The opinion
] IN THE UNITED STATES BANKRUPTCY COURT
2 FOR THE DISTRICT OF PUERTO RICO
3
4 IN RE: CASE NO.17-04156 (ESL)
5 BETTEROADS ASPHALT LLC. CHAPTER 11
6 Debtor
7 TN RE: CASE NO, 17-04157 (ESL}
8 || BETTERCYCLING CORPORATION CHAPTER 11
9 Debtor
10
OPINION AND ORDER
12
3 The matter before the court in the above captioned involuntary chapter 11 petitions is
4 whether the Petitioning Creditors, composed of Firstbank Puerto Rico (“Firstbank”), Banco
15 Santander de Puerto Rico (“Banco Santander”), the Economic Development Bank for Puerto
6 Rico (“EDB”), and Banco Popular de Puerto Rico (“Banco Popular” or the “Administrative
"7 Agent”, and collectively with Firstbank, Banco Santander and EDB, the “Lenders”), Sargeant
8 Marine, Inc. and Sargeant Trading LTD (collectively “Sargeant”), Facsimil Paper Connection,
19 Inc. (“Facsimil”), Champion Petroleum, Inc. (“Champion”), Control Force, Corp., (“Control
20 Force”) and St. James Security, Inc. (“St. James” and together with the Lenders, Sargeant,
Champion, Control Force and Facsimil, the “Petitioning Creditors”) filed the involuntary
petitions in bad faith. The critical legal issue before the court, that bad faith is an independent
cause for the dismissal of an involuntary petition under section 303(b), 11 U.S.C. § 303(b), even
when the petitioning creditors satisfied the three-prong requirement for filing an involuntary
35 petition, was determined in this court’s opinion and order entered on November 30, 2018. In re
Betteroads Asphalt,LLC and In re Bettercyeling Corporation, 594 B.R. 516 (Bankr, D. P. R.
27
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1 {/2018), Because bad faith is a fact intensive issue, an evidentiary hearing was scheduled and
2 heard.
3 EVIDENTIARY HEARING
4 A detailed exposition of the events and the evidence presented at the hearings is found im
5 this court’s minutes (docket numbers 480, 493, 494 and 497), which are attached and made a
6 || part of this opinion and order as an exhibit.
7 The burden to prove that the petitioning creditors filed an involuntary petition whether
8 not the involuntary petitions were filed “ in bad faith, that is, for an improper purpose that
9 || constitutes an abuse of the bankruptcy process” lies on the alleged debtors. In re Betteroads
10 || Asphalt,LLC and In re Bettercycling Corporation, 594 B.R. 561, 564. During the evidentiary
11 ||hearing the court emphasized that key to the alleged debtors prevailing in their allegations of
12 ||bad faith was to establish pursuant to the totality of the circumstances that the involuntary
13 petitions were filed for an improper bankruptcy purpose.
14 The evidence presented by the involuntary debtors established that the decision by the
15 || petitioning creditors to file the involuntary petitions was made upon consultation with legal
16 counsel for the petitioning financial institutions.
17 Banco Popular de Puerto Rico and the involuntary debtors engaged in extensive
18 |} negotiations and discussions after the involuntary debtors defaulted on their loan payments. As
19 || part of the negotiations Banco Popular unsuccessfully tried to renegotiate the terms of the loans
20 || which restricted the potential sale of the loans. Banco Popular initiated state court actions for
21 || collection of monies. Banco Popular as agent for a syndicate of lenders contracted and provided
22 legal advice on the filing of the involuntary petitions.
23 Mr. Jorge L. Diaz, president of the involuntary debtors, testified and recounted the
24 |linstitutional history of the corporations and the events leading to the loan with Banco Popular.
95 ||Mr. Diaz described the operations of the corporations before and after the filing of the
26 involuntary petitions. He related the pressures placed by Banco Popular upon the corporations
27 ||to make payment of the loans and how their ability to make checks and disbursements was
2.
1 ||testricted. Mr. Diaz gave as an example of undue pressure the signing of a forbearance
2 ||agreement, as a condition to provide a moratorium or an extension of time to make payments,
3 which would change the loan terms which restricted the banks from selling assets of the
4 corporation without consultation and authorization from the involuntary debtors. As a result,
5 || Banco Popular foreclosed accounts receivable and restricted access to income, which led to the
6 || closing of the corporations.
7 Ms. Marisel Rivera Torres, former Vice President of Finance of the involuntary debtors,
8 testified regarding her return after the corporations ceased to operate upon Mr, Diaz request in
9 |lorder to assist on the accounting and financial affairs of the corporations. She found the
10 || facilities in a critical situation as there were no systems working that could provide reliable date
11 ||regarding the accounting records. Although the systems were restored and they moved to
12 another facility, there was substantial accounting information missing. Thus, the financial
13 || information that could be produced to the financial institutions was limited.
14 The alleged debtors presented Mr. Francisco J. Pericas Alfaro as a witness. Mr. Pericas
15 has worked for Banco Popular since 1999. He was the director of the special loan division from
16 March 2013 to October 2013. He was then transferred to the corporate banking division as
17 || director and vice president of Banco Popular. He testified to be familiar with the involuntary
18 ||debtors’ credit facilities with Banco Popular, although there were other officers directly
19 || working with the credit facilities, particularly the syndicated credit facility, in which other
20 || banks participated. Banco Popular was the agent for the syndicate loan.
21 Prior to the filing of the involuntary petitions the banks that formed the syndicate (Banco
22 ||Popular, Banco Santander de Puerto Rico, Firstbank, and the Economic Development Bank)
23 || met in order to discuss what steps to take in relation to the involuntary debtors’ loan. One
24 |laction taken was the filing of two actions against the involuntary debtors around September
25 |12015. The discussions concerning the filing of the state court actions and the filing of the
26 involuntary petitions were not directly related. The considerations and analysis of the filing of
27 || the involuntary petitions were made by counsel for the syndicate banks.
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j However, Mr, Pericas gave a detailed explanation of the reasons that triggered the filing
2 |lof the involuntary petitions. The same are found in the minutes of the hearing held on July 17,
3 2019 (dkt. #494, pages 10-16). The court highlights below the same in part.
4
Mr. Peric[4]s proceeded to explain the reasons that triggered the filing of
the bankruptcy petitions. He testified that around September 2016, after a year
6 (365 days) of the bank not receiving payment for the principal or interest on the
loans, which is important for banks under local banking law because after a year
7 lapses without receiving payment, banks have to charge the full amount of the
loan, regardless of the value of the collateral. Thus, the banks sat down to assess
8 the situation, they did not want to charge the full amount of the loan but there was
9 no progress on the sale of the terminal. Even though there were parties that were
interested, and they had capital to support the transaction. There was the case of
10 Sargeant Marine which had the writ of attachment and they did not know if there
could be more cases like these. Therefore, they decided to exercise the remedies
1] under the contract. He stated that they tried to agree on a foreclosure agreement,
but that did not prosper, thus the banks went ahead and filed a collection claim
12 around September 2016. Shortly thereafter, the banks learned through a member
B of the bank syndicate that some of the plants were being leased to third parties.
Banco Popular was not aware of that situation. Mr. Peric|a]s testified that they
14 requested the borrower to allow the banks to visit some of the plants. He stated
that around October 2016, a group of officers from the bank syndicate visited nine
15 (9) plants and they learned that four (4) of the plants; Aguada; Arecibo, Manati
and Salinas were leased to a company named Transporte Rodriguez. Two of the
16 plants in Barranquitas and Caguas were leased to Carlos Ortiz, A bank officer
7 from Banco Popular noticed that the equipment at Caguas labeled as property of
Betteroads and Betterecycling. The Carolina plant was leased to someone
18 identified as Engineer [Purros?]. The Humacao plant, which the bank understood
was not operating based on conversations with the borrower, was being leased
19 and operated to Javi Melendez. The banks were not aware that the assets that were
the banks’ collateral were being leased to third parties. Their counsel at the same
20) time wanted to know whether Betteroads and Betterecycling was doing business
with the municipalities so they were looking at the Registry of the Puerto Rico
Comptroller’s office (Oficina del Contralor de Puerto Rico), They identified two
3? (2) contracts that seemed to be projects awarded to Betteroads and Betterecycling
and there was an attempt to transfer those contracts to a company under the name
23 of Puerto Rico Asphalt. Around the same time, through a random google search
they learned that a license under the nuclear regulatory commission that was
24 under Betteroads’ name was transferred to Puerto Rico Asphalt.
95 He further stated that once the accounts receivables were foreclosed, they
attempted to collect payments and there was a significant discrepancy between the
6 balance of accounts receivables as reported by the borrower to the banks and the
amounts the municipalities recognized as the balance of those accounts
27 receivables. The difference was significant. In some cases, the municipality was
4.
recognizing about 10% of the amount reported by the borrower. In addition, they
1 were also following the local state court website to find out if there was additional
> litigation being filed against the borrower because that would be a concern
because it could put the assets at risk in case of an adverse decision in local court.
3 Thus, from a totality of the circumstances perspective they thought that the stay
prohibition that could be obtained through bankruptcy would be beneficial
4 because it would allow the banks and the borrower to protect itself from the
5 potential results of liquidation.
Mr. Peric[A]s testified that they noticed that the assets were being used by
6 third parties. He testified that they felt that there was a lack of transparency
because most of the information regarding the licenses, the contracts, the plants,
7 and the accounts receivables was received from third parties, not from the
borrowers. The assets were being transferred and the value of the banks’ collateral
8 was being depleted because the assets were being used without the banks’
9 knowledge and the banks were not receiving any benefit and were losing value of
collateral. Mr. Peric[4]s testified that he thought it would be beneficial and could
10 not be obtained through the local courts to attain some type of orderly liquidation
and equitable distribution of assets in a transparent process and allow for either a
11 refinancing or restructuring of the syndicate credit facilities or the liquidation of
assets under the existing credit facilities.
12 Mr. Peric[a]s testified that before filing the involuntary petitions they tried
B unsuccessfully to consensually attain forbearance agreements with the borrower.
He stated that they discussed with their attorneys who at the time were O’Neill
14 and Borges and the restructuring law practice of Skadden and Arps in Delaware.
The recommendation was to proceed with the involuntary bankruptcies.
15 He stated that there was a loan agreement that provided for the sale of
assets that was executed in the year 2014. Mr. Peric[a]s testified that this
16 document is the original credit agreement that created the syndicated loan
7 (Exhibit !- Docket No. 415-1). He stated that in this agreement there was no
clause for selling equipment or assets. He testified that he is familiar with section
18 9.11 (Assignments or Participations of Loans) of Exhibit 1. He testified that
section 9.11(c) provided some conditions on who could acquire participation
19 under the loan agreement. Mr. Peric[4]s stated that section 9.11 of the Amended
and Restated Credit Agreement is pretty much same, except some minor details
20 (Exhibit 5- Docket No. 415-5) when compared with section 9.11 of the original
1 credit agreement. He testified that section 25 (Assignment) of the Amended and
Restated Ratification of Stock Pledge and Security Agreement provided some
92 limitations in the assignment of the stock of the companies in case there was a
transfer (Exhibit 6- Docket No. 415-6).
23 Mr. Peric[a]s testified that he knows José Santiago and thai he was the
officer responsible for the credit facility starting in the year 2013. He stated that
24 José Santiago’s statement is accurate regarding that these two (2) sections were
5 barely ever included as part of the loan documents executed by Banco Popular.
He testified that he does not remember any other case in which there was a
26 restriction as to the transferability of the loan.
He explained that the reason Banco Popular entered into these two credit
27 facilities in the year 2014 was to refinance a loan. He stated that the condition that
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the terminal was to be sold by February 28, 2015 was negotiated with the
I borrower. It was not imposed by the bank. The agreement was signed on June 24,
2 2014 and the alleged Debtor had to sell the terminal by February 28, 2015. That is
about eight months. These terms were discussed and agreed with the borrower,
3 Mr. Jorge Diaz. Mr. Peric[a]s testified that these terms were probably negotiated
with José Santiago and Mr. Jorge Diaz.
4 Mr. Peric[a]s stated that he knows Jorge Aldarondo. Mr. Aldarondo used
5 to manage the credit facilities of Betteroads. He is the senior vice president and
director of the corporate credit division. That division was responsible for the
6 credit of Betteroads before being transferred to special loans. He testified that he
is not aware whether Jorge Aldarondo brought Puma as a potential investor on the
7 Guayanilla terminal. He further testified that he does not recall who brought Puma
to the table, but he does recall that Mr. Jorge Diaz shared with the bank some
8 letters of intent regarding the acquisition of a portion of the terminal. The
9 transaction did not come through because they were unable to reach an
agreement. Banco Popular did not have any participation in that negotiation. The
10 borrower would occasionally share documents with the bank and that is how they
became aware of conversations between the borrower and interested parties. The
11 bank was not participating in any negotiations. Mr. Peric[4]s testified that he
recalls that Blue Roads is a company that does business with natural gas and
12 somehow they met Jorge Diaz and discussed the terms of the transaction which he
13 does not recall, but it was related to use or acquisition of the terminal to store
natural gas. He stated that he met three (3) managers from the company in Dallas,
14 Texas for probably one or two days. After that, as the conversations with Jorge
Diaz and the Blue Roads team progressed they came to Puerto Rico and visited
15 the bank with Jorge Diaz at least one time. Mr. Peric[4]s testified that he does not
recall the reason the transaction did not mature. He recalls that there was an
16 interested party that required a non-disturbance agreement. It might have been
17 Blue Roads. The non-disturbance agreement was not accepted by Banco Popular.
Mtr. Peric[4]s explained that non-disturbance agreements are seldom granted by a
18 bank because it restricts the bank’s capacity to man[alge the assets if they need to
foreclose and sell the assets. It is a limitation. He recalls that BTB had a terminal
19 which they wanted to sell or have an agreement around that terminal with
Betteroads. It was a transaction related to Betteroads it did not have to do with the
20 sale of the terminal.
2] Mr. Peric[A]s stated that Mr. Jorge Diaz approached the bank and he
shared with Eli Septlveda and himself what he was proposing as to the
22 transaction. He does not believe that Mr. Diaz and Eli Septlveda proposed a
financing for that transaction. He explained that this was a transaction between
23 Betteroads and BTB. Betteroads wanted to acquire some of the assets from BTB.
Mr. Jorge Diaz presented to the bank, a memorandum of understanding and a
24 letter of intent. An acquisition requires funds for purchase, and he shared it for the
5 bank to see the transaction. However, the bank never proposed the financing for
that transaction.
26 Mr. Peric[a]s testified that Banco Popular learned of the Sargeant Marine
judgment shortly before the foreclosure of the account receivables. Does not
27 recall exact date. He stated that this is an e-mail from Francisco Pascual sent to
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Eric Lopez, José Santiago (Exhibit 10, Docket No. 415-10). He explained that
I Francisco Pascual is the officer responsible for the loan at FirstBank. At the time
4 he sent the e-mail, FirstBank was concerned that the financial situation of
Betteroads was deteriorating and if the borrower filed for bankruptcy, there could
3 be an issue regarding the perfection of their interests in the account receivables.
Mr. Peric[a]s further testified that Mr. Pascual suggested another topic for
4 discussion which is the modification of the loan documents to allow for the sale of
5 the loan, He explained that the loans could be sold. There were restrictions in
terms of who the loan could be sold to, It is unusual for loans to have restrictions
6 on who can acquire or participate in the loan. Not having that restriction provides
the banks more options in terms of resolution of the credit.
7 Mr. Peric[4]s stated that he has seen the carve out and settlement
agreement before (Docket No. 419-5, Exhibit 63). He testified that he does not
8 know from which funds Sargeant Marine collected the $140,026 as indicated on
9 page 2 of the agreement. He stated that he was not aware that Sargeant was able
to attach certain monies on a project regarding government accounts served by
10 Betterecycling.
He testified that once the syndicate foreclosed on the accounts receivables,
11 they sent notices to all the parties, including the municipalities and the
government agencies amongst others. They requested from the clients of
12 Betteroads the payment of the accounts and we also requested confirmation of the
B amount of the receivables. The information that was provided by the clients of
Betteroads to the banks regarding the amounts of the receivables was significantly
14 different from the amount that Betteroads had previously reported to the bank.
Mr. Peric[a]s testified that Banco Popular sent the notices on the
15 foreclosure of the accounts receivables around June 2016. He stated that he does
not recall until when Betteroads operated. He stated that the last time Banco
16 Popular deposited funds in the marginal account of the debtor was around August
17 2016. There were no other funds made available to the debtors thereafter, Mr.
Peric[d]s testified that Banco Popular tried to collect several times on the accounts
18 receivables afier the same were foreclosed. He does no[t] recall exact dates. He
testified that notices were sent at least once.
19 Mr. Peric[a]s explained that their concern was more than the interest that a
third party could have regarding the accounts receivables, it was more of a
20 concern of transparency because the information that they had was significantly
1 different from the one being confirmed by the municipalities and the government
agencies. He stated that he does not recall the exact date until which Mr. José
22 Santiago was in charge of this credit relationship. Mr. Peric[a]s explained that
once the loan was transferred to late stage of special loans, Lynnette Bigio was
23 the manager and Rosimari Leén was the officer. Rosimari is peer with José
Santiago. He stated that Mr. Santiago on a regular basis would be the first contact
24 and the one to review the requests for monies made by Betteroads and
5 Betterecycling. Sometimes José would discuss disbursements with him, other
times he would not. Mr. Peric[4]s stated that he would not review all of the
26 disbursements requested by the borrower, only some of them. He explained that
there were no limits regarding the amount of disbursements Mr. Santiago could
27 approve or himself. It was more a matter of judgment discussion José had with
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1 him. José also had a manger, Eric Lépez, he could talk to. Sometimes they would
also talk with him. Eric Lopez was the manager supervising José Santiago.
2 Mr. Peric[a]s explained that by transparency, in terms of the account
receivables, he means having accurate information. He stated that at least from the
3 discrepancy in the information from the municipalities and Betteroads, Also, they
learned from a third party as to the judgment received from Sargeant. In addition,
4 the information regarding the leases of the different plants was provided by a third
5 party and it was confirmed upon the site inspections and visits. As to the licenses
under the nuclear regulatory commission they understand that it was understood
6 that it was an important asset. He testified that he learned about the transfer of the
licenses not through the borrower, but through a random google search. Lastly,
7 the contracts of the municipalities of Juncos and Florida that were intended to be
transferred from Betteroads to Puerto Rico Asphalt we learned about through
8 research conducted by our attorneys at the office of the Puerto Rico comptroller,
9 not because the borrower disclosed these transfers.
10 The above statements were substantially corroborated by Mr, Pericés during his
testimony at the hearing held on July 18, 2019 (dkt. #497, pages 1 — 7).
The involuntary debtors rested after the presentation of the above witnesses. The
B petitioning creditors moved for the denial of the involuntary debtors’ request to dismiss the
4 petition pursuant to Rule 7052 of the Fed. R. Bankr. P., on the grounds of having filed the same
5 in bad faith as the evidence presented did not discharge the initial burden which the involuntary
6 debtors had to meet.
0 MOTION FOR JUDGMENT
8 Fed. R. Bankr. P. 9014(c) makes applicable Fed. R. Bankr. P. 7052 to contested matters.
19 Rule 52(c) of the Fed. R. Civ. P., made applicable to bankruptcy proceedings, provides:
20 If a party has been fully heard on an issue during a nonjury trial and the
74 court finds against the party on that issue, the court may enter judgment against
the party on a claim or defense that, under the controlling law, can be maintained
22 or defeated only with a favorable finding on that issue. The court may, however,
decline to render any judgment until the close of the evidence. A judgment on
23 partial findings must be supported by findings of fact and conclusions of law as
4 required by Rule 52(a).
35 As stated in In re Stewart, 2012 WL 5189048 (B.A.P. 1* Cir, October 18, 2012):
26 A court should, therefore, enter a judgment under Rule 52(c) “[w]hen a
party has finished presenting evidence and that evidence is deemed by the [judge]
27 insufficient to sustain the party's position.” Morales Feliciano v. Rullan, 378 F.3d
42, 59 (ist Cir.2004). “A motion for judgment on partial findings should be
granted, ‘where the plaintiff fails to make out a prima facie case, or despite a
4 prima facie case, the court determines that the preponderance of evidence goes
against the plaintiff's claim.’ “ Giza v. Amcap Mortg., Inc. (in re Giza), 458 B.R.
3 16, 24 (Bankr.D.Mass.2011) (quoting Mosher v. Evergreen Mgmt., Inc. (in re
Mosher), 432 B.R. 472, 475 (Bankr.D.N.H.2010)); see also In re Marine Risks,
4 Inc., 441 B.R. 181, 199 (Bankr.E.D.N.Y.2010) (citations omitted) (holding that
5 court may allow Rule 52(c) motion if plaintiff has failed to make out prima facie
case). The court is not required to “ ‘draw any special inferences in the
6 nonmovant's favor or consider the evidence in the light most favorable to the
nonmoving party. Instead, the court must [weigh] the evidence, resolv[e] any
7 conflicts, and decid[e] where the preponderance lies.’ “ In re Giza, 458 B.R. at 24
3 (quoting Mosher, 432 B.R. at 475).
9 The court, when considering a motion under Rule 52(c), is not required to “consider the
10 evidence in the light most favorable to the non-moving party or draw any special inferences in
11 |ithe non-movant’s favor.” In re Taberna Preferred Funding IV, LTD., 594 B.R. 576, 585
12 |i (Bkricy. S.D.N.Y. 2018).
13 An involuntary petition has a presumption of good faith, and it is the burden of the
14
debtor to prove under the totality of the circumstances that the filing was in bad faith. In re
15
6 Forever Green Athletic Fields, Inc., 804 F.3d 328 (3d Cir. 2015). This court agrees that there
17 {are several non-exclusive factors which may be considered but have no particular importance or
1g || weight. In re General Aeronautics Corp., 594 B.R. 442, 481 (Bkricy. D, Utah 2018). The
19 |lfactors are weighed to determine if the involuntary petition was filed for an improper
20 bankruptcy purpose, such as ill will or malice, intent to harass or embarrass the debtor, or use
1 the bankruptcy court as a substitute for customary collection procedures. In re Basil Street
22
Partners, LLC, 477 B.R. 846, 852 — 854 (Bkrtcy. M.D. Fla, 2012).
23
DISCUSSION
24
5 After a careful review of the evidence presented by the involuntary debtors, the court
26 finds that the same does not establish that the petitions were filed for an improper bankruptcy
27 || purpose. Seeking that other creditors join in filing an involuntary petition in order to pursue
-9.
\ debt collection in the bankruptcy court is not an improper bankruptcy purpose. In re Basil
> || Street_Partners, LLC, 477 B.R. 853. The evidence presented showed that the involuntary
3 |\debtors had defaulted on their loan payments and, that the lenders had engaged in active
4 || collection actions. The discussions by and between the lenders, including the syndicate lenders,
> |l and the advice provided by their legal counsel show that the decision to file the involuntary
6 petitions was more in the nature of a studied business decision that an action to harass or merely
seek an alternate collection forum.
9 CONCLUSION
10 In view of the foregoing, the court determines that the involuntary petitions were not
11 || filed in bad faith. An order for relief under chapter 11 will be entered forthwith.
12
IT IS SO ORDERED.
In San Juan, Puerto Rico, this 10" day of October 2019.
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unitdd states Bankruptey dudge
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Document Page 1of17
Minute Entry
Hearing Information:
Debtors: Betteroads Asphalt, LLC. (17-04156) and Betterecycling Corporation (17-04157)
Date/Time/Room: 06/27/2019/09:45:03 am
Bankruptcy Judge: Enrique S. Lamoutte
Deputy Clerk: Darhma Zayas
Reporter/ECR: Carlos Aponte
Matters:
Evidentiary hearing on the on the alleged debtor’s motion to dismiss on the grounds of bad faith.
Appearances:
Wigberto Lugo Mender, on behalf of both alleged debtors
Luis Marini and Carolina Velaz, on behalf of Banco Popular, Banco Santander, First Bank and the
Economic Development Bank
Alejandro Febres, In House Counsel of Banco Popular
Myrna Ruiz Olmos, on behalf of Puerto Rico Asphalt
Rafael Gonzalez Valiente, on behalf of First Bank as an independent creditor of the syndicated
loans
Sonia Colon, on behalf of Sargeant Marine Inc. and Sargeant Trading LTD
Jordi Guso, co-counsel on behalf of Sargeant Marine Inc. and Sargeant Trading LTD
Alexis Fuentes Hernandez, on behalf of petitioning creditors Facsimile Paper, Champion
Petroleum and Control Force Corp.
Proceedings:
The court commences the evidentiary hearing on the merits of a motion to dismiss filed by the
involuntary debtors on June 27, 2019. Attorney Lugo begins with the pending motions. The
Attorney clarifies that although there are two separate cases, most of the arguments have been
raised jointly for both cases but that this may not be the case throughout the rest of the case.
However, there will be a single transcript of the proceedings. The court clarifies that the cases are
administratively consolidated. The court has also reviewed the motions and pretrial reports and the
positions of the parties are similar as to both involuntary debtors, therefore, the court will hold one
evidentiary hearing and, if differences should be made, the parties should point it out. The court
notes that there are pending motions as to continuances and limiting witnesses.
Attorney Lugo references Docket no. 73, and docket no. 51, Motion for Protective Order limiting
the scope of discovery filed by the petitioning creditors, and states that the court has not ruled upon
said motions. The court states that it believed that the motions were mooted by the court’s
determination that the petitioning creditors had complied with the requirements to file the petition
and that the issue remaining was if the involuntary petition was filed in bad faith or for an improper
Document Page 2 of 17
purpose, order entered on November 30, 2018 at Docket No. 271. Therefore, the order also
disposes on the oppositions to the protective orders filed by the alleged debtors (Docket No. 92
and 73).
Attorney Lugo references docket no. 404 and no. 274, Motions for Imposition of Bond pursuant
to section 303(e) and docket no. 433, the objection of petitioning creditors. Attorney Lugo requests
time to reply to the position of the petitioning creditors and requests the court to dispose on said
motion the last day of the evidentiary hearing, to be discussed after the factual evidence has been
presented. The court asks the petitioning creditors if they have an opposition to hold in abeyance
the issue of bond until after the evidence is presented. Attorney Marini states that the request be
made in writing to be able to respond. However, he states that the petitioning creditors’ position is
that the request, on its face, doesn’t even comply with the requirement of the imposition of the
bond, and that, therefore, the motion should be denied without a hearing. Attorney Marini states
that he has no opposition for the Debtor to have time to file any reply to their answer.
The court clarifies the request of the alleged debtors, that is, to hold the motions requesting bond
and the objections in abeyance until after the alleged debtors present the evidence as to the bad
faith issue. The court makes a distinction based upon the request. The issue of posting a bond may
have two routes. One is posting a bond before the court decides as to whether the involuntary
petition was properly filed, and, if dismissed, the issue of bad faith for the award of damages and
costs comes into play.
However, at this juncture the court determined that, in addition to the statutory requirements that
the petitioning creditors need in order to file an involuntary petition, the factor of bad faith can be
considered to determine if a case shall be dismissed or not, and base upon that, the alleged debtor
is requesting that a bond be posted. The court explains that although the court’s intention was to
have all pending matters addressed with an order by the date of the hearing, due to time limitations,
it was not possible. The court summarizes its preliminary position: after considering the motion
and the opposition filed yesterday by the petitioning creditors, the key section governing the
posting of a bond is section 303(e) which states that, after notice and a hearing and for cause, an
emphasize on “for cause”, “the court may require the petitioning creditors under this section to file
a bond to indemnify the debtor for such amounts as the court may later allow under subsection (i)
of this section.” Section 303(i) states that if the court dismisses an involuntary petition other than
on the consent of all the involuntary petitioning creditors and the alleged debtor, and if the alleged
debtor does not waive the right to judgment, the court may grant (1) against the petitioners and in
favor of the debtor (A) costs; or (B) reasonable attorney’s fees (2) against any petitioner that filed
the petition in bad faith for damages proximately caused by such filing”. The bond is to cover the
potential award of damages. There is one decision, which the court finds close in the fact pattern
to what is presented for its consideration, In Re Ransome Group Investors I, LP, 2009 WL 5852725
from bankruptcy court of the M.D. of Florida, a decision by Judge Glenn. The court mentions
some excerpts relevant to the facts of this case: the provisions about posting of a bond is intended
to discourage frivolous petitions as well as the more dangerous spike of petitions based on a desire
to embarrass the debtor or to put the debtor out of business without good cause. The bankruptcy
code does not impose a mandatory bond requirement, so petitioning creditors do not post a bond
when an involuntary petition is filed. Section 303(e) provides that the court may require a
petitioning creditor or creditors to post a bond upon finding of cause and it is a discretionary
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finding by the court, and it requires cause to be established. There is a presumption of good faith
on the part of the petitioning creditors, so it is debtors’ burden to show there is bad faith, as is
acknowledge in the respective pretrial reports. The alleged debtors must establish a prima facie
case of bad faith for petitioning creditor to be required to post a bond. This is congruent to the
alleged debtors request to wait until the evidence is presented for the court to determine is the
petitioning creditors should post a bond to guarantee the payment of damages that may be awarded.
However, at this juncture, the debtors have yet to establish a prima facie case of fraud or bad faith.
Therefore, the court denies the motion, without prejudice to the debtors presenting the request
again after the presentation of the evidence, and that the evidence that was presented to the court
does establish a prima facie case for fraud. In addition, there are two additional factors that the
court considers to deny the motion for the posting of a bond: (1) is that this court already entered
an order indicating that the basic statutory grounds for the filing of an involuntary petition were
met and that the only issue pending is the issue of bad faith and (2) examining the list of the
petitioning creditors and the alleged amounts owed they total approximately 98 million dollars.
Considering the amount of the debt in light of the amount of the bond requested, which is
approximately 11 million dollars, it appears that the debt far exceeds the requested bond. For that
reason, the court denies without prejudice the posting of a bond, noting that, and to fit in with the
alleged debtors’ request, it is without prejudice of presenting it to the court again when the alleged
debtor rests on its initial presentation of the case.
The court also advances that the next hearing is on July 15, 2019, and considering some of the
allegations made, the court must balance Bankruptcy Rule 1013 which indicates that the procedure
regarding a determination of an involuntary petition must be expedited. These involuntary petitions
were filed on June 9, 2017, generating two years of litigation, as the issues involved are complex
and the amounts are significant. The court does not imply that any of the parties has intentionally
delayed the proceedings, but the fact is that two years have passed and that the court must follow
the bankruptcy rule that orders an expedited resolution. The court also considers Rule 9014(c),
which makes applicable Rule 26, but not in all its provisions, it does not incorporate the time
limitations which apply to a regular adversary proceeding or civil proceeding. With those two rules
in mind is that the court attempts to commence the presentation of the evidence as promptly as
possible.
Attorney Lugo addresses the issue of additional discovery, referencing the order of the court which
authorizes additional discovery to the extent it is directed to an individual that has knowledge of
the events leading to the filing of the involuntary petition for each of the petitioning creditors,
without altering the evidentiary hearing scheduled at docket no. 436. The attorney stated that at
the time he prepared the notes, he had not received the confidentiality log, which was received
during the night and, therefore, it had not been reviewed. He states that, to move forward, the
alleged debtors will require two additional factual witnesses, namely, the deposition of Francisco
Pascual who is the authorized representative for First Bank Puerto Rico. Also pending is the
deposition of the corporate representative of Sargeant Marine and Sargeant Trading. The scope of
the discovery was reiterated in the orders entered yesterday afternoon regarding the different
pending matters on these motions. The alleged debtors wish to set the record clear on the realleged
position that there is no practical or feasible way that any meaningful discovery be completed in
such a tight schedule. On the timing constrains detailed in the motions, the alleged debtors have
had barely 60 days to conclude discovery and hold a final trial and, to their regret, this is not
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reasonable to complete and present a case of this size, specially when the burden is on the alleged
debtors to prove on the evidence, which mainly resides on the other part and which is controlled
principally by that other part. The prejudice of this scheduling order was briefed in their motions
for reconsideration which were denied. In any event, the principal risk to the alleged debtors, now,
is that two of the principal witnesses, specially Mr. Pascual, who on the information that has been
gathered to this date from other evidence, other witnesses and other documents was an active
participant in most dealings regarding the filing, may not be deposed. The witness for the one of
the principal petitioning creditors, which is Sargeant, may neither be deposed. As important as
these two witnesses, the alleged debtors may not have any able to offer any expert testimony on a
case on which the alleged justification for the filing has to do with the existence of transfers. Absent
the participation of an expert, the alleged debtors only chance for presenting counter evidence will
be with their two factual witnesses. Now, to the extent that the court has decided to continue with
the scheduling, the alleged debtors request the specific times and dates to complete this discovery
if it is going to be allowed.
Attorney Gonzalez Valiente states that the alleged debtors requested the deposition for the
representative of First Bank but neglected to notify counsel, so the deposition could not be taken.
First Bank has no objection on the taking of the deposition, but the delay is not on First Bank’s
part. The court acknowledges that the clarification is consistent with the information stated by the
alleged debtors’ counsels at a chamber’s meeting held with the attorneys of the petitioning
creditors and the alleged debtors. However, Attorney Lugo had emphasized on the importance of
the deposition. Attorney Marini states that the date for the deposition of the representative of First
Bank can be arranged. Attorney Marini also states that they sent the privilege log to attorney Lugo
yesterday afternoon and points for the record that, as part of the ongoing discovery conference that
the parties have had, the parties agreed to exchange privilege logs at the same time. As recently as
June 4 the privileged log was requested to the Debtors, but they haven’t sent it.
Attorney Guso states that the corporate representative was made available to the alleged debtors
on mid-March but, unfortunately, the parties could not agree on the scope of the examination, and
that the representative is available Monday afternoon or Tuesday, at the convenience of the alleged
debtors.
The court emphasizes that the orders were terse but direct and that one of the reasons the court
addressed the balancing on rule 1013 and rule 9014 was specifically for those reasons. After
hearing the alleged debtors’ requests and the proffers made by the attorneys of the petitioning
creditors, the court concludes that it is just a matter of the parties coordinating whatever discovery
is pending and noting that the court has no intention, at this juncture, to further continue the
schedules of the hearings.
Attorney Lugo moves to discuss the motion in limine for the expert report. Attorney Marini states
that the motion filed seeking to exclude the report by the lenders proposed expert relies on
allegations that they failed to comply with Rule 26(a)(2), which do not apply to the contested
matter, as discussed by the court previously, and references a case from the BAP of the First Circuit
In Re Colon, where the court states that Rule 1017 applies, which refers to Rule 9014, which
excludes rule 26(a)(2) from the contested matter. The court states that, to the extent that the motion
to exclude the testimony may be pending, based upon what the court already stated about the need
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for expediency and the applicability of Rule 26 as to contested matters, the court denies it without
prejudice as the presentation of the report has not yet come to the attention of the court by the
petitioning creditor. Attorney Lugo states that they plan to work on the same schedule to present
an expert report.
Attorney Ruiz Olmos, on behalf of Puerto Rico Asphalt, states that they also filed a motion to
suppress evidence and brings to the consideration of the court the matter of the expert report. The
Attorney brings to the court’s attention that the expert report must also comply with Rule 26(b)(4).
The lenders have submitted a draft and not a final expert report and the report is not signed.
Attorney Ruiz also states that the right to depose an expert is triggered when the report is provided,
and the report was provided on June 20, 2019. Therefore, she requests the expert report to be
suppressed because it is a draft, it is not signed, and that the parties have a right to depose,
interrogate or cross prior to the hearing. The court inquires the attorney as to what is the standing
of Puerto Rico Asphalt in this contested matter, that being the motion to dismiss filed by the
involuntary debtors. The court notes that in one of the motions PR Asphalt indicated that it needed
to be joined as a party. The petitioning creditors did not file an involuntary petition against PR
Asphalt. Based on the allegations on the pretrial reports and motions before the court, PR Asphalt
has been the subject of discovery on the pending issue of bad faith and it has been advanced that
transfers from the involuntary debtors to PR Asphalts (the court noting that it does not know if it
is true or will prevail) and that that is one of the reasons which led the petitioning creditors to file.
But to join PR Asphalt as an involuntary debtor is a decision that must be made by the petitioning
creditors. If the petitioning creditors prevail, and the order for relief is entered, it appears that PR
Asphalt may be a Defendant or a respondent on a future action which is not before the court. The
court expresses its concerns, irrespective of agreeing or not in relation to the applicability of Rule
26(a)(4), of what is PR Asphalt’s standing at this juncture. The court sees PR Asphalt as an entity
subject to discovery in order to prove the petitions were filed in good faith.
Attorney Ruiz states that as of May 13, 2016, PR Asphalt was only a party against whom the
lenders had tendered a subpoena and was deposed. However, as of June 20, 2019, when the lenders
filed the pretrial, PR Asphalt sees that most of the allegations raised by lenders and which are
intended to be presented today to the court for determination, in fact, have to do with PRA’s
interest because their allegation is that the alleged debtors made purported transfers to PRA. PRA
is not requesting to be joined as an alleged debtor. The definition that has been raised to the court
is that PRA is a necessary party in so far as this court needs to make determinations or rulings
regarding PRA’s interests in property, in contracts. PRA’s interests will be hindered or affected
potentially by the court’s ruling. So, by definition, PRA is a necessary part to the action. PRA does
not mean to say that it is a necessary debtor, it may be a request for relief under an adversary
proceeding. PRA is stating that, as of June 20, 2019, some allegations were raised to this court
whereas PRA’s interests are being affected and PRA has not been brought to this action and has
not been notified of the discovery proceedings where PRA needed to be part of, because it needs
to interrogate, cross examine and conduct discovery in order to defend itself from the allegations
and potential ruling that the court will be making. Attorney Ruiz continues to state that the
allegations against PRA have just been put in the docket, and, therefore, the court has two options,
either suppress all the evidence against PRA or that stem from the discovery where PRA was not
invited to, or the court can extend the discovery so that PRA can be a part of it. PRA believes that
notice should’ve been given to PRA and it should’ve been part of the discovery as it has the right
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to defend itself from the allegations from the lenders, which affect directly PRA’s interest. PRA’s
standing is predicated in Rule 19 and the pure definition of necessary party just because the court
will be making a ruling affecting PRA’s rights and interests.
Attorney Marini responds to Attorney Ruiz. He states that Rule 19 does not apply on contested
matters. Bankruptcy Rule 9014(c) specifically excludes Rule 19. The attorney further states that
what PRA is saying today is completely contradictory to what it has stated before, first, the
allegation that they discovered on June 20 that the lenders are alleging that assets were transferred
to PR Asphalt is misleading and false. The lenders have consistently stated, as early as the date
when the petition was filed, and filed a motion to appoint a trustee, that assets were transferred to
PR Asphalt, that PR Asphalt is an insider, they have detailed throughout the litigation information
that they had and have supplemented it to the court and when PRA came in before the court two
months ago after a subpoena was served for a deposition to PR Asphalt, they appear in court and
argue a motion to quash and stated that PR Asphalt was not a party and stated that the information
that the lenders were requesting from PR Asphalt was not relevant to the bankruptcy cases much
less to the contested matter, the lenders bad faith filing, especially if it is requested for the May 20,
2019 evidentiary hearing (Motion to Quash, Docket No. 299). They also argued that Rule 26 did
not apply to them and as they were not a party, and that they were subject to Rule 45. The argument
of PRA has no basis in law. The Attorney requests the court to focus on the filing. Why do PRA,
two years after the cases were filed and they new about the allegations of the transfers, why do
they come 48 hours before the hearing and request that depositions be taken again, that they be
allowed to participate, and, suddenly, now they want to be involved on the case. If it was a
legitimate concern, which the attorney submits it isn’t, they should’ve raised it months ago, years
ago. Attorney Marini concludes that the request has no basis in law.
The court refuses to further discuss the matter. The court states that to the extent in which PR
Asphalt’s requests the court to reconsider its orders regarding discovery, the request is denied for
the reasons stated before regarding the applicability of Rule 26 to contested matters and
additionally, at this juncture, for reasons of standing. The court further states that, as to the
allegations regarding the statement that it was only recently that it was notified of the potential
contested matters against PR Asphalt, as pointed out by Attorney Marini, and after a review of the
motion in docket no. 14 in case no. 4156 filed on June 12, 2017, the motion to appoint a trustee or
examiner, the disclosure of the alleged improper transfers was clearly made.
Attorney Ruiz points out that Rule 2018 gives this court the flexibility to direct that other rules of
part 7 be applied. The court states that it is fully conscious but that it didn’t and do not have the
intention in doing so, when it balances the requirements of 9014 and applicability of rules for
having expedited procedures in matters regarding involuntary petitions.
Attorney Ruiz states, to preserve the record, that as of the date that lenders are referring to, that
was two months ago when the subpoena was served, the discovery was way underway and almost
concluded, as of the discovery that had been held to date. PRA was never notified of the
depositions and the rules don’t require a third party that is not in the case to know what is going
on with discovery and appear and request to be notified. PRA’s assertion is that the depositions,
and the discovery by alleged debtors as by lenders was never notified to PRA, so PRA could never
be part of the discovery process because it was never brought to the action. The court notes PRA’s
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concern but states that its concern may be premature because the court has no pending issue as to
that matter.
As per Attorney Ruiz’ requests, the court clarifies that the ruling is that its oral request as to the
reconsideration of the order already entered by the court is denied. As to the issues of the pending
expert report, the court ruled on that issue at the request of Mr. Lugo and the ruling remains the
same. Additionally, the court rules that PRA has no standing, at this, juncture on the pending
contested matter.
Attorney Lugo commences with an opening statement, explaining the roadmap of the hearing. The
court interrupts Attorney Lugo, and states that the opening statement restates what was submitted
by the parties in their pretrial reports, and that the court wants to know what is the evidence that
support the allegations, to make the finding of facts and then apply the law. The court informs its
interest to start hearing the evidence.
Attorney Lugo states that counsel Alexis Betancourt will commence with the witnesses. ‘The court
asks what the order of the witnesses will be. Attorney Lugo explains that, for today, they are going
to present the five (5) witnesses for the small claims. The court requests the names of the witnesses.
Attorney Betancourt states that the witnesses are for certain joining petitioners. The attorney
requests the court time to stipulate the evidence with the attorneys to expedite authentication. The
court asks it they are going to make a proffer of what are the uncontested facts. Attorney Betancourt
states that they are going to make proffers of the testimony they gave to the lenders and the
testimony they gave to the alleged debtors, and that will provide the direct first questioning of each
party and they will reserve the right to cross-examine. The court clarifies the proposition made by
the attorney: (1) they will identify the witnesses; (2) they are going to make a proffer of what the
direct testimony will be and (3) the witness will be subject to cross examination. The court restates
its request as to how many witnesses are going to be presented.
Attorney Betancourt states that they are also going to discuss the stipulation of evidence and states
that Attorney Fuentes will provide the name of the specific witnesses. Attorney Fuentes addresses
the court. First, the attorney understands that there are two statements made under penalty of
perjury provided by his clients, representatives of four petitioning creditors. They were suggesting
that those two statements under penalty of perjury be admitted and that will be the proffer to
basically substitute their testimony, so they will not have to be questioned. The court asks again
who the witnesses are. As to Champion Petroleum the witness is Luis Marrero. Attorney Velaz
states that the sworn statements are marked as exhibits PC 33, 34, 35 and 36. Exhibit 33 was
submitted by Facsimile Paper Connection Corp. and signed by Mr. Angel Soler as President and
authorized representative dated June 24. Exhibit 34 was signed by St. James Security and it was
signed by Mr. Marcos Rivera as President and authorized representative dated June 20, 2019.
Exhibit 35 was signed by Control Force Corp. by its authorized representative Mr. Nicolas Lopez
and was signed on June 24. Exhibit 36 submitted by Champion Petroleum by Mr. Luis Marrero
Caballero who is the General Manager and authorized representative dated June 26. Attorney
Fuentes states that there are other four statements that are included in the alleged debtors pretrial
report. Attorney Betancourt mentions AD Exhibit 45 by St. James Security. The attorney clarifies
that St. James and Facsimile are creditors for Betteroads, the others to 17-04157, except that St.
James is creditor to both cases. Attorney Betancourt continues to state that AD Exhibit 45 is St.
Document Page 8 of 17
James sworn statement, which is different, by Mr. Marcos Rivera, representative of St James.
Facsimile Paper declaration in the case of Betteroad is AD Exhibit 50 executed and signed by
President and authorized representative Angel Soler. AD Exhibit 56 from Champion Petroleum
executed by officer Rafael Figueroa Sosa and, also, by the counsel of the petitioning creditor on
the petition date Manuel Porro Vizcarra, as an attorney. Aditionally, AD exhibit 61 by Control
Force executed by officer Nicolas Lopez Diaz. Attorney Betancourt restates that the agreement is
to, in a moment, estipulate exhibits from 42 of the AD pretrial report to 61. The attempt is to
expedite the authentication and admissibility of the documents, regarding these witnesses and
expediting interrogation by making a proffer on each parties’ declaration. Attorney Betancourt
requests 5 to 10 minutes to attempt the stipulations. Attorney Marini has no objection to the recess
however states that the court requested the attorney for the alleged debtors to state the order of the
evidence to be submitted, as the statement had not been made and requests the alleged debtors to
announce what witnesses they intent to call at trial. The court allows the recess and requests that
the alleged debtors provide the information related to the next witnesses. Attorney Lugo clarifies
that it depends in the coordination of the depositions previously announced.
The court recess until 11:30 a.m,
Attorney Betancourt states that the sworn declarations are going to be submitted as proffers, but
that they are going to call the witnesses to the stand. The court clarifies the exhibits that are
stipulated to be admitted into evidence: PC exhibits 33, 34, 35 and 36 and AD exhibits 45, 50, 56
and 61. Attorney Fuentes proffers that the statements submitted into evidence would be what is in
the direct and the cross. Any additional information is covered by the attorney-client privilege
because these creditors relied in the information provided by their attorneys, who made the analysis
in order to recommend them to sign the petition and, therefore, that their testimony would not be
necessary. The court states that the ruling would be made upon the evidence submitted to the court
and is up to the parties to interrogate the witnesses.
Attorney Betancourt calls the first witness, from Champion Petroleum, Mr. Luis Marrero. The
interpreter is sworn in. Attorney Porro Vizcarra, attorney for Champion Petroleum as of the
petition date, states that Mr. Marrero will testify as to any preliminary matter without the need of
an interpreter and if he needs any translation, he will request it to the interpreter.
The witness name is Mr. Luis Marrero Caballero, who is the General Manager for the company.
He has been in the position since March 2017. He acknowledges he is there as a designated
representative of the company and can talk about the events leading to the filing of the involuntary
petition. He was an officer before the filing of the petition. He had no participation in the planning
of the filing. All communications were made between the parties and the legal representative. The
witness issued a sworn declaration on June 26, 2019. Another declaration, by another officer, was
issued on March 8, 2019. The witness has reviewed both declarations. The witness is aware that
Champion Petroleum executed an agreement with the banks for the filing of the petition. The
witness declares he did not sign any agreement. The witness states that Rafael Figueroa is the vice-
president and owner of the company. The witness has not examined the agreement and states that
all the communications with the banks were made through their counselor. Attorney Betancourt
shows the witness a subpoena that was issued to Champion Petroleum. The witness states the
document is the one received stating that he needed to appear in court. Attorney Betancourt
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references page 4, were it states, “testimony at trial and designation”. Attorney Porro interrupts to
state, for the record, that the document they received did not include the “testimony at trial”
request. Attorney Betancourt states that he served that document to all attorneys. The designated
officer should be able to testify about the events surrounding and which led to the filing of the
petition.
Mr. Porro reads the sworn declaration admitted as exhibit 36 and states that said declaration states
that all communications related to the lenders in anticipation of the filing of the involuntary petition
were exchanged verbally through counsels of Champion and Lenders. AD Exhibit 54 is shown to
the witness, the carveout agreement. In the last page, the witness identifies the name of Rafael
Figueroa but cannot testify if that it is his signature because he has not seen his signature in a long
time. The witness states he has not seen that document before. He states that on paragraph ten of
his declaration he stated that all the information exchanged between parties was using their
counselor Mr. Porro. He declares that Mr. Figueroa is not a counselor and is an officer of the
corporation. Attorney Betancourt points out that then the signature is from an officer of the
corporation, not a counselor. Attorney Porro states that he will stipulate that it is the signature of
Rafael Figueroa. Exhibit AD 54 of the alleged debtors is admitted. The witness testifies that the
sworn statement was signed on June 26, 2019, at counselor’s office. Attorney Betancourt shows
to the witness exhibit PC 36. Attorney Betancourt references paragraph 7 of the sworn statement.
The witness restates that the communications were through counselor and the information was
transmitted to Champion through counselor. The witness declares that he has no knowledge of the
conversations held between counselors. The witness declares that he does not know if there were
any documents of the alleged transfers. Mr. Porro intervenes and states that the sworn statements
establish that Champion Petroleum did not receive any document or analysis, at paragraph 15 of
exhibit 56. Attorney Betancourt clarifies that now there is a new declaration and he wants to know
if something has changed and if there is a document that supports what is told in the declaration.
The witness reinstates that every information Champion received was through counsel, so he has
not read or seen any document and he has not sustained any meeting with any other party other
than the counsel. As per the witness testimony, Champion did not make an independent
documented analysis.
Attorney Fuentes states that this testimony and interrogatory will apply to the other three
petitioning creditors as the sworn statements are identical and state that they did not make any
independent analysis and relied on counsel. Attorney Marini places an objection based on Rule
403 of evidence to prevent the presentation of cumulative evidence. The court states that the proffer
approved by the court was that the sworn statements were the direct statement of the creditors and
that the parties may call the witnesses for purpose of impeachment. Therefore, going over the
statement already submitted would be duplicative and a waste of time.
Recess until 2:00 P.M.
Attorney Betancourt informs that the parties have agreed to stipulate the admissibility of AD
exhibits 42 through 61 excluding 44, 47, 52, 55, 57 and 58. As stated by Attorney Fuentes and
Marini, the stipulation was made considering that the rest of the small petitioning creditors will
not testify.
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Attorney Ruiz Olmos reinstates the need to preserve PRA’s objections included in its motion at
docket no. 428 referring to the objections to witness testimonies, evidence submitted and testimony
that may come out of it. Attorney Marini arguments that he sustains the same objections stated in
the morning.
Attorney Lugo calls the next witness, Mr. José Santiago Ramos. The court clarifies that the
examination of the witnesses that submitted the sworn statements has concluded. Attorney Marini
poses an objection as to the relevance and scope of Mr. Santiago’s testimony. As detailed in the
transcript for Mr. Santiago’s deposition, he left Banco Popular at least four months before the
commencement of the involuntary petition and had no duties with this case since the filing of the
complaint in state court on September 2016. He did not participate or had any knowledge related
to the filing of the petition. The court denied the objection without prejudice to rephrasing the
objection again depending on the questions and answers that are provided by Mr. Santiago Ramos.
The witness Mr. José Santiago Ramos is sworn in, Attorney Lugo conducts the direct questioning.
The witness states that he is currently the Chief Restructuring Officer for the Government
Development Bank of Puerto Rico and the Deputy Executive Director for the Puerto Rico Fiscal
Agency and Financial Advisory or AAFAF, as it is commonly known. He worked for Banco
Popular de Puerto Rico since September 2007 until February 2017. He started in the bank as a
Financial Analyst in the corporate division, then in 2009 was transferred in what was known as
the workout division as a financial analyst and in 2010 he was promoted to relationship officer and
stayed in that position until he left the bank. He was the relationship officer of the involuntary
debtors when the account was transferred to the early stage division on early 2013, approximately.
He worked as a relationship officer for Banco Popular until the account was transferred to the late
stage division on 2016, to his best recollection. Therefore, he was the relationship officer of the
involuntary debtors through the period of 2013 to 2016.
Attorney Lugo shows Exhibit 84 to the witness. The exhibit is the transcript of the witness’
deposition which was taken in May 2", 2019. The witness states that he received copy of the
deposition several weeks after it was taken, and he review it in preparation of the hearing. He
declares that he was represented by attorney Luis Marini during the deposition and that Banco
Popular is paying for said representation. He is testifying as a former officer of Banco Popular.
The witness is instructed to refer to Exhibit 2 of the deposition, which is Exhibit 84. The witness
recognizes the document as part of his duties on Banco Popular and as part of the deposition. The
document is an obiter risk rating assessment tool, commonly known as ORRAT, it is an internal
risk rating for a specific borrower. The document was prepared by Rebecca Collazo, who was a
peer, and reviewed by Lisa Ligaro. Explaining what the document signifies, the witness states that
they input some quantitative and qualitative information and is a way to measure the risk that the
borrowers present at the time. Apart from the input prepared by the relationship officer and verified
by Lisa Lugaro, the document was reviewed by the decision officer, José Luis Cotto, who works
on the risk management division of the bank. Attorney Lugo moves for the admission of the
document. Attorney Marini objects on hearsay grounds as the witness testified that he did not
prepared the document. The objection is overruled by the court. The witness explains that in the
“general comments” box in the document they include the relationship officer’s rational for the
information that was input into the tool.
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Attorney Lugo requests the witness to turn to exhibit no. 3. The witness explains that he prepared
the document. The document is a presentation to the Special Loan Credit Committee
recommending a restructuring of the borrowers’ facilities. The document is very different from the
other document reviewed. Exhibit no. 2 is a tool used by the bank regardless of it being restructure
or not, it is something that happens on the day to day administration of the portfolio. This other
document is a specific restructuring or transaction that is being recommended to the bank’s credit
committee. They are mutually exclusive. The witness agrees that all the explanations and notes
included in the document are an assessment of the loan at the time of the evaluation. Referencing
the first paragraph of the page which reads “credit facility 9007”, he explains that the Coco Beach
residential project refers to land or project which development was closely related to Betteroads
and Betterecycling. The witness explains that Banco Popular did not participate in that loan, it was
part of the syndicated structure but the loan was 100% Santander. When the witness refers to
syndicated loans, he refers to the structure that was already in place where several facilities were
participating not only by one bank but by several banks, in this case, four banks. Each had a
different participation within a facility. To this one, it was Banco Popular, Santander, First Bank
of Puerto Rico and the Economic Development Bank of Puerto Rico. Attorney Lugo moves for
the admission of the document as evidence.
The court clarifies that this is an exhibit to the transcript of the deposition, which was admitted as
AD exhibit 84. Attorney Lugo clarifies that exhibit 84 is the whole document, the transcript of the
deposition with exhibits to the transcripts. Attorney Marini clarifies, that exhibit 84 has not been
admitted into evidence, and only exhibit 2 to the transcript has been admitted into evidence.
Attorney Lugo states that his intention is to submit the whole transcript to be admitted. The court
clarifies that it understood that the offer was of exhibit 84 and that the exhibit included some
exhibits to the transcript, so when the court admitted 84 it admitted the whole document. Attorney
Marini raises an objection and states that he believed the only exhibit admitted was exhibit 2 and
argues that there are several exhibits in the deposition, 32 exhibits in total. Attorney Lugo states
that he does not intends to use them all. Therefore, the court determines that they should be
admitted one by one and that the admitted exhibit would be exhibit 84.2. As to exhibit 84.3,
Attorney Marini objects based on relevance and the court overrules the objection.
Attorney Lugo references the paragraph below the Coco Beach paragraph, related to a transfer of
a loan to the special loans’ division. The witness explains the process to transfer the loan from
relationship to special loans. He states that, once the bank identifies that it was in a deteriorating
financial condition his department refers it to the late stage division, more like an internal transfer.
Prior to the transfer, the facilities were in the corporate lending division specifically the asset-
based lending which is part of the corporate banking division. He states that, in reference to exhibit
84.2, Lisa Lugaro is the team leader of the asset-based lending group. The witness reviews the
documents and explains the reason to the change of classification of the syndicate loans from
March 2012 to the end of fiscal year 2013. He states that it was the beginning of a new electoral
cycle and the lenders had 80% or more on government contracts and, usually, that cycle starts
during 2013. Attorney Lugo references the page that states “collateral valuation”, and which
mentions certain property in Guayanilla. The witness explains that the property in Guayanilla
referenced in the document is a tank holding facility, where the borrowers store their primary
product which is liquid asphalt. The witness is referred to the part that states “...we arrive at the
conclusion that Borrower must sell, sell and leaseback, or lease the excess capacity in the terminal”
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and explains that the instruction was part of an analysis or the due diligence that the bank makes
and, in this case, it was one of the assets with more value, and part of the structure was to try to
deleverage the borrower. He explains that “to deleverage” means to reduce their debt burden. The
deleverage can be done in any number of ways, first, it means you pay down your loans. In this
case revenues, when they did the analysis, weren’t enough to bring down the normal amortization
so the next specific step is what kind of assets can we monetize so that the debt can be reduced.
The witness states that Banco Popular’s determination to sell and enter on these transactions, as
detailed in the paragraph, was part of the recommendation the witness did and it was an agreement
between the bank, the borrower and the syndicate banks, to that specific structure of monetizing.
Attorney Lugo references exhibit 84.5. The witness testifies that he prepared the document.
Attorney Lugo moves for the admission of the document, a Status Meeting Report, a summary
report. Attorney Marini objects due to relevance. The court asks if the status report is an update of
the report 84.3. Attorney Lugo states that that is the question. The court sustained the objection
because the relevance of the document has not been established. The witness explains that he does
not recall the date, and that it was prepared a little after the restructuring took place as a status
update and does not recall if it was presented to the syndicate banks or if it was an internal
presentation. The document is not submitted into evidence.
Attorney Lugo references exhibit 84.6. The witness states that he prepared the document on
December 10, 2014. He explains that there were two transactions for approval, one was a renewal
of the revolving line of credit for an additional six months, which was the standard maximum
amount at the time, facility 1002813-4001/4002 for $25,000,000.00; and then there was a change
in corporate structure Betteroads Asphalt Corp. was been changed to Betteroads LLC, and they
were asking approval for that change. Attorney Lugo moves for the admission of the document,
which is objected by Attorney Marini due to relevance. The court states, to clarify what the
document is, it is a report prepared by Mr. Santiago concerning the renewal of the revolving line
of credit of the alleged debtors, which was for $25,000,000.00. Attorney Lugo clarifies that once
he can complete the document, he will show other evidence to state its relevance, specifically as
to the intent of how this developed and the witness is the individual that can explain how
everything started and leading to 2016, when the closing of the operations occurred. Attorney
Marini raises the same objection. The court questions Attorney Lugo in relation to the statement
made and requests to clarify if the alleged debtors are operating. Attorney Lugo clarifies that they
are operating. The court states that it understood that the attorney just stated that the two
corporations ceased operation in 2016 and that is important. The attorney clarifies that it shut down
their regular operation of paving and asphalt, which are the ones that are now being referred as
“transfers”, amongst other allegations made to sustain the involuntary petitions. The court inquires
about what operations were shutdown on 2016, and notes that the exhibit was made in 2014.
Attorney Lugo states that in exhibit 84.2 there is a full description, in the general comment section,
that states what Betteroads is about. “It is principally engaged in the manufacturing of asphalt plant
mix and asphalt paving and was established in 1954”. Attorney Marini raises and additional
objection, alleging that the counsel is testifying for the witness and he should rather ask the
questions he intends to ask. He also states that based on the questions asked and the testimony, he
renews the objection as to relevance. The court states that, at this time, it is going to overrule the
objection, but subject to the alleged debtors establishing the relevance, the court will give more
time to make questions to pose the relevance because the document was prepared in September
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10, 2014, and based on the statement of Attorney Lugo there was a shut down on operations in
2016. The court asks which operations were shut down on 2016 and Attorney Lugo states that the
Betterecycling operations were shut down and that Betteroads continues storing and warehousing
material in the Guayanilla terminal. Attorney Lugo explains that Betterecycling ceased operations
as an asphalt and paving company. However, there are certain plants and facilities which were
operated by Betterecycling and were leased to other parties, which is part of the theory of the
petitioning creditors trying to justify transfers of properties. Attorney Marini objects because the
attorney is characterizing and is assuming facts. The court clarifies that it is an argument and allows
Attorney Lugo to continue questioning the witness.
Attorney Lugo directs the witness to page 2 of 3 of the document. Attorney Lugo asks the witness
which assets were to be disposed in line with the requirement of the loan agreements. The witness
states that there was an airplane and a helicopter and although not stated there, a milestone for
amortization was the Guayanilla terminal, be of sale or lease, any way the borrower could monetize
the asset for the benefit of the borrower. The document was admitted into evidence.
Attorney Lugo continues to exhibit 84.8. The witness states that he prepared the document on April
27, 2015, to request additional authorization from the credit committee to obtain waiver of several
covenants in the loan agreement signed in 2014. The credit agreement included all the agreements
within the syndicated structure. Attorney Marini objects to the questions as the document is not
admitted into evidence, and further objects to the relevance of the questions and the document.
The court requests a proffer from Attorney Lugo. Attorney Lugo states that he is trying to see how
the loan developed up to September 2016 and that he is trying to be as quick as possible and trying
to establish the history before the other events that trigger the filing of the petitions. That is the
intention with the witness, as he was the principal officer who signed most of the documents.
Attorney Marini states that the proffer articulates no basis for relevance, and they are going on a
fishing expedition to see what they find. The court clarifies that considering the amounts of the
loans involved in this case and a revolving line of credit of $25,000,000.00, he understands that
reports are going to be made at intervals in order to exercise due management of the loans for the
benefit of the bank and to update what is going on, in order to take measures, such as the disposition
of assets to monetize for the benefit of the borrower. But how does the management of the loan
for a substantial amount and the recommendations tie in with the filing of an involuntary petition
for an improper purpose? That is the key to accept or continue the line of questioning. Where does
it tie? Attorney Lugo clarifies that one of the elements in that same decision has to do with the
purpose to use the bankruptcy court as a collection agency. The court clarifies that the documents
presented include recommendations, and steps to be taken which go to a committee which is an
internal process. Attorney Lugo clarifies that what he means with the court’s decision, as to the
list of items, such as intent and the purpose of using the bankruptcy court to collect when they had
the opportunity in state court. The alleged debtors never had an interest to come to the bankruptcy
court. It is a matter of “why are we here?” Why, if they could have dealt with everything outside
the bankruptcy court. The Attorney further states that they believe that they need to establish that,
and it is not a simple task to present the intent, and that he needs to give a background, before
entering to the state court matter. The most important part is the purpose since day one and with
other documents they can show what was behind and that the main interest in this whole process
was to get management out of the equation in order to monetize. Attorney Marini renews the
objection stating that the proffer does not show what facts he intends to get form the testimony
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particularly when Mr. Santiago left the bank prior to the filing of the petition and that the case was
transferred before the state court actions. The court requests to Attorney Lugo to specifically state
what part of the opinion requests the alleged debtor to prove the steps or factors. Attorney Lugo
refers to docket 432 and the Forever Green analysis and the totality of circumstances factors and
states that does are the elements they are after. Without agreeing or disagreeing with the alleged
debtors’ position, the court notes that it now understands what Attorney Lugo is stating. The court
clarifies that the totality of circumstances and the factors are key to find that bad faith was an
element to determine to dismiss either a voluntary or an involuntary bankruptcy petition. The key
is factors to show improper purpose. Attorney Marini states that, other than reciting from the case
law, Attorney Lugo has not articulated what evidence of facts he expects to elicit from the witness
that are relevant to an improper conduct for the legal allegation that they are submitting. Attorney
Gonzalez joins the objection and states that the witness can only testify about how the loans were
given and that he left the bank 7 months prior to the filing of the petition and took no part in the
decision of the filing. The court allows a limited time and avers to Attorney Lugo the impossibility
go back to review every single detail as to the process leading to the granting, servicing and reports
on the loans. There needs to be a connection to the key elements. The court notes that the alleged
debtors stated that they were presenting their case in three days and they can be cutting into their
time. It must lean in to the relevant issues, and the court is aware that the alleged debtors requested
continuance of the hearing, but the court is not going to force a continuance by hearing testimony
which is not directly relevant to the positions taken by the involuntary debtors. Yet, the court will
give Attorney Lugo some leeway.
A recess of 15 minutes is granted to Attorney Lugo, to review exhibits and the presentation, to
reach the key issues.
Attorney Lugo presents exhibit 84.22. The witness states that the document is an email that he
prepared to the bank officers of the Economic Development Bank because they were inquiring
about the status of a forbearance agreement that was going to be made at that time and the reasons
why it hadn’t been closed yet. The forbearance was not signed because the client was requesting
some changes to the terms and conditions that were proposed and one bank wanted to change some
of the terms on the structure. Attorney Lugo moves to admit the document as evidence, on terms
of motive or preliminary statement as to why the company ended as it ended. Attorney Marini
objects on relevance to the issue of improper purpose or any of the allegations. The court clarifies
that the document is prepared by Mr. Santiago at the request of the Economic Development Bank,
that was inquiring about the forbearance agreement. The court allows the attorney to continue
questioning the witness. Attorney Lugo asks if one of the reasons that the forbearance was not
signed was because the banks were requesting that the restrictions on selling or transferring the
notes be released. The witness testifies that one of the reasons that the borrowers were refusing to
sign the forbearance was that the banks were amending one of the terms, which put certain
conditions on the sale of the notes. He does not remember exactly what the amendment was, he
knows that the banks were looking for a clean exit strategy. He explains that a clean exit strategy
is when any commercial credit bank manages a distress loan, it is common practice that, if the
primary source of repayment which was the operation of the corporations, does not comply, exit
strategies are assessed. In this case, there was a term in the current structure that specifically stated
that if the bank sold the note, then “x” happened. Commonly, if a borrower is not performing the
bank can sell a loan but, in this case, if the bank sold the loan there was a release of certain assets
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and they try to amend it so that no collateral was released if the sale of the note took place. Attorney
Lugo moves for the admission of the document, which is objected by Attorney Marini due to
relevance. The court admits the document and states that it will give it the weight it deems
appropriate, as Exhibit 84.22.
Mr. Santiago clarifies that he managed the loan until September 2016, but he left the bank in 2017.
He declares that every morning, he would call the client and regarding the account they managed,
including what were the expected collections during the day. If the collections were enough to
cover the overdraft, the bank proceeded to satisfy the overdrafts. All of this was an exception, to
continue the operations during 2016.
Mr. Santiago acknowledges that there was a notice of foreclosure of account receivables, he does
not remember the exact date, however, it was during 2016. The witness states that some of the
recipients of the notices questioned the amounts that were owed. He also states that in agreement
with the borrowers, the involuntary debtors could collect the account receivables to be deposited
in their accounts and, with those collections, they continued to make the exception to make payroll
payments and supplier payments, until some point of September 2016. The witness believes that
the determination of stopping all funding of the operations of the involuntary debtors was made
by all the syndicate banks. Mr. Santiago does not recall if after September 2016 there were
payments to employees, vendors or suppliers. The witness states that he remained as a relationship
officer until September 2016, when the first state court complaint was filed. The loan was
transferred to the late stage division, within the special loans’ division. The loan was assigned to
Rosimari Leén as relationship officer and team leader Linette Bigio. As to the chain of command
to which the witness reports or works for, Mr. Santiago explains that there was a financial analyst,
Enidseri Gonzalez, that his immediate supervisor was Eric Lopez and Francisco Pericds, and the
chain goes up to Eli Sepulveda. The witness states that he did not participate in any discussion,
analysis or dealing or assisted in the preparation of the filing of the petitions. Attorney Lugo asks
the witness if Betteroads or Betterecycling informed him as to the need of the filing of a bankruptcy
petition on behalf of there companies and the witness states that the client mentioned that “over
his dead body”, in so many words.
Attorney Lugo refers to exhibit 26, which is and email written by the witness on September 9,
2016, sent to the borrowers’ legal counsel at the time, and copying Eric Lopez, Francisco Pericas
and Jorge L. Diaz. The witness confirms that on that date the bank informed the borrowers that the
funds will not be available for the operation. The document is moved in to evidence, which is
objected by Attorney Marini due to relevance. Additionally, Attorney Marini states an objection
as to the translation of the document, because it refers to “bank receiver” and it should refer to
“bank syndicate”. The court acknowledges that it is a “bank syndicate” and overrules the objection
accepting exhibit 26 into evidence as a communication by Banco Popular of its decision not to
approve use of funds deposited at Banco Popular, dated September 9, 2016.
Attorney Lugo refers to exhibit 25. The witness explains that the document is an email from
Marisel Rivera, from the corporations, with her projections for the next couple of weeks of the
operations, expenses and collections, bases on the day to day management of the account and
operations. The email is addressed to the witness, with copy to Jorge L. Diaz, Francisco Pericas,
Eric Lopez and Roberto Corretjer. The email is dated September 7, 2016. The email covers the
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Document Page 16 of 17
operations from September 8 until October 7, 2016. Mr. Santiago assumes that this is the petition
that was denied on exhibit 26. Attorney Lugo moves for the admission, which is objected by
Attorney Marini due to relevance. Exhibit 25 is admitted into evidence.
Attorney Lugo states he has no further questions to the witness.
On cross-examination, Attorney Marini reviews the witness’ testimony as to the exit strategy when
an asset is in distress and that one of the exit strategies was the potential sale of a loan. The witness
states that the potential sale is a general strategy considered in most cases and that it is atypical to
have a restriction to sell a loan. Attorney Marini refers the witness to exhibit 26 dated September
9, 2016. The witness states that at the time the communication was sent, the borrowers were not
complying with their obligations under the credit agreement and there was a payment default of
almost a year, at that time, without paying their facilities along with other services and covenants
that were included in the loan agreements.
Attorney Lugo, in redirect examination, reviews the answer of the witness to Attorney Marini’s
first question and the witness restates that the sale of assets is typical in the case of distressed loans.
The witness states that a restriction of the sale of the loans is not typical. He does not recall any
other case that includes restrictions to sell of the loans. Mr. Santiago states that when he refers to
payment delays, he meant as to interest and principal amounts. He declares that there was no
moratorium or release of payments during that period, to his recollection.
Attorney Lugo addresses “housekeeping matters”. He informs that the deposition to the corporate
representative of Sargeant Trading and Sargeant Marine is confirmed for next Tuesday and the
deposition for Mr. Francisco Pascual was confirmed with both attorneys for July 9 at 2:00 P.M.
Attorney Lugo requests a recess, as he has no other witnesses ready for the day. The court clarifies
the witnesses left, which are: Mr. Luis Diaz Irizarry, corporate representative for the two
involuntary debtors, Mr. Francisco Pericds, from Banco Popular and Ms. Marisel Rivera finance
manager who worked for the alleged debtors. The Attorney will start with Mr, Francisco Pericas,
continue with Ms. Marisel Rivera and finish with Mr. Diaz. Attorney Marini states that Mr. Diaz
is present in the courthouse and can be called to testify. Attorney Lugo informs that he has not
prepared the witness and does not have the exhibits to proceed with the witness. The court
continues the hearing to July 15, 2019, at 9:30 am.
Attorney Betancourt addresses the court to state an objection on the record as to the court’s ruling
of the applicability of Rule 26, as per Federal Rule of Bankruptcy Proceeding 9014. Attorney
Betancourt states that the applicable Rule is 1018, which states the applicability of Rule 26.
Attorney Marini states that the argument had already been raised and if they are going to move for
reconsideration they should put in writing. Attorney Betancourt clarifies that they want to preserve
the objection in the record. The court clarifies that when it ruled upon the application of Rule 26,
there was no mention of Rule 1018 and candidly admits that it did not consider it when it made
the decision in the morning. The court states that, if the alleged debtors want to move for
reconsideration on the ruling, it must be made in writing allowing time for an opposition by the
lenders. The court qualifies that the reconsideration must take into consideration the status of the
case right now, the agreements for the taking of the depositions and the balancing required of an
expedited resolution as required by Rule 1013.
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Attorney Marini argues that Rule 1018 provides that “except as otherwise prescribed in Part I of
these rules, the following rules in Part VII apply to all proceedings contesting an involuntary
petition”. He states that the hint is in “except as otherwise prescribed” considering that Rule
1017(f) states that Rule 9014 governs a proceeding to dismiss or suspend a case. So first, Rule
1018 provides a caveat: “except as otherwise prescribed in Part I of these rules”, and rule 1017(f)
prescribes that Rule 9014 applies in proceedings to dismiss or suspend a case. Attorney Marini
refers to the In Re Reyes Colon, 2008 WL 8664716 decision from the First Circuit Bankruptcy
Appellate Panel where the court stated, “bankruptcy rule 1017 applies in the context of a motion
to dismiss an involuntary petition”. Attorney Marini also quotes from the decision in In Re Brown
21 B.R. 701 at page 703 a decision from the Bankruptcy Appellate Panel on 1982, where the court
applied Rule 9014 to a Motion to Dismiss an involuntary bankruptcy petition. He also refers to In
Re Lever Development LLC, 2012 WL 5053441, decision from the Bankruptcy Court of
Massachusetts where the court, in the context of a motion to dismiss a petition filed by the alleged
debtors ruled that 9014(c) applied. Attorney Marini also refers to a decision of Judge Brian Tester
In Re Pipeliners 2014 WL 2467578 where the court determined that a motion to dismiss an
involuntary petition was a contested matter. All the decisions are from courts of the First Circuit
and have held that Rule 1017 applies in the context of a motion to dismiss. The attorney further
state that the record is clear, and the parties filed discovery schedules, Docket no. 325, Docket no.
80, the record has been clear that they are moving in an expedited matter and if they wanted to
articulate that other rules apply, they should’ve done so in their motions to suppress evidence.
Attorney Marini states that nowhere in their papers they cite Rule 1018 and states that the argument
(1) has been waved and (2) is not based in any case law or in any foundation for the court to
reconsider. Attorney Marini requests the court not to delay the matter and no further motion need
be filed as there is no basis on law to reconsider the court’s ruling and that Rule 1018 doesn’t apply
and 9014 governs this contested matter.
Attorney Betancourt reinstates that he consigns the objection on the record, considering the
schedule that has been agreed by the parties for the upcoming hearings, they will comply with the
scheduling but they believe that regardless if 9014 applies, it may have to be read together with
1018 and they reserve the right to reconsider if that is proper, but that this are interlocutory
determinations and, considering the upcoming hearings they will move forward, preserving their
rights as to the objection. The court states that considering the oral reply by the petitioning lenders,
and in reading rule 1017(f)(1), it specifically states that rule 9014 governs a proceeding to dismiss
or convert a case except under section 706(a), 1112(a), 1208(a) or (b), or 1307(a) or (b) and none
of those sections are the ones applicable in this case. For those reasons, the oral request for
reconsideration is denied by the court.
Attorney Ruiz Olmo, on behalf of Puerto Rico Asphalt states for the record that this morning she
addressed Rule 1018 and that the court determined that Puerto Rico Asphalt has no standing. The
court sates that it may have not heard the allegation clearly but that the ruling as to standing stands.
The court recesses and will reconvene On July 15, 2019.
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Minute Entry
Hearing Information:
Debtors: Betteroads Asphalt, LLC. (17-04156) and Betterecycling Corporation (17-04157)
Date/Time/Room: 07/15/2019/09:57:06 am
Bankruptcy Judge: Enrique S. Lamoutte
Deputy Clerk: Darhma Zayas/ Dennis Rodriguez
Reporter/ECR: Graciela Mufiiz
Matters:
Evidentiary hearing on the alleged debtor’s motion to dismiss on the grounds of bad faith.
Appearances:
Wigberto Lugo Mender, on behalf of the alleged debtors
Luis Marini and Carolina Velaz, on behalf of Banco Popular, Banco Santander, Firstbank and
Banco de Desarrollo Econdémico
Rafael Gonzalez Valiente, on behalf of Firstbank as an individual creditor separate from the
syndicated loans
Sonia Colon, on behalf of Sargeant Marine Inc. and Sargeant Trading LTD
Jordi Guso, co-counsel on behalf of Sargeant Marine Inc. and Sargeant Trading LTD
Myrna Ruiz Olmos, on behalf of Puerto Rico Asphalt as party in interest
Alexis Fuentes Hernandez, on behalf of unsecured petitioning creditors
Alexis Betancourt, joining Mr. Lugo Mender, attorneys for the alleged debtors
Proceedings:
The court addresses two matters. First, due to the special and critical moment Puerto Rico is facing,
there are public manifestations in Old San Juan where the court is located. The court acknowledges
that a message was sent informing that the court would be closed but arrangements were made to
continue with the scheduled hearing. The hearing will continue in Old San Juan if it is secure to
do so. However, the U.S. District Court made available the Hato Rey courthouse, in case the venue
needs rearrangement due to the public manifestations.
Second, the reason the court began a little late is because a motion was filed on Sunday in which
the alleged debtors inform the court of certain facts and notify the court that USIC is the bonding
company of the alleged debtors, which could present an issue for the court. The alleged debtors
are not requesting the recusal of the Judge. However, the court advances that the Judge recuses
himself from any contested matter related with USIC and, to the extent the contested matter is
critical to the case, Judge Lamoutte recuses himself from the case. Back in May 2018, the Judge
recused from a related proceeding, 18-00054, because USIC was directly related to the adversary
proceeding. Judge Lamoutte states that the recusal hinges in how and to what extent will USIC be
affected favorably or adversely by a holding of the court that the petitions should not be dismissed
Document Page 2of19
on the grounds of bad faith. The Judge notes that this issue should be addressed as promptly as
possible and, therefore, allow the parties to state their arguments.
Attorney Lugo states that, while preparing for the case and going over the lists of projects pending
and the receivables foreclosed, collected or transferred by Banco Popular de Puerto Rico, he
identified two instances in which USIC’s participation may be important, on one side or the other.
The documents regarding one contract were included in the motion to explain how the contract
ended up elsewhere although it did not constitute an illegal transfer. The participation of USIC
relates to the bonding of the projects and the possibility of being the entity responsible, in the event
of default, to cover the projects. This hinges directly on the part of the transfers, if the transfers are
considered as part of the grounds to enter the order of relief, based on the allegations of the lenders.
Attorney Lugo states that this also has to do with the right to the receivables, who is entitled to the
funds and why the lender filed the petition instead of continuing proceedings in state court. USIC
is not part of the bankruptcy, it has not filed a proof of claim, but the alleged debtors have the
default letters notifying the defaulted amounts and that is part of the evidence to be submitted
today.
The Judge clarifies that the principal owners of USIC are his first cousins and that he will not
entertain any contested action having a direct relation with USIC and he will avoid any appearance
of impropriety, which is important for the court. But the Judge also has a responsibility to dispose
of the cases assigned to him and cannot recuse just for convenience. That is why it is important for
the court to determine how will USIC be adversely or favorably affected regarding, at this juncture,
the pending motion to dismiss. Attorney Lugo clarifies that the alleged debtors didn’t request the
recusal as they don’t have grounds for it but that those are the facts in terms of the evidence, which
establishes the relations between the companies and the banks, and what will be the claims in favor
or against USIC be, regarding the involuntary petition. Attorney Lugo states that, in the event the
orders for relief are entered, USIC may become a part of the involuntary proceedings as a creditor,
being the bonding company of the involuntary debtors.
Attorney Marini argues that the allegations made in the Motion to Inform are not relevant to the
matters pending and are an attempt to delay the resolution of the case. The parties submitted
pretrial reports where their respective allegations were included, and the word USIC is not
mentioned anywhere in the alleged debtors’ Pretrial Report and was just brought up yesterday.
Additionally, the alleged debtors announced their witnesses during the last hearing and USIC was
not announced as a witness. If there are any issues related to the propriety of transfers and whether
they are avoidable or not, it will not be an issue to determine in this hearing. If the court enters an
order for relief, and if the court determines that the petition was filed in good faith, then during
avoidance actions, the issue of USIC may become relevant.
Attorney Lugo clarifies that the matter of “transfers” as a reason or valid foundation to file the
involuntary petitions has been brought several times. When the attorney reviewed the expert report
of the lenders, which was submitted after the alleged debtors submitted their preliminary Pretrial
Report, he finally understood what the lenders are after, in terms of the allegations. Additionally,
USIC is the bonding company for all the projects dealt with during the relevant timeframe, and
Mr. Jorge Luis Diaz will testify to that effect. He explains that a rebuttal witness from USIC may
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Document Page 3
need to be called, depending on the testimony of Mr. Francisco Pericas. The parties are going to
talk about transfers one way or the other. Mr. Diaz will testify as to which projects are not bonded.
The court states that it will not need to decide as to the alleged transfers at this juncture. Attorney
Lugo argues that, depending on the evidence presented, the court may need to decide on the effect
of the transfers on the filing of these petitions. He states that the rights of each party will hinge in
a determination of correctness in the decision made by USIC to assign the contracts to third parties,
which will go against the allegations of the lenders that the transfers were incorrect.
The court inquires if Attorney Lugo is stating that USIC transferred the bonding contracts to
another party. Attorney Lugo replies that construction contracts can be transferred and that USIC
is in the process of transferring the bond to another party and such transfers are being called illegal
transfers by the lenders because Puerto Rico Asphalt is the company that is going to complete the
project in agreement with USIC. As to the project PR1S, the exit plan has been arranged by USIC
and Puerto Rico Asphalt in order to have the project transferred to Puerto Rico Asphalt for it to
complete the project on the same terms and conditions, to avoid a default. That will be Mr. Diaz’s
testimony regarding what happened to the PR15 project. Attorney Lugo states that if Banco
Popular goes back to the Bayam6n Superior Court, they will be facing USIC’s claims, in addition
to the alleged debtors’ claims, regarding the contracts that the lenders alleged were transferred or
that they foreclosed back in June 2016. Attorney Lugo argues that the reason it is necessary to
determine if USIC’s participation will have any effect in this case is that one of the main reasons
they are here today is because Banco Popular does not want to hear the cases in the Bayamon
Court. They want to close the companies, have a Trustee appointed and dispose of the assets
through a carveout agreement, such as the agreements with the small petitioning creditors.
Attorney Marini responds, stating that with the intent to keep delaying the hearing, the alleged
debtors keep changing the story. The alleged debtors state that they now understood that the lenders
filed the petition for the alleged transfers. However, since the filing of the Motion to Appoint a
Trustee the lenders stated that they filed the involuntary petition to avoid the depletion of assets
and detailed several transfers. Since then, the lenders have submitted throughout the case
information of the transfers known, and the ones discovered during the process. Attorney Marini
further states that this is not a trial on an avoidance action, or to determine whether transfers are
avoidable or made in violation of the Bankruptcy Code, the issue now is if the petition was filed
in good faith or bad faith. Whether USIC has defenses to the alleged transfers, or the alleged
debtors have defenses to the alleged transfers, is a matter to be decided later when the court enters
an order for relief and avoidance actions are filed. However, the matter before the court now is the
reasons why lenders filed, and USIC is irrelevant to this decision and the alleged debtors so
recognize it when they did not list USIC in their pretrial nor listed it as a witness, nor included any
evidence related to USIC in the pretrial. They did that yesterday to delay the resolution of the case.
Attorney Marini requests the court to deny the alleged debtors petition.
Attorney Lugo clarifies that, although the question of depletion of assets has been around since the
inception of these cases, to an asset to be depleted the court must first determine if it is an asset or
a liability, and that this PR1S contract is an example of that contested issue. In order to determine
if assets are being depleted, first it must be determined what the assets are, and then, that the assets
were transferred. Attorney Lugo states that this a totality of the circumstances test. The court must
Document Page 4of19
determine several factors to conclude if there are grounds for dismissal or not. The alleged debtors
are advancing that the issue of the transfers, as alleged, hinges on whether the funds are of the
debtors, the banks or of USIC. Attorney Marin reinstates his position and requests to continue the
hearing.
Attorney Gonzalez clarifies that there is no allegation from the banks that the alleged debtors
transferred illegally any projects to USIC. He states that the alleged debtors are arguing that USIC
sent letters of default as a bonding company, which it has the right to do, and that, as a bonding
company, it can ask another company to finish the project. It is not a transfer of the project, it is a
hiring of a third party to do a project that the debtor did not finish. It has nothing to do with illegal
transfers, it has to do with the default of the debtor, and this does not affect or is affected by the
allegations of improper transfer of projects, and it is irrelevant at this juncture.
The court acknowledges that the parties have different perspectives of the role of USIC at this
stage of the proceedings. One thing is clear, the Judge will not entertain any action in which USIC
is a party or may be adversely affected. In any contested matter, as stated in the order on the
adversary proceeding, if the contested matter is relevant or key to the disposition ofa case in chief,
the judge will recuse himself. However, the court is concerned on timing and ethical issues. These
cases where filed in June 2017, over two years ago. At least, one year ago in the Adv. Proc. 18-54
the court entered an order recusing itself from the adversary proceeding due to the intervention of
USIC and the relevance of USIC to the proceeding. As a matter of ethical responsibility if there
are grounds to recuse, the Judge will do it, not only if there is an actual conflict but to avoid the
appearance of impropriety. But the fact that this issue is presented to the court after two years,
after substantial litigation and discovery, concerns the court in regards of the delay of the
proceedings. The Judge has the ethical responsibility and integrity to recuse himself but also has
the responsibility to dispose of the cases that are assigned to him. In involuntary petitions the court
must balance the discovery and other matters with the statutory requirement of an expedited
resolution. Two years have gone by. Although the court has reviewed certain documents attached
to the motion, which are signed by the individuals that may warrant the judge to recuse itself, the
court still does not now what USIC’s role is as to the contested matter, which is whether the petition
should be dismissed on the grounds of bad faith. The court already entered an order that states that
the petitioning creditors complied with the statutory provisions, but the court included a
requirement that the petition must be filed in good faith, and therefore, dismissal may be warranted
before entering the order for relief. The court is not clear as to the role of USIC in relation to the
motion to dismiss. If the court hears testimonial evidence that shows that USIC has such a direct
relation with the pending issue before the court that warrants the recusal of the judge, the court
will do so. At this time, the judge is not recusing but after hearing the evidence, he may.
Attorney Lugo informs that today Mr. Jorge Luis Diaz will testify and standby is Ms. Marisel
Rivera, witnesses of the alleged debtors. For Wednesday, they have scheduled the testimony of
Mr. Francisco Pericds from Banco Popular. There were two pending depositions. The deposition
of Francisco Pascual was completed last Tuesday, and the transcript was received on Saturday. It
will be sent by electronic mail to both attorneys for Firstbank and the alleged debtors intend to
settle some testimony with the lenders. Attorney Lugo states that, after hearing the position of
Firstbank, evidence should go into the record in terms of their motivation, not only as participant
of the syndicate lenders, but as to the separate loan or credit facility. As to the deposition to Mr.
Document Page 5 of 19
Ginter of Sargeant Marine and Sargeant Trading, the deposition took place in July 2, 2019. The
transcript of the deposition was sent to Sargeant and comments to the deposition were received on
Friday, but Attorney Lugo hasn’t been able to review the comments. He expects to agree with the
attorney as to a statement or proffer about the witness’s testimony to submit it to the court. The
testimony is important to support the case. If the parties do not agree on a proffer, they will request
to call the witness within the timeframe allowed by the court. Attorney Lugo requests authorization
to present the expert witness the last day scheduled by the court, which will be July 24, 2019.
Attorney Marini states that he was just notified in the morning of Attorney Lugo’ s request to call
Mr. Francisco Pascual and Mr. Ginter and clarifies that the persons were not named as witnesses
at the hearing that concluded last week. Additionally, the alleged debtors didn’t notify, after the
deposition, the intention of using Mr. Pascual as a witness. Attorney Marini states that he will do
his best, but he hasn’t even checked if the witness is available. Finally, Attorney Marini claims
that the alleged debtors are talking about additional days to schedule witness testimony but that
was not what the parties agreed to. The parties had agreed to three days for the presentation of the
alleged debtors’ evidence and then the lenders would present their evidence. The case in chief
cannot be scheduled after a rebuttal. Additionally, the alleged debtors have not presented an expert
report. Attorney Marini states that he will make his best effort to make Firstbank available but
objects to the effort to continue to take all the days of trial, without allowing the lenders to have
time to present their case.
Attorney Guso states that they delivered the errata sheet to the alleged debtors last Friday. Mr.
Ginter has not been subpoenaed for trial. They will endeavor to work through a stipulation with
Attorney Lugo tomorrow, but preserve their objection to the calling of Mr. Ginter as a witness.
Mr. Gonzalez joins Attorney Marini’s objection to calling Mr. Pascual at this time, as he was not
announced. He states that the court repeatedly ask the alleged debtors who the witnesses were
going to be, and Mr. Pascual was not mentioned. Additionally, Attorney Gonzalez states that if the
alleged debtors are going to have an expert witness it should be presented when they finish their
evidence and not after the petitioning creditors present their part of the case. He states that it is not
the lenders fault that the alleged debtors are not ready, they new of the hearing for months and
have no reason to delay their expert report.
The court states that it has tried to accommodate the needs and schedules of the parties, to the
extent possible, and acknowledges the propositions of the parties that they have been working on
the issues. However, when it came to the evidentiary hearing, there was not a clear agreement, so
the court scheduled the hearing based on its calendar as it is inherent to its responsibility. The court
understood that the involuntary debtors needed three days to conclude the presentation of the
evidence and three days to petitioning creditors to contest. It was not clear to the court, and still
may not be so clear, as to what is the evidence that he alleged debtors will be presenting. Therefore,
the court will hold the parties to the schedule and will continue with the hearing presenting
evidence that the petitions were filed in bad faith.
Attorney Lugo calls Mr. Jorge Luis Diaz. Mr. Diaz is sworn in. The full name of the witness is
Jorge Luis Diaz Irizarry. He is the President of Betteroads and Betterecycling. Betteroads was
founded by his father in 1946 and manufactured pavement asphalt. Since 1946 the business was
Document Page 6of19
an asphalt pavement manufacturing plant. Then, in 1983, they bought the Guayanilla terminal. The
terminal included tanks to hold different type of liquids. When the terminal was owned by PPG, it
held chemicals. The tanks were modified to hold liquid asphalt. At that time, there was a monopoly
of liquid asphalt control by PLACO, which was a Shell subsidiary. Since 1983, Betteroads Asphalt
company expanded and increased its production thanks to the acquisition of the Guayanilla
terminal, which allowed them to bring its own liquid asphalt at a much lower cost that the PLACO
price. The company grew and, at this moment, it has 11 asphalt plants and the Guayanilla terminal.
The witness testifies that when he brought the idea of recycling asphalt, they created
Betterecycling. The company began recycling asphalt based on specifications of the Federal
Highway. Since 1997, Betterecycling, a subsidiary of Betteroads, started to produce recycled
asphalt.
Mr. Diaz testifies that his father, Arturo Diaz Marquez and his mother, Judith Irizarry Morales,
were the stockholders of Betteroads Asphalt. Since, 2012, the estate of his parents is the
stockholder which is controlled by an Executor.
He explains that he is here today because the consortium formed by Banco Popular, Firstbank,
Banco Santander and the Economic Development Bank filed an involuntary bankruptcy of their
companies in bad faith. He states that in 2012, a financing was done with the consortium. After
that, his parents died and he came to control the operation of the companies. Since the 2012
financing, officers of Banco Popular insisted and tried to convince his father to sell the Guayanilla
terminal to PUMA. PUMA was originally in the filing of the involuntary petition, and when his
attorneys requested the information of the stocks and the stockholders, they withdrew. Attorney
Marini moves to strike the testimony as hearsay and for lack of personal knowledge. The objection
was overruled by the court.
In year 2013, although the alleged debtors were up to date in the payment of principal and interests
of the loans, Popular made an approach again to make some changes to the loans, which were
made. Then on year 2014, they signed an additional restructuring document, again, wanting to
force them to sell the terminal, to reduce the number of plants operating, and to close the operation
of several plants. Attorney Marini requests to strike the testimony as hearsay and for lack of
personal knowledge. The objection was overruled.
The witness states that they held many meetings with the bank, and that there are emails,
correspondence, documents where the banks, not only requested them to do what he stated before,
but that they included something that they had verbally agreed upon with Don Arturo. This
agreement was to name a financial advisor to be in the company and paid by the company, but
who reported to the banks and would be the liaison to provide information and keep the banks
informed of what was happening in Betteroads. The name of that person was Amilcar Jordan. On
March 2012, the financing was signed, and Amilcar Jordan came to the company at that same time.
He was an ex-employee of Banco Popular and he was chosen by the lenders. Eventually, Mr.
Jordan left to work for Triple S, but he brought Luis Abreu as a substitute, which continued in the
position until 2016. This is officially documented in the 2014 agreement.
Document Page 7 of 19
Attorney Lugo shows the witness exhibit number 1. The witness states that this is the contract,
negotiated since 2011, and signed on March 2012. He states that on section 9.11 of the contract
“Assignment or Participation of Loans” there is a limitation to sell participations of the contract
except to institutions described in the document, which worked in conjunction with a pledge
agreement of the stocks of the company. The documents were signed concurrently. This was
signed by his father, Banco Popular, the consortium of Popular, Firstbank, Santander and the
Development Bank. Attorney Lugo requests the document to be admitted into evidence. The
document is admitted as exhibit |.
Attorney Lugo provides exhibit 2 to the witness. The witness states that the documents were signed
at the same time in the offices of the O’Neill & Borges law firm. The document was signed by
Arturo Diaz, Banco Popular represented by Jorge Aldarondo, and in representation of the
consortium. The witness reads section 23 of the document, which conditions the transfer of the
loans. The document is admitted as exhibit 2.
The witness declares that in 2014 there was a restructuring, the contract was renewed, and some
parts were modified. Attorney Lugo shows the witness exhibit 5. The witness confirms that the
document is the 2014 agreement and that he signed the document. The document is titled
“Amended and Restated Agreement”. He testifies that there were several changes, one was the
financial assistant mentioned before. Section 9.11 of the previous contract was not modified. On
this document, the bank requested the sale of the Guayanilla terminal. Attorney Lugo references
section 5.20 “Sale of Guayanilla Property”. In this document, the alleged debtors were required to
sell the Guayanilla property on or before February 28, 2015. The witness refers to section 5.21
“sale of airplane and helicopter”. He explains that his father had bought a jet and a helicopter.
Both, the airplane and the helicopter were sold. The document is admitted as the alleged debtor's
exhibit 5.
Attorney Lugo shows the witness exhibit 6. The debtor identifies the document as the “Amended
and Restated Ratification of Stock Pledge and Security Agreement” and states that section 23
remained the same. The document is admitted as exhibit 6.
Attorney Lugo presents to the witness exhibits 40 and 41, which are the involuntary petitions for
Betteroads and Betterecycling, respectively. The witness is asked to identify which parties of the
involuntary filing relate to the documents previously reviewed. He enumerates the following:
Banco Santander, Firstbank, the Economic Development Bank and Banco Popular. The documents
are admitted as evidence.
Mr. Diaz states that during 2015 to 2016, Puerto Rico went through its lowest in relation to asphalt
sales, and it sold less than $0.50 of the $1.00 that it usually sold. The market was less than half of
what it had ever been during the history of Puerto Rico. He explains how the asphalt market
behaves: its highest point is on election year, or the point of more sales, and its lowest point the
year after elections. Then it starts to increase the second year, the third, and again, on election year
to its highest point. It is a cycle and it has been like that for 70 years. When the sales decreased,
although the company continued to pay the loan, principal and interests, they started to receive
pressure, specifically from Banco Popular, which is the leading bank of the consortium. He testifies
that the pressures came in different ways. When the company had funds that had not yet cleared,
Document Page 8 of 19
the bank began to deny them the ability to make checks and make payments, although the funds
were in the bank. He states that there is a document, in the discovery documents, from a bank
official which states that this should be done to put pressure on them, so that Betteroads would do
what they wanted it to do. Attorney Marini requires the testimony to be stricken for hearsay and
the objection is overruled.
Attorney Lugo requests exhibit 9 to be shown to the witness. Attorney Marini poses an objection
to the document, as it is an email exchange between officials of Banco Popular, whom are not
testifying today, therefore, it constitutes hearsay and because it is in Spanish, Attorney Lugo replies
stating that the email was provided by counselor during discovery and, to that extent, the document
is authentic. The court states that, assuming that relevance and authenticity are stablished, the court
may accept it, subject to be translated within ten (10) days. Attorney Marini clarifies that his
objection is not about authenticity, it is as to relevance, and because it contains statements of bank
officers that are not present in court. Attorney Lugo clarifies that it may be considered as an
admission of the party.
The witness testifies that he has seen the document before as part of the discovery proceedings.
He explains that it is an email from Francisco Pericas Alfaro to Eli Sepulveda. Explaining his
relationship with Mr. Pericds, the witness states that José Santiago Ramos was the day to day
liaison, whose bosses were Pericas and Eric Lopez, and Eli Sepulveda was the boss of all of them.
The email came from Jorge Aldarondo Pérez and is copying Francisco Pericas Alfaro, Eric Lopez
and Eli Sepulveda. He reads “yesterday afternoon the operations manager of Puma Americas
called to inform that they will be suing Betteroads for collection, with respect to some material
owed. He wanted us to be informed.” Eli Sepulveda responded: “Betteroads is a case full of
contradictory stories. Gogo [the witness, called by his nickname] alleges that he owes Puma
money, a little over a million, but that they are in conversations for a claim they have against them.
Puma and Betteroads had a meeting to allegedly talk about an agreement for storage and
distribution. Now Puma informs them of a possible complaint. Let’s meet with Gogo as soon as
possible”, Attorney Marini objects for the reading of a document which is not in evidence. The
court sustains the objection. Mr. Diaz declares that the document confirms in writing that
instructions are given between officials Francisco Pericas and Eli Sepulveda to start to seek
alternatives, for him to feel the pressure. Attorney Lugo requests the admission of the document,
which is objected by Attorney Marini for relevance. Attorney Marini further states that the
document was prepared two years prior to the filing of the involuntary petition and that it does not
support the witness’s allegation. The court overrules the objection and states that it will give the
document the weigh it deems appropriate. Exhibit 9 is admitted.
Mr. Diaz testifies that during late 2015, the company requested an extension, and the extension
was approved subject to the signing of a forbearance agreement. In that forbearance agreement,
the lenders attempted to change section 9.11 to be able to sell the assets of the company to
whomever the banks decided to, without the authorization or consultation of the involuntary
debtors. Attorney Marini objects the testimony for lack of foundation and personal knowledge.
The court overrules the objection. The witness states that the fact that they had a debt with Sargeant
Marine and that they were making partial payments was known to the banks. He states that the
banks, through Luis Abreu, after reviewing what Marisel Rivera, the comptroller, requested,
decided which checks could be paid and which couldn’t, When they decided to continue partial
Document Page 9 of 19
payments to Sargeant Marine, it was not approved by the banks. Mr. Diaz testifies that on June
2016, the bank decided to close the line of credit and justified the decision by stating that they
didn’t knew Sargeant Marine had sued due to the pending balance, which he alleges was not true.
They also foreclosed on the account receivables, for $49 million. Attorney Marini moves to strike
the testimony based on hearsay and speculation. He states that if there are written documents
related to the allegations, then they should be presented. The objection is overruled.
Attorney Lugo shows the witness exhibit no. 14 and requests the witness to review it. Attorney
Marini objects as to relevance and hearsay. The court holds the objection in abeyance pending the
submittal by counsel of alleged debtors. The witness states that the document was sent to him by
Mr. José Santiago Ramos and it is an “Indicative Term Sheet”, beginning in the page that reads at
the bottom “BPPR2_ 0002996”. The document was sent to him on May 11, 2016, before the
foreclosure of the account receivables. He states that this was another attempt to change the 2014
original financing by changing section 9.11, that allowed them to sell the loans. The witness
references page 8, where it states, “Assignments and Participations”. He states that the document
was not signed considering that the banks were attempting to modify the terms, to be able to sell
the assets of the corporation without their authorization or consultation. Attorney Lugo requests
the document to be admitted into evidence. Attorney Marini objects as to relevance. The court
overtules the objection. The document is admitted as exhibit 14.
Mr. Diaz testifies that the accounts were foreclosed on June 2016. During 2016 the banks sent the
alleged debtors different versions of the forbearance. Then, every month the bank provided the
alleged debtors a letter, allowing them to collect, but they would approve and control what would
be paid. From August 31, 2016, since they haven’t managed to change the clause, they decided to
close the company’s operation. They also debited money from the marginal account, on which
only Banco Popular was authorized to withdraw. Attorney Marini objects to the testimony on
grounds of hearsay and lack of foundation. The objection was overruled.
The witness is shown admitted exhibits no., 25 and 26. The witness states that he was copied on
the emails. As to exhibit 25, Mr. Diaz describes the parties in the email and explains that it was
the budget for September 8 to October 7, including collections in hand. He states that Marisel
Rivera wrote the communication including the budget of payments necessary for the operation. It
also included the list of the collections received in the last few days that were going to be delivered
to the bank and not yet reported in the marginal account. He describes the columns included in the
email. He states that this was sent after the bank had closed the company and curtailed the funds.
Referencing exhibit 26, he explains that it is an email from José Santiago Ramos to Roberto
Corretjer stating that the receiver had decided to maintain its position not to approve the utilization
of funds for payment of Betteroads and Betterecycling expenses. Mr. Diaz testifies that no monies
were advanced or transferred to the accounts of Betteroads and Betterrecycling. After the denial
of the funds, a situation of crisis began because all the contracts were bonded by USIC. Mr. Diaz
needed to solve all the contracts that had a USIC bond in order to find someone to perform, because
USIC was going to claim any cost and they will have to disburse the amounts. He testifies that the
employees remained working for two weeks without getting paid, waiting for an agreement with
the bank, to continue working. There was no opportunity to reach an agreement, and the employees
had to be terminated. He states that 300 mothers and fathers of families were out of the street
without warning and that the alleged debtors didn’t had the money to pay vacation leave, the
Document Page 10 of 19
ASUME payments, 401K, social security, income tax, and all other debt for the employees. He
states that the companies were left without any employees. Mr. Diaz testifies that, while this
happened, the receivables continued to be deposited in the marginal account, and Banco Popular
withdrew them and kept the account at zero.
Exhibit no. 27 is shown to the witness. Mr. Diaz recognizes the document. The documents were
prepared by Marisel Rivera and discussed with the witness and reflects a list of $1,789,362.59,
which was the amount withdrawn by Banco Popular from the marginal account along with
additional deposits received after, amounting to $1.9 million withdrawn from the marginal
account. There is also a copy of the Banco Popular’s statements, which reflect the withdrawals
from the marginal account. Mr. Diaz was never informed how they distributed the funds. The
accounts were closed, and they had no internet access to the accounts, and the bank never provided
further information. The court admits the document into evidence, overruling Attorney Marini’s
objection based on relevance.
The court recesses until 2:00 P.M.
Mr. Diaz explains what happened with the contracts after the closing of the company. When the
companies were closed, they didn’t have any money to execute the contracts. Therefore, at that
moment, the contracts went into default.
Attorney Lugo presents Exhibit 157 to the witness. Mr. Diaz states that the document is a “work
on hand” as of September 2016, a list of the contracts with the municipalities. Marisel Rivera
prepared the document and it was prepared at the time of the closing to know what was pending.
Attorney Lugo requests the document to be admitted into evidence, and Attorney Marini objects
based on relevance and stating that the document was filed yesterday afternoon and that there is
no reason that justifies not filing the document with the Pretrial on June 20", as it was a document
prepared by the alleged debtors. Attorney Lugo states that the document was produced a long time
ago, as part of the transcript of the deposition of Linette Biggio, although it was filed yesterday
with the court. He states that it has been available to the other party a long time ago. As to the
objection of relevance, Attorney Lugo states that the arguments of the lenders refer to the depletion
of assets. The attorney states that these are the assets that were allegedly depleted. Within the assets
allegedly depleted, there are contracts. Therefore, their intention is to describe what are those assets
and what happened to them in order to scrutinize the petitioning creditors’ foundation to file the
involuntary petitions.
Attorney Marini replies and states that the fact that the attorney stated that the document was
available since May as part of the deposition transcript sustains the position that there is no reason
for not presenting the document by June 20". Attorney Lugo states that they were still in discovery
after the pretrial was filed and that the documents were not filed by inadvertence, but the document
does not come as a surprise nor is new to the lenders. Attorney Marini alleges that these are not
documents related to the depositions or the remaining discovery, the document was produced by
the alleged debtors and should’ve been filed with the Pretrial.
The court clarifies that a few weeks ago the parties met in Chambers. The purpose of the meeting
was for the parties to provide the court an idea of what was the evidence to be presented in the
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Document Page 11of19
evidentiary hearing scheduled to determine whether the involuntary petitions were filed in bad
faith. At the meeting, and later at the initial hearing, the court asked the alleged debtors to identify
with specificity and clarity what were the grounds that led the involuntary debtors to move for the
dismissal on the ground of bad faith. The court asks: why present the list of contracts that were
pending when the corporations were closed? An issue that the corporations were closed or
remained operating was not something clearly alleged as a ground or defense for the filing of the
motions. Why bring them now, stressing the point that USIC was the bonding company for those
contracts? The court goes back to the beginning of the hearing, when it stated that if USIC is a
party to the contested matter, the Judge will not hear the contested matter and if USIC is relevant
to the outcome of the case, the Judge will recuse himself from the case. The court stated that it will
make the decision after it heard the evidence. The basic question is how USIC will be affected by
the court determining whether the petition was filed in bad faith or in good faith, particularly when
the informative motion was filed yesterday, Sunday, and on Friday the court denied a Motion for
Stay Pending Appeal in another action. The timing and the stress on the factor are relevant but it
does not do away with the court’s responsibility. Therefore, the court aims to be sure as to what is
the intent of presenting the evidence, if it is within the scope of the hearing, or whether the alleged
debtors are expanding the scope to ultimately move the Judge to recuse himself.
Attorney Lugo clarifies that the exhibit was included in the Pretrial Report as exhibit 101 (docket
no, 420-18) which addresses the issue as to timeliness. The court states that it has read exhibit 101,
which summarizes a list of the municipalities as of September 2016 or at the time that operations
were allegedly closed. The document is part of the documents included in Docket 420 filed on
June 22, 2019 and should be considered in relation to the Pretrial Report filed at docket 414. The
court asks Attorney Lugo were in docket 414 is exhibit 101 referred to and for what purpose. The
court clarifies that the exhibit is a list of contracts and has no mention of USIC. The court rephrases
the question. Which proposed finding in the Pretrial Report refers to exhibit 101?
Attorney Lugo states candidly that at the time of the meeting in Chambers there were several
motions pending regarding additional discovery and additional work that would be performed. As
to that matters, the court ruled after the meeting. The plan and answers, specifically on the time
allotted for purposes of presenting evidence, rested in a good part in the work of an expert, which
was retained and announced on time and which purpose was to deal with the issues of the transfers.
To Attorney Lugo’s regret, all the issues about timing have backfired against the alleged debtors.
The allegations of the banks on all the depositions undertaken is centered in the depletion of assets.
None of the deponents knew which were the contracts, the projects or what happened with the
assets of the companies whose principal asset is, precisely the “work on hand”, including the recent
deposition of Mr. Ginter. To the extent that the attorney is unable to use an expert witness who
was supposed to deal with these technical issues, and to the extent they were unable to comply
with the court’s order, to file a Join Pretrial Report in which all the discovery issues would’ □□ been
solved, the alleged debtors are dealing now with an incomplete pretrial report which has been
supplemented with additional discovery. The attorney clarifies that this is his witness to present
the alleged debtors’ case in chief, in terms of what, if anything happened, with these transfers.
Attorney Lugo states that he reviewed this evidence precisely preparing for Mr. Diaz’s testimony.
However, this is not a change in scope, it is a matter of how the case is being presented. As to the
transfer of assets, the attorney states that he learned the allegations of the petitioning creditors
through their expert report, which was filed on the 20". He asked for a deposition of the expert,
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Document Page 12
and by email, the petitioning creditors stated that their expert is a rebuttal witness and that the
alleged debtors needed to produce their witness first. The attorney clarifies he has no other way to
proof that there are no transfers as alleged, which is the reason why the bankruptcy petition was
filed. As to USIC, Attorney Lugo states that he realized the relationship with the contracts in
preparation to Mr. Diaz’s testimony, when he was shown the contracts and recalled the adversary
of San Sebastian and the judge’s recusal. He went over the contracts in order to prepare to
demonstrate that the contracts, which were assets, are now liabilities because the contracts entered
to default. Attorney Lugo states that whether USIC will have a responsibility is not a matter that
may need to be solved today because there is no claim filed nor an order for relief have been
entered.
Attorney Marini states that the timeframe works the same for all parties, that this process was the
result of consented discovery plans and that the debtors’ lack of diligence in preparing their case
is no excuse for bending the rules or ignoring the court’s orders. Attorney Marini replies to Mr.
Lugo’s mention that the alleged debtors suddenly now understand what the transfers are, and state
that they don’t need the petitioning creditors’ expert to acknowledge what the transfers are as they
are the ones that made the transfers. The petitioning creditors have put throughout the case and in
multiple pleadings the transfers discovered to date. Attorney Marini further states that the alleged
debtors’ statement that the evidence was not available is misleading, they had the evidence
available and chose not to include it in the pretrial. The inclusion of USIC as a bonding company
was not relevant when they filed the pretrial and they are making it relevant now as an attempt to
delay the case. Exhibit 101 is not referenced in the pretrial report and the debtors’ pretrial doesn’t
mention the word USIC. Attorney Marini states that this exhibit along with all the exhibits
submitted yesterday should be excluded.
The court asks, once more, what is the relevance of the list of contracts as of September 2016 for
determining whether this case was filed in bad faith. Attorney Lugo states that there have been
allegations of transfers. The court asks if the projects were transferred. Attorney Lugo affirms that
the projects were transferred as the company was unable and defaulted on all these projects. The
purpose of the testimony of Mr. Diaz will be what was transferred and why. The court orders
Attorney Lugo to continue the examination. Attorney Marini renews its objection as to the exhibit
based on relevance. The court admits exhibit 101 asa list of contracts with municipalities and ACT
pending as of September 2016.
Mr. Diaz describes the document as a list of “work on hand”, the name of the contracts,
municipalities and/or contractor or subcontractor. He explains that, when you go to a bid of a
municipality, the bid is made for one year, from July to June 30". The bid, which is bonded,
states that you must supply the municipality, at any time. The asphalt pavement, 10 tons today or
a 100 tomorrow, must be readily available when they pick it up. When the company closed due to
the curtailing of the funds, they evaluated which of these contracts were becoming a liability or a
claim against the company. It the municipalities were unable to pick up the asphalt pavement from
the plants, they will be in default with the contract. Therefore, the bonding company will request
the company payment of the amounts it had to pay for other company to supply the asphalt.
Attorney Marini objects, as the witness is assuming facts that are not in evidence by testifying
about contracts and the content of them which have not been submitted into evidence. The court
sustains the objection considering the lack of specificity of the contract being described.
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Document Page 13 of 19
The witness testifies that the list also includes the contracts with the Puerto Rico Highway
Authority (ATC). He states that they had with the municipalities two type of contracts, “pick up
in plant” or “installed and compacted”. In the contract with ACT, the alleged debtors were the
direct contractors in charge of the project and had the responsibility of doing everything that is
included in the project, not only the asphalt. In the case of Carreteras, if they defaulted, the
company would never be authorized to bid in the agency on any future contract. That is exactly
what happened with the PR15 from Guayama to Cayey. The alleged debtors had to default, and
wrote a letter accepting the default and the bonding company, then, has a claim against the alleged
debtors because they must find someone to finish the job. In his experience, when the company
pays to finish the job, it is more expensive that the amount of the bid, He states that all the contracts,
as soon as the company was closed, change from an asset to a liability and a claim to the company.
Attorney Marini renews the objections as the witness is testifying about contracts not included as
evidence. The objection is overruled.
Mr. Diaz describes the third type of contracts, when another company, such as las Piedras
Construction, wins a bid and then subcontracts Betteroads and Betterecycling. In that case, there
is no bond, but there is a contract that makes the alleged debtors liable.
Attorney Lugo shows the witness exhibits 184 and 185. Attorney Marini objects the testimony
related to the exhibits, based on the untimeliness of the filing of the documents and that it should’ve
been filed on June 20", the exhibits are in Spanish and based hearsay, as it is a letter from the
Government of Puerto Rico that is not there to testify. The court asks the purpose of the exhibit,
which is a letter from Autoridad de Carreteras y Transportacién awarding the contract. Attorney
Lugo states that it is related to the project PR15 to which the witness testified. Attorney Lugo
explains that exhibit 184 is the award of the contract by ACT and the order to commence is exhibit
185; then he will show the contract, which is exhibit 191 and then he will show the letter of default.
The court expresses its concern as to what the documents will show. Attorney Lugo states that it
will show the difference between an asset and a liability. He states that the petitioning creditors
argue that alleged debtors transferred assets, and they intend to show that there were no assets to
transfer as the alleged debtors were in default. The court clarifies that the petitioning creditors have
not presented any evidence yet and that, at this juncture, the court is considering the evidence of
the alleged debtors that the involuntary petitions were filed in bad faith or for an improper purpose.
The court asks how do the documents, which are a notice and an award of contracts, show that the
petitions were filed for an improper purpose, what is the relevance to tie in to the alleged debtors’
allegations? Attorney Lugo states that the petitioning creditors are resting on their burden of proof
to see the if they can proof their case, and the alleged debtors need to proof all the elements and
need the rebut the arguments in favor of the petitioning creditors, as alleged. The attorney clarifies
to the court that the proposed “finding” would be that the contracts in exhibit 101 are not assets
but liabilities and that there was nothing to transfer. In addition, he clarifies that this contract is the
kind that was assigned to Puerto Rico Asphalt, party in interest. The court clarifies that PR Asphalt
is present, but there are not a party to this contested matter. Attorney Lugo states that PR Asphalt
has been a recipient of this transfers and this is evidence of how this contract is alleged to be a
liability for the alleged debtors, and asset for the petitioning creditors. The court inquires if PR
Asphalt is an independent and separate corporation from the involuntary debtors. Attorney Lugo
clarifies that it is totally independent.
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Attorney Marini states that they made three arguments, and Attorney Lugo only responded to one
of them. He states that he objects to providing the translations in ten days, as the petitioning
creditors filed their translations on time and the alleged debtors had the opportunity to do so, as
well. Additionally, the alleged debtors did not provide valid reasons why the documents were not
provided by June 20". Furthermore, in terms of relevance, the alleged debtors are trying to reply
at the rebuttal of the petitioning creditors, which has not been presented and this does not address
the reason of the improper conduct. Attorney Gonzalez adds that, even if they are correct, that
these contracts are liabilities and not assets, how does that prove bad faith? The court clarifies that
such a determination corresponds to the court. The court overrules the objection, at this juncture,
as to excluding questions related to exhibits 184 and 185. The court is not admitting the documents
but is not preventing questions related to the documents. The court clarifies that any document in
Spanish admitted must be translated within then days.
Mr. Diaz describes exhibit 184 as an award of one of the alleged debtors’ bids, as the lower bidder.
The document proves that they were awarded the contract of PR 15. Attorney Lugo shows the
witness exhibit 185. Attorney Marini renews his objections of untimeliness, document in Spanish
and relevance. The court maintains its determination and allows the questions.
Mr. Diaz explains that the document is the order to proceed, and that the project is federally funded.
He explains that the project began, but when the bank closed the accounts and the company, they
had to go into a court, and had to deal with the bonding company. The also had to notify the Puerto
Rico Highway Authority that they had entered in default, after 70 years of never defaulting. The
witness testifies that the project has not been completed. When the project came into default, they
had to negotiate with the Puerto Rico Highway Authority, to assume responsibility of the $1.9
million, approximately, left to be able to finish this project.
Attorney Lugo shows exhibits 160 and 161 to the witness. Attorney Marini preserves the same
three objections for the record. The court asks the purpose of the documents. Attorney Lugo states
that the purpose is to reaffirm the witness’s testimony regarding the nature and effect, for purposes
of this bankruptcy filing, of the default and the effect of the “alleged transfers” averred by the
petitioning creditors to enter the order of relief. Attorney Marini states that it doesn’t go into any
of the elements for improper act or the elements for the totality of the circumstances. The court
overrules the objection. Attorney Marini adds for the record that exhibit 160 is dated June an".
2017, after the filing of the bankruptcy case, which relates to relevance. The court notes that the
two letters in the document are dated post-petition. Attorney Lugo states that they relate to the
PR15 project and its cancellation, Attorney Marini states that a document prepared after the filing
has no relevance as to reason for filing the involuntary petition. Attorney Lugo clarifies that exhibit
161 is pre-petition. The court accepts exhibit 161 with the same caveats but not exhibit 160.
Mr. Diaz reviews docket 161. He explains that the document is the claim of the Puerto Rico
Highway Authority for the project PR15 sent to USIC, as the bonding company, stating there was
a balance on the project not finished and their responsibility to finish it. The second letter was sent
to the witness by the Puerto Rico Highway Authority stating that they had not finish the project
and the list of defaulted jobs. The third document is a letter sent by the witness to Mr. Duhamel
Iglesias, Vice-president of USIC, declaring the default on the project and handing over the project.
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As requested by Attorney Marini, the testimony of the content of the letter which is not admitted
into evidence, is stricken by the court.
The witness testifies that USIC negotiated with PR Asphalt to finish the project at the same cost
stated on the letters with the remaining balance to be paid by the PR Highway Authority. Attorney
Marini moves to strike the testimony as hearsay, as it is a negotiation between USIC and PR
Asphalt. The objection is overruled. The witness states that USIC communicated with the alleged
debtors and told them that the negotiation with PR Asphalt was successful and that a claim to
Betterecycling could still be possible if there was an increase in costs. Attorney Lugo moves for
the admission of the three documents, exhibits 161, 184 and 185. The court admits the documents.
However, the documents need to be translated and the court will give the documents whatever
weight it deems appropriate. Attorney Marini renews his objections which are noted by the court.
The witness explains that on April 2016, before the accounts receivables were foreclosed, the
alleged debtor had leased a plant in Arecibo to Rodriguez Asphalt and had leased another plant in
Barranquitas to Professional Asphalt. He states that the leases were approved by the bank. He
declares that he found companies that were willing to operate the plants in order to lease them.
The two leased plants mentioned had municipality contracts of Betterecycling and Puerto Rico
Highway contracts.
Exhibit 142 and 158 are shown to the witness. Attorney Marini states for the record the same
objection, the documents were not filed on time and are in Spanish. The court allows the attorney
to proceed. The witness explains that exhibit 142 is a contract leasing the Arecibo asphalt plant to
Rodriguez Asphalt. The contract addressed important issues, such as a stipulation that Betteroads
and Betterecycling will be providing the design, lap inspections and field inspections whenever
the asphalt being installed was for the PR Highway Authority. The contract also stated that the had
to exclusively buy the liquid asphalt from Betteroads in Guayanilla. It also had a fixed price,
$65.00 per ton, in case the companies needed to buy asphalt from them, which was a great price.
This was done in order to finish contracts with municipalities and Carreteras. Attorney Marini
objects based on relevance and the objection is overruled. The contract was executed the 14" of
April 2016. He declares that they communicated the lease to Banco Popular, the reasons for the
lease, and that Banco Popular agreed.
The court clarifies that the admitting the documents and overruling the objections based on
relevance, does not mean that the court finds that they are relevant to the issue of filing a petition
in bad faith, but the court is assuming that it its going to be tied to other documents or testimony.
Attorney Lugo requests exhibits 142 and 158 to be admitted into evidence. Attorney Marini
presents the same objections. The documents were admitted with the same caveats.
The witness describes exhibit 158 as a contract between Betterecycling Corporation and
Professional Asphalt LLC signed on the 1“ of April, with the same conditions as the one mentioned
before. This contract is for the Barranquita plant. This contract was notified to Banco Popular and
approved. The witness declares that Professional Asphalt is a client of Banco Popular. Attorney
Marini objects due to speculation and the objection was overruled by the court. The lease was for
$4,000.00, Attorney Marini requests the court to allow a standing objection as to timeliness and
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language, to all the documents presented yesterday, exhibits 152 through 191. The court notes the
objection.
Mr. Diaz states that the agreements were accomplished prior to the foreclosure of the accounts
receivable and before August, when the bank curtailed the funds. After the closing of the company,
they leased several plants to Rodriguez Asphalt which was already leasing one plant, and they also
leased another plant to Professional Asphalt LLC and one plant to Harry Melendez in Humacao.
They leased the properties because if the plants were not operating, the value of the plants
decreases and become “rusty iron” and unusable, The witness states that by leasing the plants to
Rodriguez and Harry Melendez, they were able to serve asphalt “pick up” at plants, to some of the
municipalities with that type of contract.
Document 188 is shown to the witness. Attorney Marini adds an objection as to relevance and it
is noted by the court. Mr. Diaz explains that when the company was closed, except Arecibo and
Barranquitas that were already leased, every other plant of Betteroads and Betterecycling was
leased to PR Asphalt. They were leased because PR Asphalt hired the engineers and laboratory
technicians to provide the quality control services as well as to provide the design of combination
of asphalt, in combination with the fact that PR Asphalt was supplying the liquid asphalt to all the
plants. Mr. Diaz explains that all the agreements are the same. Attorney Lugo reque
This text is long and has been trimmed here. Open the source document for the complete record.