In re Colon, BAP No. PR 07-053 (B.A.P. 1st Cir. 11/21/2008)

• Court: U.S. Bankruptcy Appellate Panel, First Circuit
• Writing for the Court: Rosenthal
• Decision Date: 21 November 2008
• Docket Number: BAP No. PR 07-053,Bankruptcy Case No. 06-04675-GAC
• Citation: In re Colon, BAP No. PR 07-053 (B.A.P. 1st Cir. 11/21/2008), Bankruptcy Case No. 06-04675-GAC, BAP No. PR 07-053 (B.A.P. 1st Cir. Nov 21, 2008)
• Parties: EDGAR ABNER REYES COLON, Alleged Debtor. BANCO POPULAR DE PUERTO RICO, Appellant, v. EDGAR ABNER REYES COLON, Appellee.

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EDGAR ABNER REYES COLON, Alleged Debtor BANCO POPULAR DE PUERTO RICO, Appellant, v. EDGAR ABNER REYES COLON, Appellee.

BAP No. PR 07-053

Bankruptcy Case No. 06-04675-GAC

United States Bankruptcy Appellate Panel, First Circuit.

November 21, 2008

Appeal from the United States Bankruptcy Court for the District of Puerto Rico, Hon. Gerardo A. Carlo, U.S. Bankruptcy Judge.

Eldia M. Diaz Olmo, Esq., on brief for Appellant.

Charles Cuprill-Hernandez, Esq., on brief for Appellee.

Before Boroff, Deasy, and Rosenthal, United States Bankruptcy Appellate Panel Judges. ROSENTHAL, Bankruptcy Appellate Panel Judge.

Banco Popular de Puerto Rico ("BP" or "Appellant") appeals from the bankruptcy court's March 27, 2007 order dismissing the involuntary chapter 11 petition filed by BP for failure to have three petitioning creditors as required by § 303(b)(1),¹ and the July 9, 2007 order denying BP's motion for reconsideration for raising arguments not previously presented to the court. BP claims that the dismissal was erroneous because the twenty (20) day notice to all parties in interest, as required by Bankruptcy Rules 1017 and 2002, was not provided and because it was denied the opportunity to conduct discovery. Moreover, it alleges the lack of notice and opportunity to conduct discovery and be heard is a violation of its due process rights. BP also argues that the bankruptcy court abused its discretion in denying reconsideration. Finally, BP argues that the bankruptcy court abused its discretion in granting Appellee attorney's fees. We agree, and for the reasons set forth below, we REVERSE and REMAND for the entry of an order consistent with this opinion.

BACKGROUND

On November 22, 2006, BP, as the sole petitioning creditor, filed an involuntary chapter 11 petition under § 303(b) against Edgar Abner Reyes Colon ("Colon" or "Appellee"). Colon responded with a motion to dismiss under § 303(j) on the grounds that BP's petition failed to comply with § 303(b)(1) because he had more than 12 creditors. The bankruptcy court ordered Colon to file a list of all creditors as required by Bankruptcy Rule 1003(b). Before the creditor list was filed, Popular Auto joined BP's involuntary petition.

On December 28, 2006, Colon filed a list of 58 creditors as well as a second motion to dismiss alleging that the petition was filed in bad faith as BP knew or should have known that the debtor had more than 12 creditors at the time of filing. On the same day the court noted that it "appear[ed] that there are twelve or more creditors" and issued an order stating that "all creditors... are granted fifteen (15) days to join in the petition. Notice of this order shall be given to the creditors by Banco Popular de Puerto Rico."² BP subsequently filed a response to Colon's motion to dismiss and, although noting that it filed the petition as a single creditor based on an assertion in Colon's July 31, 2005 financial statement that he had only five creditors, it requested an additional 15 days during which creditors could join the petition. BP also requested that Colon file a list of creditors for which he serves as guarantor. On January 17, 2007, the court ordered Colon to reply to BP's response. Colon filed a timely response asserting that BP had requested Equifax credit reports on January 27 and July 24, 2006, which reports "reveal[ed] that Respondent [Colon] had and has more than three [sic] creditors." Alleging that his "condensed and pro forma financial report," which appears to be a reference to the July 31, 2005 financial statement, "does not contradict" his assertion that he had more than 12 creditors, Colon requested that he be deemed in compliance with the court's January 17, 2007 order.

On February 2 and March 1, 2007, BP filed motions for compliance, again asking the court to order Colon to file a list of creditors for debts for which he was a guarantor. Colon answered these motions by asserting that he had already complied, that the court did not require him to do anything further, and that he only served as guarantor on one debt, which he listed. Colon again requested that the court dismiss the case because the petition was defective and filed in bad faith.

On March 27, 2007, the court issued a decision and order concluding that Colon had more than 12 creditors and that such creditors were given a reasonable opportunity to join in the petition in compliance with Bankruptcy Rule 1003(b). The court dismissed the case, but indicated that it could not conclude from the information before it that the petition was filed in bad faith. The court also awarded attorney's fees under § 303(i)(1)(B)³ and ordered Colon to file a fee application within 20 days. BP was given 10 days in which to respond to Colon's application for attorney's fees or the application for fees would be granted. On March 30, 2007, Colon filed his application for attorney's fees and also requested that the court retain jurisdiction to determine whether the petition was filed in bad faith and whether Colon was entitled to damages, including punitive damages. The court granted Colon's request to retain jurisdiction.

On April 9, 2007, new counsel entered an appearance for BP⁴ and filed a motion for reconsideration asserting that a "special circumstances" exception exists by which the court could allow the petition to proceed with less than three creditors. The motion for reconsideration also requested that the court allow BP to conduct discovery and asserted that BP was entitled to a trial on the merits. On April 10, 2007, BP filed a supplement to its motion for reconsideration and on the same day the court gave Colon 20 days to respond to the motion for reconsideration. On April 30, 2007, Colon filed his answer to the motion for reconsideration and asserted that the motion for reconsideration was not timely. Moreover, even if the motion were timely, Colon argued that BP failed to establish any grounds for altering or amending the court's March 27, 2007 order. BP replied that dismissal of the case without affording BP the right to discovery and a trial on the merits, as required by § 303(h) and the applicable Rules of Bankruptcy Procedure, was a manifest error of law. In its July 9, 2007 decision and order denying the motion for reconsideration, the court rejected the argument that the motion to reconsider was untimely but restated its prior conclusion that the involuntary petition was insufficient on its face. The court further noted that BP was aware that the number of petitioning creditors was in issue yet during the period between the filing of the petition and the case's dismissal, BP failed to raise a theory as to how the petition could be maintained without the presence of three creditors. The bankruptcy court agreed that if BP had raised the argument earlier and not received a hearing, that scenario would have constituted a manifest error of law.

JURISDICTION

A bankruptcy appellate panel may hear appeals from "final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1)] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)]." Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (B.A.P. 1st Cir. 1998). "A decision is final if it `ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Id. at 646 (citations omitted). An interlocutory order "'only decides some intervening matter pertaining to the cause, and requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.'" Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir. 1985)). A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits even if not raised by the litigants. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724 (B.A.P. 1st Cir. 1998).

Courts within this circuit have repeatedly held that dismissal of a case under chapter 11 is a final order. See, e.g., In re Abijoe Realty Corp., 943 F.2d 121, 124 (1st Cir. 1991); In re Gilroy, 2008 WL 4531982, at *4 (B.A.P. 1st Cir. 2008). The finality of the order of dismissal is not undermined by the bankruptcy court's retention of jurisdiction to determine whether the petition was filed in bad faith. In re DSC Ltd., 2005 WL 2671314, *2 (E.D. Mich. Oct. 19, 2005).

STANDARD OF REVIEW

Appellate courts reviewing an appeal from the bankruptcy court generally apply the "clearly erroneous" standard to findings of fact and de novo review to conclusions of law. See T I Fed. Credit Union v. Delbonis, 72 F.3d 921, 928 (1st Cir. 1995); Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719-20 n.8 (1st Cir. 1994); In re SPM Mfg. Corp., 984 F.2d 1305, 1311 (1st Cir. 1993).

The abuse of discretion standard applies to matters within the judge's discretion. "A decision committed to the discretion of the bankruptcy court will only be reversed if the record demonstrates `that the trial judge indulged a serious lapse of judgment.'" Efron v. Gutierrez, 226 B.R. 305, 312 (D.P.R. 1998) (quoting Texas Puerto Rico, Inc. v. Dep't of Consumer Affairs, 60 F.3d 867, 875 (1st Cir. 1995)). "It is well settled that the trial judge has broad discretion in ruling on pre-trial management matters," and that a trial court's denial of discovery should be reviewed for abuse of its considerable discretion. Ayala-Gerena v. Bristol Myers-Squibb Co., 95 F.3d 86, 91 (1st Cir. 1996) (citations omitted). An appeals court should intervene only upon a clear showing of manifest injustice, that is, "where the lower court's discovery order was plainly wrong and resulted in substantial prejudice to the aggrieved party." Mack v. Great Atl. & Pac. Tea Co., Inc., 871 F.2d 179, 186 (1st Cir. 1989).

In the case at hand, the appropriateness of dismissal without notice and...