P.R. Asphalt, LLC v. Betteroads Asphalt, LLC
| Decision Date | 10 February 2020 |
| Docket Number | Civil 19-1661 (ADC) |
| Parties | PUERTO RICO ASPHALT, LLC, Appellant v. BETTEROADS ASPHALT, LLC, Appellee. |
| Court | U.S. District Court — District of Puerto Rico |
Pending before the Court is Puerto Rico Asphalt, LLC's ("PRA") Urgent Motion for Stay Pending Appeal. ECF No. 3. Firstbank Puerto Rico, Banco Santander de Puerto Rico, the Economic Development Bank for Puerto Rico, and Banco Popular (collectively the "lenders") opposed. ECF No. 10. PRA replied. ECF No. 14. For the reasons set forth below, PRA's motion is DENIED.
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 "alleged debtors") opposed. BP No. 17-4156, ECF No. 47; BP No. 4157, ECF No. 28.
On June 27, 2017, alleged debtors moved for dismissal of the involuntary petitions. BP No. 17-4156, ECF No. 46; BP No. 4157, ECF No. 27. The lenders opposed, alleged 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, the lenders moved for summary judgment and alleged debtors opposed. BP No. 17-4156, ECF No. 120-121, 167-168; BP No. 4157, ECF No. 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 is a valid ground to dismiss an involuntary petition. BP No. 17-4156, ECF No. 135; BP No. 4157, ECFNo. 98. Upon finding that bad faith is a fact intensive issue which generally relies on equitable principles, the court granted the parties 21 days to file supplemental briefs on the good and bad faith issue. Id. Lenders and alleged debtors filed their respective memorandums in compliance. BP No. 17-4156, ECF No. 169, 170, 181, 182; BP No. 4157, ECF No. 125, 126, 136, 137. On August 24, 2018, PRA filed a notice of appearance as a party in interest in the Betteroads case. 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 alleged 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 in bad faith. BP No. 17-4156, ECF No. 273, 308; BP No. 4157, ECF No. 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 No. 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, alleged 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. Alleged debtor's 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 alleged debtors filed their respective pretrial reports. BP No. 17-4156, ECF No. 413-419, 431, 459, 461, 464; BP No. 4157, ECF No. 283, 284, 285-290. On June 25, 2019, the Bankruptcy Court reaffirmed the June 27 hearing date and scheduled 5 additional hearing dates. Id.
On June 25, 2019, alleged debtors filed a motion in limine to exclude various depositions as well as lender's 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. 4157, ECF No. 293, 294. On June 26, 2019, PRA 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. 17-4156, ECF No. BP No. 4157, ECF No. 298.
During the June 27, 2019 evidentiary hearing, the Bankruptcy Court addressed various matters pertaining to alleged debtor's motion to dismiss the involuntary petition as well as the pending motions and discovery disputes.3 BP No. 17-4156, ECF No. 480; BP No. 4157, ECF No.339. Essentially, after hearing the parties, the Bankruptcy Court concluded that the parties should coordinate whatever discovery was pending and noted that the court had no intention to further continue the schedules of the hearings. On this issue, the Bankruptcy Court pointed out that despite Federal Rule of Bankruptcy Procedure ("Fed. R. Bankr. P.") 1013's mandate that involuntary petitions be expedited, the involuntary petitions were filed on June 9, 2017, two years of ongoing litigation had transpired, and required a prompt resolution. Additionally, the Bankruptcy Court denied without prejudice alleged debtors' motion seeking to exclude the report by the lenders' proposed expert citing Federal Rule of Civil Procedure 26's ("Rule 26") limited applicability to contested matters and noted that the report had not yet come to the attention of the court by the petitioning creditors.
Also, during the hearing, lenders opposed PRA's motion to suppress. Counsel for PRA, for its part, argued in support of their motion, noting that: lenders had not submitted a final expert report and the report was not signed; they were deprived of the right to depose the expert since the report was provided on June 20, 2019; PRA had standing on Federal Rule of Civil Procedure 19 ("Rule 19") (necessary party) since the court's ruling would affect PRA's rights and interests; and notice should've been given to PRA during discovery in order to defend itself from the allegations from the lenders.
Upon hearing the parties' arguments on this point, the Bankruptcy Court concluded that PRA lacked standing to request the striking, suppression or reopening of discovery in the bankruptcy case. Specifically, the court held that PRA lacked standing in the contested matter since it was only subject to discovery regarding the motion to dismiss filed by the alleged debtors. The court further noted the petitioning creditors did not file an involuntary petition against PRA and it was up to the petitioners to decide whether PRA would be joined as a debtor. According to the court, based on the allegations on the pretrial reports and motions filed by the parties, PRA was the subject of discovery only regarding the pending issue of good/bad faith mainly because the alleged debtors purportedly transfers from alleged debtors to PRA led to the filing of the instant petitions. Lastly, the court reiterated the inapplicability of certain provisions of Rule 26 in contested matters, precluding PRA's claims under such rule.
On July 9, 2019, PRA filed a notice of appeal within the bankruptcy proceedings as to the court's bench ruling denying their motion to suppress, and moved for a stay pending appeal. BP No. 17-4156, ECF No. 445, 446; BP No. 4157, ECF No. 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. As to the former, the Bankruptcy Court held that mandatory joinder requirements in Rule 19 made applicable to adversary proceedings via Fed. R. Bankr. P. 7019 do not apply to contested matters such as the alleged debtors' motion to dismiss and the hearing to determine whether the lenders acted in bad faith by filing the involuntary petition. This deprived PRA of standing to request the suppression of evidence. Id. The Bankruptcy Court further pointed out that discovery orders are interlocutory and thus not final appealable orders. Id. Lastly, the court held that PRA failed to show irreparable harm absent a specific showing as to how its interests would be affected. Id.
On July 12, 2019, PRA filed the instant motion requesting a stay pending appeal, setting forth the same arguments raised before the Bankruptcy Court. ECF No. 3. Lenders opposed, and PRA replied. ECF Nos. 10, 14.
A motion for stay pending appeal is governed by Fed. R. Bankr. P. 8007 and remains solely within the court's discretion. In re MJS Las Croabas Props., 2015 Bankr. LEXIS 2147, *4. In exercising such discretion, courts consider the traditional four-part standard applicable to preliminary injunctions. In re MJS Las Croabas Props., 2015 Bankr. LEXIS 2147, *4 (citing Acevedo-García v. Vera-Monroig, 296 F.3d 13, 16 (1st...
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