Vento Development Corp., In re

• Decision Date: 20 June 1977
• Docket Number: No. 76-1500,76-1500
• Citation: 560 F.2d 2
• Parties: In re VENTO DEVELOPMENT CORP., Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 2

560 F.2d 2

In re VENTO DEVELOPMENT CORP., Appellant.

No. 76-1500.

United States Court of Appeals First Circuit.

June 20, 1977.

Otero Suro & Otero Suro and Robles, Torres & Trias, Hato Rey, P.R., on brief for appellees. Appellees submitted on brief.

Before VAN OOSTERHOUT, ^* INGRAHAM ^** and CAMPBELL, Circuit Judges.

INGRAHAM, Circuit Judge.

Debtor-appellant Vento Development Corporation challenges the approval of a petition for involuntary bankruptcy and reorganization under Chapter X of the Bankruptcy Act. ¹ Vento contends that (1) the petition lacked three creditors as required by 11 U.S.C. § 526, (2) the petition was not filed in good faith as required by 11 U.S.C. § 541, and (3) the findings of the district court were too cursory to receive favorable appellate treatment. We affirm.

FACTS

Vento is a one-man corporation whose twenty shares (par value $100 per share) are owned by Mr. Felix A. Rosabal. Vento was engaged in a real estate project known as Jardines de Loiza, located in Loiza, Puerto Rico. The enterprise consisted of subdividing lots and building houses upon them. The improved lots were then sold. In 1973 Vento foundered on financial shoals and threatened to submerge completely. Continental Mortgage Investors (CMI), a Massachusetts business trust, was Vento's major creditor. On October 19, 1973, CMI, Wackenhut Corporation and Waterworks Suppliers, Inc. petitioned for the United States District Court for the District of Puerto Rico for reorganization of Vento under Chapter X. The petition outlined a bleak financial picture. Vento's only asset, the real estate development, was valued at $1,708,655. Liabilities known to the petitioners were: secured claims, $2,238,037.62, of which $1,950,960.42 was owed to CMI Vento denied that the petition was filed in good faith. Its responsive pleadings emphatically denounced the petition as an attempt to destroy Vento. Debtor noted that it had a suit pending against CMI in the same court. ² It claimed that the petition was yet another tactic utilized by one Durand Holladay in his struggle to wrest control of Jardines de Loiza from Vento. Vento also urged the court to hold that CMI was not a legal entity and therefore could not be counted as one of the three creditors necessary for the approval of the petition.

unsecured claims, $459,406.68, of which $7,460.35 was owed to Waterworks Suppliers and $5,737.20 to Wackenhut Corporation; and taxes, $51,888.81. Petitioners alleged that Vento was insolvent and/or unable to pay its debts as they became due.

On June 13, 1974, Ramon Guas applied for leave to intervene as a petitioning creditor in favor of the reorganization petition. The case languished for almost two years. At some point CMI was placed in bankruptcy in the United States District Court for the District of Massachusetts. On April 21, 1976, the district court in Puerto Rico granted Guas' application to intervene. In mid-September of that year the district court held a two day hearing and on September 24 approved the petition. Vento prosecuted this appeal.

FINDING A THIRD CREDITOR

We reject appellant's contention that there were not three creditors. First, CMI is a legal entity under Puerto Rican law. Puerto Rico Civil Code arts. 27-30, 31 L.P.R.A. §§ 101-104; Suchem, Inc. v. Central Aguirre Sugar Co., 52 F.R.D. 348 (D.P.R.1971). Under F.R.Civ.P. 17(b) ³ the capacity of CMI, an unincorporated association, to sue is determined by the law of the forum state, i. e. Puerto Rico. Should there by any doubt that capacity to sue is equivalent to capacity to petition as a creditor, we note that bankruptcy, an equitable proceeding, ⁴ is more liberal than garden variety lawsuits with respect to parties. The bankruptcy court must protect the debtor as well as numerous creditors. Its tasks are even greater in reorganization proceedings.

The very kernel of a reorganization proceeding is the careful consideration given to all outstanding liabilities, debts and claims. Only in the light of such an examination does it become possible for the bankruptcy court to determine whether the corporation as recapitalized can weather the financial storm. (Citation omitted.) For such an examination and such a determination to be successful, every obligation of the debtor must be brought before the eye of the court.

American Service Co. v. Henderson, 120 F.2d 525, 529 (4th Cir. 1941). Chapter X is more liberal with respect to counting claimants as creditors for the petition than other chapters. Compare 11 U.S.C. § 506(4) with 11 U.S.C. § 95(e); see also G. F. Wertime, Inc. v. Turchick, 358 F.2d 802, 811 (2d Cir. 1966). Haggling over whether an association is an entity does not obscure the fact that it is the holder of a claim. In a tax case concerning the deductibility of bad debts, Judge Mahoney of this Circuit stated There are many meanings (attached) to such words as 'debt' or 'indebtedness', and their precise meaning in any given statute must depend upon the purpose of the statutory provision.

Hamlen v. Welch, 116 F.2d 413, 417 (1st Cir. 1940). The broad responsibilities of the Chapter X court demand an expansive definition of the term "creditor." This requirement has been recognized in other contexts. In Wertime, supra, the claim was against an individual named T. H. Kinne, not the bankrupt Kinne Co. which he controlled. However, security for the claim was a mortgage on land owned by Kinne Co. Declining the opportunity to exalt form over substance, the court upheld the allowance of the claim in bankruptcy. 358 F.2d at 812. In another situation, a trustee was permitted to file claims in bankruptcy court for the cestui que trust. In re Plankinton Bldg. Co., 135 F.2d 273 (7th Cir. 1943). ⁵

Appellant's position is self-contradictory. Vento does not question its right to sue CMI, but does contest CMI's capacity to petition Vento into bankruptcy. It would be ironic if CMI, which itself has been placed in bankruptcy, could not avail itself of the same title of the United States Code in order to obtain reimbursement of sums allegedly owed it by Vento, nonpayment of which may have caused its own financial plight. We conclude that CMI may be counted as a creditor.

We find an alternative ground for upholding the sufficiency of the petition as to the number of creditors. Ramon Guas' intervention allows him to be counted as a creditor. The Chapter X rules allow creditors to join an involuntary petition at any time before its dismissal. Rules Bankr.Proc. 10-105(c). Intervention in all matters is generally allowed for cause. Rules Bankr.Proc. 10-210(b). These rules took effect on August 1, 1975 and applied to all pending proceedings unless their application would be unjust or impractical. We see no reason why they should not be applied. Rule 10-105(c) merely codified existing case law. See Canute S.S. Co. v. Pittsburgh & W. Va. Coal Co., 263 U.S. 244, 44 S.Ct. 67, 68 L.Ed. 287 (1923); Guterman v. C. D. Parker & Co., 86 F.2d 546 (1st Cir. 1936), cert. denied, 300 U.S. 677, 57 S.Ct. 670, 81 L.Ed. 882 (1937); In re Evansville Television, Inc., 286 F.2d 65 (7th Cir.), cert. denied, 366 U.S. 903, 81 S.Ct. 1048, 6 L.Ed.2d 204 (1961). The reservation in Canute of situations where the petition is insufficient on its face does not arise here.

Appellant next argues that neither CMI nor Guas may be counted because they are secured creditors. This argument was never presented to the district court and was first mentioned at oral argument. ⁶ It apparently stems from 11 U.S.C. § 95(e), which excludes from the number of creditors to be counted in a petition all fully secured creditors and creditors with preferences, liens, or transfers which are void or voidable. Questions of waiver aside, this argument is without merit. Section 95(e) does not apply to Chapter X proceedings. Section 506 provides special definitions for Chapter X, including a broader definition of "creditor" as the "holder of any claim."11 U.S.C. § 506(4). The definition of "claim" in § 506(1) includes both secured and unsecured claims. It is irrelevant whether a petitioner is secured. 6 Collier on Bankruptcy (14th ed. 1940) P 4.07(2) at 814 & n. 26, citing H.R.Rep. No. 1409, 75th Cong., 1st Sess. 41 (1937) and S.Rep. No. 1916, 75th Cong., 3d Sess. 25 (1938); 6 Collier, supra, P 4.07(4) at 819. ⁷

GOOD FAITH

Vento heatedly alleges that the petition is part of a campaign to wrest control of the project from it. Of course, petitioning creditors have the burden of showing good faith. Marine Harbor Properties, Inc. v. Manufacturers Trust Co., 317 U.S. 78, 85, 63 S.Ct. 93, 87 L.Ed. 64 (1942). The court must find that a reorganization can be effected which "avoid(s) the milking of the embarrassed debtors and the enrichment of a few professional reorganizers possessed of mischievous or hungry proclivities." In re Diversey Hotel Corp., 165 F.2d 655, 658 (7th Cir.), cert. denied, 333 U.S. 861, 68 S.Ct. 739, 92 L.Ed. 1140 (1948). If it cannot reasonably be expected that a successful reorganization will occur, good faith is lacking. Fidelity Assurance Ass'n v. Sims, 318 U.S. 608, 63 S.Ct. 807, 87 L.Ed. 1032 (1943). Petitioners need not provide a specific plan in order to comply with the good faith requirement. No more is demanded of them than proof of a reasonable possibility that a plan can be formulated. In re Bermec Corp., 445 F.2d 367 (2d Cir. 1971); In re Business Finance Corp., 451 F.2d 829 (3d Cir. 1971). Appellant conceded at oral argument that financing would resuscitate the project. That Vento would prefer to obtain financing independent of bankruptcy supervision does not mean that the petition was not filed in good faith. Nor does it mean that reorganization cannot work. In fact, it supports the opposite conclusion.

The preliminary report of the receiver, dated November 1, 1973, noted:

The project as of now gives the impression of complete abandonment. The streets (have) deteriorated as they were not completely...