In re: Eliseo Morales Garcia and Maribel Mena Melendez v. Orlando Gonzalez Claudio; Mercedes Gonzalez Claudio; et al.

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: March 26, 2012
• Docket: 10-00170
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 IN RE: : CASE NO. 04-12461 (ESL) 3 : ELISEO MORALES GARCIA : 4 MARIBEL MENA MELENDEZ : : 5 Debtors : CHAPTER 13 : 6 NOREEN WISCOVITCH RENTAS : : Plaintiff/Trustee : ADVERSARY NO. 10-00170 (ESL) 7 : vs. : 8 : ORLANDO GONZALEZ CLAUDIO; : 9 MERCEDES GONZALEZ CLAUDIO; : ET AL. : 10 : Defendants : 11 ____________________________________: 12 OPINION AND ORDER 13 Before this court is the Motion to Dismiss under Rule 12(b)(1) of the Federal Rules of Civil 14 Procedure and Pursuant to [the] Supreme Court’s Decision in Stern v. Marshall (the “Motion to 15 Dismiss”, Docket No. 83) filed by codefendants Héctor and René, both Torres Dávila (the “Torres 16 Defendants”), claiming that this court lacks subject-matter jurisdiction to entertain this adversary 17 proceeding. Plaintiff filed her Answer thereto and a Supplemental Answer to Motion to Dismiss 18 (Docket Nos. 92 & 104) asserting that this court has subject-matter jurisdiction to entertain this core 19 turnover adversary proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). For the reasons stated 20 herein, the Torres Defendants’ Motion to Dismiss is hereby denied. 21 Procedural Background 22 Debtors Eliseo Morales García and Maribel Mena Meléndez filed a Voluntary Chapter 11 23 Bankruptcy Petition on December 9, 2004, Case No. 04-12461 (the “Lead Case”). On May 28, 2009, 24 the case was converted to a Chapter 7 upon Debtors’ request. See Lead Case Docket Nos. 205 & 25 207. On May 29, 2009, Noreen Wiscovitch-Rentas was appointed as Chapter 7 Trustee (the 26 “Trustee” or “Plaintiff”) for this case. See Lead Case Docket No. 208. 27 During the course of the Lead Case, two previous adversary proceedings were filed. The first 28 one (No. 05-00102) was filed by Debtors against Hon. Luisa Colom García (Judge of the Puerto Rico Court of First Instance, Superior Court of Bayamon) and the members of the estate of María Josefa, 1 María de las Mercedes and José Antonio González Rodríguez, which included the Torres Defendants 2 (the “González Estate”), to declare null and void a public auction of real property belonging to the 3 González Estate and to recover damages for an alleged violation of the automatic stay provisions of 4 11 U.S.C. § 362(a). In this adversary proceeding, the this court rendered an Opinion & Order (Adv. 5 Proc. 05-00102 Docket No. 145) on December 18, 2007 whereby it asserted jurisdiction under 11 6 U.S.C. §§ 157 & 1334 but proceeded to dismiss it under Fed. R. Civ. P. 12(b)(1) for failure to state 7 a claim upon which relief could be granted. In the Opinion & Order, this court expressly adopted 8 a determination made by the Puerto Rico Court of Appeals (the “PR Court of Appeals”) ruling that 9 Debtors “own 78.54% of the Gonzalez Estate”, which “means that they have a credit against the 10 product of the sale of the subject properties and does not imply ownership of the real properties 11 owned by the Gonzalez Estate”, and that the Bankruptcy Court has “exclusive jurisdiction to 12 determine what is property of the bankruptcy estate” (Adv. Proc. 05-00102, Docket No. 145, p. 17). 13 In the instant adversary proceeding filed by the Chapter 7 Trustee on October 29, 2010, 14 Plaintiff seeks a determination that Debtors’ Bankruptcy Estate has a 78.54% or approximately 15 $2,878,491 in the proceeds of the sale of certain real properties belonging to the González Estate. 16 Thus, as proposed by Plaintiff, after this court determines that 78.54% of the sale proceeds are 17 property of the estate, it may order the Clerk of the Puerto Rico Court of First Instance, Superior 18 Court of Bayamon (the “PR Court”), to transfer the funds representing approximately the amount of 19 $2,878491.00, plus accrued interests, corresponding to Debtor’s participation in the public auction 20 of the properties of the González Estate. The proceeds are consigned at the PR Court. See Docket 21 No. 1. 22 On April 6, 2011, the Torres Defendants filed their Answer to the Complaint (Docket No. 45). 23 On October 3, 2011, the Torres Defendants filed the Motion to Dismiss alleging that: (I) the Courts 24 of the Commonwealth of Puerto Rico have assumed jurisdiction over the controversy which Plaintiff 25 wishes to litigate in Bankruptcy Court; (ii) before the commencement of the instant adversary, the 26 validity of the sale contracts upon which Debtors acquired the 78.54% participation of the González 27 Estate had been challenged before the PR Court and the PR Court of Appeals; and (iii) this court 28 lacks subject-matter jurisdiction pursuant to Stern v. Marshall, 131 S. Ct. 2594, 180 L.Ed. 2d 475 2 1 (2011), because “claims that are keyed only to state law rights or privileges are to be left to the state 2 courts to decide”1. The Torres Defendants further sustain that because the PR Courts assumed 3 jurisdiction over the validity of the contracts controversy, this adversary proceeding is non-core in 4 this case pursuant to 28 U.S.C. § 157(b)(2), and that the Stern decision precludes this court to 5 entertain it since it is purely a matter of state law with no federal claims or issues involved and 6 therefore this court has no authority to intervene and deprive state judicial authorities of their duty 7 and right to rule upon state claims. 8 On October 18, 2011, the Trustee filed an Answer to the Motion to Dismiss (Docket No. 92) 9 arguing that this case is a core proceeding under Section 157(b)(2) of the Bankruptcy Code and that 10 it is distinguishable from Stern because contrary to the latter, which was a defamation case and a 11 tortious interference claim that had nothing to do with the administration of the bankruptcy estate, 12 in the instant case the Trustee is particularly requesting the turnover of the property of the bankruptcy 13 estate, namely the monies deposited at the PR Court. Plaintiff concludes that a turnover proceeding 14 is a “matter concerning the administration of the estate” under 11 U.S.C. § 157(b)(2)(A) and (O). 15 See ¶¶ 7-8 of the Trustee’s Answer (Docket No. 92, p. 2). 16 A pretrial hearing was held on October 21, 2011 in which the parties were granted 21 days 17 to supplement their respective Motion to Dismiss (Docket No. 83) and Answer thereto (Docket No. 18 92). The hearing was continued without a date pending the resolution of the jurisdictional issue 19 raised by the Torres Defendants. See the Minute Entry of the pretrial hearing at Docket No. 95. 20 On November 18, 2011, the Trustee filed the Supplemental Answer to Defendants’ Motion 21 to Dismiss (the “Supplemental Answer”, Docket No. 104) after having requested a brief extension of 22 5 days to do so (Docket No. 102), which the court granted on November 16, 2011 (Docket No. 103). 23 In it, Plaintiff avers that Stern should be narrowly construed and that although state courts have 24 proficiency in certain matters such as divorce, alimony and child custody decrees, federal courts are 25 not bared from adjudicating matters within federal jurisdiction. Plaintiff further contends that she 26 seeks in the instant case a declaratory relief to participate in the distribution of the González Estate, 27 28 1 See ¶ 14 of the Motion to Dismiss (Docket No. 83, p. 3). 3 1 which has been liquidated and which proceeds are currently consigned in the PR Court. Plaintiff 2 that those proceeds are property of the bankruptcy estate under 11 U.S.C. § 541 and that 3 consequently she is entitled to recover them for the bankruptcy estate under 11 U.S.C. § 542. 4 The Torres Defendants did not supplement their Motion to Dismiss nor replied to Plaintiff's 5 Supplemental Answer. 6 Applicable Law & Analysis 7 = Stern v. Marshall 8 In 1978, Congress enacted a new Bankruptcy Code, created a new system of non-Article III’ 9 bankruptcy courts, and vested them with broad jurisdiction to hear and determine all “civil 10 |lproceedings arising under title 11 or arising in or related to cases under title 11.” 28 U.S.C. § 1471(b) 11 |\(repealed 1984). A few years later, in 1982, the United States Supreme Court declared said Section 12 unconstitutional because it authorized non-Article II bankruptcy courts to finally decide a state 13 breach of contract action. See Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 14 50, 87 (1982). Asa result, in 1984 Congress revamped the bankruptcy jurisdictional scheme 15 recasting non-Article “unit[s]” of the district court “to be known as the bankruptcy court for that 16 ||district’’® and enacted Sections 1334(b) and 157 of the Code of Judiciary and Judicial Procedure to 17 |lregulate the exercise of bankruptcy jurisdiction. 28 U.S.C. §§ 1334(b) and 157. Section 1334 grants 18 |lfederal district courts jurisdiction over all bankruptcy proceedings. Section 157(a) permits district 19 to delegate that authority to the bankruptcy courts in their districts, who can in turn hear and 20 |\determine all core proceedings arising under Title 11, subject to ordinary appellate review. See 28 21 §§ 1334, 157(a) & 157(b)(1). Furthermore, Section 157(c)(1) authorizes bankruptcy judges 22 |Ito only “hear” proceedings that are “related to” a case under Title 11, but cannot enter a final 23 |ldecision. 28 U.S.C. § 157(c)(1). Bankruptcy judges can entertain those “related to” cases, but can 24 J—_____—— 25 * Article III of the United States Constitution mandates that “[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and 26 || establish,” and provides that the judges of those constitutional courts “shall hold their Offices during good Behaviour” and “receive for their Services[ ] a Compensation[ ] [that] shall not be diminished” during their tenure. 27 || Also see Stern v. Marshall, 131 S. Ct. at 2595. 28 * 28 U.S.C. § 151.

1 issue proposed findings of facts and conclusions of law, which can be reviewed de novo by 2 Article HI judges. See Stern v. Marshall, 131 S. Ct. at 2610; 28 U.S.C. § 157(c)(1). 3 Stern v. Marshall held that bankruptcy courts, as a constitutional matter, cannot enter a final 4 ljudgment on a counterclaim that did not arise under Title 11 or in a case under Title 11 arising out 5 state law with no link to federal law or regulations, even when 28 U.S.C. § 157(b)(2)© grants such 6 authority. The two controversies in that case were: (J) whether the Bankruptcy Court had the 7 statutory authority under 11 U.S.C. § 157(b) to issue a final judgment on a counterclaim regarding 8 alleged tortious interference with the expectancy ofa gift; and (i) if statutory authority was found, 9 |whether conferring such authority on the bankruptcy court was or not constitutional. Id. at 2599. In 10 analysis, the Supreme Court explained that bankruptcy Judges are not Article III judicial officers, 11 jland thus they have limited authority to resolve certain causes of action that the debtor (or bankruptcy 12 trustees) may hold against others. Id. at 2608-2612. Therefore, the Supreme Court determined that 13 |\“although ... Section 157(b)(2)© [of the Bankruptcy Code] permits the Bankruptcy Court to enter [a] 14 judgment on [a tortious interference] counterclaim, Article III of the Constitution does not.” 15 |\Id. at 2608. The reasoning is the following: “[w]hen a suit is made of the stuff of the traditional 16 jlactions at common law tried by the courts at Westminster in 1789 and is brought within the bounds 17 federal jurisdiction, the responsibility for deciding that suit rests with Article II judges in Article 18 III courts.” Id. at 2609 (quotations omitted). Accordingly, in its lengthy analysis to determine when 19 |lbankruptcy courts can issue final judgments, the Supreme Court reasoned that “Congress may not 20 |Ibypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the 21 |\question is whether the action at issue stems from the bankruptcy itself or would necessarily 22 resolved in the claims allowance process.” Id. at 2618 (original italics; emphasis supplied). 23 This does not mean that the bankruptcy courts are completely devoid of jurisdiction to hear such 24 |Imatters. See Refco, Inc. v. Krischner, 461 B.R. 181, 184 (S.B.D.N.Y. 2011) (explaining that the 25 _v. Marshall analysis “is not a question about the [bankruptcy] court’s subject-matter 26 |\jurisdiction”, but rather about the court’s “ability to issue a final judgment”). It simply means that 27 |jif the bankruptcy court entertains them, it may only address them by submitting proposed findings 28 |lof fact and conclusions of law (unless the parties otherwise expressly consent in writing). Also see

1 |McCarthy v. Wells Fargo Bank, N.A. (In re El-Atrari), 2011 U.S. Dist. LEXIS 133423 at *8 2 |(Bankr.E.D.Va., November 18, 2011) (“Regardless of whether the effect of Stern was to remove 3 |Icertain proceedings from the list of ‘core proceedings’ under § 157(b)(2) or simply to strike the 4 ‘and determine’ from § 157(b)(1), it does not follow that bankruptcy courts have lost all power 5 hear a fraudulent conveyance proceedings. ... [T]he bankruptcy court retains the authority to 6 |jsubmit proposed findings of fact and conclusions of law that the district court then considers before 7 jlentering a final judgment. § 157(c)(1).”) 8 In summary, when considering their authority to issue final orders, bankruptcy courts must 9 |/first consider whether they have the statutory authority to issue a final order in a matter before them. 10 Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). Stern v. Marshall, supra, further mandates 11 when doing so, a bankruptcy court must first consider whether it has the necessary statutory 12 jlauthority and if it does it must then consider if it has the constitutional authority to finally adjudicate 13 dispute. 14 The decision in Central Va. Cmty. College v. Katz, 546 U.S. 356, 363-364 (2006), provides 15 |Ithe following guidance as to what constitutes a “fundamental bankruptcy matter”: “Critical features 16 every bankruptcy proceeding are the exercise of exclusive jurisdiction over all of the debtor’s 17 |property, the equitable distribution of that property among the debtor’s creditors, and the ultimate 18 |ldischarge that gives the debtor a ‘fresh start’ by releasing him, her, or it from further liability for old 19 |debts.” 20 The instant case does not involve a counterclaim nor is it solely based on state law: it involves 21 request by the Trustee for the turnover of property that allegedly belongs to the bankruptcy estate 22 llunder 11 U.S.C. §§ 541 & 542. As discussed below, that is one of the most fundamental core- 23 |lprocedures in bankruptcy cases that stems from federal law. The Stern doctrine does not impair this 24 |Icourt’s subject-matter jurisdiction over property of the bankruptcy estate. 25 Turnover of property to the bankruptcy estate 26 Central to bankruptcy’s collective debt-collection scheme is the creation of the bankruptcy 27 under Section 541 of the Bankruptcy Code, 11 U.S.C. § 541. See William L. Norton, Jr. & 28 ||William L. Norton III, Norton Bankruptcy Law and Practice, 3" Ed. § 61:1 (2012). After all, it is

1 the bankruptcy estate that creditor’s claims will be satisfied. Id. Notwithstanding, when a 2 |\debtor files for bankruptcy, some of his/her/its property may be in possession of third parties. A 3 may gain possession of this property to add to the debtor’s pool of assets through a turnover 4 llorder pursuant to Section 542(a) of the Bankruptcy Code, which requires a third party in possession 5 “property that the trustee may use, sell, or lease under § 363” to deliver that property to the trustee. 6 }11 U.S.C. § 542. Also see William D. Warren & Daniel J. Bussel, Bankruptcy, Foundation Press, 7 Ed. 2009, p. 36. 8 Section 542 was added to the Bankruptcy Code as part of the Bankruptcy Reform Act of 1978 9 |to expand the trustee’s power to “bring into the estate property in which the debtor did not have a 10 |lpossessory interest at the time the bankruptcy proceedings commenced,” thereby ensuring that a 11 broad range of property is included in the bankruptcy estate. Braunstein v. McCabe, 571 F.3d 108, 12 (1* Cir. 2009), citing United States v. Whiting Pools, Inc., 462 U.S. 198, 205, 207-08, 103 S. Ct. 13 12309, 76 L. Ed. 2d 515 (1983). It allows bankruptcy courts “to reach property in the hands of ... 14 lIcreditors and to expand the turnover power beyond reorganization to liquidation cases (as 15 |lrecommended by the National Bankruptcy Conference).” Braunstein v. McCabe, 571 F.3d at 121. 16 |/Turnover disputes are core proceedings pursuant to Section 157(b)(2)(E) of the Code of Judiciary and 17 |Judicial Procedure, 28 U.S.C. § 157(b)(2)(E). Still, as previously discussed, that is not enough for 18 court to be able to issue a final determination on the controversy: “the question is whether the 19 jlaction at issue stems from the bankruptcy itself or would necessarily be resolved in the claims 20 |jallowance process.” Stern v. Marshall, supra, 1318S. Ct. at 2618. 21 In the case at bar, the Torres Defendants allege lack of subject-matter jurisdiction because 22 Courts of Puerto Rico have assumed jurisdiction over the controversy which the plaintiff wishes 23 litigate in Bankruptcy Court”. Motion to Dismiss, Docket No. 83, p. 3, § 15. However, the Torres 24 ||Defendants have not placed this court in a position to even evaluate which controversies or 25 |lallegations have been brought before the PR Courts. Moreover, the PR Court of Appeals already 26 that this court has “exclusive jurisdiction to determine what is property of the bankruptcy 27 |lestate”. See the Opinion & Order issued in Adv. Proc. 05-00102, Docket No. 145, p. 17. This court 28 that a turnover action is a fundamental bankruptcy matter that “stems from the bankruptcy

1 and “would necessarily be resolved in the claims allowance process” because it intricately 2 on the proper constitution of the bankruptcy estate. Stern v. Marshall, 1318S. Ct. at 2618. As 3 in Braunstein v. McCabe, a turnover proceeding “invokes the [bankruptcy] court’s most basic 4 llequitable powers to gather and manage the property of the property of the estate”. 571 F. 3d at 122. 5 Therefore, this court has subject-matter jurisdiction to entertain the instant core adversary proceeding 6 can ultimately issue a final determination on its merits in accordance with Stern v. Marshall. 7 Conclusion 8 In view of the foregoing, the Torres Defendants’ Motion to Dismiss is hereby denied. 9 SO ORDERED. 10 In San Juan, Puerto Rico, this 26" day of March, 2012. 11 7 □□ Ap dene 14 United States Bankruptcy Judge 15 16 17 18 19 20 21 22 23 24 25 26 27 28