In re: Empresas Inabon, Inc.; Wigberto Lugo Mender, Trustee v. Centro de Recaudacion de Ingresos Municipales; Hon. Norman E. Foy Santiago, Executive Director of Centro de Recaudacion de Ingresos Municipales

Opinion

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 1 5 IN RE: : CASE NO. 96-06038

3 EMPRESAS INABON, INC., : CHAPTER 7 4 Debtor : 5 WIGBERTO LUGO MENDER, Trustee, : ADV. NO. 06-0124 6 : Plaintiff : ? : v. : 8 .

9 CENTRO DE RECAUDACION DE : INGRESOS MUNICIPALES; HON. : 10 NORMAN E. FOY SANTIAGO, Executive : Director of Centro de Recaudacion de : Ingresos Municipales, : 12 Defendant : 13 14 OPINION AND ORDER ® Before the court are cross-motions for summary judgment filed by the trustee on 16 November 22, 2006 (dkt. #16) and by the Municipal Revenue Collection Center 17 13 (“CRIM”) on January 2, 2007 (dkt. #17), as well as each party’s opposition. For the

19 reasons set forth below, the Trustee’s motion is granted and CRIM’s motion is denied. 20 Uncontested Material Facts 1. Debtor, Empresas Inabon, Inc. (“Inabon”) filed a petition for reorganization 22 under chapter 11 of the Bankruptcy Code on August 6, 1996. 23 0 2. The Chapter 11 Plan dated November 15, 1999, as supplemented on May 10,

95 2000, was confirmed on September 8, 2000. The plan contemplates the sale of real estate

belonging to the debtor and its principals. 1 3. The case was converted to chapter 7 on August 31, 2005, and plaintiff herein 2 was appointed the chapter 7 trustee. 3 . 4. The assets of the estate included a real property located at Barrio Coto Laurel 4 in Ponce, Puerto Rico.

6 5. The property is described in the Property Registry as follows: 7 FINCA #38322, inscrita al folio 196 del tomo 1336 de Ponce IJ, inscripcién 1ra. (Seccién I de Ponce). 8 9 DESCRIPCION: Tomada de la inscripcidn Ira.

10 RUSTICA: PARCELA #L-29: Parcela de terreno radicada en el Barrio Coto Laurel del Término Municipal de Ponce, Puerto Rico, con una cabida de 5.39 cuerdas, equivalentes 12 a 2 hectéreas, 11 dreas y 84.82 centidreas, colinda por el: NORTE con camino vecinal. SUROESTE con la Parcela 43 #28. OESTE con camino de finca de la Sucesion J. Serrallés. ESTE con la Parcela #30. 14 45 En esta parcela queda incluida un area que se dedica a caminos que sirven a otras parcelas. 16 ORIGEN: Se segrega de la finca #14893, inscrita al folio 7 76 del tomo 438 de Ponce. 8 6. As per CRIM’s property registry, the subject property has been assigned 19 property identification number 0366-000-007-19-000 under account number 01529344. 20 7. As per CRIM’s property registry, the account appears under the name Inabon

99 Aggregates, Inc., but pertains to the estate herein and was sold on June 5, 2006. 23 8. According to CRIM’s property registry, the property owes $6,866.33 in real 24 property taxes, including $3,803.09 in principal, $2,683.01 in interest and $380.23 in 25 26

surcharges, for the years 1990 to 2006, as of June 1, 2006. | 9. As per CRIM’s property registry, the permanent structures on the land described above have been assigned property identification number 366-000-007-19-001 3 under account number 01529345. 4 5 10. As per CRIM’s property registry, the account under the name Casa Duramax

Inc. c/o Empresas Inabon, but pertains to the estate herein and was sold on June 5, 2006.

7 11. According to CRIM’s property registry, these permanent structures owe 8 $37,326.24 in real property taxes, including $21,844.94 in principal, $13,296.92 in 9 interest and $2,184.38 in surcharges, for the years 1988 to 2006, as of June 1, 2006. 10 12. CRIM’s secured debt is a statutory “implied” lien (“hipoteca legal tacita”’) 1 42 and should be paid to the extent it is secured with the proceeds arising from the sale of the

13 property. 14 13. The only matter in controversy is the amount in each debt certificate entitled 15 to secured status. 16 Procedural Background 17 18 On June 6, 2006, plaintiff commenced this adversary proceeding by filing a

19 complaint against CRIM pursuant to Fed. R. Bankr. P. 7001(2), (7) and (9) to determine 20 the validity, priority and extent of CRIM’s secured claim, and also sought injunctive relief and declaratory judgment regarding the amount claimed for real property taxes. Plaintiff 22 seeks that the court fix the amount of CRIM’s secured claim in the amount of 23 $12,173.72 in principal and $3,555.80 in accrued interest, for a total of $15,729.52!,

25 . . ‘Said amount pertains to the amounts owed for tax years 2001 - 2006. 26

pursuant to 30 L.P.R.A. § 2651, 31 L.P.R.A. § 5193 and 13 L.P.R.A. § 361, and that the 1 excess amount of CRIM’s claim be deemed unsecured pursuant to 11 U.S.C. § 726. 2 The trustee’s position is that the amount entitled to security is limited to the annual tax installments corresponding to the last five years preceding their payment, plus the current year, and any amounts due in excess should be considered claims due

personally by the debtor and do not constitute a lien over the property. 7 CRIM’s position is that since it was stayed from collecting on its lien due to the 8 automatic stay, 11 U.S.C. § 362, its lien was preserved by the concept of equitable tolling ° under 11 U.S.C. § 108(c) and, therefore, the secured status of their claim should be determined as of the date of the filing of the petition and the entire claim should be

42 deemed secured. According to CRIM, its claim cannot become unsecured by the lapse of

13 time when it is barred from collecting its claim by the automatic stay.’ The CRIM alleges 14 that the automatic stay continued uninterruptedly since the filing of the chapter 11 petition, ® and throughout conversion to chapter 7. A pre-trial hearing was held on October 30, 2006, at which time the parties agreed

48 the facts were not at issue and the only matter in controversy is the amount of each debt

19 certificate entitled to secured status. 20 21 22 23 Originally, CRIM also argued that the full amount of their claim should have secured 24 status because the “Tax Debts Sale Act”, 21 L.P.R.A. §§ 5921 - 5944, so provides for 95 the years 1990-2006; they subsequently withdrew that portion of their pleadings. See dkt. #20 at p. 2, par. 6. 26

Discussion 1 Summary Judgment Standard 2 Rule 56 of the Federal Rules of Civil Procedure, made applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that

summary judgment should be entered “if the pleadings, depositions, answers to

8 interrogatories, and admissions on file, together with the affidavits, if any, show that there

7 is no genuine issue as to any material fact and that the moving party is entitled to a 8 judgment as a matter of law.” Fed. R. Bankr. P. 7056; see also, In re Colarusso, 382 F.3d ° 51 (1* Cir. 2004), citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

49 “The summary-judgment procedure authorized by Rule 56 is a method for

13 promptly disposing of actions in which there is no genuine issue as to any material fact or 14 in which only a question of law is involved.” 10A Wright and Miller, Federal Practice and ® Procedure § 2712 (3d ed. 1998). “Rule 56 provides the means by which a party may pierce the allegations in the pleadings and obtain relief by introducing outside evidence

18 showing that there are no fact issues that need to be tried.” Id. Summary judgment is not

19 a substitute for a trial of disputed facts; the court may only determine whether there are 20 issues to be tried, and it is improper if the existence of a material fact is uncertain. Id. a" Liens on Property of the Estate A chapter 7 trustee may sell any property of the estate, free and clear of liens, after notice and hearing, if the property is to be sold for a price greater than the aggregate value

95 of all liens on the property. 11 U.S.C. § 363(f). Under the Code, the term “statutory lien”

means a “lien arising solely by force of a statute on specified circumstances or conditions, 1 or a lien of distress for rent, whether or not statutory, but does not include security interest 2 or judicial lien, whether or not such interest or lien is provided by or is dependent upon a 3 statute, and whether or not such interest or lien is made fully effective by statute. 11 4 U.S.C. § 101(53). 5 6 A statutory lien that was valid under applicable state law remains valid through the

7 bankruptcy unless invalidated by some provision of the Bankruptcy Code. In re Bisch, 8 159 BR. 546, 550 (9" Cir. BAP 1993), citing Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 9 . 773, 775, 116 L.Ed.2d 903 (1992) (“A lien passes through bankruptcy unaffected”). 10 Accordingly, one must look to state law to establish the extent, validity and amount to be 11 paid for a secured claim encumbering real property of the estate and arising from a

43 statutory lien. 14 Tax Liens under Puerto Rico Law "8 The Puerto Rico Mortgage Law establishes that a statutory lien for property taxes 16 due to the “Estado Libre Asociado de Puerto Rico”, or its municipalities, or CRIM as its 17 48 collection agency, arises for the amount of the taxes of the five annual assessments and the

49 current unpaid period. Specifically, 20 A statutory mortgage is constituted in favor of the Commonwealth of Puerto Rico, the Center for Collection at of Municipal Incomes of the Commonwealth of Puerto 99 Rico, and its corresponding municipalities on the taxpayers’ property for land taxes pertaining to the last five annual 23 assessments and for current unpaid taxes encumbering it. This statutory mortgage is implicit and specifies a 24 preference in favor of its titleholders above all other 95 creditors and over the third acquirer, even though he may 26

have recorded his rights. 1 30 L.P.R.A. § 2651 (1979)°. The Puerto Rico Civil Code establishes the preference to be 2 allowed to said statutory lien: 3 With respect to certain real property and rights on the realty 4 of the debtor, the following shall have preference: 5 (1) Credits in favor of the Commonwealth of Puerto Rico, 6 the Municipal Revenue Collection Center, or the corresponding municipality on the taxpayer’s assets for the 7 amount of the last five (5) annual assessments and the current unpaid taxes encumbering them. 8 9 31 L.P.R.A. § 5193(1) (1930). See also, 13 L.P.R.A. § 361 (“With the exception of the

10 taxes on the encumbered property for five years and for the current year, mortgage credits 11 and crop loans are hereby declared to be liens, having preference over any other charge or lien for taxes or for any other cause.”) 13 The law grants secured status to the amounts corresponding to principal and 14 45 interest owed for property taxes accrued for the period of five years preceding its

16 payment, plus any amount due for the current year. In The Chase Manhattan Bank v. 17 Corporacion Hotelera de Puerto Rico, 446 F.S. 1052 (D.P.R. 1978), the district court 18 addressed the extent to which a purchaser of property at judicial sale was liable for 19 property taxes due and owing. It stated: 20 The law of Puerto Rico thus establishes a preferred legal 21 mortgage existing in favor of the Commonwealth. 99 However, the plain language of the statute sets forth a floating time limit within which the preferred lien can be 23 invoked, and there is nothing in this case suggesting that 24 — 95 3A lthough both the trustee and CRIM cite to 30 L.P.R.A. § 292, said provision was repealed by Act of Aug. 8, 2979, No. 198, p. 585, S 254. 26

said statutory time limit can be obviated. 1 Id. at 1055 (emphasis added)*. Further, 2 It is clear to us that when San Jeronimo Hotel Corporation 3 purchased the property in 1972, it was only subject to the lien imposed by statute, to wit, to the current annual 4 assessment at the time of the acquisition and to not more 5 than the three’ annual assessments next preceding the same, provided said taxes had not been paid by Corporacion 6 Hotelera. 7 Id., citing Martinez v. Sancho, 53 D.P.R. 553, 53 P.R.R. 527 (1938), appeal dismissed, 8 108 F.2d 960 (1* Cir. 1940); Banco Popular v. Ramirez, 57 D.P.R. 618, 57 P.R.R. 605 9 (1940). The court concluded that when the property was purchased it was only subject to 10 4 the lien imposed by statute; that is, the current annual assessment at the time of

49 acquisition and not more than the three annual assessments preceding the same, and that 13 any other taxes due were the personal obligation of the former property owner. Id. 14 The trustee and the CRIM agree that state law establishes a statutory lien in favor 15 of CRIM for real property taxes for the last five annual assessments and the current year. 16 The trustee proposes to pay accordingly. It is not clearly explained by CRIM how the 17 48 equitable tolling provisions in section 108(c) will extend for a larger period the amounts

19 allowed by state law. 20 The Equitable Tolling Provisions of 11 U.S.C. § 108 Section 108(c) extends the time period for commencing or continuing civil actions 22 23 “The court cited 30 L.P.R.A. § 292(5), the predecessor to 30 L.P.R.A. § 2651. 24 5Act No. 125 of July 23, 1974 augmented the three year term to five years. The 96 amendment was also made extensive to 13 L.P.R.A. §§ 462, 302 P.R.A. 292(5), 342, and 31 L.P.R.A. §§ 5193(1), 5194(1). 26

that are stayed by sections 362, 922, 1201 or 1301 of the Code. “Tt provides that if an 1 action on a claim against the debtor in a court other than a bankruptcy court is stayed due 2 to the bankruptcy case, any time deadline for commencing and continuing the action is 3 extended to 30 days after notice of termination of the stay, if the deadline would have 4 occurred on an earlier date.” 2 Lawrence P. King, et al., Collier on Bankruptcy { 108.04 5 6 (15" ed. rev’d 2007). “It applies only to civil actions in courts on claims against the 7 debtor”; “[c]ourts have generally held that it does apply to time periods within which a 8 creditor must bring an action to enforce a lien before the lien expires.” Id. at 108-14. 9 In Gurney v. State of Arizona Department of Revenue, 192 B.R. 529, 539 (9" Cir. 10 BAP 1996), the court concluded that pursuant to sections 108(c) and 105(a) the equitable 11 tolling doctrine may be applied when efforts to collect delinquent taxes were blocked by 13 the automatic stay. The court stated that there is “a legitimate interest in preventing 14 statutes from becoming a shield for serious inequity.” Id. at 536. The tolling period 1 “prevents the debtor from filing bankruptcy and the waiting until the statute of limitations 16 has run on the creditor’s claim.” 1 Norton Bankruptcy Law and Practice 2d, § 16:4, pg. 17 16-6.° 18 19 The tolling principles set forth in § 108(c) apply to tax cases. However, the court 20 agrees with the trustee that CRIM’s right to secured status for its claim is established by 21 99 ® The CRIM cites to Simon v. Navon, 71 F. 3d 9 (1* Cir. 1996), for the proposition that section 108(c) applies to this case. However, the case is inapposite as it concerns a jury 93 finding defendants liable for defamation. The court assumes that the Simon v. Navon case meant to be cited is the one in 116 F.3d 1 (1* Cir. 1997). In the latter case the first 24 circuit found that the suspension period in section 108(c) may result from either state or federal law. The court also stated that the mere existence of the automatic stay does not trigger the suspension period in section 108(c). 26

Puerto Rico law, and granting its request for tolling will constitute an unwarranted 1 extension of the statutory lien in detriment of the bankruptcy estate and in contravention of the principles set forth in 30 L.P.R.A. § 292(5) and 31 L.P.R.A. § 5193(1). CRIM should not receive more in bankruptcy than it would receive outside of bankruptcy. The court declines CRIM’s proposition to find “as an additional uncontested

6 material fact that the automatic stay under 11 U.S.C. § 362(a) has been continuously in 7 operation since the inception of this case, as it regards CRIM’s pre-petition secured claim, 8 first under chapter 11 of the Bankruptcy Code, and thereafter under chapter 7.” First, the ° proposition is a legal conclusion. Second, the court disagrees with the legal conclusion. Section 362(c)(2)(C) states that the automatic stay continues until a discharge is granted

42 or denied. Section 1141(d)(1) provides for the discharge of debts upon confirmation of

13 the chapter 11 plan. Thus, the confirmation of the plan in September 2000 discharged the 14 debtor of dischargeable debts, thereby lifting the automatic stay. It was not until August 2005 that the case was converted to chapter 7. 16 Conclusion 17 48 The court agrees with the trustee that under the provisions of Puerto Rico law

19 cited herein, CRIM’s lien over the debtor’s properties is for the amounts due for the tax 20 year 2006 and the five years preceding. The secured amount of CRIM’s claim is fixed at 21 $12,173.72 for principal and $3,555.80 for interest, for a total of $15,729.52; the balance is allowed as unsecured. CRIM is ordered to modify their property registry to reflect the amounts allowed as secured and unsecured and, upon payment of the secured amount, any

95 and all amounts due in excess of that amount be deleted from property records number 26 10

366-000-007-19-000 and 366-000-007-19-001. The trustee’s motion for summary 1 judgment is granted, and CRIM’s motion for summary judgment is denied. 2 The Clerk shall enter judgment accordingly and close this adversary proceeding. ° SO ORDERED. In San Juan, Puerto Rico, of July, 2007.

6 7 Vey S. LAMOUTTE 8 U.S. Bankruptcy Court 9 10

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