Herrans v. Mender, 06-1072(JAG).
| Decision Date | 15 March 2007 |
| Docket Number | No. 06-1072(JAG).,Bankruptcy No. 99-11662.,06-1072(JAG). |
| Citation | 364 B.R. 463 |
| Parties | Jorge Barroso HERRANS, Madeline O. Rosario Farrulla, Debtors-Appellants, v. Wigberto Lugo MENDER, Trustee-Appellee. |
| Court | U.S. District Court — District of Puerto Rico |
Fernando E. Longo-Quinones, Berrios & Longo, PSC, Carmen D. Conde-Torres, C. Conde & Associates, San Juan, PR, for Debtors-Appellants.
Luisa S. Valle-Castro, C. Conde & Associates, San Juan, PR, for Trustee-Appellee.
Pending before the Court is Jorge Barroso and Madeline O. Rosario's ("Debtors") appeal from an opinion and order of the United States Bankruptcy Court for the District of Puerto Rico. (Docket No. 10). On May 4, 2006, this appeal was referred to a Magistrate Judge. On November 18, 2006 the Magistrate Judge issued a report and recommendation to affirm the decision of the Bankruptcy Court. (Docket No. 34). For the reasons set forth below, the Magistrate-Judge's report and recommendation is adopted in its entirety.
Debtors were the sole shareholders of Powertronics Electrical and Mechanical Contractors, Inc. ("Powertronics"). This corporation was dissolved on August 24, 1999 due to the insolvency caused by the Puerto Rico Aqueducts and Sewer Authority's ("PRASA")alleged breach of two construction contracts. (Bankruptcy Court Docket No. 122, app. 3).
On August 30, 1999, Powertronics, Debtors and their conjugal partnership filed two complaints in the Puerto Rico Court of First Instance (San Juan Part) against PRASA for two projects located at Punta Santiago (KAC 99-1225) and Aguas Claras (KAC 99-1226). (Dockets Nos. 27-3, at 13; 27-4, at 18.) Both complaints comprised three causes of action: 1) breach of contractual obligations and corporate damages, 2) personal damages of Debtors for their economic loss and financial distress and 3) accounts receivable of Powertronics. On that same date, Powertronics, Debtors and their conjugal partnership filed a voluntary petition for bankruptcy pursuant to Chapter 7 of the Bankruptcy Code. (Bankruptcy Court Docket No. 1). The same day Debtors filed for bankruptcy protection, the United States appointed Wigberto Lugo Mender, Esq., ("the Trustee") to act as a the Chapter 7 Trustee. (Bankruptcy Court Docket No. 2). On September 20, 1999, Debtors filed their Schedules and Statement of Financial Affairs. In Schedule B-15, Debtors filed two accounts receivable owed by PRASA to Powertronics identifying them as Punta Santiago, $102,843.21 and Aguas Claras, $67,608.98. Debtors placed a value on each law suit at $4000 in their filing of Schedule B-20. In Schedule C, Debtors claimed an exemption of $4000 for each case, pursuant to 11 U.S.C. § 522(d)(5). The Trustee did not file objections to these exemptions. (Bankruptcy Court Docket No. 5).
On December 5, 2002, the Trustee informed the Bankruptcy Court that it had reached an agreement with PRASA for the settlement and the liquidation of the two cases before the State Court. The settlement agreement stipulated an amount of $50,000 for each case. (Bankruptcy Court Docket Nos. 120 and 121). The Bankruptcy Court approved the agreement, which settled both suits for $100,000. The Trustee stated that he would deliver $8000 of the settlement's proceeds to Debtor in full satisfaction of their claimed exemptions. (Bankruptcy Docket No. 182).
On October 17, 2005, the United States Bankruptcy Court for the District of Puerto Rico issued an opinion and order regarding several contested matters between Debtors and the Trustee. The opinion and order of the Bankruptcy. Court concluded that: 1) the circumstances of the case show Debtors undervalued the suits when listing the assets as contingent claims with a market value of $4,000 each; 2) the exemptions claimed in Schedule C do not cover the entire market value of the suits listed both as contingent claims and accounts receivable, and are limited to Debtors' $8,000 interest in the assets; 3) the suits listed as assets under contingent claims were property of the estate and were not removed from the estate and the administration by the Trustee, by the exemption claimed by Debtors; 4) the Trustee had no reason to object to the exemptions; 5) the Trustee can administer the suits listed as contingent claims and has the authority to settle these claims subject to Court approval; 6) the Bankruptcy Court has jurisdiction to approve the settlement and approve the agreement; and 7) Debtors do not have a right to try this equitable matter before a jury. (Bankruptcy Court Docket No. 182).
On October 28, 2005, Debtors filed their Notice of Appeal (Bankruptcy Court Docket No. 184) and filed their brief on March 8, 2006. (Docket No. 10). Appellants' reply brief was filed on June 7, 2006, and a supplemental motion, was filed on June 9, 2006. (Docket Nos. 28 and 29). On April 24, 2006, the Trustee's brief was filed and his sur-reply brief was filed on June 29, 2006. (Docket Nos. 15 and 32).
On May 4, 2006, Debtors' appeal was referred to Chief Magistrate Judge Justo Arenas. (Docket No. 24). On November 18, 2006 the Magistrate Judge issued its Report and Recommendation, to affirm the decision of the Bankruptcy Court. The Report and Recommendation narrowed down Debtors' appeal to three main issues of law: 1) whether the Bankruptcy Court correctly concluded that the suits against PRASA, which were listed by the Debtors in their Schedules, are property of the estate and were not removed from the estate by the exemption claimed by the Debtors over both law suits; 2) whether the Bankruptcy Court correctly concluded that the Debtors do not have the right to have this equitable matter (the claim for exemption over an asset under bankruptcy law) tried before a jury; and 3) whether the Bankruptcy Court correctly concluded that counsel for the Trustee did not have an actual or potential undisclosed conflict of interest, which mandated her disqualification.
Regarding the first issue, the Magistrate Judge concluded that the suits against PRASA were property of the estate because they were corporate causes of action that involved the outstanding accounts receivables of Powertronics. The Report and Recommendation determined that Debtors $8,000 exemption was only for their personal damages and did not constitute an exemption over Powertronic's accounts receivable. The Magistrate Judge determined that Powertronic's accounts receivable were not part of Debtor's personal property. The Magistrate Judge also determined that a Debtor is precluded from asserting a right to trial by jury, when the issue concerns a core proceeding equitable in nature. The Report and Recommendation concluded that the exemption issued decided by the Bankruptcy Court was a core proceeding that was equitable in nature under the sole authority of the Bankruptcy Court. Consequently, the Magistrate Judge stated that Debtors were estopped from asserting a right to trial by jury. Finally, the Report and Recommendation concluded that counsel for Trustee had no actual or potential conflict of interest. (Docket No. 34).
On December 5, 2006, Debtors filed their objection to the Magistrate's Report and Recommendation. Debtors did not object to the Report and Recommendation's finding that counsel for the Trustee had no potential or actual conflict of interest. (Docket No. 35). On December 20, 2006, the Trustee filed "Appellee's Position on Appellants' Opposition to the Magistrate's Report and Recommendations" which states the Trustee's position regarding the objections raised by Debtors. (Docket No. 36).
1) Standard for Reviewing a Magistrate-Judge's Report and Recommendation
Pursuant, to 28 U.S.C. §§ 636(b)(1)(B); Fed.R.Civ.P. 72(b); and Local Rule 503; a District Court may refer dispositive motions to a United States Magistrate Judge for a Report and Recommendation. See Alamo Rodriguez v. Pfizer Pharmaceuticals, Inc., 286 F.Supp.2d 144, 146 (D.P.R. 2003). The adversely affected party may "contest the Magistrate Judge's report and recommendation by filing objections `within ten days of being served' with a copy of the order." United States of America v. Mercado Pagan, 286 F.Supp.2d 231, 233 (D.P.R.2003) (quoting 28 U.S.C. §§ 636(b)(1)). If objections are timely filed, the District Judge shall "make a de novo determination of those portions of the report or specified findings or recommendation to which [an] objection is made." Rivera de Leon v. Maxon Eng'g Servs., 283 F.Supp.2d 550, 555 (D.P.R. 2003). The Court can "accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate", however, if the affected party fails to timely file objections, "the District Court can assume that they have agreed to the magistrate's recommendation'." Alamo Rodriguez, 286 F.Supp.2d at 146 (quoting Templeman v. Chris Craft Corp., 770 F.2d 245, 247 (1st Cir.1985)).
Debtors object to the Standard of Review adopted by the Report and Recommendation, The Report and Recommendation adopted the "clearly erroneous" test to review the findings of facts made by the Bankruptcy Court. Debtors argue that the applicable standard is the "de novo" test. The Court disagrees.
Appellate Bankruptcy Courts generally apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. Marrama v. Citizens Bank of Mass., 313 B.R. 525, 529 (1st Cir. BAP 2004). "The more fact-dominated the question, the more likely it is that the trier's resolution of it will be accepted unless shown to be clearly erroneous." In re Extradition of Howard, 996 F.2d 1320, 1328 (1st Cir.1993); see also In re Diaz, 261 B.R. 546, 548 (D.P.R.2001). The Bankruptcy Court's findings will be considered clearly erroneous if, after a review of the entire record, there is a definite and firm conviction that a mistake has been committed. Bezanson v....
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