Banco Popular De Puerto Rico v. United States (In re Reitter Corp.)

• Decision Date: 31 March 2012
• Docket Number: Civil Nos. CIV. 11–1132(DRD), 11–1529(DRD).,Bankruptcy No. 10–07152 ESL.
• Parties: In re REITTER CORPORATION d/b/a Hospital San Gerardo, Debtor(s). Banco Popular De Puerto Rico, Appellant(s), v. United States of America, Appellee(s).
• Court: U.S. District Court — District of Puerto Rico

475 B.R. 314

In re REITTER CORPORATION d/b/a Hospital San Gerardo, Debtor(s).Banco Popular De Puerto Rico, Appellant(s),

v.United States of America, Appellee(s).

Civil Nos. CIV. 11–1132(DRD), 11–1529(DRD).

Bankruptcy No. 10–07152 ESL.

United States District Court, D. Puerto Rico.

March 31, 2012.

Monique J. Diaz–Mayoral, Rafael Perez–Bachs, Jose R. Gonzalez–Irizarry, McConnell Valdes, San Juan, PR, for Appellant.

Andrew C. Strelka, United States Department of Justice, Washington, DC, for Appellee.

Alexis Fuentes–Hernandez, Fuentes Law Offices, San Juan, PR, for Debtor.

OPINION AND ORDER

DANIEL R. DOMINGUEZ, District Judge.

Pending before the Court are two appeals which have been consolidated, as both are intrinsically intertwined. In both cases, appellant Banco Popular de Puerto Rico (“BPPR”) challenges the decision of the bankruptcy court finding that the United States of America through its agency the Internal Revenue Service (the “United States” or the “IRS”), “is the senior lien holder over Debtor's [Reitter Corporation d/b/a Hospital San Gerardo (hereinafter ‘Reitter’) ] accounts receivable which were generated on or after March 1, 2010.” See Opinion and Order of May 13, 2011, Bankruptcy No. 10–07152(ESL), Docket No. 194. For the reasons set forth below, both appeals, that is, Civil No. 11–1132(DRD) and Civil No. 11–1529(DRD) are dismissed albeit on different grounds.

Jurisdiction

This Court has jurisdiction to entertain the appeal referred from the bankruptcy court under 28 U.S.C. § 158(a)(1).

Standard of Review

On bankruptcy appeals, the district court reviews rulings of law de novo and findings of fact for clear error. Prebor v. Collins (In re I Don't Trust) 143 F.3d 1, 3 (1st Cir.1998); Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.1995). “Under an abuse of discretion standard, a reviewing court cannot reverse unless it has a ‘definite and firm conviction that the court below committed a clear error of judgment’ in the conclusion it reached upon a weighing of the relevant factors.” T aylor v. Hosseinpour–Esfahani, 198 B.R. 574, 577 (9th Cir. BAP 1996), citing Marchand v. Mercy Medical Ctr., 22 F.3d 933, 936 (9th Cir.1994). “Evidentiary rulings by the bankruptcy court are subject to the ‘abuse of discretion’ standard.” Williamson v. Busconi, 87 F.3d 602, 603, n. 4 (1st Cir.1996), citing United States v. Cotto–Aponte, 30 F.3d 4, 6 (1st Cir.1994).

“The standard of review on this appeal requires that we respect, unless ‘clearly erroneous,’ all findings of fact by the bankruptcy court, which includes any finding of actual reliance and any raw fact findings pertinent to the issue of justifiable reliance. Brandt v. Repco Printers & Lithographics, Inc., 132 F.3d 104, 107–08 (1st Cir.1997).” In re Spadoni, 316 F.3d 56, 58 (1st Cir.2003). “A court reviewing a decision of the bankruptcy court may not set aside findings of fact unless they are clearly erroneous, giving ‘due regard ... to the opportunity of the bankruptcy court to judge the credibility of the witnesses.’ (Citations omitted).” Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir.1997).

“A finding of fact is clearly erroneous, although there is evidence to support it, when the reviewing court, after carefully examining all the evidence, is ‘left with the definite and firm conviction that a mistake has been committed.’ ” Palmacci, 121 F.3d at 785, citing Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). “Deference to the bankruptcy court's factual findings is particularly appropriate on the intent issue ‘[b]ecause a determination concerning fraudulent intent depends largely upon an assessment of the credibility and demeanor of the debtor.’ ” Id. citing In re Burgess, 955 F.2d 134, 137 (1st Cir.1992). “Particular deference is also due to the trial court's findings that depend on the credibility of other witnesses and on the weight to be accorded to such testimony.” Id. citing Fed.R.Bank.R. 8013; Keller v. United States, 38 F.3d 16, 25 (1st Cir.1994).

Issues

The main issues before the Court are: (a) whether the bankruptcy court erred in finding that the IRS is the senior lien holder of Reitter's accounts receivable that were generated by services rendered on or after March 1, 2010, pursuant to 26 U.S.C. § 6323(c)(3); (b) whether the parties were properly notified under the applicable bankruptcy rules; (c) whether the bankruptcy court erred in taking judicial notice of the documents that are part of the record; and (d) whether the bankruptcy court erred by failing to inform counsel the procedure to be followed when challenging a lien priority and/or the use of cash collateral. The Court is cognizant that the parties have raised a total of 13 statements to be addressed on appeal. The Court, however, has consolidated the statements that will dispose of the instant appeal.

Factual and Procedural Background

Reitter Corporation d/b/a Hospital San Gerardo filed for voluntary relief under Chapter 11 of the Bankruptcy Code, on August 6, 2010. On September 1, 2010, Reitter and BPPR filed their first Urgent Joint Motion and Stipulation for Interim Use of Cash Collateral, Adequate Protection and for other Relief, Bankruptcy No. 10–07152, Docket No. 28.¹ The parties gave notice to all parties interest included in the Master Address List which is part of Bankruptcy No. 10–07152(ESL), Docket No. 1.² On September 8, 2010, the bankruptcy court approved the request for use of cash collateral as being unopposed. See Bankruptcy No. 10–07152(ESL), Docket No. 33.

Thereafter, Reitter and BPPR filed several joint stipulations for the use of cash collateral, to wit, on October 26, 2010, Bankruptcy No. 10–07152(ESL), Docket No. 44; on November 4, 2010, Bankruptcy No. 10–07152(ESL), Docket No. 55, and the corresponding orders approving the same by the bankruptcy court, as being unopposed, see Bankruptcy No. 10–07152(ESL), Docket entries No. 56, 58.

On December 6, 2010, the United States filed a Motion to Prohibit Use of Cash Collateral, Bankruptcy No. 10–07152(ESL), Docket No. 204. The core of the issues on appeal stems from the United States' opposition to the use of cash collateral, and BPPR's reply thereto. In a nutshell, the United States allege that, pursuant to 26 U.S.C. § 6323(c)(3), the IRS is the senior lien holder of Reitter's accounts receivable which were generated 45 days from January 14, 2010, date when the IRS recorded its first Notice of Federal Tax Lien with the United States District Court for the District of Puerto Rico. BPPR argues that it has a secured claim duly guaranteed by Reitter's property under applicable Puerto Rico law. A hearing was held on December 28, 2010 by the bankruptcy court on this matter. After hearing the parties' arguments, the bankruptcy court issued its ruling. See Bankruptcy No. 10–07152(ESL), Docket No. 97. The bankruptcy court further ordered the parties to file simultaneous briefs on or before January 14, 2011, and 14 days thereafter to file the replies. See Bankruptcy No. 10–07152(ESL), Docket No. 97. On May 13, 2011, the bankruptcy court entered an Opinion and Order on this matter, which is now pending before this Court. See Bankruptcy No. 10–07152(ESL), Docket No. 194.³

The record shows that, on December 29, 2010, BPPR took an appeal from the bankruptcy court's ruling entered on December 28, 2010. See Bankruptcy No. 10–07152(ESL), Docket No. 98. BPPR elected to hear this appeal at the district court, and it was docketed under Civil No. 11–1132(DRD). The record further shows that, on May 16, 2011, BPPR filed a second appeal from the bankruptcy court Opinion and Order of May 13, 2011. See Bankruptcy No. 10–07152(ESL), Docket No. 197. BPPR again requested that the second appeal be heard by the district court, and it was docketed under Civil No. 11–1529. At that time, the Court requested that Civil No. 11–1529 be assigned to the undersigned, as both appeals are directly related and intertwined with Civil No. 11–1132(DRD). SeeCivil No. 11–1132(DRD), Docket No. 14. Both appeals were consolidated, as per Order of June 29, 2011. SeeCivil No. 11–1132(DRD), Docket No. 16.

The record shows that both parties have filed their briefs. The Court deems this matter is submitted without a hearing.⁴

Applicable Law and Discussion

A. IRS: a senior lien holder under 26 U.S.C. § 6323(c).

The core of this appeal is whether the IRS is the senior lien holder over Reitter's accounts receivables generated on or after March 1, 2010. To answer this query the Court refers to the provisions of the Federal Tax Lien Act (“FTLA”), 26 U.S.C. §§ 6321, 6323.

26 U.S.C. § 6323(c) provides in its relevant part:

(c) Protection for certain commercial transactions financing agreements, etc.

...

(2) Commercial transactions financing agreement.

(A) Definition. The term “commercial transaction agreement” means an agreement (entered into by a person in the course of his trade or business)—(i) to make loans to the taxpayer to be secured by commercial financing security acquired by the taxpayer in the ordinary course of his trade or business, or (ii) to purchase commercial financing security (other than inventory) acquired by the taxpayer in the ordinary course of his trade or business; but such an agreement shall be treated as coming within the term only to the extent that such loan or purchase is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.

(B) Limitation on qualified property. The term “

qualified

property,” when used with respect to a commercial transactions financing agreement, includes only commercial financing security acquired by the taxpayer before the 46th day after the date of tax lien filing.

(c) Commercial financing security defined. The term “commercial financing security” means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts receivable, (iii) mortgageson real...