading Department, caused

some $295,000 in Puerto Rico General Obligation Bonds to

disappear from Banco Cooperativo’s account at Prudential. Banco

Cooperativo asserted that Prudential, as the employer of Serrano,

was liable to Banco Cooperativo for such loss.

4. Banco Cooperativo de P.R. v. Bache Halsey Stuart et al. v. Miguel A.

Serrano, etal., Civil No. 84-5941 (903), Superior Court of Puerto Rico, San Juan Part.

32a

Appendix C

In April of 1985, Prudential filed a third party complaint

against Serrano in the Superior Court case asking that Serrano be

held liable for the amount of any judgment which may be entered

against Prudential in the action brought by Banco Cooperativo. It

is on the basis of the pending action of Banco Cooperativo against

Prudential and on Prudential’s also pending third party claim

against Serrano in the Superior Court case, that Prudential claims

to have a $400,000 contingent claim against Serrano.

The funds attached by the FDIC were part of the proceeds

from the sale of 32,400 shares of Bayamén Federal Savings Bank

stock which belonged to Serrano and which he maintained in an

account with Prudential. The 32,400 Bayamon Federal shares were

sold pursuant to an Order of the U.S. Bankruptcy Court in the

Chapter 11 bankruptcy case of Serrano.

Prudential claims to have a preferential lien over the funds

attached by the FDIC by virtue of a Customer Agreement executed

by Serrano with Bache Halsey Shields Incorporated (Prudential’s

predecessor) in September of 1980. The Agreement contains

language providing that Prudential shall have a general lien over

any securities held by Prudential on behalf of the client (Serrano)

for the discharge of the account holder’s obligation to Prudential.

Prudential also asserts that pursuant to a choice of law

provision in the Customer Agreement New York law controls in

this case and that pursuant to section 151 of New York Debtor and

Creditor Law, it has a lien and right of set off over the funds in

question.°

5. See Briefin Support of Prudential Bache Securities, Inc.'s Preferential Lien

Over Funds Attached by Plaintiff at 12-19 (Docket No. 502) and Reply to FDIC's

Opposition to Prudential Bache’ s Brief Preferential Lien Over the Funds (Docket No.

514).

33a

Appendix C

Prudential advances, in the alternative, that it has a lien over

the funds in question under Puerto Rico law pursuant to the

contract of agency provisions of the P.R. Civil Code, 31 L.P.R.A.

§§ 4421, et. seg. Prudential’s Brief at 19, Docket No. 502.

The FDIC asserts that the Customer Agreement upon which

Prudential claims a preferential lien over the funds does not

operate to create a lien over the funds under Puerto Rico law.

The FDIC asserts that it is Puerto Rico and not New York law

which must be applied in this case. FDIC contends that under

Puerto Rico law the Customer Agreement does not create a

preferential lien in favor of Prudential. The FDIC further asserts

that even if New York law were to be applied, Prudential’s claim

over the funds in question would fail.

A. Choice of Law

The law chosen by the parties to govern their relationship will

not be applied when:

(2) .<.

(a) the chosen state has not substantial

relationship to the parties or the transaction and

there is no other reasonable basis for the

parties’ choice, or

(b) application of the law of the chosen state

would be contrary to a fundamental policy of a

state which has a materially greater interest

34a

Appendix C

than the chosen state in the determination of the

particular issue and which, under the rule of

188, would be the state of the applicable law in

the absence of an effective choice of law by the

parties.

Restatement, Conflict of Laws 2d, § 187.

There seems to be no dispute that the Customer Agreement,

upon which Prudential relies for its contention that it is New York

and not Puerto Rico law that should be applied, was executed in

Puerto Rico, between a resident of Puerto Rico and a securities

firm located in Puerto Rico, the customer’s account was opened in

Puerto Rico, the shares in question were purchased in Puerto Rico

and were issued by a financial institution (Bayamon Federal

Savings) located in Puerto Rico. Thus, it is Puerto Rico not New

York, that has a substantial relationship to the parties, the

transaction and the securities.

Additionally, to the extent that application of New York law

would permit the creation of a general lien on unmatured and

contingent obligations arising out of a document not recorded or

executed before a notary, it would also violate fundamental

policies of the laws of Puerto Rico.

Art. 1764 of the P.R. Civil Code provides: “[a] pledge shall not

be effective against a third person, when evidence of its date is not

shown by authentic documents.” 31 L.P.R.A § 5023.

Since Prudential’s alleged lien would be tantamount to a

pledge in this jurisdiction, it is invalid and unenforceable against

third parties, as it does not appear executed in an “authentic

35a

Appendix C

document”. Ramos Mimoso v. Superior Court, 93 P.R.R. 538, 541

(1966); Liechty v. Descartes Sauri, 109 D.P.R. 496, 504 (1980); Jn

re Santos & Nieves, Inc., 814 F.2d 57 (Ist Cir. 1987); In the Matter

of Supermercados San Juan, Inc., 575 F.2d 8 (ist Cir. 1978).

The Customer Agreement pursuant to which Prudential

claims a preferential lien was not executed before a notary and is,

therefore, not an authentic document. Not having complied with

the above stated requirements, Prudential does not have a

preferential lien over the funds attached in favor of the FDIC under

the law of Puerto Rico.

B. New York Law

Even if New York law were to be applied Prudential does not

have a perfected lien over the funds attached by the FDIC.

Prudential claims that the controlling statute in this case is

N.Y. Debt. & Cred. Law, §151, which provides as follows in

pertinent part:

Every debtor shall have the right upon:

(d) the issuance of any execution against

any of the property of a creditor;

(e) the issuance of a subpoena or order, in

supplementary proceedings, against or with

respect to any of the property of a creditor; or

6. A private agreement is not an authentic document. A document executed

before a notary is an authentic document. Ramos Mimoso v. Tribunal Superior, 93,

P.R.R. 538 (1966).

36a

Appendix C

(f) the issuance of a warrant, of attachment

against any of the property of a creditor, to set

off and apply against any indebtedness,

whether matured or unmatured, of such

creditor to such debtor, any amount owing

from such debtor to such creditor, at or at any

time after, the happening of any of the above

mentioned events, and the aforesaid right of set

off may be exercised by such debtor against

such creditor. . .

Pursuant to the above statutory provision, Prudential alleges

to have a preferential lien and right of set-off against the funds

attached by the FDIC in this case.

Prudential asserts that the lien and right of set-off which it

claims are based upon a contingent liability of Serrano to

Prudential. (Prudential’s Brief at 17, Docket No. 502). Contingent

liabilities are not within the right of set-off contemplated by § 151

of N.Y. Debt. & Creditor Law. Trojan Hardware Co., Inc. v.

Bonacquisti Const. Corp, 534 N.Y.S. 2d 789, 141 A.D. 2d 278

(1988).

Section 151 provides a right of set-off only against

indebtedness, matured or unmatured. “‘Indebtedness’ refers to the

condition of being in debt and debt is generally defined as a fixed

and certain obligation.” Trojan Hardware Co., Inc., 534. N.Y.S. at

790, 141 A.D. 2d at 281; Norwich Pharmacal Co. v. Barrett, 205

A.D. 749, 752, 200 N.Y.S. 298 (1923). It does not include

liabilities which are contingent in that it is uncertain as to whether

anything will ever be demandable. So long as acontingent liability

in tort is unlitigated, it is not yet an “indebtedness” within the

meaning of a statute providing for set-off. Trojan Hardware Co.;

37a

Appendix C

Yellowitz v. J.H. Marshall & Associates. Inc., 284 A. 2d 665, 667

(D.C. App. 1971).

Accordingly, § 151 of N.Y. Debt. & Creditor Law does not

afford Prudential a right of set-off nor a statutory lien over the

funds attached by the FDIC.

C. Agency Provisions of the P. R. Civil Code

Prudential also argues that it has a statutory lien over the funds

attached by the FDIC pursuant to the contract of agency provisions

of the P.R. Civil Code, 31 L.P.R.A. 4421, et seq., in particular art.

1621, 31 L.P.R.A 4464. Prudential brief at 19-21, Docket No. 502.

Among the requirements to invoke the right to retain things in

pledge pursuant to art. 1621 are the following: (1) retention of a

thing; (2) the existence of a credit in favor of the holder and (3)

connection between the credit and the thing retained in pledge. I-II

Puig Brutau, Fundamentos de Derecho Civil at 545 (2nd ed. 1976).

As to the requirement of the existence of a credit, Puig Brutau

states that the right of retention in pledge can only be invoked in

connection with a credit which is due and payable (“vencido”). I-II

Puig Brutau at 546. In this case, there was no credit due and

payable by Serrano to Prudeniia! as it is on the basis of an

unmatured, contingent liability that Prudential claims to have a

right to retain in pledge the stock (now its proceeds) in question.

In addition, Prudential’s claim under art. 1621 fails because

there is no connection between the credit (the unmatured

contingent liability) and the thing retained in pledge (the Bayamén

Federal shares). The contingent liability upon which Prudential

bases its claim to the shares is premised upon Serrano’s activities

38a

Appendix C

as an employee of Prudential and not due to Serrano’s relationship

with Prudential as a customer.’ The Customer Agreement pursuant

to which Prudential claims its right to retention in pledge, states

that the customer (Serrano) is not an employee of Prudential or of

any of its predecessors, or of any Exchange or Member Firm of any

Exchange.' It is apparent that there is no connection between the

stock retained in pledge pursuant to the Customer Agreement and

the alleged contingent liability of Serrano to Prudential, which

arises in connection with Serrano’s activities as an employee of

Prudential, not as an account holder.

Nevertheless, even if the requirements to properly invoke the

right to retain things in pledge pursuant to Article 1621 were

present, such a pledge is invalid and unenforceable against third

parties such as the FDIC in this case unless it appears executed in

an authentic document pursuant to 31. L.P.R.A. 5023. Ramos

Mimoso v. Superior Court, 93 P.R.R. at 541; Liechty v. Descartes

Sauri, 109 D.P.R. at 504.

Ill. CLAIM OF BANCO COOPERATIVO

On August 20, 1990, Banco Cooperativo filed a Request for

Permission to Intervene in these proceedings (Docket No. 501).

Thereafter, Banco Cooperativo it submitted numerous motions

claiming a “preference” over the funds attached by the FDIC.

(Docket Nos. 508, 509, 512, 516, 519, 521,523, 524, 527 and 528).

7. See complaint in Civil Case No. 84-5941, Superior Court of Puerto Rico,

San Juan Part, attached as Exhibit A to Opposition of the FDIC, Docket Nos. 504 and

505.

8. See Customer Agreement { 2, attached as Exhibit A to Prudential’s Brief,

Docket No. 502.

39a

Appendix C

Banco Cooperativo claims that because its judgment against

Serrano was issued prior to that of the FDIC - Banco Cooperativo

apparently obtained a judgment against Serrano in September of

1987, whereas the FDIC obtained its judgment in October of 1989 -

pursuant to arts. 1821-1825 of the P.R. Civil Code, 31 L.P.R.A.

5191-5195, it has a preference over the funds attached by the FDIC

in the present case. Banco Cooperativo’s Legal Basis for Claimed

Preference, Docket No. 508.

Specifically, Banco relies on the provisions of Article 1824 ;

which state in pertinent part:

With regard to all other personal and real

property of the debtor, preference shall be

given to:

(4) Indebtedness which without special

privilege appear:

(b) In a final judgment, should they have been

the object of litigation.

These credits shall have preference among

themselves according to the priority of dates of

the... judgments.

Art. 1824 of the P.R. Civil Code, 31 L.P.R.A. 5194.

40a

Appendix C

The FDIC argues that the preferences and priorities set forth in

arts. 1821-1825, are not applicable to the question at bar, because

Banco Cooperativo did not perfect an attachment or otherwise

obtain any rights over the Bayam6n Federal shares or its proceeds.

The FDIC asserts that based on the axiom prior tempore portior

jure Banco Cooperativo’s claim over the attached funds is without

merit.

In Oronoz & Co. v. Alvarez, 23 P.R.R. 497, 500 (1916) the P.R.

Supreme Court held that:

[T]he mere priority in judgment [dates] gives

the prior creditor no lien. An attachment or

other similar step is necessary to give the

judgment a priority and as between judgment

creditors the first to attach has the priority.

It is a race of diligence. The priority of

payments to which sections 1822 et seq. of the

Civil Code relate has no application to

attachments. (emphasis added) (citations

omitted)

In P.R. Bedding Mfg. Corp. v. Herger, 91 P.R.R. 503, 507

(1964) the Supreme Court of Puerto Rico stated, “[t]here is no

question that among common creditors the first one who attaches

has preference over the others. . .” It has also held that “[i]t should

be remembered that, grounded on the axiom prior tempore portior

jure, even among creditors, ‘the first who attaches has a preference

over the others . . ."” Empresas Capote, Inc. v. Tribunal Superior, 3

P.R. Supreme Court Official Translations 1067, 1078-79 (1975),

citing P.R. Bedding, 91 P.R.R.507.

In view of the foregoing, the claim of Banco Cooperativo over

the funds attached by the FDIC in this case is without merit.

4la

Appendix C

IV CONCLUSION

Based on the foregoing, the Brief in Support of Prudential

Bache Securities, Inc.’s Preferential Lien over Funds Attached by

Plaintiff (Docket No. 502) is hereby DENIED.

It is further ORDERED that the Legal Basis for Claimed

Preference filed by Banco (Docket No. 508) is hereby DENIED.

Accordingly, the claims of Prudential and Banco Cooperativo

over the funds attached by the FDIC are hereby DISMISSED and

the attached monies presently deposited with the Clerk of the Court

will be disbursed to the FDIC.

IT IS SOORDERED.

San Juan, Puerto Rico this 6th day of March, 1992.

s/ RAYMOND L. ACOSTA

United States District Judge

42a

APPENDIX D — REQUEST FOR PERMISSION TO

INTERVENE

IN THE UNITED STATES DISTRICT COURT

DISTRICT OF PUERTO RICO

CIVIL NO. 840758 (RLA)

FEDERAL SAVINGS AND LOAN INSURANCE CORP.,

Plaintiff,

SHEARSON AMERICAN EXPRESS, et al,

Defendants.

REQUEST FOR PERMISSION TO INTERVENE

TO THE HONORABLE COURT:

Now comes Banco Cooperativo through the undersigned

attorney and respectfully claims and prays:

1. On 1984 Banco Cooperativo started suit No. 84-5941

(803) in the local Superior Court of San Juan, Puerto Rico, and on

September 15, 1987 a judgement was issued against Miguel

Serrano Arreche. He filed a request for reconsideration, which was

denied and, as no appeal was taken from said decision, the

judgement became firm and final.

2. On January 23, 1987 a hearing had been held before Hon.

Judge Jaime Pieras, Jr., in criminal case No. 84-381, in relation

with a restitution order and the claims of FDIC (FSLIC),

43a

Appendix D

Prudential-Bache, and Banco Cooperativo over 32,400 shares of

Serrano which Bache was holding and had been ordered to deposit

in Court under the Court’s jurisdiction and until further

determination. All the claims were discussed and Judge Pieras Jr.,

ruled that the shares were to stay under the custody of the Court for

safekeeping, with the understanding that “nobody waives a claim

here”, (page 33 transcript), and that the Court “do(es) not want any

attachment of those shares”. (page 32 transcript).

3. As during the month of January 1987 this party requested

from the Superior Court an order to secure the judgement it

expected to get against Miguel Serrano, the attorney for the FDIC

wrote us a threatening letter where he stated:

“We understand that your client, Banco

Cooperativo, may be considering violating the

terms of Judge Pieras’ order by seeking to

attach some of Serrano’s property. Please be

advised that such an action may place Banco

Cooperativo in contempt of the Court’s order.”

(Exh 1)

4. Consistent with its threat, FSLIC filed a motion requesting

that we be held in contempt of court, to which we replied:

“The request of FSLIC is improvident and

ignores the previous proceedings and

pronouncements made by Judge Jaime Pieras,

Jr., in the January, 23rd hearing, wherein the

Judge stated “The stock is going to be kept in

the vault of the court. . . . and nothing will be

done with that stock unless there is a final

judgement, ... nobody waives a claim here.

d4a

Appendix D

We are doing it for safekeeping.” (Exh 2)

The contempt charge was properly and adequately ignored by the

Court.

5. On February 12, 1987 the attachment order was issued, and

a $100,000.00 bond posted to cover any damages the attachment

may cause. The order was filed in the Federal Court, on September

9, 1987, with a motion that stated that:

“(s)aid attachment has not been executed out of

commity from the insular court and Banco

Cooperativo since this Honorable Court—

Judge Pieras, Jr..—decided that the stock

would be kept by the court’s clerk and that no

attachment would ensue. As a matter of record

and as evidence of the interest of Banco

Cooperativo to attach either the shares or the

proceeds if they are released by the court,

copies of the attachment papers are hereby

included with the request that they be made a

part of the record.” (Exh 3)

6. That motion was followed by another dated September 23

1987, submitting the order to the marshall, further showing “the

renewed interest of Banco Cooperativo in attaching certain shares

or the proceeds thereof of Miguel Serrano Arreche and deposited

with the court clerk.” (Exh 4)

7. Meanwhile, the Court (Judge Pieras Jr.) had issued two

very interesting orders on April 11, 1987. One read, “The matter as

to the rights of the parties to the proceeds of the shares is not here

decided.” The other, addressed precisely to FSLIC, said: “The

45a

Appendix D

parties have understood and agreed that the matter of ownership

and priority of creditors and victims as to the Bayamon Fed. S&L’s

shares are questions pertaining to findings of facts and conclusions

of law to be entered by this Court.” (emphasis ours)

8. We had to abide by the order of Judge Pieras, Jr., and in

good faith relied in his caveat and complied with it, under the

conviction that said order was going to be observed by all

concerned. Much to our chagrin, we just found out such was not the

case, as parties that were present through counsel in said hearing,

have completely disregarded the same and attached the proceeds of

said shares, without mentioning to this Court the standing order of

Judge Jaime Pieras, Jr. We have also been informed that said party

(FDIC) requested disbursement of said funds. Banco Cooperativo

was not notified of said request even though FDIC is aware of the

bank’s claim against said monies.

9. Upon Serrano’s filing for bankruptcy, Judge Pieras, Jr.,

referred the whole file with all the matters he had under advisement

to that court. The Bankruptcy Court did not enter into any of those

issues, and the petition of Serrano was dismissed on May 16, 1990.

Hence, it follows that the status of the proceeds of the shares and

the rights and priorities of the creditors are and should be matters

pending before Judge Pieras, Jr., who has not yet ruled on them. It

is equally obvious that the action of FSLIC in not informing this

Honorable Judge of the background of which it was intensely

aware to the extent of having requested sanctions for “violations”

to said orders, is a guileful action and the least it merits is a rebuke.

10. From the above, it follows that before FSLIC could attach

the proceeds of the shares;

46a

Appendix D

a) it should have disclosed the whole factual and legal

picture before this Court;

b) Judge Jaime Pieras Jr., must have been given an

opportunity to decide the matters pending before him;

c) the prior lien claim of Bache-of which FDIC-FSLIC

are fully aware- should have been disposed of

d) the prior attachment -prior judgement rights of Banco

Cooperativo, of which they are also fully aware,

should have been disposed of,

¢) the least they should have done is notify this Court

and these parties before attempting to abscond with

the funds.

Therefore, it is respectfully requested that the attachment and

disbursement ordered be held in aboyance and the matter of prior

claims, pending in case No. 84-381 be referred to its proper forum

(Judge Jaime Pieras, Jr.) or in the alternative, be taken into

consideration by this court before ruling definitely on the matter.

I CERTIFY: That on this same date I have sent a true and

exact copy of this document to Roberto Boneta, Esq., Mujioz

Boneta Arbona Benitez Peral, Popular Center Building, Hato Rey,

Puerto Rico; Salvador Antoneti, Fiddler Gonzdlez & Rodriguez,

Chase Manhattan Bank Building, Hato Rey, Puerto Rico; José

Correa Cintr6n, Box 23314, University Station, San Juan, Puerto

Rico, 00931-23314, Maximiliano Trujillo, Apartado Postal 9481,

Bayamé6n, Puerto Rico 00619; Juan Luis Boscio, P.O. Box 708,

Ponce, Puerto Rico 00732; McConnell, Valdés, Kelley, Sifre,

Griggs & Ruiz-Suria, G.P.O. Box 4225, San Juan, Puerto Rico

00936.

47a

Appendix D

In San Juan, Puerto Rico, Agust 20, 1990.

PLINIO PEREZ MARRERO

J. GERARDO CRUZARROYO

JOSE A. RODRIGUEZ JIMENEZ

Banco Cooperativo Plaza

Floor 9th, Tower “A”

623 Ponce de Leén Avenue

Hato Rey, Puerto Rico 00917

Tel: 764-2100

Fax: 764-2944

By: Plinio Pérez Marrero

USDC - PR 115114

48a

APPENDIX E — RELEVANT STATUTES

ADDENDUM 5

Chapter 399. Classification of Credits

§ 5191. Howcredits classified

Credits shall be classified for their graduation and payment in

the order and manner specified in this chapter. — Civil Code,

1930, § 1821.

§ 5192. Credits preferred —As to specified personal property

of debtor

With regard to specified personal property of the debtor, the

following are preferred:

1. Credits for the construction, repair, preservation, or for the

amount of the sale of personal property which may be in the

possession of the debtor to the extent of the value of the same.

2. Those secured by a pledge which may be in the possession

of the creditor, with regard to the thing pledged and to the extent of

its value.

3. Those guaranteed by a security of goods or securities

constituted at a public or commercial establishment with regard to

the security and for the value of the same.

4. Credits for trasportation, with regard to the goods

transported, for the amount of said transportation, expenses and

rates of carriage and preservation, until the time of the delivery and

for a period of thirty days afterwards.

49a

Appendix E

5. Expenses of boarding with regard to the persona! property

of the debtor remaining in inns.

6. Credits for seeds and expenses of cultivation and

harvesting, advanced to the debtor, with regard to the fruits of the

crops to which they were applied.

7. Credits for rents and leases for one year with regard to the

personal property of the lessee existing on the estate leased and on

the fruits thereof. If the personal property, with regard to which the

preference is allowed, has been surreptitiously removed, the

creditor may claim it from the person who has the same, within the

term of thirty days counted from the time it was so removed. —

Civil Code, 1930, § 1822.

Annotations

2. Purchase price. A vendor of personal property has no right

to attach the said property upon claiming the preference referred to

in this section after the purchaser has sold and given the possession

of it to another person, even assuming that it had not been paid for

in full. Benftez Flores v. Borinquen Trading Corp., 1924, 33 P.R.R.

481.

The mere levy of an attachment on personal property at the

instance of the holder of a promissory note is not sufficient to place

such property beyond the operation of this section under which

preference in connection with certain personal property of the

debtor is given to creditors for the purchase price of the property,

and less so in a case in which the property was sold under a public

instrument while the promissory note was not made with that

formality. Gonzalez v. Alonso, 1924, 33 P.R.R. 66.

50a

Appendix E

§ 5193. — As to certain real property and rights on realty

With regard to certain real property and rights on realty of the

debtor, the following shall have preference:

1. Credits in favor of the Commonwealth of Puerto Rico or of

the corresponding municipality with regard to the property of the

taxpayers for the amounts of the last three annual assessments and

the current annual assessment, unpaid, of the taxes which burden

the same.

2. Credits for advances for agricultural purposes, as to the

crops on the property for which such advances are made, as

provided in the special act relative to that subject.

3. Credits of insurers, with regard to the property insured, for

the insurance premiums for two years, and should the insurance be

mutual, for the last two dividends declared.

4. Mortgage and agricultural credits (refaccionarios) entered

and recorded in the registry of property, with regard to the property

mortgaged, for which had been the object of the agricultural loan

(refaccién).

5. Credits, of which a cautionary notice has been made in the

registry of property by virtue of a judicial mandate, by reason of

attachments, sequestrations, or execution of judgments, with

regard to the property entered therein and only with regard to

subsequent credits.

6. Agricultural loans not entered or recorded with regard to

the real estate to which the agricultural loan (refaccidn) relates,

and only with regard to other credits from that mentioned in the

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four preceding numbers. — Civil Code, 1930, § 1823; Const., art.

IX, § 4, eff. July 25, 1952.

§ 5194. — As to all other personal and real property

With regard to all other personal and real property of the

debtor, preference shall be given to:

1. Credits in favor of the Commonwealth of Puerto Rico and

of the corresponding municipality for the taxes of the last three

annual assessments due and the current unpaid annual assessment

which are not covered by paragraph one of the preceding section.

2. Credits for advances for agricultural purposes, as to the

crops on the property for which such advances are made, as

provided in the special act relative to that subject.

3. Those due:

(a) For judicial expenses and those of administration of

bankruptcy for the common interest of the creditors, made with the

proper authorization or approval.

(b) For the funeral expenses of the debtor, according to the

customs of the place, and also those of his wife and of his children,

under their parental authority, should they have no property of their

own.

during the last year, counted up to the day of their death.

(d) For daily wages and salaries of employees and domestic

servants for the last year.

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(e) For advances made to the debtor for himself and his

family constituted under his authority, in provisions, clothing, or

shoes, for the same period of time.

(f) For income for support during proceedings in bankruptcy,

unless they are based on mere beneficence.

4. Indebtedness which without a special privilege appear:

(a) Ina public instrument.

(b) In a final judgment, should they have been the object of

litigation. -

These credits shall have preference among themselves

according to the priority of dates of the instruments and of the

judgments. — Civil Code 1930, § 1824; Const., art. IX, § 4, eff.

July 25, 1952.

§ 5195. Credits having no preference

Credits of any other kind or for any other consideration not

included in the preceding sections, shall have no preference. —

Civil Code, 1930, § 1825.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.