P.R. Asphalt, LLC v. Betteroads Asphalt, LLC
| Decision Date | 29 May 2020 |
| Docket Number | Civil 19-1661 (ADC),Civil 19-1662 (ADC) |
| Parties | PUERTO RICO ASPHALT, LLC, Appellant v. BETTEROADS ASPHALT, LLC, Appellee. PUERTO RICO ASPHALT, LLC, Appellant v. BETTERECYCLING CORPORATION Appellee. |
| Court | U.S. District Court — District of Puerto Rico |
Pending before the Court is Firstbank Puerto Rico, Banco Santander de Puerto Rico, Economic Development Bank for Puerto Rico, and Banco Popular de Puerto Rico's (collectively the "lenders") motion to dismiss for lack of jurisdiction. ECF No. 33. Puerto Rico Asphalt, LLC ("PRA") opposed. ECF Nos. 44, 48. Lenders replied. ECF No. 55.
For the reasons set forth below, lenders' motion to dismiss is GRANTED and PRA's appeal is DISMISSED with prejudice.
On June 9, 2017, the lenders, St. James Security, Inc., Champion Petroleum, Inc., and Control Force, Corp. filed an involuntary petition for relief under the Bankruptcy Code against Betterecycling Corporation ("Betterecycling") in the US Bankruptcy Court for the District of Puerto Rico. Bankruptcy Petition ("BP") No. 17-4157, ECF No. 1. That same day, the lenders, Sargeant Marine, Inc., Sargeant Trading LTD, and Facsimil Paper Connection Corp., filed an involuntary petition against Betteroads Asphalt, LLC ("Betteroads")1. BP No. 17-4156, ECF No. 1. The cases were administratively consolidated by the Bankruptcy Court.2 See BP No. 17-4156, ECF No. 480; BP No. 17-4157, ECF No. 339. On June 12, 2017, the lenders requested the appointment of an interim Chapter 11 trustee. BP No. 17-4156, ECF No. 14; BP No. 4157, ECF No. 8. Betteroads and Betterecycling (collectively "debtors") opposed. BP No. 17-4156, ECF No. 47; BP No. 4157, ECF No. 28.
On June 27, 2017, debtors moved for dismissal of the involuntary petitions alleging they were filed in bad faith. BP No. 17-4156, ECF No. 46; BP No. 4157, ECF No. 27. The lenders opposed, debtors replied, and lenders sur-replied. BP No. 17-4156, ECF No. 74; BP No. 4157, ECF Nos. 52, 68, 79. After an initial hearing, discovery then ensued. On November 13, 2017, thelenders moved for summary judgment and debtors opposed. BP No. 17-4156, ECF Nos. 120, 121, 167, 168; BP No. 4157, ECF Nos. 87, 88, 123, 124.
During the November 17, 2017 hearing to discuss the pending motions, the Bankruptcy Court held that there is no statutory requirement that petitioning creditors commence an involuntary petition in good faith; instead, the critical issue hinged on whether bad faith was a valid ground to dismiss an involuntary petition. BP No. 17-4156, ECF No. 135; BP No. 4157, ECF No. 98. Upon finding that bad faith was a fact intensive issue which generally relied on equitable principles, the court granted the parties 21 days to file supplemental briefs on the good and bad faith issue. Id. Lenders and debtors filed their respective memorandums in compliance. BP No. 17-4156, ECF Nos. 169, 170, 181, 182; BP No. 4157, ECF Nos. 125, 126, 136, 137.
On August 24, 2018, PRA filed a notice of appearance as a party in interest in the Betteroads case.3 BP No. 17-4156, ECF No. 240. On November 30, 2018, the Bankruptcy Court issued an Opinion and Order ruling as follows: (1) the petitioning creditors satisfied the three-prong requirement for filing an involuntary petition; (2) bad faith is an independent cause for dismissal of an involuntary petition under section 303(b); and (3) the debtors failed to show that dismissal pursuant to section 305(a)(1) abstention is in the best interest of both the creditors and the debtor. BP No. 17-4156, ECF No. 271; BP No. 4157, ECF No. 206. The Bankruptcy Court then scheduled an evidentiary hearing to consider whether the involuntary petitions were filed inbad faith. BP No. 17-4156, ECF Nos. 273, 308; BP No. 4157, ECF Nos. 208, 243. Thereafter, the parties filed various amended discovery schedules.
On March 25, 2019, PRA filed a motion to quash the lenders' subpoena to appear at a deposition and requesting production of documents. BP No. 17-4156, ECF No. 299. Lenders and PRA actively contested this matter. BP No. 17-4156, ECF Nos. 300, 306, 314, 315, 335. Ultimately, the Court denied PRA's motion to quash the subpoena and PRA's deposition was conducted. BP No. 17-4156, ECF No. 345.
On May 13, 2019, debtors filed a motion requesting extension of the discovery schedule and conversion of the evidentiary hearing into a status hearing, or to address the pending discovery. BP No. 17-4156, ECF No. 375; BP No. 4157, ECF No. 259. Lenders opposed said request. BP No. 17-4156, ECF No. 390; BP No. 4157, ECF No. 267. Debtors' request for hearing conversion was denied by the Bankruptcy Court, which noted that the parties had ample time to conduct discovery. 4157, ECF No. 295. On June 20 and 21, 2019, the petitioning creditors and debtors filed their respective pretrial reports. BP No. 17-4156, ECF Nos. 413-419, 431, 459, 461, 464; BP No. 17-4157, ECF Nos. 283, 284, 285-290. On June 25, 2019, the Bankruptcy Court reaffirmed the June 27 hearing date and scheduled five (5) additional hearing dates. Id.
On June 25, 2019, debtors filed a motion in limine to exclude various depositions as well as lenders' expert John P. Sordillo's report and testimony from the evidentiary hearing, and also requesting sanctions against the lenders. BP No. 17-4156, ECF No. 424, 425; BP No. 17-4157, ECF No. 293, 294. On June 26, 2019, PRA, as party in interest, filed an urgent motion to suppress certain discovery from the evidentiary hearing, including lenders' expert's report and testimony, and PRA's deposition. BP No. 17-4157, ECF No. 298. PRA also argued it was a necessary party under Fed. R. Civ. P. 19 (made applicable by Fed. R. Bankr. P. 7019) arguing that the disposition of the contested matter, that is, lenders' motion to dismiss the involuntary petitions4, without their intervention risked their ability to protect their interests or afford complete relief among the parties. Id.
During the June 27, 2019 evidentiary hearing5, the Bankruptcy Court addressed various matters pertaining to debtor's motion to dismiss the involuntary petition, the discovery disputes, and PRA and lenders' respective motions to suppress. BP No. 17-4156, ECF No. 480; BP No. 4157, ECF No. 339. Of particular relevance to this appeal, the Bankruptcy Court issued bench rulings denying PRA's motion to suppress as well as debtors' motion seeking to exclude the report by the lenders' proposed expert, citing Fed. R. Civ. P. 26's ("Rule 26") limited applicability to contested matters and noting that the report had not yet come to the attention of the court by the petitioning creditors, rendering the issue premature. The Bankruptcy Court also concluded that PRA - who was not a debtor or creditor in the case - lacked standing to seek suppression of discovery as it pertained to the contested matter, namely, debtors' motion to dismiss theinvoluntary petitions and more specifically, the determination whether the petitions were filed in bad faith.
On July 9, 2019, PRA filed a notice of appeal within the bankruptcy proceedings as to the Bankruptcy Court's bench ruling denying their motion to suppress for lack of standing and moved for a stay pending appeal. BP No. 17-4156, ECF Nos. 445, 446; BP No. 4157, ECF Nos. 306, 307. On July 12, 2019, the Bankruptcy Court denied PRA's request for a stay pending appeal noting that PRA failed to show a likelihood of success on the merits and irreparable harm. BP No. 17-4156, ECF No. 454; BP No. 4157, ECF No. 314.6
On July 12, 2019, PRA filed a motion with this Court requesting the stay of the bankruptcy proceedings pending appeal, setting forth the same arguments raised before the Bankruptcy Court. ECF No. 3. Lenders opposed, and PRA replied. ECF Nos. 10, 14. On February 11, 2020, this Court denied PRA's motion to stay, mirroring the Bankruptcy Court's reasoning. ECF No. 35. In the interim, on October 11, 2019, the Bankruptcy Court issued an Opinion and Order finding that the involuntary petitions were not filed in bad faith and entered an order for relief under Chapter 11 of the Bankruptcy Code. BP 17-4157, ECF No. 363. PRA and debtors filed various appeals stemming from said Opinion and Order as well as various decisions by theBankruptcy Court; these appeals are currently pending before the Court. See Civil Nos. 19-2019, 19-2020, 19-2021, 19-2023.
On February 10, 2020, lenders moved to dismiss this appeal for lack of jurisdiction. ECF No. 33. They also filed their Appellee brief. ECF No. 38. PRA opposed lenders' request for dismissal. ECF Nos. 44, 48. Lenders replied. ECF No. 55.
"Because federal courts are powerless to act in the absence of subject matter jurisdiction, we have an unflagging obligation to notice jurisdictional defects." Lee-Barnes v. Puerto Ven Quarry Corp., 513 F.3d 20, 24 (1st Cir. 2008) (citing Espinal-Dominguez v. Puerto Rico, 352 F.3d 490, 495 (1st Cir. 2003)). In bankruptcy appeals, the standing requirement "is more restrictive than the standing requirement of Article III, which 'need not be financial and need only be 'fairly traceable' to the alleged illegal action.'" Advantage Healthplan, Inc. v. Potter, 391 B.R. 521, 540 (D.D.C. 2008) (citing Travelers Ins. Co. v. H.K. Porter Co., 45 F.3d 737, 741 (3rd Cir. 1995)). On this point, the First Circuit has held that "only a 'person aggrieved' by a bankruptcy court order has standing to appeal, and that 'person aggrieved' is one whose pecuniary interests are 'directly and adversely' affected by an order of the bankruptcy court." Cousins Int'l Food Corp. v. Vidal, 565 B.R. 450, 458 (1st Cir. B.A.P. 2017) (quoting Spenlinhauer v. O'Donnell, 261 F.3d 113, 117-18 (1st Cir. 2001)). As in other jurisdictional contexts, the party asserting appellate jurisdiction bears the burden of establishing standing to appeal. Id.
District courts have jurisdiction to hear appeals from "final judgments, orders and decrees" and "with leave...
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