Nat'l Promoters & Servs., Inc. v. Multinational Life Ins. Co. (In re Nat'l Promoters & Servs., Inc.)
| Decision Date | 06 April 2020 |
| Docket Number | CASE NO. 12-01076 (ESL),ADV. PROC. NO. 13-00051 (ESL) |
| Parties | IN RE: NATIONAL PROMOTERS AND SERVICES INC. Debtor NATIONAL PROMOTERS AND SERVICES, INC. Plaintiff v. MULTINATIONAL LIFE INSURANCE COMPANY Defendant |
| Court | U.S. Bankruptcy Court — District of Puerto Rico |
This adversary proceeding is before the court upon the contested matter which was raised in the February 28, 2018 evidentiary hearing (Docket No. 167) by the court namely; that even if there is a right to compensation under the Civil Code of Puerto Rico, if under the circumstances and the legal juncture of this bankruptcy case, what are the binding effects of a confirmed chapter 11 plan and how the state setoff rights apply in bankruptcy. Thereafter, Multinational Life Insurance Company (hereinafter referred to as "Multinational" or Defendant) filed a Memorandum of Law Related to Affirmative Defense arguing: (i) confirmation and discharge do not prohibit the defensive use of setoff in a subsequent action by the debtor; (ii) the defense of setoff is applicable in this adversary proceeding pursuant to 11 U.S.C. §553 and articles 1149-1156 of the Puerto Rico Civil Code ("Civil Code"); (iii) section 553 takes precedence over section 1141; and (iv) no impediment or constraint has been identified for this Court to consider the allegations of compensation/setoff in a defensive nature, as raised by the defendant in the affirmative defense and the counterclaim (Docket No. 166). National Promoters and Services, Inc. (hereinafter referred to as "NAPRO" or the Debtor or Plaintiff) filed its Memorandum of Law Regarding the Effect of the Confirmation of the Plan on Defendant's Alleged Counterclaim in which it contends: (i) any claim by the Defendant has been waived and cancelled by the effect of the Order confirming Debtor's plan of reorganization; (ii) Defendant had actual knowledge and notice of the bankruptcy proceedings and received notice of all matters related to the Disclosure Statement, Debtor's plan of reorganization, as amended, and of the confirmation of the plan since their initial appearance in April 2013; (iii) Defendant is bound by the plan of reorganization and the confirmation order; (iv) Defendant waived through its inaction, the right to assert any prepetition claim at this juncture of the proceedings; (v) "[b]oth sections 553(a) and 362(a)(7) provide that any setoff rights which a creditor may have are subject to the provisions of the automatic stay and that creditors are enjoined from enforcing such setoff rights, until they seek and obtain relief from the automatic stay;" (vi) "[c]ourts have even stated that in order for a creditor to interpose its right to setoff a counterclaim, such creditor must first request relief from the automatic stay in order to effectuate such right;" and (vii) "...in bankruptcy a creditor must assert its rights of setoff in a timely fashion in the debtor's bankruptcy proceedings, or risk losing the right altogether" 5 Collier on Bankruptcy ¶553.07 (Docket No. 169). Multinational filed a Motion in Reply to Docket No. 169 arguing that: (i) pursuant to the "Home Bankruptcy Exception" the automatic stay does not apply to proceedings in the bankruptcy court which has jurisdiction over the debtor. "Any action to recover property, to collect money, to enforce a lien, or to assert a prepetition claim against the debtor which would otherwise be enjoined by 11 U.S.C. §362(a) if initiated in any other context, is not subject to the automatic stay if commenced in the bankruptcy court where the debtor's bankruptcy case is pending" (citations omitted); (ii) "... it is unwarranted that defendant is required to seek the relief of the automatic stay to assert its rights of setoff within an adversary proceeding brought by the debtor in its own case and before the same Bankruptcy Court; (iii) the Defendant first raised and brought its right of setoff on May 9, 2013 when it filed its Answer to Complaint and Counterclaim (Docket No. 10). This was more than one (1) year before the plan of reorganization was confirmed on May 23, 2014; (iv) "[i]t isuncontested and consistent to standing case law that a creditor's failure to file a proof of claim does not impair its right to exercise its setoff rights;" and (v) the confirmation of a plan of reorganization, which does not address the defendant's setoff rights nor claim, does not preclude the defendant right to assert a setoff in a defensive fashion (Docket No. 172). The Debtor filed its Response to Defendant's Reply to Debtor's Memorandum of Law (Docket No. 174).
The legal issues before the court are the following: (i) whether filing a proof of claim is a prerequisite to assert the right of setoff; (ii) whether the Defendant had to file a motion for relief of the automatic stay to file its counterclaim in the adversary proceeding pursuant to 11 U.S.C. §§553(a) and 362(a)(7); (iii) is setoff an affirmative defense or must the same be asserted via a counterclaim pursuant to Fed. R. Bankr. P. 7013; and (iv) whether 11 U.S.C. §553 takes precedence over 11 U.S.C. §1141, meaning whether the Defendant's setoff rights have been waived and cancelled by the effect of the Order confirming Debtor's Plan of Reorganization.
For the reasons stated herein, the court holds as follows: (i) filing a proof of claim is not a prerequisite to asserting the right of setoff; (ii) the Defendant in an adversary proceeding does not have to file a motion for relief of the automatic stay to assert its setoff rights as an affirmative defense or to file a counterclaim; (iii) setoff may be treated as an affirmative defense if no distribution from the bankruptcy estate is requested or it may be asserted as a permissive counterclaim if affirmative relief is sought; and (iv) in the instant case, 11 U.S.C. §553 takes precedence over 11 U.S.C. §1141.
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This is a core proceeding pursuant to 28 U.S.C. §§157(b)(1) and (b)(2). Venue of this proceeding is proper under 28 U.S.C. §§1408 and 1409.
The Debtor filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on February 15, 2012 (Lead Case No. 12-01076). The deadline to file a proof of claim for all creditorswas June 21, 2012 (Lead Case No. 12-01076, Docket No. 4). The Debtor included in Schedule B- Personal Property, an account receivable from Multinational in the amount of $115,000 for administrative fees for the month of December 2011 (Lead case No. 12-01076, Docket No. 8, pg. 26). On March 14, 2013, the Debtor filed the instant adversary proceeding against Multinational for breach of contract and collection of monies owed pursuant to a service contract executed between the Plaintiff and defendant National Life Insurance Company (NALIC), now Multinational Life Insurance Company (Docket No. 1). On May 9, 2013, the Defendant filed its Answer to Complaint and Counterclaim (Docket No. 10). On May 28, 2013, the Plaintiff filed its Answer to Crossclaim1 (Docket No. 12). On July 19, 2013, the Defendant filed a Motion Requesting Rescheduling and/or Conversion of Pre-Trial Hearing and the same was granted on July 23, 2013 (Docket Nos. 13 & 14). On January 28, 2014, the pretrial conference was held in which the court granted the parties sixty (60) days to file a settlement agreement and ninety (90) days to file dispositive motions and replies are due fourteen (14) days thereafter. The pretrial hearing is continued without a date (Docket No. 20).
On May 5, 2014, the Debtor filed its Third Amended Plan of Reorganization and the Order Confirming Third Amended Plan was entered on May 23, 2014 (Lead case No. 12-01076, Docket Nos. 379 & 386). On April 23, 2014, the Court ordered the parties as follows: (Docket No. 22). On May 7, 2014, NAPRO filed a Motion in Compliance with Order to Inform requesting a date for a pretrial hearing, given that it has not had the time to meet and discuss the allegations with its legal counsel to consider a settlement (Docket No. 24). On May 7, 2014, the Defendant filed a Motion in Compliance requesting that the discovery process remain open for another month so that parties may exchange information that could result in asettlement (Docket No. 25). On May 13, 2014, NAPRO filed its Position Regarding Reply to "Motion in Compliance with Order to Inform" by which it requested the court to set a date for a pretrial hearing (Docket No. 26). On May 19, 2014, the court denied the motion (Docket No. 24) filed by the Debtor without prejudice to renewing the request after thirty (30) days (Docket No. 27).
On June 26, 2014, the Debtor/Plaintiff filed a Motion to Inform Intent to Perform Additional Discovery requesting a term of forty-five (45) days to conclude discovery and file dispositive motions and the court granted the same on July 1, 2014 (Docket Nos. 32 & 33). On July 15, 2014, the Plaintiff filed a Motion to Inform Service of Request for Discovery (Docket No. 35). On September 11, 2014, the Plaintiff/Debtor filed a Motion Requesting Order to Compel Response to Discovery Requested by the Debtor requesting the court to order the Defendant to immediately respond to the discovery interrogatories submitted and served on July 15, 2014 and the same was granted on (Docket Nos. 36 & 37).
Thereafter, the Plaintiff filed additional motions to compel and requested sanctions for violating discovery requests and orders. On November 2, 2017, the Court entered an Order (for both adversary proceedings...
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