1 IN THE UNITED STATES BANKRUPTCY COURT FOR 2 THE DISTRICT OF PUERTO RICO
3 4 IN RE: CASE NO. 14-06449 BKT 5 Chapter 11 6 CARLINA ORTEGA
8 Debtor(s) FILED & ENTERED ON 10/29/2014 9 ORDER 10 11 Before this court is the motion for relief of the automatic stay pursuant to 11 U.S.C. 12 §362(d)(1)&(2) filed by secured creditor LSREF2 Island Holdings, LTD. (Island Holdings) [Dkt. 13 No.14], as well as Debtor’s response [Dkt No. 24], supplement [Dkt No. 28] and reply [Dkt No. 43] 14 15 thereto. For the reasons set forth below, Island Holdings’ request for relief of the automatic stay is 16 denied. 17 I. Background 18 19 Debtor filed a voluntary petition under the provisions of chapter 13 of the Bankruptcy Code 20 on August 6, 2014 [Dkt. No. 1]. Debtor submitted her schedules on September 8, 2014 [Dkt No. 20]. 21 Debtor disclosed in her schedules an interest over her deceased father’s estate. The hereditary estate 22 23 includes several real estate properties. Debtor claims to have 42% participation on the hereditary 24 estate [Dkt No. 20, p. 5]. 25 Island Holdings is the owner and holder of a mortgage note and a mortgage deed which
encumbers one of the real properties of the hereditary estate, to which Debtor claims to have an interest [Dkt. No. 14]. The real property in question is located in Barrio Candelero Abajo de Humacao (the “Real Property”). As part of the loan agreement, the non-debtor borrowers (Debtor’s 1 parents) assigned the rents of the Real Property to Island Holdings. On August 28, 2014, Island 2 Holdings requested relief from the automatic stay in order to foreclose on the Real Property [Dkt. 3 4 No. 14]. 5 Island Holdings’ allegations in support of its claim for relief are twofold. First, that Debtor is 6 part of an hereditary community and/or hereditary estate that has not been distributed or adjudicated. 7 8 The Real Property is part of that hereditary or probate estate. Therefore, the Real Property does not 9 belong to the Debtor and consequentially is not part of the estate. Island Holdings’ asserts that the 10 “probate exception” is controlling and deprives this court of subject matter jurisdiction to adjudicate 11 12 the percentage of participation of the Debtor until there is a final adjudication in the state court. 13 Furthermore, Island Holdings asserts that prior to the filing of the petition the state court adjudicated 14 Island Holdings rights over the real property’s proceeds and rents, and issued an order and writ for 15 16 execution in favor of Island Holdings, thus further preventing this court from adjudicating over any 17 related amounts. Island Holding concedes that the Debtor owns an interest or right to a distribution 18 of a fraction of the hereditary estate, but until the estate is resolved, the Debtor and its bankruptcy 19 20 estate have no property interest in the Real Property itself. 21 Debtor responds to this jurisdictional point by arguing that the Court need not assign or 22 adjudicate on the percentage of Debtor’s interest in the property. Rather, Debtor asks that the Court 23 24 finds that the Debtor has a legally recognizable interest to the Real Property. Debtor’s purported 25 interest stems from the possession and control over the Real Property, and from the future interest
over the distribution of the Real Property. The Debtor holds that these interests suffice to award the Debtor the protection of the automatic stay upon the Real Property. Island Holdings’ second allegation is on the merits of the request for relief from the 1 automatic stay. The Debtor thoroughly briefed and discussed its opposition to the request for relief 2 from stay. However, because the court concludes that the Debtor does not survive the first 3 4 jurisdictional prong, there is no need to go into the merits of the request for relief. 5 II. Discussion 6 A. Jurisdiction in general 7 8 The jurisdiction of the bankruptcy court, like that of any other federal court, is limited by 9 statute. Subsections 1334(a), (b) and (e) of title 28, United States Code, establish the jurisdiction of 10 the federal district courts over title 11 cases, civil proceedings in title 11 cases and property of the 11 12 title 11 estate. Particularly, Section 1334(b) of Title 28 provides that “the district courts shall have 13 original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or 14 ‘related to’ cases under title 11.” This jurisdiction is original and exclusive as to the title 11 case 15 16 itself and property of the estate. In turn, 28 U.S.C. § 157(a) permits the district courts to refer most of 17 that jurisdiction to the bankruptcy courts established by 28 U.S.C. § 151 as units of the district 18 courts. 19 20 At its essence, bankruptcy court jurisdiction exists in cases “under” the United States 21 Bankruptcy Code, 11 U.S.C. §§ 101 et seq., and those cases “arising under,” “arising in,” and 22 “related to” title 11. 28 U.S.C. § 1334(b); 28 U.S.C. § 157(a). Thus, a bankruptcy court may hear and 23 24 finally determine all core bankruptcy proceedings; the parties’ agreement is not needed. 28 U.S.C. § 25 157(b). ). In non-core “related to” proceedings, however, only the district court may enter final
orders absent consent of the parties. 28 U.S.C. § 157(c). The court is not going to expound on the issue of jurisdiction inasmuch as prior opinions of this Court have covered this topic extensively. 1 B. Property of the estate 2 A bankruptcy estate is created upon the commencement of a bankruptcy case. Section 541(a) 3 4 defines the property that is considered part of this bankruptcy estate. In relevant part, property of the 5 estate includes all legal or equitable interests of the debtor in property, wherever located or by 6 whomever held, as of the commencement of the case. 11 U.S.C. § 541(a)(1). This definition is 7 8 limited to a point in time –the commencement of the case. As a result, under section 541 a Debtor 9 cannot be revested with property lost prepetition, such as through foreclosure or eviction. 5 Collier 10 on Bankruptcy ¶541.03 (16th ed.) 11 12 C. The Probate Exception 13 The “probate exception” is a court-made exception to federal bankruptcy jurisdiction. In the 14 case of Marshall v. Marshall, 126 S. Ct. 1735, 1748 (U.S. 2006), the U.S. Supreme Court held that 15 16 such exception, however, is a narrow one. Jurisdictional concerns reserve to state probate courts “the 17 administration of a decedent’s estate; it also precludes federal courts from endeavoring to dispose of 18 property that is in the custody of a state probate court. But it does not bar federal courts from 19 20 adjudicating matters outside those confines and otherwise within federal jurisdiction.” Marshall v. 21 Marshall, supra. 22 Given the narrowness of the exception, this Court must consider the status and relationship 23 24 of the probate estate being administered in state court with the request for relief brought in the 25 bankruptcy court by Island Holdings. But first, we look into the somewhat related case of In re
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR 2 THE DISTRICT OF PUERTO RICO
3 4 IN RE: CASE NO. 14-06449 BKT 5 Chapter 11 6 CARLINA ORTEGA
8 Debtor(s) FILED & ENTERED ON 10/29/2014 9 ORDER 10 11 Before this court is the motion for relief of the automatic stay pursuant to 11 U.S.C. 12 §362(d)(1)&(2) filed by secured creditor LSREF2 Island Holdings, LTD. (Island Holdings) [Dkt. 13 No.14], as well as Debtor’s response [Dkt No. 24], supplement [Dkt No. 28] and reply [Dkt No. 43] 14 15 thereto. For the reasons set forth below, Island Holdings’ request for relief of the automatic stay is 16 denied. 17 I. Background 18 19 Debtor filed a voluntary petition under the provisions of chapter 13 of the Bankruptcy Code 20 on August 6, 2014 [Dkt. No. 1]. Debtor submitted her schedules on September 8, 2014 [Dkt No. 20]. 21 Debtor disclosed in her schedules an interest over her deceased father’s estate. The hereditary estate 22 23 includes several real estate properties. Debtor claims to have 42% participation on the hereditary 24 estate [Dkt No. 20, p. 5]. 25 Island Holdings is the owner and holder of a mortgage note and a mortgage deed which
encumbers one of the real properties of the hereditary estate, to which Debtor claims to have an interest [Dkt. No. 14]. The real property in question is located in Barrio Candelero Abajo de Humacao (the “Real Property”). As part of the loan agreement, the non-debtor borrowers (Debtor’s 1 parents) assigned the rents of the Real Property to Island Holdings. On August 28, 2014, Island 2 Holdings requested relief from the automatic stay in order to foreclose on the Real Property [Dkt. 3 4 No. 14]. 5 Island Holdings’ allegations in support of its claim for relief are twofold. First, that Debtor is 6 part of an hereditary community and/or hereditary estate that has not been distributed or adjudicated. 7 8 The Real Property is part of that hereditary or probate estate. Therefore, the Real Property does not 9 belong to the Debtor and consequentially is not part of the estate. Island Holdings’ asserts that the 10 “probate exception” is controlling and deprives this court of subject matter jurisdiction to adjudicate 11 12 the percentage of participation of the Debtor until there is a final adjudication in the state court. 13 Furthermore, Island Holdings asserts that prior to the filing of the petition the state court adjudicated 14 Island Holdings rights over the real property’s proceeds and rents, and issued an order and writ for 15 16 execution in favor of Island Holdings, thus further preventing this court from adjudicating over any 17 related amounts. Island Holding concedes that the Debtor owns an interest or right to a distribution 18 of a fraction of the hereditary estate, but until the estate is resolved, the Debtor and its bankruptcy 19 20 estate have no property interest in the Real Property itself. 21 Debtor responds to this jurisdictional point by arguing that the Court need not assign or 22 adjudicate on the percentage of Debtor’s interest in the property. Rather, Debtor asks that the Court 23 24 finds that the Debtor has a legally recognizable interest to the Real Property. Debtor’s purported 25 interest stems from the possession and control over the Real Property, and from the future interest
over the distribution of the Real Property. The Debtor holds that these interests suffice to award the Debtor the protection of the automatic stay upon the Real Property. Island Holdings’ second allegation is on the merits of the request for relief from the 1 automatic stay. The Debtor thoroughly briefed and discussed its opposition to the request for relief 2 from stay. However, because the court concludes that the Debtor does not survive the first 3 4 jurisdictional prong, there is no need to go into the merits of the request for relief. 5 II. Discussion 6 A. Jurisdiction in general 7 8 The jurisdiction of the bankruptcy court, like that of any other federal court, is limited by 9 statute. Subsections 1334(a), (b) and (e) of title 28, United States Code, establish the jurisdiction of 10 the federal district courts over title 11 cases, civil proceedings in title 11 cases and property of the 11 12 title 11 estate. Particularly, Section 1334(b) of Title 28 provides that “the district courts shall have 13 original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or 14 ‘related to’ cases under title 11.” This jurisdiction is original and exclusive as to the title 11 case 15 16 itself and property of the estate. In turn, 28 U.S.C. § 157(a) permits the district courts to refer most of 17 that jurisdiction to the bankruptcy courts established by 28 U.S.C. § 151 as units of the district 18 courts. 19 20 At its essence, bankruptcy court jurisdiction exists in cases “under” the United States 21 Bankruptcy Code, 11 U.S.C. §§ 101 et seq., and those cases “arising under,” “arising in,” and 22 “related to” title 11. 28 U.S.C. § 1334(b); 28 U.S.C. § 157(a). Thus, a bankruptcy court may hear and 23 24 finally determine all core bankruptcy proceedings; the parties’ agreement is not needed. 28 U.S.C. § 25 157(b). ). In non-core “related to” proceedings, however, only the district court may enter final
orders absent consent of the parties. 28 U.S.C. § 157(c). The court is not going to expound on the issue of jurisdiction inasmuch as prior opinions of this Court have covered this topic extensively. 1 B. Property of the estate 2 A bankruptcy estate is created upon the commencement of a bankruptcy case. Section 541(a) 3 4 defines the property that is considered part of this bankruptcy estate. In relevant part, property of the 5 estate includes all legal or equitable interests of the debtor in property, wherever located or by 6 whomever held, as of the commencement of the case. 11 U.S.C. § 541(a)(1). This definition is 7 8 limited to a point in time –the commencement of the case. As a result, under section 541 a Debtor 9 cannot be revested with property lost prepetition, such as through foreclosure or eviction. 5 Collier 10 on Bankruptcy ¶541.03 (16th ed.) 11 12 C. The Probate Exception 13 The “probate exception” is a court-made exception to federal bankruptcy jurisdiction. In the 14 case of Marshall v. Marshall, 126 S. Ct. 1735, 1748 (U.S. 2006), the U.S. Supreme Court held that 15 16 such exception, however, is a narrow one. Jurisdictional concerns reserve to state probate courts “the 17 administration of a decedent’s estate; it also precludes federal courts from endeavoring to dispose of 18 property that is in the custody of a state probate court. But it does not bar federal courts from 19 20 adjudicating matters outside those confines and otherwise within federal jurisdiction.” Marshall v. 21 Marshall, supra. 22 Given the narrowness of the exception, this Court must consider the status and relationship 23 24 of the probate estate being administered in state court with the request for relief brought in the 25 bankruptcy court by Island Holdings. But first, we look into the somewhat related case of In re
Garcia, 507 B.R. 32, 43 (1st Cir.BAP 2014), recently decided by the Bankruptcy Appellate Panel for the First Circuit (“BAP”). In Garcia, the chapter 7 trustee sought from the bankruptcy court (1) a determination that the debtors had a 78.54 percent interest in the sale proceeds of certain properties 1 of a probate estate, and (2) an order directing the turnover of such funds, which had been consigned 2 to the probate court. The assets of the probate estate had not been adjudicated or distributed at the 3 4 time of the filing of the bankruptcy petition. The assets had remained at all times in the possession of 5 the probate court. The BAP found that the assets never ceased to be part of the probate estate. As a 6 result, the BAP held that the funds had not become property of the Debtors, and therefore they never 7 8 became property of their bankruptcy estate. The BAP concluded that “[a]t most, the Debtors owned a 9 right to distribution of a fraction of the hereditary estate; until the funds are distributed, the Debtors 10 and their bankruptcy estate have no property interest in the funds themselves. Therefore, the funds in 11 12 question are not property of the bankruptcy estate.” In re Garcia, 507 B.R. at 43. This Court is 13 inclined to follow BAP’s rationale. 14 D. State court action 15 16 It is undisputed that the Debtor holds an interest in part of a hereditary community that has 17 not been adjudicated by the probate court. The Real Property is part of that probate estate. The assets 18 of the probate estate had not been distributed as of the time of the filing of the instant bankruptcy 19 20 petition. The assets of the probate estate have remained at all times in the possession of the probate 21 court. 22 Furthermore, before the filing of the petition, Island Holdings obtained a judgment from the 23 24 probate court adjudicating to Island Holdings the rights over the Real Property’s proceeds and rents, 25 and an order and writ for its execution.
Here, as in the case of In re Garcia, the Real Property is still an asset of the probate estate, which has not been distributed and has not ceased to be part of the probate estate. As a result, the Real Property is not property of the Debtor, and therefore it did not become property of her 1 || bankruptcy estate. At most, the Debtor owns a right to a potential future distribution of a fraction o 2 the hereditary estate. In re Garcia, 507 B.R. 32, 43 (1st Cir.BAP 2014). The Debtor and he 3 4 || bankruptcy estate have no property interest in the real property itself. And so, the Real Property is no > || property of this bankruptcy estate. Id. 6 Consequently, the Court finds Island Holding’s arguments on lack of subject matte 4 g || jurisdiction persuasive. Therefore, the Court concludes that it lacks jurisdiction to adjudicate on th ? || merits of any request for relief over the Real Property. 10 WHEREFORE, IT IS ORDERED that the request for relief of the automatic stay shall be 11 12 it hereby is, DENIED insofar the Court lacks jurisdiction to adjudicate on the merits of sai 13 Il relief. 14 SO ORDERED 15 16 San Juan, Puerto Rico, this 29th day of October, 2014. 17 19 Brian K. Tester 20 U.S. Bankruptcy Judge 21 22 23 24 25