In re San Juan Hotel Corp.

• Court: U.S. District Court — District of Puerto Rico
• Writing for the Court: FUSTE
• Citation: In re San Juan Hotel Corp., 71 B.R. 413 (D. P.R. 1987)
• Decision Date: 04 March 1987
• Docket Number: Civ. No. 85-1089 (JAF).
• Parties: In re SAN JUAN HOTEL CORPORATION, Debtor. (B-80-00259(A)). Hans Lopez STUBBE, Chapter 7 Trustee, Plaintiff, v. Hector RODRIGUEZ ESTRADA, Defendant.

71 B.R. 413 (1987)

In re SAN JUAN HOTEL CORPORATION, Debtor. (B-80-00259(A)) Hans Lopez STUBBE, Chapter 7 Trustee, Plaintiff, v. Hector RODRIGUEZ ESTRADA, Defendant.

Civ. No. 85-1089 (JAF).

United States District Court, D. Puerto Rico.

March 4, 1987.

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William J. Dean, U.S. Dept. of Justice, Washington, D.C., for plaintiff.

Manuel González-Gierbolini, San Juan, P.R., for defendant.

MEMORANDUM OPINION, FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

FUSTE, District Judge.

A trustee is one to whom something is entrusted in order to keep or administer it. Said person is legally committed in trust and must administer for the benefit of a named beneficiary or for a purpose recognized as lawful by statute. A trustee is one in whose hands the effects of another are attached by the trustee process. He is a guardian of his ward's property.

Trust, by its own definition, implies assured reliance on some person or thing. It is a dependence on the character, ability, strength or truth of someone or something. Trust entails belief, faith, and hope. It is a charge or duty imposed in confidence or as a condition of some relationship.

In a bankruptcy-law context, a trustee has always been bound by the above-mentioned principles. 11 U.S.C. sec. 323(a); 2 Collier on Bankruptcy para. 323.03 (15th ed. 1985). It being legal in origin and closely related to equity, we say that under bankruptcy-law principles, the figure of the guardian is a strict trusteeship. An operating trustee, as a reorganization trustee, is a representative of the bankruptcy court. Equity tolerates in bankruptcy trustees no interest or posture adverse to the trust. By the exclusion of the trustee from any adverse personal interest, the principles stated here expect that all goes well and that the estate-trustee legal mechanism contained in our bankruptcy code avoid such delicate inquiries as we have here, into the conduct of one such officer. Mosser v. Darrow, 341 U.S. 267, 271, 71 S.Ct. 680, 682, 95 L.Ed. 927 (1951). We will now recite the facts as found.

The file of this cause shows that this action was instituted by Hans López Stubbe, the actual Chapter 7 liquidation trustee of debtor San Juan Hotel Corporation. The defendant, Héctor Rodríguez Estrada, former Chapter 11 operating trustee and Chapter 7 liquidation trustee, faces a serious charge. It is claimed that he acted negligently¹ as a Chapter 11 operating trustee, with willful, deliberate, intentional disregard for the consequences of his actions upon the debtor's estate. It is further claimed that his actions extended for a brief period of time while he served as an interim Chapter 7 trustee and until a creditors' committee, by unanimous vote, removed him from office.

The trial of this action was held January 26 to February 4, 1987. The court received the testimony of several witnesses. The defendant failed to testify. Both parties presented in evidence a substantial number of exhibits. After a careful evaluation of the evidence, both direct and circumstantial, and after passing upon the demeanor and credibility of witnesses, we enter our Findings of Fact, Conclusions of Law, and Order of Judgment. Fed.R.Civ.P. 52(a). We find for plaintiff.

Findings of Fact

The jurisdiction of this Federal District Court is found in 28 U.S.C. secs. 1334, 1471; In re Pac. Homes, 611 F.2d 1253 (9th Cir.1980),² it being proper for the United States to prosecute this suit against Rodríguez Estrada on behalf of the estate. In re El San Juan Hotel v. Héctor Rodríguez Estrada, 809 F.2d 151 (1st Cir.1987).

On May 20, 1980, San Juan Hotel Corporation, then indebted to a great number of creditors in the amount of some $40 Million, filed a petition for relief and corporate reorganization under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. secs. 1101-1146 (1978).

Shortly thereafter, on July 10, 1980, defendant Héctor M. Rodríguez Estrada was appointed by the bankruptcy court to serve as an operating Chapter 11 trustee. This was done pursuant to 11 U.S.C. secs. 1104 and 1108 (1978). The trustee was vested with the powers and duties of the office under the Bankruptcy Reform Act of 1978, 11 U.S.C. secs. 1105-1106 (1978). We note that the appointment was made to serve without bond.³

Four days after his appointment, defendant trustee Rodríguez Estrada filed his first trustee's report, Exh. 54. There he recognized that it would be presumptuous and irresponsible on his part to consider his first report as a final one (meaning that his first report was a preliminary report), inasmuch as he needed time to familiarize himself with the debtor's activities in order to bring about a substantiated forecast on the business of the hotel. Notwithstanding, the defendant trustee recognized, at this early stage of intervention, that there existed three alternatives to deal with the case, to wit: (1) the continuance of debtor's operations as a hotel; (2) the temporary closing of debtor's operations and reopening during the forthcoming late 1981-82 peak tourism season, and (3) the conversion of the case to a Chapter 7 proceeding.

By July 24, 1980, the trustee represented to the bankruptcy court that he was now familiar with the involved and complicated nature of debtor's business, being in full understanding of the extensive nature of his duties and responsibilities as a trustee. Exh. 55. Compensation was requested. The court approved his request the same day, fixing a provisional $750 a week allowance, plus expenses incurred in the performance of his duties. He was authorized to draw as allowed, subject to final liquidation. See 11 U.S.C. sec. 326(a) (1978).

On March 24, 1983, after two years and ten months of extremely troubled financial operations, the Chapter 11 reorganization proceeding was converted, upon motion of the Puerto Rico Electric Power Authority, to a Chapter 7 liquidation proceeding. Rodríguez Estrada acted as the Chapter 7 liquidation trustee until September 1983, when the unanimous vote of creditors was instrumental in his removal. The plaintiff trustee was subsequently elected as a Chapter 7 trustee. At this time, the estate had incurred in accumulated deficits as follows:

               SAN JUAN HOTEL CORPORATION
                            Statements of Accumulated Deficit4
                            Years ended May 31, 1982 and 1981
                                                    1982          1981
                Balance at beginning of year
                As previously reported           $39,627,787    $38,967,172
                Adjustment—Reduction
                on property taxes
                liabilities due to the
                retroactive effect of a
                tax exemption grant
                (note 12)                            824,336        824,336
                                                ____________    ___________
                As restated                       38,803,451     38,142,836
                Net loss for the period            1,743,382        660,615
                                                ____________    ___________
                Balance at end of year           $40,546,833    $38,803,451
                                                ===========     ===========
                Analysis of accumulated
                deficit as of May 31
                Pre-petition                     $38,142.836    $38,142,836
                Post-petition                      2,403,997        660,615
                _____________                    ___________    ___________
                                                 $40,546,833    $38,803,451
                                                 ===========    ===========
                

The record shows that on or about March 27-31, 1983, the hotel closed to the public. The known hotel's financial position for the taxable year ending May 31, 1981, seen in light of the financial position at the end of 1982, leads to the inescapable conclusion that the debtor's business during the Chapter 11 reorganization financed its operation during both 1981 and 1982 from the moneys which eventually became due and owing to post-petition creditors. Rodríguez Estrada was privy to this situation at all times.

Outside auditors disclaimed. The financial statements were prepared on the basis of accounting principles applicable to a going concern. Auditors refused to express any opinion on the prepared statements. Exhibit 18, seen in light of Exhibit 206 and S.

The evidence established that as early as May 1981, it was obvious to debtor's comptroller, Marshall J. Kagan, and to Rodríguez Estrada, that a reorganization plan was not possible. Kagan's cash flow projections of May 1, 1981 showed that payments in the first year of reorganization would require some $3,760,000. The company's profit before interest and depreciation was $1,824,000 through March 31, 1981. No increase in revenue was expected for the remainder of the fiscal year. Not considering payment of the balance due to the largest secured creditor, Connecticut General Insurance Co., or expenditures for capital improvements, a reorganization plan would be almost $2 Million short. Even if payments to unsecured creditors of about $1 Million would be withheld, the amounts payable would be some $2,760,000, or about $1 Million more than what they could currently provide from hotel operations. Outside funding or increased profits were a must for debtor to survive. The third alternative, that is, conversion to a Chapter 7 liquidation, was the only sensible solution. See Plaintiff's Exh. 107 and 113.

The above having been established, we now look at the course of action of former trustee Rodríguez Estrada during the years 1980 to 1983. It shows how his intervention, or lack thereof, contributed to the eventual collapse of the prolonged Chapter 11 reorganization, all in detriment of creditors. These specific findings show how the former trustee breached his statutory duties, 11 U.S.C. sec. 1106 (1978), and benefited from this ill-fated operation until removed in September 1983.

The defendant trustee, Rodríguez Estrada, seeking personal gain, and by willful, deliberate, intentional, and reckless conduct, disregarding the impact his actions and omissions would have...