Fall 2004-06 Mortgage note returned to debtor still valid

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Number 57
Fall 2004
Puerto Rico Supreme Court

Mortgage note returned to debtor still valid

A mortgage debtor may receive back a previously issued mortgage note, and such recapture does not cancel the note or the mortgage. R & G Premier Bank v. Valentín, 2004 TSPR 128.

The facts

Samuel Santos and Zulma Raíces had delivered to Banco Bilbao Vizcaya a first mortgage note for $500,000, which they later reacquired from the bank. Subsequently they made a $900,000 mortgage note to R & G Premier Bank, and requested the Registry of Property to subordinate the $500,000 mortgage that they were holding to R & G's $900,000. The registrar refused, asserting that:

  • the $500,000 mortgage disappeared by operation of law when Santos and Raíces became both debtors and holders-a legal figure known as "confusion of rights"- and
  • they could not request subordination of the $500,000 because they were not the creditors thereof.

The Puerto Rico Supreme Court reversed the ruling of the registrar.

Confusion of rights

That there is no confusion of rights when a mortgage debtor again becomes holder of the mortgage note has been case law in Puerto Rico for a long time. The leading case is Secretario de Hacienda v. Tribunal Superior, 95 D.P.R. 436 (1967). The differences between the Secretario de Hacienda case and Santos-Raíces' were that:

  • in the former, the debtor immediately re-issued the mortgage note, while Santos and Raíces held on to it, and
  • the mortgage note in the Secretario de Hacienda case was payable on demand, and in the Santos-Raíces case it matured on a stated date.

As to this second item the Supreme Court emphasized that the note had still not matured at the time the events took place.

The registrar's confusion argument "banishes before the reality that the note does not lose its negotiable character because of the temporary confusion of rights episode in which it finds itself, particularly when it matures on year 2008," the Court said. And the fact that the debtors held on to it-as opposed to immediately re-issuing, as happened in Secretario de Hacienda-has no effect because the note had yet to mature. The Court compared the situation to that of an owner who mortgages his property and holds on to the mortgage note for future use. "As long as he retains the note, its validity and effectiveness, as well as that of the mortgage security, remain latent, but as soon as possession of the instrument is transferred, all rights that derive from the instrument and its security gain full force and effect from the very date on which the former [i.e., the note] was made and the latter [i.e., the mortgage] was presented for recordation with the Registry of Property."

The Mortgage Law is to be construed so as to facilitate and protect commercial trade, maintained the Supreme Court.

Subordination

Mortgage rankings can be legally negotiated; thus one mortgage can be subordinated to another. The law requires, needless to say, that the affected creditor consent to the subordination.

The registrar's conclusion that there was no "creditor" in the swap requested by Santos and Raíces was in error because their possession of the mortgage note made them such "creditors," the Supreme Court ruled.


© 2004 Goldman Antonetti