Opinion

Court: United States Bankruptcy Court, D. Puerto Rico
Filed: Sep 2, 2016
Cited by: 0 cases
Authority: More cited than 41.2%

The opinion

IN THE UNITED STATES BANKRUPTCY COURT

2 FOR THE DISTRICT OF PUERTO RICO

3 IN RE: CASE NO. 06-04675 (ESL)

INVOLUNTARY

4 EDGAR ABNER REYES COLON CHAPTER 11

Debtor

7 OPINION AND ORDER

The issue pending in this case is whether Banco Popular de Puerto Rico (hereinafter

10 referred to as “Banco Popular” or “BPPR”) and its affiliate Popular Auto, Inc. (hereinafter

11 referred to as “Popular Auto”) failed to comply with the requirements of 11 U.S.C. §303(b)

because at the time the involuntary petition was filed (November 22, 2006) against Dr. Edgar

Abner Reyes Colón (hereinafter referred to as “Involuntary Debtor” or “Dr. Reyes”) Dr. Reyes

had more than twelve (12) creditors. This court, in the opinion and order entered on May 23,

2012 (docket # 404) (‘the “Opinion and Order”), In re Colon, 474 B.R. 330 (Bankr. D.P.R.

17 2012), found that as of petition date the Involuntary Debtor had 15 creditors and that there are

18 only two petitioning creditors. However, the court also concluded that the judicially created

19 “special circumstances exception” to the numerosity requirement in § 303(b) may apply if the

petitioning creditors establish fraud, artifice or scam “based upon the alleged fraudulent transfers

made by the Involuntary Debtor to various corporations prior to the filing of the bankruptcy

petition.” Thereafter, “if the petitioning creditors prove that special circumstances are indeed

present in this case, then the court would have to determine whether the Involuntary Debtor was

25 ‘generally not paying such debtor’s debts as such debts become due’ pursuant to 11 U.S.C.

26 §303(h)(1) in order to grant the order of relief in this case.” See order entered on August 10,

27 2015 (dkt. # 488).

This case is also before the court upon the Involuntary Debtor’s renewed motion to

2 dismiss the involuntary petition. The Involuntary Debtor reasserts its contention that the

3 involuntary petition must be dismissed because the same fails to comply with the statutory

4 provisions in 11 U. S. C. § 303(b)(1) and (2), requiring that whenever there are more than 12

creditors, at least three undisputed creditors must join the petition. The Involuntary Debtor also

reaffirms its legal conclusion that after the Supreme Court’s opinion in Law v. Siegel, 134 S. Ct.

1188 (2014), the “special circumstances exception” addressed in this court’s order of May 12,

2012 is not applicable, and that it has so been determined by recent decisions.

10 The travel and facts of this case are found in the opinion of May 12, 2012. In re Reyes

11 Colon, 474 B.R. 330 (Bkrtcy. D.P.R. 2012) (Lamoutte, BJ). See also the orders entered on

12 August 10, 2015 (dkt. #488) and October 28, 2015 (dkt. #540). The issue pending after these

13 decisions was whether there were facts warranting that the “special circumstances exception” to

14 the creditor numerosity requirement, as determined in In re Moss, 249 B.R. 411 (Bankr. N.D.

15 Tex. 2000), be applied in this case. After a thorough analysis of all the evidence presented to

16 this court and the applicable law, the court concludes that there are special circumstances due to

17 the Involuntary Debtor’s scheme to misrepresent his financial condition, but that such

18 misconduct may not override the statutory requirement that three or more creditors join in the

19 filing of an involuntary petition when there are 12 or more creditors. In reaching this

20 conclusion, the court acknowledges that after Law v. Siegel, its equitable powers have been

21 significantly diminished.

22 The court held evidentiary hearings in November and December 2015 to consider

23 whether there are special circumstances warranting the exception to the three or more creditor

24 requirement in section 303(b). The minutes of said hearings include a detail of both the

25 documentary evidence and the testimony of the witnesses presented. See docket numbers 633,

26 704, 706, 709, 716 and 720. The court incorporates said minutes and attaches the same hereto

27 as constituting its findings of fact. The inferences from the testimony of the witnesses presented

1 by the petitioning creditors, that is, professionals who have worked with or for the Involuntary

2 Debtor, show that these professionals (accountants[Mr. Félix Román Dávila], certified public

3 accountants [CPA Félix N. Negrón Román], attorneys [Eric Y. Reyes Colón, Esq.], notary

4 publics [María Torres Cartagena, Esq.], friends and associates [Dr. Francisco J. Quintero Peña])

5 related to Dr. Reyes exhibited convenient or selective amnesia to blur the economic scenario of

6 Dr. Edgar A. Reyes and to orchestrate a scheme to deceive creditors by misrepresenting

7 transactions to transfer assets, as well as the financial condition of the Involuntary Debtor and

8 related entities, which misrepresentations ultimately were aimed at benefiting the Involuntary

9 Debtor. These individuals voluntarily agreed to misinform creditors. The uncontroverted

10 testimony and the reports (Exhibit 41 and Exhibit 42) of the expert witness, CPA Eduardo

11 Soria, CPA/ABV, CVA, CIA, CFE, Esq., pellucidly established the involuntary debtor’s

12 fraudulent actions and scheme. The witnesses’ testimony, as incorporated and analyzed by

13 CPA Eduardo Soria, evince a puppet scheme approach on the part of Dr. Edgar A. Reyes to

14 defraud Banco Popular. Therefore, the court finds that the scheme to defraud constitutes special

15 circumstances.

16 However, only two creditors joined the petition, and the Involuntary Debtor had more

17 than twelve creditors. Therefore, the court is compelled to balance the statutory requirements

18 for filing an involuntary petition and the application of equity principles in the administration of

19 bankruptcy proceedings.

20 The view that bankruptcy courts are courts of equity was summarized in The Official

21 Committee of Unsecured Creditors of Cybergenics Corporation v. Chinery, 330 F. 3d 548, 567

22 (3d Cir. 2003), as follows:

The Supreme Court has long recognized that bankruptcy courts are equitable

tribunals that apply equitable principles in the administration of bankruptcy

25 proceedings. See Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S.Ct. 695, 78 L.Ed.

1230 (1934) (“[C]ourts of bankruptcy are essentially courts of equity, and their

26 proceedings inherently proceedings in equity.”). The enactment of the Code in 1978

increased the degree of regulation Congress imposed upon bankruptcy proceedings, but

27 it did not alter bankruptcy courts' fundamental nature. See H.R. Rep. No. 95–595, at

359 (1977), reprinted in U.S.C.C.A.N. 5963, 6315 (stating that, under the Bankruptcy

Code, “[t]he bankruptcy court will remain a court of equity”) (citing Local Loan Co.,

2 292 U.S. at 240, 54 S.Ct. 695). Any lingering doubt on that point is dispelled by a string

of post-enactment Supreme Court decisions—see Young v. United States, 535 U.S. 43,

3 50, 122 S.Ct. 1036, 152 L.Ed.2d 79 (2002) (“[B]ankruptcy courts [ ] are courts of

equity and ‘apply the principles and rules of equity jurisprudence.’ ”) (quoting Pepper

4 v. Litton, 308 U.S. 295, 304, 60 S.Ct. 238, 84 L.Ed. 281 (1939)); United States v. Energy

Resources Co., 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990)

(“[B]ankruptcy courts, as courts of equity, have broad authority to modify creditor–

6 debtor relationships.”)—and by the Code itself. See 11 U.S.C. § 105(a) (“The Court may

issue any order, process, or judgment that is necessary or appropriate to carry out the

7 provisions of this title. No provision of this title providing for the raising of an issue by a

party in interest shall be construed to preclude the court from, sua sponte, taking any

8 action or making any determination necessary or appropriate to enforce or implement

court orders or rules, or to prevent an abuse of process.”).

Equity in bankruptcy has been generally related to the “fresh start” principles. Grogan

v. Garner, 498 U. S. 279 (1991). Section 105(a) of the Bankruptcy Code, which allows

bankruptcy judges to issue orders that are necessary or appropriate to carry out the provisions of

the Code, has been used as the basis to claim equitable powers in bankruptcy. Marrama v.

Citizens Bank of Massachusetts, 549 U.S. 365 (2007). This was the rule in the First Circuit

after Marrama. See Malley v. Agin, 693 F. 3d 28 (1st Cir. 2012). The rule has been admittedly

limited to exercising equitable powers to facilitate other code provisions and not a roving

commission to do equity. In re Ludlow Hospital Society, Inc., 124 F. 3d 22 (1st Cir. 1997). See

also In re Nosek, 544 F. 3d 34 (1st Cir. 2008). However, the legal scenario changed in 2014.

Change in bankruptcy is not a strange concept. As stated by the Supreme Court in Wright v.

Union Central Life Ins. Co., 304 U.S. 502, 513 (1938): “[t]he subject of bankruptcies is

incapable of final definition. The concept changes.”

After Law v. Siegel, the equitable powers of the bankruptcy courts, to the extent they

existed, have been diminished or restricted whenever exercising such equitable powers

contravenes specific statutory provisions. Law v. Siegel, making reference to the Supreme

Court’s decision in Marrama, specifically did not endorse “the view that equitable

considerations permit a bankruptcy court to contravene express provisions of the Code.” This

change was acknowledged by the First Circuit in U. S. V. Ledee, 772 F. 3d 21, 29 n. 10 (1st Cir.

1 2014). The First Circuit noted that “the Supreme Court’s ruling does not restrict the bankruptcy

2 court’s discretion concerning amendments unrelated to exemptions …” This view was the one

3 adopted by the court at the hearing held on November 12, 2015 when the following was stated:

The court advanced to the parties, that this court’s appreciation of the facts in

5 2012 in order to determine whether the special circumstances apply may be

different in 2015. In the year 2012, the prevalent decision by the Supreme Court

was In re Marrama, 449 U.S. 365 (2007). The court stated that it is fully

7 conscious that in the year 2014, the Supreme Court entered another decision, Law

v. Siegel. Thus, in order to make a final determination based upon the facts as to

8 whether special circumstances should be applied in this scenario (involuntary

petition) which is different from the exemption scenario in Law v. Siegel and is

9 different from the factual scenario in Marrama which was a motion to convert.

The court stated that it has to make a decision based on the facts and it is

conscious of the law and will apply the same as best as it can. However, the

11 parties have the duty and responsibility to place the court in a position to be able

to render a legal decision based upon the facts. The court cannot avoid making the

12 decision because the parties are reticent to present the evidence to the court. This

court will make a ruling based upon the evidence presented. The reasons for this

13 hearing should have been clear since the court’s May 22, 2012 decision which has

been postponed basically because of the discovery issues that have been brought

before the court. The court further stated that it was aware of the mandamus that

15 was filed not for an action, but for the First Circuit to make a decision on the legal

issue that is ultimately before the court. That is the First Circuit Court’s province

16 which I will not even attempt to delve into. The court stated that it may decline to

grant the involuntary petition for relief, but that does not divest the court of

jurisdiction to impose sanctions for violations of discovery orders and whether or

not the ultimate sanction of granting the relief requested that is the entry of the

order for relief is a legal determination that will be considered.

See minutes at docket #633, page 8.

Supreme Court precedent lends support to this court’s perspective at such juncture. In

22 Taylor v. Freeland & Kronz, 503 U.S. 638, 646 (1992) the Supreme Court found that there were

23 no “unusual circumstances” warranting addressing equity arguments under section 105(a). Thus,

24 implicitly, misconduct may be a factor to consider.

1 The First Circuit Court of Appeals recently addressed the subject of claims of equitable

2 relief in the bankruptcy courts in In re Oak Knoll Associates, L.P, ___ F.3d ___, 2016 US App.

3 Lexis 15276, 2016 WL 4410065, (1st Cir. August 19, 2016), and held that:

4 Congress has given bankruptcy courts the authority to "issue any order, process, or

judgment that is necessary or appropriate to carry out the provisions" of the Bankruptcy

Code. 11 U.S.C. § 105(a). We have cautioned, however, that this does not give

6 bankruptcy courts "a roving writ, much less a free hand" to provide equitable relief. In re

Jamo, 283 F.3d 392, 403 (1st Cir. 2002). Rather, this statute "may be invoked only if, and

7 to the extent that, the equitable remedy dispensed by the court is necessary to preserve an

identifiable right conferred elsewhere in the Bankruptcy Code." Id.

The filing of a voluntary petition in bankruptcy has few limitations. On the other hand,

an involuntary petition initiated by creditors is more limited as it must meet the requirements in

§ 303. Involuntary relief is only available in cases under chapter 7 or chapter 11. The entry of

an order for relief is not automatic in an involuntary case as the petitioning creditors must

establish the statutory grounds supporting relief. Charles Jordan Tabb, Law of Bankruptcy.

Third Edition (2013), pgs. 120-121.

Creditors generally commence involuntary cases to protect themselves against

dissipation or diminution of assets, particularly if the creditor is concerned that the debtor may

be transferring assets outside their reach. David Wheeler, Involuntary Bankruptcy Petitions: Is

§ 303 Still a Viable Creditor Alternative? 29-9 ABIJ 36 (November 2010). The evidence before

this court clearly shows that the reasons leading to the filing of the involuntary petition are the

typical ones prompting creditors to take action. The Involuntary Debtor was transferring assets

to related entities under his possession and control, and was engaged in a scheme to defraud his

main creditor, Banco Popular de Puerto Rico.

An involuntary petition must be executed by the parties specified in § 303 (b). Hon.

Joan N. Feeney, Hon. Michael G. Williamson, Michael J. Stepan, Esq., Bankruptcy Law

Manual, Fifth Edition, Volume 2, § 14.8. The number of petitioning creditors depends on the

number of creditors holding qualified claims. Hon. Joan N. Feeney, Hon. Michael G.

Williamson, Michael J. Stepan, Esq., Bankruptcy Law Manual, Fifth Edition, Volume 2, § 14.9.

1 This court has determined that there are more than twelve creditors. Therefore, at least three

2 petitioning creditors must join the petition. 11 U. S. C. § 303(b)(1).

3 The bankruptcy court in In re Mateer, 525 B.R. 559, 567 (Bkrtcy. D. Mass. 2015), was

4 faced with a similar predicament, determining whether the statute or equity should prevail. I

5 share in the frustration inferred from the statements by Chief Judge Hoffman in Mateer,

6 concluding that misconduct cannot override a statutory provision in the Bankruptcy Code. In

7 this case there is a specific statutory requirement for the filing of an involuntary petition against

8 a debtor who has more than twelve creditors. The involuntary petition must be filed by three or

9 more creditors. A fraudulent scheme, after Law v. Siegel, is not a basis for a bankruptcy court

10 to obviate the statutory requirement that there be three or more creditors joining the involuntary

11 petition when there are twelve or more creditors. As stated by Professor Klee: “After Law,

12 bankruptcy courts may be less likely to test the limits of their equitable powers. If they do,

13 appellate courts should be less likely to tolerate a use of the equity powers that conflicts with

14 the Bankruptcy Code.” Professor Kenneth N. Klee on the Supreme Court’s holding in Law v.

15 Siegel, 571 U.S. ___ , 2014 U.S. Lexis 1784 (March 4, 2014), 2014 Emerging Issues 7162.

16 Thus, the Marrama holding that bankruptcy judges may take appropriate actions to avoid

17 abuse of process under section 105(a) has been severely restricted by Law v. Siegel, as

18 bankruptcy judges do not have equitable powers not found in the Bankruptcy Code, when the

19 invocation of the equitable powers is based on bad faith or misconduct. Such is the law, and

20 this court is obligated to follow the same. The notion that bankruptcy courts are courts of equity

21 may now be more an illusory construct than a judicial precept. Perhaps rightly so, as “[t]he

22 intended function of the federal courts is to apply the law as it comes to them from the hands of

23 others.” Robert H. Bork, The Tempting of America, The Political Seduction of the Law, pg. 4

24 (1990).

25 In view of the foregoing, the involuntary petition is hereby dismissed.

26 SO ORDERED.

27 In San Juan, Puerto Rico, this 2nd day of September, 2016.

3 unitdd staves Eenkrupeoy Judge

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