IN THE UNITED STATES BANKRUPTCY COURT 1 FOR THE DISTRICT OF PUERTO RICO 2 IN RE: 3 CASE NO. 19-01022 (ESL) PUERTO RICO HOSPITAL SUPPLY, 4 INC. CHAPTER 11
5 Debtor 6 IN RE: 7 CASE NO. 19-01023 (ESL) CUSTOMED, INC. 8 CHAPTER 11 Debtor 9
10 BANCO SANTANDER PUERTO RICO 11 Plaintiff 12 ADV. PROC. No. 19-00448 (ESL) 13 vs.
14 PUERTO RICO HOSPITAL SUPPLY, FILED & ENTERED ON APR/03/2020 INC. AND CUSTOMED, INC. 15 Defendants 16
18 OPINION AND ORDER 19 The instant adversary proceeding is before the court upon the motion to dismiss the 20 complaint for failure to state a claim upon which relief may be granted filed by the Debtors and 21 Defendants, Puerto Rico Hospital Supply, Inc. (“PRHS”) and Customed, Inc. (“Customed”) 22 (“Defendants”), pursuant to Fed. R. Civ. P. 12(b)(6), made applicable to adversary proceedings 23 by Fed. R. Bankr. P. 7012(b) (Docket No. 13). The motion to dismiss has been opposed by 24 plaintiff, Banco Santander Puerto Rico (“Santander”), in its capacity as agent of Santander 25 Financial Services, Inc., and Firstbank Puerto Rico, the loan lenders (“Lenders”) (Docket No. 23). 26 27 1 The defendants replied to Santander’s opposition, and Santander surreplied (Docket Nos. 28 & 2 32). 3 The court will first address the factual and legal allegations in the complaint, then state 4 the position of the parties, and ultimately analyze the parties’ arguments in light of the applicable 5 law. The court advances that the legal issue in this case, in the bankruptcy context, has not been 6 clearly addressed in this district. 7 The Complaint 8 Santander filed the present action seeking declaratory relief to determine the extent of its 9 lien over property of the Defendants, specifically, the proceeds obtained by the 10 Debtors/Defendants in an arbitration proceeding concerning the distribution rights against 11 Johnson and Johnson International, Inc. and Etichon, Inc. (collectively “J&J”) in an award 12 confirmed by the U.S. District Court for the District of Puerto Rico in case number 17-01405 13 (FAB), as well as any proceeds in another pending case, case number 17-02281 (DRD). Santander 14 alleges that the relevant facts are uncontested as the same have been stipulated in the Cash 15 Collateral Stipulation and informs that a decision on this matter is critical as the proposed Chapter 16 11 plan does not provide for payment of said funds to Santander. 17 On April 28, 2017, the Debtors entered into a Credit Agreement (Revolving Line of Credit 18 and Letters of Credit) (the “Credit Agreement”) with Banco Santander Puerto Rico and FirstBank 19 Puerto Rico (collectively, the “Lenders”), pursuant to which the Lenders provided a certain credit 20 facility to the Borrowers in the amount of $32,000,000.00 (the “Loan”). The Loan is evidenced 21 by the loan documents (collectively, the “Loan Documents” or the “Collateral”) stipulated in ¶ 1 22 of the Cash Collateral Stipulation, Bankr. Case No. 19-01022-ESL11, Docket No. 65 (the “Cash 23 Collateral Stipulation.”). 24 As part of the Collateral Documents, Borrowers executed a (i) Security Agreement; (ii) 25 Pledge and Assignment of Account; (iii) Mortgage Notes Pledge and Security Agreement; and 26 (iv) UCC-1 Financing Statements; among others, as listed in the Credit Agreement, Section 5 at 27 p. 32. This fact was Stipulated in ¶ 2 of the Cash Collateral Stipulation. 1 To secure their obligations under the Credit Agreement, Debtors granted the Lenders, 2 through the Security Agreement (the “Security Agreement”), a first priority security interest over, 3 among other assets of the Debtors, their inventories, accounts receivable, general intangibles, 4 such as contract rights, and any proceeds thereof. This fact was Stipulated in ¶ 3 of the Cash 5 Collateral Stipulation. The Lenders properly perfected their security interests over the Collateral 6 granted by the Debtors under the Security Agreement by filing the corresponding UCC-1 7 Financing Statements. This fact was Stipulated in ¶ 4 of the Cash Collateral Stipulation. 8 On March 28, 2017, J&J filed a Complaint against the Debtors claiming that the latter 9 failed to pay over $4.244 million in past due product purchases, in violation of its essential 10 payment obligations, and requested a declaration from the Court to the effects that it had just 11 cause to terminate its commercial relationships with the Debtors. 12 The Debtors moved to compel arbitration based on a clause in certain Non-Exclusive 13 Distribution Agreement (the “2005 Contract”) which provides for the arbitration of claims before 14 the American Arbitration Association (“AAA”). On July 10, 2017, the Court entered an order 15 compelling arbitration. On May 2, 2019, the Panel issued an award in favor of Debtors and against 16 J&J in the amount of $1,184,598.19 (the “J&J Award”). On September 30, 2019, the Court 17 confirmed the J&J Award. 18 On November 6, 2017, Debtors filed a separate complaint against J&J for violations to 19 Law 75 alleging J&J’s termination without just cause of an exclusive distribution agreement they 20 maintained since 1990 (the “1990 Agreement”). See, Civil Case No. 17-02281(DRD) (“the 21 Second Case”), collectively with the First Case, the “J&J Litigation”). Debtors asserted, among 22 other damages suffered, lost benefits, loss of profits, loss of goodwill, the value of unsold 23 inventory, and the value of capital investments to the extent those cannot be used for another 24 business activity, which damages are estimated to exceed $10 million, exclusive of interests, 25 costs, attorney’s fees, and expert witness fees. Id. On April 10, 2019, the Court stayed the Second 26 Case due to Debtors’ bankruptcy filings. 27 1 The legal analysis in the complaint adduces that pursuant to the Security Agreement and 2 the UCC-1 Financing Statements, Santander has a perfected lien over, among other collateral, the 3 general intangibles of the Debtors, contract rights and proceeds arising therefrom. Santander 4 alleges that Debtors ratified the validity and perfection of Santander’s lien through the Cash 5 Collateral Stipulation. Furthermore, Section 9-102 of the Uniform Commercial Code of Puerto 6 Rico provides, in pertinent, that “proceeds” means whatever is collected on, or distributed on 7 account of, collateral and rights arising out of collateral. 10 L.P.R.A. §2212. Santander concludes 8 that its lien extends to all contract rights of the Debtors and proceeds thereof, including but not 9 limited to the J&J Award, the J&J Litigation and any other proceeds obtained by the Debtors 10 arising from contract rights or general intangibles. 11 Santander further contends that Debtors’ claims from which the J&J Award arose were 12 premised on a contract between J&J and the Debtors, the 2005 Contract. Specifically, that 13 Debtors’ claims for loss of profit and inventory under Law 75 relate directly to the 2005 Contract 14 with J&J, and, as such, the contract is integral to these claims. The Debtors received compensation 15 for the termination of a contract, the exercise of a right that existed pre-petition, and as such, 16 represent proceeds of the pre-petition collateral. Debtors’ claims against J&J are pre-petition 17 claims that fit the definition of a contract right and general intangible under the Puerto Rico 18 Uniform Commercial Code and are therefore subject to Santander’s lien based on the Security 19 Agreement and Financing Statements. Thus, it follows that Santander’s perfected security interest 20 in Debtors’ general intangibles, contract rights, and proceeds thereof apply to the J&J Award. 21 The allegations in the complaint state that the Johnson & Johnson Litigation is ongoing, 22 and it stems from both the 1990 Contract and the 2005 Contract. As such, the contract is integral 23 to these claims. Section 9-102 (64) of the Uniform Commercial Code of Puerto Rico provides, in 24 pertinent, that “proceeds” means whatever is collected on, or distributed on account of collateral, 25 rights arising out of collateral, and all claims arising out of the loss of, or damage to the collateral. 26 See, 19 L.P.R.A.§2212. Therefore, Santander’s collateral consists of, among other things, 27 Debtors’ general intangibles, contract rights, and proceeds thereof. 1 Santander seeks a declaration from the Court as to the extent of its lien over Debtors’ 2 property, specifically, over the Debtors’ contract rights and general intangibles, including but not 3 limited to the J&J Award and the J&J Litigation, and any other awards, judgments or proceeds 4 arising from Debtors’ contract rights. 5 Position and Argument of the Parties 6 Defendants – Movants in the Motion to Dismiss 7 Debtors/Defendants have moved for the dismissal of the complaint on the ground that the 8 same fails to state a claim upon which relief may be granted. Defendants do not question the 9 factual allegations in the complaint but disagree with the legal inferences drawn by plaintiff from 10 the same. 11 Defendants’ first argument is that claims for relief are tortious in nature because a 12 principal’s termination without just cause of the relationship is a tortious act under Puerto Rico 13 Law 75, 10 L.P.R.A. §§ 278-278e. The statute provides in section 278b that “if no just cause 14 exists for the termination of the dealer’s contract for detriment to the established relationship, or 15 for refusal to renew the same, the principal shall have executed a tortious act against the dealer.” 16 Defendants cite to decisions supporting said characterization. Defendants contend that Santander 17 may not discard the tortious nature of Law 75 claims as the same are clearly stated in the Puerto 18 Rico Law 75 statute. The public interest of Law 75 is remedial in nature and must be liberally 19 interpreted. 10 L.P.R.A. §278(c). The strong public policy is directed to “leveling the contractual 20 conditions between two groups financially unequal in their strength.” Medina & Medina v. 21 Country Pride Foods, Ltd., 858 F.2d 817, 820 (1st Cir. 1988), quoting Walborg Corp. v. Tribunal 22 Superior, 104 DPR 184, 189 (1975). 23 The Secured Transactions Chapter of the Commercial Transactions Act of Puerto Rico, 24 19 L.P.R.A §§ 2211-2409, does not allow for the creation of liens on claims arising in torts, except 25 for commercial tort claims. In order for a commercial tort claim to be allowed, there are certain 26 conditions and restrictions. The allowance of a commercial tort claim must be identified and 27 described with specificity in the security agreement and the financing statement. 19 L.P.R.A. § 1 2234. A general reference to collateral as defined in the Commercial Transactions Act will not 2 suffice. In re American Cartage, Inc., 656 F.3d 82, 88 (1st Cir. 2011). 3 Defendants’ second argument is that a lien cannot be acquired over commercial tort claims 4 as after-acquired property. “A security interest does not attach under a term constituting an after- 5 acquired property clause to...(2) a commercial tort claim.” Section 9-204 of the Commercial 6 Transactions Act, P.R. Laws Ann. tit. 19, § 2234. “Furthermore, an after-acquired property clause 7 in a security agreement cannot create a security interest in a commercial tort claim. The claim 8 must already exist when the parties enter into the security agreement.” American Cartage, 656 9 F.3d at 88.” 10 Defendants further argue that “[t]wo important consequences follow from this. First, they 11 had to be specified in the security agreement to be covered by Santander’s lien. See Sec. 9- 12 108(e)(1) of the Commercial Transactions Act, P.R. Laws Ann. tit. 19, § 2218, supra. Second, 13 Santander’s alleged lien on Debtors’ accounts, contract rights, general intangible, accounts 14 receivable, inventory, etc. cannot reach them as after-acquired property. See Sec. 9-204 of the 15 Commercial Transactions Act, P.R. Laws Ann. tit. 19, § 2234, supra. In addition to these two 16 consequences, American Cartage holds that Debtors’ commercial tort claims cannot be 17 considered “proceeds” of secured collateral for Santander’s security agreement.” 18 Defendants posit that the allegations in the complaint to the effect that the security 19 agreement covers the Law 75 claim “should be disregarded as legal labels or conclusions or mere 20 recitations of elements of the cause of action, far from well-pleaded facts. Whether the Debtors’ 21 Law 75 claims are general intangibles, contract rights, or proceeds from such collateral, and 22 whether they are claims in contract or tort are legal conclusions.” Defendants argue that the court 23 is not bound to accept Santander’s legal conclusions in the complaint and should ignore them 24 when deciding the motion to dismiss. 25 Defendants also argue that Santander incorrectly alleges that Law 75 claims concern 26 contract rights as it ignores the current definition of an account under the Uniform Commercial 27 Code and the Uniform Commercial Code of Puerto Rico. The revised versions do not include 1 contract rights as an account. The definition of “contract right” in Article 9 of the Uniform 2 Commercial Code is “any right to payment under a contract not yet earned by performance and 3 not evidenced by an instrument or chattel paper.” This definition plainly does not include Debtors’ 4 Law 75 claims for damages because of a termination without just cause as the damages do not 5 arise from a “right to payment under a contract not yet earned by performance.” Under Article 9, 6 the Uniform Commercial Code, and the Uniform Commercial Code of Puerto Rico, commercial 7 tort claims are expressly excluded from the account definition. Santander’s conclusory allegations 8 that any recovery on it is a general intangible under UCC Article 9 is inconsistent with the 9 definition of general intangible in the Uniform Commercial Code of Puerto Rico, 19 L.P.R.A. 10 §2212. A law suit under Law 75 is not a general intangible subject to Santander’s lien. Defendants 11 cite to American Cartage in support to their position that “the commercial tort claim itself is not 12 proceeds and a secured creditor has no right to it, even when the claim has been previously 13 assigned as security to the creditor.” American Cartage, 656 F.3d at 89. “[W]hen a party has an 14 interest in a commercial tort claim as proceeds, what the secured party has is a right to the 15 recovery, not a right to the claim itself.” 16 Defendants also contend that Santander’s arguments are based on law from other 17 jurisdictions and that Debtors’/Defendants’ Law 75 claims should be considered under Puerto 18 Rico Law. Under Puerto Rico Law, a Law 75 action for damages is independent of any contract’s 19 provisions. La Electronica, Inc. v. Electric Storage Battery Co., 260 F. Supp. 915, 916 (D.P.R. 20 1966) (“the very purpose of the Act under which this action has been brought is to permit the 21 enforcement of certain rights independent of the agreement itself”). A Law 75 claim does not 22 require the existence of a formal or a written contract as a precondition. Under Law 75, a “dealer” 23 (or distributor) is a “[p]erson actually interested in a dealer’s contract because of his having 24 effectively in his charge in Puerto Rico the distribution, agency, concession or representation of 25 a given merchandise or service.” 10 L.P.R.A. § 278(a). A dealer’s contract is defined as a 26 “[r]elationship established between a dealer and a principal or grantor whereby and irrespectively 27 of the manner in which the parties may call, characterize or execute such relationship, the former 1 actually and effectively takes charge of the distribution of a merchandise, or of the rendering of a 2 service, by concession or franchise, on the market of Puerto Rico.” Id.,§ 278(b). In summary, 3 Defendants conclude the following:
4 “Overall, these cases cited by Santander for the proposition that a lawsuit 5 may be considered a general intangible are beside the point. It is uncontroverted that the definition of “general intangible” in Puerto Rico Chapter 9 includes “things 6 in action.” See P.R. Laws Ann. tit. 19, § 2212. Other sorts of property are expressly 7 excluded from the definition, however, among them commercial tort claims. Id. As a result, Debtors’ claims against J&J are excluded from the scope of “general 8 intangibles,” regardless of whether “things in action” may generally be considered 9 so. The issue for Santander’s complaint is not whether the arbitration award and any eventual recovery in the pending federal lawsuit between Debtors and J&J are 10 the result of a lawsuit but whether they are the result of a commercial tort claim. 11 Since on this point, Puerto Rico Law 75 and Chapter 9 are clear and categorical that the commercial tort claims are excluded from the definition of accounts, contract 12 rights, and general intangibles, the case law cited by Santander for the proposition 13 that some lawsuits may be general intangibles is superfluous or inapposite.”
14 Defendants, in their reply to the opposition filed by Santander which is summarized below, 15 stress that the applicable statute bars claims arising in tort, 19 L.P.R.A. §2219(d)(12); and that a 16 partial exception is made for commercial tort claims, for which strict conditions are required, and 17 Santander failed to meet the same, 19 L.P.R.A. §§ 2218, 2234. They also allege that the definition 18 of commercial tort claims in 19 L.P.R.A. § 2212 has no reference to extracontractual claims and limits itself to claims arising in tort. 19 Defendants argue that Santander’s contention that a claim should be considered contractual 20 or extracontractual may be relevant in a case where an action is filed under Puerto Rico’s general 21 tort statute, Article 1802 of the Civil Code, 31 L.P.R.A. § 5141. Law 75, as a special law, prevails 22 over the Civil Code. Claims for damages caused by a breach of contract arise under Article 1054 23 of the Civil Code, 31 L.P.R.A. § 3018, which provides that “[t]hose who in fulfilling their 24 obligations are guilty of fraud, negligence, or delay, and those who in any manner whatsoever act in contravention of the stipulations of the same, shall be subject to indemnify for the losses and 25 damages caused thereby.” However, Law 75 imposes a liability for damages arising from acts that 26 go beyond the “stipulations” or terms of a contract, and indeed despite them. “[A]n action for 27 damages for breach of contract (sec.1054) only lies when the damage suffered exclusively arises 1 as a consequence of the breach of an obligation specifically agreed upon.” Ramos Lozada v. 2 Orientalist Rattan Furniture Inc., 130 D.P.R. 712, 727 (1992). The concurrence of tort and contract 3 claims arising from the same events is well-settled in Puerto Rico law. Ramos Lozada, 130 D.P.R. 4 at 727. 5 Santander’s lien does not extend to Law 75 claims, nor to amounts recovered as a result of 6 them. First, by virtue of the provisions of Chapter 9 and Law 75, Debtors’ claims against J&J are commercial tort claims excluded from the reach of Santander’s lien. “In re American Cartage, Inc., 7 656 F.3d 82 (1st Cir. 2011), holds that Santander’s lien cannot reach the Law 75 claims as proceeds 8 from any original collateral.” Defendants argue that American Cartage in dicta leaves open the 9 question of whether amounts recovered from a commercial tort claim may under certain 10 circumstances be proceeds of some other original collateral. However, even if correct, which they 11 do not admit to being so, the Debtors’ bankruptcy filings before the rendering of any arbitration 12 award or judgment on those claims impedes Santander’s lien from reaching the amounts recovered by Debtors as a result of the claims as a post-petition recovery. 13 14 Plaintitiff’s/Santander’s Opposition to Motion to Dismiss 15 Plaintiff responds by stating that the allegations in the complaint are that the Debtors’ 16 claims against J&J arise from the distribution agreements purportedly terminated without just 17 cause. The Complaint alleges that the contracts with J&J are undeniably part of the Lenders’ 18 collateral and that the proceeds thereof, which include the eventual payment of the award or 19 judgments against J&J, are also part of BSPR’s collateral. Santander concludes that the Complaint 20 has sufficient well-pleaded facts to survive a motion to dismiss under the Rule 12(b)(6) standard. 21 Santander alleges that the “claims against J&J arise under the contracts encumbered by 22 Lenders’ lien, and, therefore, any right to eventual payment pursuant to awards or judgments 23 arising therefrom are also part of the Lenders’ collateral as proceeds. In other words, pursuant to 24 the allegations in the Complaint the payments to be received by Debtors for those awards or 25 judgments are, at bottom, proceeds of the Lenders’ collateral covered by their duly perfected 26 security interest.” 27 1 Santander admits that there is no clear precedent in this district regarding whether the 2 payments received or to be received by Debtors as a result of the termination without cause of a 3 distribution agreement pursuant to Law 75 are part of a lender’s collateral. However, it is 4 Santander’s position that they are collateral subject to the valid lien it holds against property of 5 the Debtors. 6 Santander’s argument is that its lien extends to the proceeds of each claim, not to the claim 7 itself. It is the end product of those actions that constitute proceeds, over which Santander 8 maintains a valid and perfected pre-petition lien. Complaint at ¶46. What constitutes “proceeds” 9 is in “Chapter 9 of the Puerto Rico Commercial Transactions Act (“PR-UCC”), which adopts 10 Revised Article 9 of the Uniform Commercial Code. Section 9-102(64) of the PR-UCC defines 11 “proceeds” as including whatever is collected on, or distributed on account of collateral, rights 12 arising out of collateral, and all “claims arising out of the loss, nonconformity, or interference 13 with the use of, defects or infringement of rights in, or damage to, the collateral.” P.R. LAWS 14 ANN. tit. 19, § 2212 (emphasis supplied.) Furthermore, the Official Comments to the Uniform 15 Commercial Code explain that a security interest in a tort claim also may exist under [Revised 16 Article 9] if the claim is proceeds of other collateral.” U.C.C. § 9-102, cmt. 5(g).” 17 Santander alleges that the definition of proceeds in the PR-UCC does not exclude tort 18 claims and “much less a right to payment under an arbitration award or judgment arising out of 19 the termination of a contract that is subject to a valid security interest, regardless of the underlying 20 basis. This point is further confirmed by the U.S Court of Appeals for the First Circuit’s opinion 21 in In re American Cartage, Inc., 656 F.3d 82 (1st Cir. 2011), which Debtors grossly misinterpret. 22 There, the Court of Appeals discussed the distinction between “commercial tort claims” and 23 “proceeds” under Massachusetts’ iteration of Article 9 of the Uniform Commercial Code.” 24 Santander includes the following in a footnote with the definition of proceeds in 19 L.P.R.A. 25 §2212:
26 64) Proceeds, except as used in § 2369(b) of this title, means the following 27 property: (A) Whatever is acquired upon the sale, lease, license, exchange, or other 1 disposition of collateral; 2 (B) whatever is collected on, or distributed on account of, collateral; (C) rights arising out of collateral; 3 (D) to the extent of the value of collateral, claims arising out of the loss, 4 nonconformity, or interference with the use of defects or infringement of rights in, or damage to, the collateral, or 5 (E) to the extent of the value of collateral and to the extent payable to the 6 debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral. 7
8 Santander cites to In re American Cartage, Inc., 656 F.3d 89, to support its contention that a commercial tort action are proceeds of the original collateral. 9 “. . . Viewed as a whole, Article 9 teaches that when a party has an interest 10 in a commercial tort claim as proceeds, what the secured party has is a right to the 11 recovery, not a right to the claim itself. An action for conversion is not proceeds; only the end product of that action—the settlement amount or award—constitutes 12 proceeds.” 13 14 In summary, Santander states that it “seeks a declaration from this Honorable Court to the effects that BSPR has 15 a security interest over the proceeds obtained by the Debtors as a result of the 16 arbitration award and other judicial proceedings against J&J concerning its distribution rights under certain distribution contracts. To be clear, BSPR is not 17 asserting a security interest over the Law 75 claim itself, rather, it asserts that its 18 security interest extends over the proceeds resulting from the arbitration award, future awards, and judgments arising from or related to Debtors’ distribution 19 contracts, regardless of the basis of the underlying claim -that is, the right to receive 20 the payment of the end product of those judicial actions. BMW Fin. Servs., NA, LLC v. Rio Grande Valley Motors, Inc., 2012 WL 4623198, at *10 (S.D. Tex. Oct. 21 1, 2012) (noting that “the definition of proceeds does not exclude commercial tort 22 claims” and the relationship between the claims and franchise rights in that case “illustrate[d] how settlement of those claims falls squarely within the definition of 23 ‘proceeds”); Breckenridge Edison Dev., L.C. v. Sheraton Operating Corp., 2015 24 WL 5459833, at *5 (S.D.N.Y. June 2, 2015) (noting that Revised Article 9 of the Uniform Commercial Code allows a security interest in a tort claim if proceeds of 25 other collateral.)” 26 27 1 Santander further alleges that the Debtors’ claims against J&J are contractual in nature 2 and subject to its lien. The Law 75 statute cited by the defendants provides that if no just cause 3 exists for the termination of the dealer’s contract for detriment to the established relationship, or 4 for the refusal to renew the same, the principal shall have executed a “tortious act” against the 5 dealer. P.R. Laws Ann. Tit. 10 §278b. The phrase “tortious act” contextually means “that such 6 act is sanctionable, improper, incorrect and punishable, but it does not convert a breach of contract 7 into an extra-contractual claim.” The 1965 amendments to Law 75 and Rule 4.7 of the Rules of 8 Civil Procedure of Puerto Rico are intended to protect local dealers from damages resulting out 9 of the principal’s termination or refusal to renew a distribution contract. Law 75 protects a 10 contract. “What Law 75 defines as tortious is the act of terminating or refusing to renew a 11 distribution contract, not the cause of action resulting therefrom.” 12 Santander states in the preliminary statement of its surreply that: “This case was filed to determine the extent of the Lenders’ lien over the 13 property of Puerto Rico Hospital Supply, Inc. and Customed, Inc. (collectively, 14 “Defendants”). The determination of the extent of Lenders’ lien depends on whether the security interest they maintain over Defendants’ property, specifically 15 Debtors’ rights arising from the distribution agreements it maintained with Johnson 16 and Johnson, Inc. (“J&J”), are covered by such security interest. Therefore, the issue before the Court is a question to be resolved under the applicable PR-UCC 17 provisions governing the perfection and extent of Lender’s lien to secure payment 18 of a loan.” 19 The court agrees with such summary, particularly that the issue before the court must be 20 resolved under applicable Puerto Rico law to determine the extent of Santander’s lien over the 21 funds obtained by the Debtors under tort actions pursuant to Law 75, the Puerto Rico Dealer’s 22 Contracts Act, 10 L.P.R.A. §§ 278a – 278e. Santander expressed the following conclusion and 23 concern over a decision in favor of Defendants: 24 “Regardless of the nature of those claims, any award and/or judgment 25 resulting from the aforesaid litigation will be compensatory in nature and substitute 26 the proceeds that Defendants, the distributor, would have generated if the distribution agreements had not been terminated. In essence, any compensation 27 constitutes proceeds of the original collateral –the distribution agreements. Adopting Defendants’ interpretation of the PR-UCC will lead to rendering security 1 interests over distribution agreements in Puerto Rico unenforceable. The 2 Defendants interpretation is absurd because it purports to have the Court determine that a cause of action for termination of a distribution contract should be considered 3 a commercial tort under the PR-UCC and, therefore, should not be covered by a 4 perfected security interest. Such a ruling would destabilize the economy as no lender would be amenable to provide credit facilities to distributors who, like 5 Defendants in this case, have a business which essential assets and its mean to 6 generate income include distribution agreements.” 7 Jurisdiction 8 This court has jurisdiction over the instant adversary proceeding pursuant to 28 U.S.C. §§ 9 157(b)(1), 157(b)(2)(K) and 1334. The subject matter is a core proceeding under 28 U.S.C. 10 §157(b)(2). Venue is proper under 28 U.S.C. §§1408 and 1409. 11 Standard of Motion Under Fed. R. Civ. P.12(b)(6) - Failure to state a claim upon 12 which relief may be granted. 13 “The purpose of a motion to dismiss under Fed. R. Civ. P. 12(b)(6) is to assess the legal 14 feasibility of a complaint, not to weigh the evidence which the plaintiff offers or intends to offer.” 15 Velez-Arcay v. Banco Santander de P.R. (In re Velez-Arcay), 499 B.R. 225, 230 (Bankr. D.P.R. 16 2013), citing Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 17 779 (2nd Cir.1984); Citibank, N.A. v. K-H Corp., 745 F. Supp. 899, 902 (S.D.N.Y. 1990). 18 Fed. R. Civ. P. 8(a)(2), applicable to adversary proceedings through Fed. R. Bankr. P. 19 7008, mandates that a complaint contains a “short and plain statement of the claim showing that 20 the pleader is entitled to relief.” “Although detailed factual allegations are not required, the Rule 21 does call for sufficient factual matter”. Surita-Acosta v. Reparto Saman Inc. (In re Surita-Acosta), 22 464 B.R. 86, 90 (Bankr.D.P.R. 2012). Therefore, to survive a motion to dismiss under Fed. R. 23 Civ. P. 12(b)(6), a complaint must contain sufficient factual matter that, accepted as true, “state[s] 24 a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 25 (2007). A claim has prima facie plausibility when the pleaded factual content allows the court to 26 draw the reasonable inference that the defendant is liable for the alleged facts. Id. at 556. The 27 Twombly standard was further developed in Ashcroft v. Iqbal, 556 U.S. 622 (2009), advising 1 lower courts that “determining whether a complaint states a plausible claim for relief will ... be a 2 context-specific task that requires the reviewing court to draw on its judicial experience and 3 common sense.” 556 U.S. at 679. “In keeping with these principles, a court considering a motion 4 to dismiss can choose to begin by identifying pleadings that, because they are no more than 5 conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the 6 framework of a complaint, they must be supported by factual allegations. When there are well- 7 pleaded factual allegations, a court should assume their veracity and then determine whether they 8 plausibly give rise to an entitlement to relief.” Id. at 679. In sum, allegations in a complaint cannot 9 be speculative and must cross “the line between the conclusory and the factual.” Peñalvert-Rosa 10 v. Fortuño-Burset, 631 F.3d 592, 595 (1st Cir. 2011). “[A]n adequate complaint must provide fair 11 notice to the defendants and state a facially plausible legal claim.” Ocasio-Hernandez v. Fortuño- 12 Burset, 640 F.3d 1, 11 (1st Cir. 2011). 13 In Schatz v. Republican State Leadership Committee, 669 F.3d 50, 55 (1st Cir. 2012), the 14 U.S. Court of Appeals for the First Circuit (the “First Circuit”) established a two-step standard 15 for motions to dismiss under Fed. R. Civ. P. 12(b)(6). Step one is to isolate legal conclusions. 16 Step two is to take the complaint’s well-pleaded (non-conclusory) allegations as true, drawing all 17 reasonable inferences in favor of the plaintiff and determine if they plausibly narrate a claim for 18 relief. Also see Pérez v. Rivera (In re Pérez), 2013 WL 1405747 at 3, 2013 Bankr. LEXIS 1561 19 at 9-10 (Bankr. D.P.R. 2013); Zavatsky v. O’Brien, 902 F. Supp. 2d 135, 140 (D. Mass. 2012); 20 Guadalupe-Báez v. Pesquera, 2016 U.S. App. Lexis 7173, *7 (1st Cir. 2016). 21 Consideration of a motion to dismiss requires the court to assume the truth of all well- 22 plead facts and give the benefit of all reasonable inferences therefrom. A complaint that states a 23 claim plausible on its face survives a motion to dismiss. 24 Discussion 25 There is no controversy regarding the factual allegations in the Complaint and the parties 26 agree that that Puerto Rico law controls the legal issue before the court, that is, whether the legal 27 conclusions in the Complaint are supported by the facts, entitling the Plaintiff for the relief it 1 seeks. There is no controversy over the fact that Santander is a lien creditor with a valid security 2 agreement. Since the validity of the lien is not in question, the legal issue before the court is a 3 determination over what collateral the lien extends to, specifically if the lien extends to all contract 4 rights of the Debtors and the proceeds thereof, including any award resulting from the J&J 5 litigation. The issue before the court must be resolved under applicable Puerto Rico law to 6 determine the extent of Santander’s lien over the funds obtained by the Debtors under tort actions 7 pursuant to Law 75, the Puerto Rico Dealer’s Contracts Act, 10 L.P.R.A. §§ 278a – 278e. 8 The court must isolate the legal conclusions to determine if they plausibly narrate a claim 9 based on the factual allegations in the Complaint. To achieve this objective the court will engage 10 in the following analysis: (1) Identify the content of the security agreement as it relates to the 11 collateral given to guarantee the loan. The same is set forth in Section 2 of the Agreement “Grant 12 of Security” which was attached as Exhibit 3 to the cash collateral stipulation; (2) detail the 13 applicable statutory provisions to the legal controversy, principally Puerto Rico Law 75, 10 14 L.P.R.A. §§278a – 278e, and the Commercial Transactions Act of Puerto Rico, 19 L.P.R.A. 15 §§2211 – 2409; (3) analyze the holding by the First Circuit in In re American Cartage, Inc., 656 16 F.3d 82 (1st Cir. 2011); and (4) reach a legal conclusion based on the previous three 17 considerations. 18 1. The Security Agreement 19 Section 2 of the Security Agreement, Grant of Security, provides that the Debtors grant to 20 the Lenders “a security interest in and to all of the Grantor’s rights, title and interest in and to the 21 following, whether presently held or hereafter acquired (collectively, the “Collateral”).” There 22 are four separate descriptions of the assigned collateral: (a) Accounts; (b) Inventory; (c) Fixtures; 23 and (d) Products and Cash and Non-Cash proceeds of the foregoing Collateral. The two relevant 24 to the legal controversy before the court are (a) Accounts and (d) Products and Cash. These two 25 will be addressed in detail. Pursuant to the Security Agreement, references to the UCC in the 26 Security Agreement are to the Puerto Rico Commercial Transactions Act, as amended, and in 27 1 effect on the date of the agreement; and any additional security over collateral not in Puerto Rico 2 will be governed by the UCC in effect in such other jurisdiction. 3 “(a) All accounts (as defined in the UCC), receivables, accounts receivable, lease 4 receivables, contract rights, chattel paper, drafts, acceptances, instruments, writings 5 evidencing a monetary obligation or a security interest or a lease of goods, general 6 intangibles and other obligations of any kind, now or hereafter existing, whether or 7 not arising out of or in connection with the sale or lease of goods or the rendering of 8 services, and all rights now or hereafter existing in and all security agreements, leases, 9 and other contracts securing or otherwise relating to any such accounts, receivables, 10 account receivables, lease receivables, contract rights, chattel paper, drafts, 11 acceptances, instruments, writings evidencing a monetary obligation, or a security 12 interest or a lease of goods, general intangibles or obligations (collectively, the 13 “Receivables”); and 14 . . . 15 (d) All products and cash and non-cash proceeds of any and all of the foregoing 16 Collateral, including without limitation any rents, revenues, issues and profits arising 17 from the sale, lease, license, exchange, disposition or transfer of any of the foregoing 18 Collateral and, to the extent not otherwise included, all payments under insurance or 19 any indemnity, warranty or guaranty, payable by reason of loss or damage to or 20 otherwise with respect to any of the foregoing Collateral.” 21 Immediately following the description of the Collateral, in the last paragraph of Section 2 22 of the Security Agreement, there is the following statement: “The parties hereto agree that, except 23 to the extent overridden by applicable law, those agreements that constitute a part of the 24 Collateral, which by the terms thereof may not be assigned by the Grantors without the prior 25 consent of the other parties thereto, shall not be deemed to have been assigned pursuant hereto 26 and shall not be included within the Collateral until such time as all required consents to the 27 assignment contemplated hereunder have been duly obtained.” 1 The Collateral in the Security Agreement is broad and comprehensive, and does include 2 contract rights, general intangibles, and proceeds. However, there is no specific reference to 3 commercial tort claims. The court must determine if due to the tortious nature of an action under 4 Law 75, which gives rise to a commercial tort claim, the commercial tort claim is clearly identified 5 and described with specificity in the Security Agreement provisions regarding the Collateral 6 given by the Defendants to the Lenders. The court finds that commercial tort claims are not clearly 7 identified and described in the Security Agreement provisions regarding Collateral given by 8 Debtors to Santander.
9 2. Statutory Provisions: Puerto Rico Law 75, 10 L.P.R.A. §§278a – 278e, and the 10 Commercial Transactions Act of Puerto Rico, 19 L.P.R.A. §§2211 – 2409.
11 The source of the funds in question is the litigation of the Debtors/Defendants against J&J 12 for violation of the distribution rights under Law 75 resulting from the termination of their 13 distribution relationship. The court will first address the provisions in Law 75 and then the 14 provisions in the Commercial Transactions Act of Puerto Rico (“PR UCC”). Section 278a of Law 75 provides that “[n]otwithstanding the existence in a dealer's 15 contract of a clause reserving to the parties the unilateral right to terminate the existing 16 relationship, no principal or grantor may directly or indirectly perform any act detrimental to the 17 established relationship or refuse to renew said contract on its normal expiration, except for just 18 cause.” This section served as the basis for the actions before the U. S. District Court of Puerto 19 Rico for the termination of the distribution contracts. Its applicability and extent are determined 20 by the district court and not by the bankruptcy court in the case under consideration. This court only notes that the 1966 amendments added to the prohibition to “directly or indirectly perform 21 any act detrimental to the established relationship.” Such amendment strengthens the protection 22 afforded to the dealer. 23 Section 278b provides for the award of damages for the termination of the relationship 24 without just cause and states in its relevant part that “[i]f no just cause exists for the termination 25 of the dealer's contract for detriment to the established relationship, or for the refusal to renew 26 same, the principal shall have executed a tortious act against the dealer and shall indemnify it to the extent of the damages caused him, the amount of such indemnity to be fixed on the basis of 27 the following factors: . . .” This section creates and provides for the execution of a tortious act 1 when the principal terminates the dealer’s relationship without just cause. The damage factors are 2 only a guide to determine the amount of damages to be awarded. Marina Industrial, Inc. v. Brown 3 Boveri Corporation, 114 D.P.R. 64 (1983). The damages for a tortious act based on factors in 4 section 278b should be liberally construed in favor of the dealer. Computer Systems Corp. v. 5 General Automation, Inc., 599 F. Supp. 819 (D.P.R. 1984). 6 Section 278c states that “[t]he provisions of this chapter are of a public order and therefore the rights determined by such provisions cannot be waived. This chapter being of a remedial 7 character, should, for the most effective protection of such rights, be liberally interpreted; in the 8 adjudgment of the claims that may arise hereunder, the courts of justice shall recognize the right 9 in favor of whom may, effectively, have at his charge the distribution of activities, 10 notwithstanding the corporate or contractual structures or mechanisms that the principal or 11 grantor may have created or imposed to conceal the real nature of the relationship established.” 12 Therefore, actions under Law 75 are of public order, unwaivable, remedial, to be liberally interpreted in favor of the dealer, when considering the adjustment of claims that may arise under 13 Law 75. 14 The legal controversy before the court rests mainly on the provisions of the PR UCC. The 15 court will first identify several key definitions in the PR UCC to then apply them to the operational 16 and executory sections in the same. The PR UCC definitions are in 19 L.P.R.A. §2212. The 17 relevant ones to the controversy before the court are: 18 “(2) Account, except as used in account for, means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that 19 has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) 20 for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy 21 provided or to be provided, (vi) for the use or hire of a vessel under a charter or 22 other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game 23 of chance operated or sponsored by a State, governmental unit of a State, or person 24 licensed or authorized to operate the game by a State or governmental unit of a State. The term includes health-care-insurance receivables. The term does not 25 include (i) rights to payment evidenced by chattel paper or an instrument, (ii) 26 commercial tort claims, (iii) deposit accounts, (iv) investment property, (v) letter- of-credit rights or letters of credit, or (vi) rights to payment for money or funds 27 advanced or sold, other than rights arising out of the use of a credit or charge card 1 or information contained on or for use with the card. 2 . . (9) Cash proceeds. Means proceeds that are money, checks, deposit accounts, or 3 the like. 4 . . . (12) Collateral. Means the property subject to a security interest or agricultural lien. 5 The term includes: 6 (A) Proceeds to which a security interest attaches; (B) accounts, chattel paper, payment intangibles, and promissory notes that have 7 been sold, and 8 (C) goods that are the subject of a consignment. . . . 9 (13) Commercial tort claim. Means a claim arising in tort with respect to which: 10 (A) The claimant is an organization, or (B) the claimant is an individual and the claim: 11 (i) Arose in the course of the claimant's business or profession, and 12 (ii) does not include damages arising out of personal injury to or the death of an individual. 13 . . . 14 (42) General intangible. Means any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, 15 documents, goods, instruments, investment property, letter-of-credit rights, letters 16 of credit, life insurance policies, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software. 17 . . . 18 (44) Goods. Means all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed 19 under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops 20 grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program 21 embedded in goods and any supporting information provided in connection with a 22 transaction relating to the program if (i) the program is associated with the goods in such a manner that it customarily is considered part of the goods, or (ii) by 23 becoming the owner of the goods, a person acquires a right to use the program in 24 connection with the goods. The term does not include a computer program embedded in goods that consist solely of the medium in which the program is 25 embedded. The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment 26 property, letter-of-credit rights, letters of credit, money, or oil, gas, or other 27 minerals before extraction. . . . 1 (61) Payment intangible. Means a general intangible under which the account 2 debtor's principal obligation is a monetary obligation. . . . 3 (64) Proceeds, except as used in § 2369(b) of title. Means the following property: 4 (A) Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral; 5 (B) whatever is collected on, or distributed on account of, collateral; 6 (C) rights arising out of collateral; (D) to the extent of the value of collateral, claims arising out of the loss, 7 nonconformity, or interference with the use of, defects or infringement of rights in, 8 or damage to, the collateral, or (E) to the extent of the value of collateral and to the extent payable to the debtor or 9 the secured party, insurance payable by reason of the loss or nonconformity of, 10 defects or infringement of rights in, or damage to, the collateral.”
11 After considering the disposition in section 278b of Law 75 establishing that a principal’s 12 infringement of a dealer relationship without just cause is a tortious act and the definition of 13 commercial tort action in section 2112(13) of the PR UCC, the court concludes that the damages 14 award in question constitute a commercial tort claim. 15 The Security Agreement includes in Section 2(a) “contract rights” as Collateral to the loan. “Contract rights” is defined in the 1962 version of the UCC as “any right to payment under 16 a contract not yet earned by performance and not evidenced by an instrument or chattel paper.” 17 Under the PR UCC there is no definition of “contract rights.” The same arguably fall under the 18 general definition of “account” in section 2112(2). However, even if “contract rights” as defined 19 in the 1962 UCC may be considered as part of the Collateral, the same are not applicable to the 20 funds obtained through the exercise of the tortious right of action under the Law 75 statute because 21 the damages are the result of a tortious act and are not a payment under a contract not yet earned by performance. Therefore, the same are not proceeds to which the lien attaches. 22 Section 2218 of the PR UCC provides that “[e]xcept as otherwise provided in subsections 23 (c), (d), and (e) of this section, a description of personal property is sufficient, whether or not it is 24 specific, if it reasonably identifies what is described.” However, under subsection (e) a description 25 by type of collateral is an insufficient description when it concerns a commercial tort claim. The 26 description in the Security Agreement is insufficient as it does not mention commercial tort 27 claims. 3. In re American Cartage, Inc., 656 F.3d 82 (1st Cir. 2011). 1 The First Circuit in In re American Cartage considered a question “of first impression as 2 to the distinction between ‘commercial tort claims’ and ‘proceeds’” and concluded that the 3 disputed claims were commercial tort claims. The secured creditor argued that the claims against 4 the Debtor were proceeds of the collateral. The Debtor asserted that the disputed claims are 5 commercial tort claims, not proceeds, and as such, are not covered by the security interest. 6 The First Circuit held that creditors' rights in bankruptcy arise from the underlying substantive law creating the debtor's obligation and that the underlying substantive law is the law 7 of Massachusetts, a jurisdiction in which secured transactions are governed by a state-specific 8 iteration of Article 9 of the Uniform Commercial Code (UCC). See Mass. Gen. Laws ch. 106, §§ 9 9–101 to 9–709. The panel found as uncontested that the Debtor gave a security interest to the 10 lender in many of its assets; and that the question was whether the claims asserted “were caught 11 up within the sweep of this security interest.” This court notes that the issue before the First Circuit 12 in In re American Cartage is substantially similar to the legal issue in this case. The security interest in In re American Cartage extended to: 13 “all goods, inventory, equipment, accounts, accounts receivable, chattel paper, 14 documents, instruments, contract rights, general intangibles, investment property, 15 securities entitlements, deposit accounts, fixtures and other property, wherever located, now or hereafter belonging to [American Cartage] ... and in all proceeds, 16 insurance proceeds, substitutions, replacement parts, additions and accessions of 17 and/or to all of the foregoing.”
18 The court notes that the collateral in the case before the court is more comprehensive and 19 broader than the one described in In re American Cartage. However, neither specifically includes 20 and describes a commercial tort action. 21 The claims in In re American Cartage are claims for conversion, interference with 22 contractual relations, breach of fiduciary duty, and civil conspiracy. The First Circuit found that each of them sounds in tort. The claims in this adversary proceeding are a tort because the 23 applicable statute specifically provides that the infringement of a dealership relation is a tortious 24 act. 25 The First Circuit held that: 26 “Under Massachusetts law, commercial tort claims must be described with 27 specificity in a security agreement in order to be considered part of that agreement. Mass. Gen. Laws ch. 106, § 9–108(e)(1). This requirement places commercial tort 1 claims in stark contrast to other kinds of collateral, which may be defined broadly 2 by type as long as the description, even if not specific, “reasonably identifies what is described.” Id. § 9–108(a). Furthermore, an after-acquired property clause in a 3 security agreement cannot create a security interest in a commercial tort claim. Id. 4 § 9–204(b)(2). The claim must already exist when the parties enter into the security agreement. See id. cmt. 4; see also id. § 9–108 cmt. 5.” 5
6 In this case the applicable law is the PR UCC, which is in accord with the conclusion 7 reached by the First Circuit in In re American Cartage. In re American Cartage found that the security agreement did not specifically mention any 8 commercial tort claims as no such claims existed when the security agreement was signed. In this 9 case there is no specific reference in the Collateral to commercial tort claims and none existed at 10 the time the Security Agreement was signed. This reasoning was adopted by the court in In re 11 Alliance Insurance Group of Arkadelphia, Inc., 2019 WL 1992622, (W.D.Ark. February 12, 12 2019), holding that: 13 Because the tort claims that are at issue in this case were not specifically described in the parties' security agreements and, in fact, did not even exist at the 14 time the security agreements were entered into, the Court finds that the banks' 15 respective security agreements do not encompass the commercial tort claims that are at issue in this case. All commercial tort claims that existed when the debtor 16 filed his voluntary petition remain property of the debtor's estate. 17 The First Circuit in In re American Cartage found that the secured creditor tried to 18 characterize the claims as proceeds of collateral and held that “[t]his argument presents an issue 19 of first impression in this circuit. The question is whether the right to pursue a commercial tort 20 claim can be passed to a secured creditor as proceeds of original collateral. We conclude that it 21 cannot.” The reasoning involves the definition of proceeds. The First Circuit held that “we interpret the UCC and the case law to mean that the term ‘proceeds’ refers to the secured creditor's 22 right to value derived from the collateral, not to the mere act of attempting to recover that value.” 23 The First Circuit reasoning was applied in In re Alliance Insurance Group of Arkadelphia, Inc. 24 that concluded that “tortious interference with contractual relationship or conversion would 25 necessarily be related to damage to the original collateral.” Since the commercial tort claims in 26 the case before the court were not specified and identified in the Security Agreement, the damage 27 award is not related to the Collateral. 1 A key determination by the First Circuit in In re American Cartage and critical to the case 2 before the court is the following:
3 Of course, the UCC states that “[a] security interest in a tort claim ... may 4 exist under this Article if the claim is proceeds of other collateral.” U.C.C. § 9–102 cmt. 5(g). But this comment must be read in light of the UCC's statement that it is 5 a right to payment from the resolution of a tort claim, and not the claim itself, that 6 may constitute proceeds of collateral. “[Article 9] ... applies to assignments of ‘commercial tort claims' ... as well as to security interests in tort claims that 7 constitute proceeds of other collateral (e.g., a right to payment for negligent 8 destruction of the debtor's inventory).” Id. § 9–109 cmt. 15 (emphasis added). Viewed as a whole, Article 9 teaches that when a party has an interest in a 9 commercial tort claim as proceeds, what the secured party has is a right to the 10 recovery, not a right to the claim itself. An action for conversion is not proceeds; only the end product of that action—the settlement amount or award—constitutes 11 proceeds. 12 It is important to emphasize that in the above statement the First Circuit indicated that 13 “when a party has an interest in a commercial tort claim as proceeds, what the secured party has 14 is a right to the recovery, not a right to the claim itself.” In order for the secured creditor to have 15 a right to the recovery, as opposed to the claim, the party must have a right to the recovery. The 16 right to recovery of a commercial tort claim under the PR UCC requires that the same be clearly 17 identified and described in the security agreement. It was not so in this case. The First Circuit 18 reasoned that “ . . .treating commercial tort claims themselves as proceeds would blur any 19 meaningful distinction between the two categories.” Therefore, this court concludes that the 20 commercial tort claim was not included in the Security Agreement as part of the Collateral and, 21 thus, Santander does not have a right to the recovery of the funds resulting from the Johnson 22 litigation. 23 4. Legal Conclusion 24 Section 278b of Law 75 creates and provides for the execution of a tortious act when the 25 principal terminates the dealer’s relationship without just cause. The damages award in question 26 27 1 constitute a commercial tort claim within the definition of commercial tort action in section 2 2112(13) of the PR UCC due to the tortious nature of an action under Law 75. 3 Commercial tort claims are not clearly identified and described with specificity in the 4 Security Agreement provisions regarding the Collateral given by the Defendants to the Lenders. 5 Section 2218 of the PR UCC provides that “[e]xcept as otherwise provided in subsections (c), (d), 6 and (e) of this section, a description of personal property is sufficient, whether or not it is specific, 7 if it reasonably identifies what is described.” Subsection (e) provides that a description by type 8 of collateral is an insufficient description when it concerns a commercial tort claim. The 9 description in the Security Agreement is insufficient as it does not mention commercial tort 10 claims. In re American Cartage held that a security agreement that does not specifically mention 11 any commercial tort claims does not encompass the commercial tort claims that are at issue. In 12 this case there is no specific reference in the Collateral to commercial tort claims and none existed 13 at the time the Security Agreement was signed. Since the commercial tort claims in the case before 14 the court were not specified and identified in the Security Agreement, the damage award is not 15 related to the Collateral. 16 The court notes that the collateral in the case before the court is more comprehensive and broader than the one described in In re American Cartage. However, neither specifically included 17 and described a commercial tort action. 18 In order for the secured creditor to have a right to the recovery, as opposed to the claim, 19 the party must have a right to the recovery. The right to recovery of a commercial tort claim 20 under the PR UCC requires that the same be clearly identified and described in the security 21 agreement. It was not so in this case. 22 Therefore, this court concludes that the commercial tort claim was not included in the Security Agreement as part of the Collateral and, thus, Santander does not have a right to the 23 recovery of the funds resulting from the Johnson litigation. 24 CONCLUSION 25 In view of the foregoing, the court finds and concludes that the funds resulting from the 26 J&J litigation are a commercial tort claim and that the same was not clearly identified and 27 described in the Security Agreement. Therefore, the same are not Collateral. This legal conclusion 1 leads the court to determine that Santander’s lien over the funds obtained by the Debtors under tort actions pursuant to Law 75, the Puerto Rico Dealer’s Contracts Act, 10 L.P.R.A. §§ 278a — 278e are not proceeds to which the lien attaches. Thus, Santander’s action does not plausibly give 3 rise to an entitlement to the relief requested based on the factual allegations in the Complaint. 4 Consequently, the court grants Defendants’ motion to dismiss. Judgment will be entered 5 || accordingly. 6 IT IS SO ORDERED. 7 In San Juan, Puerto Rico, this 3"! day of April 2020. 8
10 unitdd states Bankruptcy Judge 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 -25-