In re Colon

• Decision Date: 02 September 2016
• Docket Number: CASE NO. 06-04675 (ESL)
• Citation: 558 B.R. 563
• Parties: In re: Edgar Abner Reyes Colon, Debtor
• Court: U.S. Bankruptcy Court — District of Puerto Rico

558 B.R. 563

In re: Edgar Abner Reyes Colon, Debtor

CASE NO. 06-04675 (ESL)

United States Bankruptcy Court, D. Puerto Rico.

Signed September 2, 2016

Filed September 30, 2016

George B. Cauthen, Nelson Mullins Riley & Scarborough LLP, Columbia, SC, Richard Greiffenstein, Richard David Lara, Curtis J. Mase, Mase Lara Eversole PA, Miami, FL, Jose L. Nieto-Mingo, Nieto Law Offices, Celina Romany, Celina Romay Law Offices, Fernando Van Derdys, Law Offices of F. Van Derdys, San Juan, PR, for Debtor.

OPINION AND ORDER

Enrique S. Lamoutte, United States Bankruptcy Judge

The issue pending in this case is whether Banco Popular de Puerto Rico (hereinafter referred to as "Banco Popular" or "BPPR") and its affiliate Popular Auto, Inc. (hereinafter referred to as "Popular Auto") failed to comply with the requirements of 11 U.S.C. § 303(b)because at the time the involuntary petition was filed (November 22, 2006) against Dr. Edgar Abner Reyes Colón (hereinafter referred to as "Involuntary Debtor" or "Dr. Reyes") Dr. Reyes had more than twelve (12) creditors. This court, in the opinion and order entered on May 23, 2012 (docket # 404) ('the "Opinion and Order"), In re Colon, 474 B.R. 330 (Bankr. D.P.R. 2012), found that as of petition date the Involuntary Debtor had 15 creditors and that there are only two petitioning creditors. However, the court also concluded that the judicially created "special circumstances exception" to the numerosity requirement in § 303(b)may apply if the petitioning creditors establish fraud, artifice or scam "based upon the alleged fraudulent transfers made by the Involuntary Debtor to various corporations prior to the filing of the bankruptcy petition." Thereafter, "if the petitioning creditors prove that special circumstances are indeed present in this case, then the court would have to determine whether the Involuntary Debtor was 'generally not paying such debtor's debts as such debts become due' pursuant to 11 U.S.C. § 303(h)(1)in order to grant the order of relief in this case." See order entered on August 10, 2015 (dkt. # 488).

This case is also before the court upon the Involuntary Debtor's renewed motion to dismiss the involuntary petition. The Involuntary Debtor reasserts its contention that the involuntary petition must be dismissed because the same fails to comply with the statutory provisions in 11 U. S. C. § 303(b)(1) and (2), requiring that whenever there are more than 12 creditors, at least three undisputed creditors must join the petition. The Involuntary Debtor also reaffirms its legal conclusion that after the Supreme Court's opinion in Law v. Siegel, ––– U.S. ––––, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), the "special circumstances exception" addressed in this court's order of May 12, 2012 is not applicable, and that it has so been determined by recent decisions.

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

In re Reyes Colon, 474 B.R. 330 (Bkrtcy. D.P.R. 2012)(Lamoutte, BJ). See also the orders entered on August 10, 2015 (dkt. # 488) and October 28, 2015 (dkt. # 540). The issue pending after these decisions was whether there were facts warranting that the "special circumstances exception" to the creditor numerosity requirement, as determined in In re Moss, 249 B.R. 411 (Bankr. N.D. Tex. 2000), be applied in this case. After a thorough analysis of all the evidence presented to this court and the applicable law, the court concludes that there are special circumstances due to the Involuntary Debtor's scheme to misrepresent his financial condition, but that such misconduct may not override the statutory requirement that three or more creditors join in the filing of an involuntary petition when there are 12 or more creditors. In reaching this conclusion, the court acknowledges that after Law v. Siegel, its equitable powers have been significantly diminished.

The court held evidentiary hearings in November and December 2015 to consider whether there are special circumstances warranting the exception to the three or more creditor requirement in section 303(b). The minutes of said hearings include a detail of both the documentary evidence and the testimony of the witnesses presented. See docket numbers 633, 704, 706, 709, 716 and 720. The court incorporates said minutes and attaches the same hereto as constituting its findings of fact. The inferences from the testimony of the witnesses presented by the petitioning creditors, that is, professionals who have worked with or for the Involuntary Debtor, show that these professionals (accountants[Mr. Félix Román Dávila], certified public accountants [CPA Félix N. Negrón Román], attorneys [Eric Y. Reyes Colón, Esq.], notary publics [María Torres Cartagena, Esq.], friends and associates [Dr. Francisco J. Quintero Peña] ) related to Dr. Reyes exhibited convenient or selective amnesia to blur the economic scenario of Dr. Edgar A. Reyes and to orchestrate a scheme to deceive creditors by misrepresenting transactions to transfer assets, as well as the financial condition of the Involuntary Debtor and related entities, which misrepresentations ultimately were aimed at benefiting the Involuntary Debtor. These individuals voluntarily agreed to misinform creditors. The uncontroverted testimony and the reports (Exhibit 41 and Exhibit 42) of the expert witness, CPA Eduardo Soria, CPA/ABV, CVA, CIA, CFE, Esq., pellucidly established the involuntary debtor's fraudulent actions and scheme. The witnesses' testimony, as incorporated and analyzed by CPA Eduardo Soria, evince a puppet scheme approach on the part of Dr. Edgar A, Reyes to defraud Banco Popular. Therefore, the court finds that the scheme to defraud constitutes special circumstances.

However, only two creditors joined the petition, and the Involuntary Debtor had more than twelve creditors. Therefore, the court is compelled to balance the statutory requirements for filing an involuntary petition and the application of equity principles in the administration of bankruptcy proceedings.

The view that bankruptcy courts are courts of equity was summarized in The Official Committee of Unsecured Creditors of Cybergenics Corporation v. Chinery, 330 F.3d 548, 567 (3d Cir. 2003), as follows:

The Supreme Court has long recognized that bankruptcy courts are equitable tribunals that apply equitable principles in the administration of bankruptcy proceedings. See Local Loan Co. v. Hunt , 292 U.S. 234, 240, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)("[C]ourts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity."). The enactment of the Code in 1978 increased the degree of regulation Congress imposed upon bankruptcy proceedings, but it did not alter bankruptcy courts' fundamental nature. See H.R. Rep. No. 95-595, at 359(1977), reprinted in U.S.C.C.A.N. 5963, 6315 (stating that, under the Bankruptcy Code, "[t]he bankruptcy court will remain a court of equity ") (citing Local Loan Co. , 292 U.S. at 240, 54 S.Ct. 695). Any lingering doubt on that point is dispelled by a string of post-enactment Supreme Court decisions—see Young v. United States , 535 U.S. 43, 50, 122 S.Ct. 1036, 152 L.Ed.2d 79 (2002)("[B]ankruptcy courts [ ] are courts of equity and 'apply the principles and rules of equity jurisprudence.' ") (quoting Pepper v. Litton , 308 U.S. 295, 304, 60 S.Ct. 238, 84 L.Ed. 281 (1939)); United States v. Energy Resources Co. , 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990)("[B]ankruptcy courts , as courts of equity , have broad authority to modify creditor-debtor relationships.")—and by the Code itself. See 11 U.S.C. § 105(a)("The Court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.").

Equity in bankruptcy has been generally related to the "fresh start" principles, Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Section 105(a) of the Bankruptcy Code, which allows bankruptcy judges to issue orders that are necessary or appropriate to carry out the provisions of the Code, has been used as the basis to claim equitable powers in bankruptcy, Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). This was the rule in the First Circuit after Marrama. See Malley v. Agin, 693 F.3d 28 (1st Cir. 2012). The rule has been admittedly limited to exercising equitable powers to facilitate other code provisions and not a roving commission to do equity. In re Ludlow Hospital Society, Inc., 124 F.3d 22 (1st Cir. 1997). See also In re Nosek, 544 F.3d 34 (1st Cir. 2008). However, the legal scenario changed in 2014. Change in bankruptcy is not a strange concept. As stated by the Supreme Court in Wright v. Union Central Life Ins. Co., 304 U.S. 502, 513, 58 S.Ct. 1025, 82 L.Ed. 1490 (1938): "[t]he subject of bankruptcies is incapable of final definition. The concept changes."

After Law v. Siegel, the equitable powers of the bankruptcy courts, to the extent they existed, have been diminished or restricted whenever exercising such equitable powers contravenes specific statutory provisions. Law v. Siegel, making reference to the Supreme Court's decision in Marrama, specifically did not endorse "the view that equitable considerations permit a bankruptcy court to contravene express provisions of the Code." This change was acknowledged by the First Circuit in U. S. v . Ledee, 772 F.3d 21, 29 n. 10 (1st Cir. 2014). The First Circuit noted that "the Supreme Court's ruling does not restrict the bankruptcy court's discretion concerning amendments unrelated to exemptions ..." This view was the one adopted by the court at the hearing held on November 12,...