In re: Gulfcoast Irrevocable Trust; In re: Gulfcoast Irrevocable Trust XIV; In re: Gulfcoast Irrevocable Trust XIX

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: December 11, 2013
• Docket: 12-06338
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: CASE NO. 12-06338 4 || GULFCOAST IRREVOCABLE CHAPTER 11 TRUST 5 Debtor © |TIN RE: CASE NO. 12-06339 7 || GULFCOAST IRREVOCABLE TRUST XIV CHAPTER 11 8 Debtor 9 |TIN RE: 10 CASE NO. 12-06340 GULFCOAST IRREVOCABLE 1] || TRUST XIx CHAPTER 11 12 Debtor 13 14 OPINION AND ORDER 15 These three (3) cases are before the court upon the motion requesting reconsideration in 16 each case of this Court’s Orders denying the GULFCOAST IRREVOCABLE TRUST I, 17 GULFCOAST IRREVOCABLE TRUST XIV, and GULFCOAST IRREVOCABLE XIV, and 18 GULFCOAST IRREVOCABLE TRUST XIX (hereinafter referred to as the “Trusts” or 19 “Debtors”) an evidentiary hearing based on the court’s ruling that the proffered facts, even if 20 proven (or shown), do not establish that the Debtors are business trusts since they failed to 21 satisfy the crucial test of whether the trust was created to transact business or a commercial 22 activity for the benefit of a group of investors (Case No. 12-06338, Docket No. 101, Case No, 23 12-06339, Docket No. 100 and Case No. 12-06340, Docket No. 100). The Federal Deposit 24 Insurance Corporation, as receiver for Westernbank Puerto Rico (hereinafter referred to as the 25 “FDIC-R”) opposed the Debtors’ motion for reconsideration in all three (3) cases (Case No. 12- 26 06338, Docket No. 102, Case No. 12-06339, Docket No. 101 and Case No. 12-06340, Docket 27

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1 □□□ 101). For the reasons stated below the motions for reconsideration in all three (3) cases are 2 || hereby denied. 3 4 || Fed. R. Civ. P 59(e) 5 A motion for reconsideration of an order or judgment is not recognized by the Federa 6 || Rules of Civil Procedure. In re Pabon Rodriguez, 233 B.R. 212, 218 (Bankr. D.P.R. 1999) aff'd 7 2001 WL 958803 (1" Cir. 2001) (citing Van Skiver v. United States, 952 F. 2d 1241, 1243 (10° g || Cir. 1991)). Federal courts treat such a motion as either a motion to alter or amend judgmen g || under Fed. R. Civ. P. 59(e) or a motion for relief of judgment under Fed. R. Civ. P. 60(b). “Thes 10 two rules are distinct; they serve different purposes and produce different consequences. Whic 11 ||rule applies depends essentially on the time a motion is served. If a motion is served withi 12 || fourteen (14) days of the rendition of judgment, the motion ordinarily will fall under Rule 59(e). 13 ||If the motion is served after that time, it falls under Rule 60(b). Id. In the instant case, th 14 || Debtors’ motions for reconsideration were filed thirteen (13) days after the Orders for whic 15 || reconsideration was sought were entered. Therefore, the motion will be treated as one under □□□□ 16 || R. Civ. P. 59(e) made applicable here through Fed. R. Bankr. P. 9023. 17 Fed. R. Civ. P. 59(e) authorizes the filing of a written motion to alter or amend 18 ||judgment after its entry. The motion must demonstrate the “reason why the court shoul 19 || reconsider its prior decision” and “must set forth facts or law of a strongly convincing nature” t 20 ||/induce the court to reverse its earlier decision. Pabon Rodriguez, 233 B.R. at 218 (citation 21 omitted). The movant “must either clearly establish a manifest error of law or must presen 22 newly discovered evidence.” Id. See also; BBVA v. Vazquez (In re Vazquez), 471 B.R. 752, 76 93 (B.A.P. Ist Cir. 2012), citing Aybar v. Crispin-Reyes, 118 F.3d 10, 16 (1st Cir. 1997).The part 24 || cannot use a Rule 59(e) motion to cure its own procedural failures or to introduce new evidenc 25 ||or advance arguments that could and should have been presented originally to the court. Id| 26 || Generally, when a party is made aware that a particular issue will be relevant to its case but fail 97 produce readily available evidence pertaining to that issue, the party may not introduce tha

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1 || evidence to support a Rule 59(e) motion. Id. Neither can the party use this motion to raise nove 2 legal theories that it had the ability to address in first instance. Id. The federal courts hav 3 || consistently stated that a motion for consideration of a previous order is an extraordinary remed 4 ||that must be used sparingly because of interest in finality and conservation of scarce judicia 5 resources. Id. In practice, Fed. R. Civ. P. 59(e) motions are typically denied because of th 6 || narrow purposes for which they are intended. Id. 7 || Debtors’ Arguments & Discussion 8 The court in its June 20, 2013 Order held that: “...an evidentiary hearing is not necessary 9 |] as the proffered facts, even if established, do not establish that the Debtors are business trusts 10 || since they fail to satisfy the crucial test of whether the trust was created to transact business or 11 }|commercial activity for the benefit of a group of investors. See In re Medallion Realty Trust, 103 12 || B.R. 8, 9-10 (Bankr. D. Mass. 1989) aff'd, 120 B.R. 245 (D. Mass. 1990).” (Case No. 12-06338, 13 || Docket No. 98, Case No. 12-06339, Docket No. 97 and Case No. 12-06340, Docket No. 97). Th 14 || Debtors argue that the court: “...failed to take into account multiple factors that support sai 15 }|conclusion. Furthermore, Debtors respectfully understand that the Court placed undue emphasis 16 || on criteria that bear no relevance in the proper evaluation of whether the trusts are business trust 17 || or not.” (Case No. 12-06338, Docket No. 102, Case No. 12-06339, Docket No. 101 and Case No| 18 || 12-06340, Docket No. 101). The Debtors further argue that: (i) “...to qualify as a business trus 19 || the operations of the Trusts need not be undertaken on a for profit basis. Thus, the test is whethe 20 || the Debtors generate income or not, but rather if they are engaged in business;” (1i) “Debtors ar 21 ||not passive owners or holders of shares of certain corporations but rather actively participate i 22 || business affairs';” and (iii) “...by perfecting the necessary financing to facilitate the operations 23 24 ' The Debtors argue that they engage in the following business activities: “(a) [s]election of the type of projects to develop, i.e.; commercial (retail or office) or residential (multi-family or single family); (b) [rleview appropriate 25 market areas in Puerto Rico to develop the projects. Locate a specific suitable property for the development; (c) [p]lrepare market/feasibility studies and appraisals prepared by licensed appraisers in Puerto Rico; (d) [i]nvestigate 26 financing options with various lending institutions in Puerto Rico; (e) [p]repare cost estimates to ascertain the financial viability of the projects; (f) [d]evelop comprehensive sales and marketing plans;” (g) [nJegotiate and close financing of the projects; including the execution of guarantees to obtain the necessary financing. (Case No. 12- 27 06338, Docket No. 102, Case No. 12-06339, Docket No. 101 and Case No. 12-06340, Docket No. 101).

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1 || of their subsidiaries, Debtors are indeed engaging in business activities and as such qualify a 2 || business trusts;” Civ) “...Gulfcoast Irrevocable Trust I, on June 2005, said trust obtained a heav 3 || equipment loan in Puerto Rico in [the] amount of $1,222,000.00. This loan was paid off to th 4 || FDIC in February 2012. The sale resulted in a surplus of approximately $300,000 that was seize 5 || by the FDIC under various Security Agreements;” (v) “...Mr. Michael J. Scarfia has a famil 6 || trust named The Scarfia Irrevocable Trust wherein assets of non-business nature are held for th 7 || sole purpose of liability and asset protection;” (vi) “[t]he Court further declined to take judicia 8 notice of the Schedules and Statements of Financial Affairs submitted in the above captione 9 || cases. The Court also failed to take judicial notice of the Minutes of the 341 Meeting of Creditors 10 || of all cases, wherein it was clearly stated that all the Debtors had submitted to the Office of th 11 || U.S. Trustee copies of their tax returns for the last two years and their last financial statements; 12 || and (vii) “...the court failed to consider the affidavit of Perter Makris, C.P.A. where he stated i 13 || paragraphs 3 and 4 that “[m]y firm was retained to provide various accounting and tax service 14 for Gulfcoast Irrevocable Trust, Gulfcoast Irrevocable Trust XIV, and Gulfcoast Irrevocabl 15 || Trust XIX since formation of the trusts in 1988. I have prepared numerous Financial Statements 16 || and Trust Tax Returns for Gulfcoast Irrevocable Trust, Gulfcoast Irrevocable Trust XIV, an 17 || Gulfcoast Irrevocable Trust XIX. In addition, all general business discussions regarding th 18 || operation of these trusts have already been centered upon maximizing profit and tax planning.” 19 This court in its June 20, 2013 Order discussed all of the legal and factual points th 20 || Debtors allege the court failed to consider. The court in its Order for the three (3) Trusts based its 21 || ruling upon the following: 22 “The court concludes that the Debtors have failed to rebut the preliminary findings an conclusions made by this court in the Opinion and Order entered on November 30, 2012) 23 The Debtors’ statement of material facts regarding the eligibility of the same to file a business trusts under 11 U.S.C. $101(9)(A)(v) was supported by an affidavit of Mr. Michael J. Scarfia as trustee of all three (3) Trusts and an affidavit of CPA Peter Marki 5 whose firm has provided various accounting and tax services for the Trusts. The cour notes that the Debtors did not include financial statements, income tax returns, an 26 transactional documents pertaining to the Trusts from prior years as evidence to rebut th court’s decision that the Trusts are not eligible to file as business trusts. In addition, th 27 Schedules and Statement of Affairs submitted by the individual Debtors support th

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1 conclusion that the Trusts are not business trusts. The court declines to take judicia notice regarding the information asserted in Debtors’ Schedules and its Statement o 2 Financial Affairs pursuant to Fed. R. Evid. 201(c). However, the statements contained 1 3 the Debtors’ bankruptcy petition and schedules may be considered as admission pursuant to Fed. R. Evid. 801(d)(2), and as such may estop the Debtors from allegin 4 otherwise. See In re Bohrer, 266 B.R. 200, 201 (Bankr. N.D. Cal. 2001) citing In r Gervich, 570 F.2d 247 (8" Cir. 1978) (“Statements in bankruptcy schedules are execute 5 under penalty of perjury and when offered against a debtor are eligible for treatment a ‘ judicial admissions.”); In re Moore, 269 B.R. 864 (Bankr. D. Idaho 2001).

4 Debtor Gulfcoast Irrevocable Trust in line item 1 (income from employment or operatio of business) provides that year to date gross income for this particular Trust is $0, las g year’s gross income is $0 and the gross income from the year before is $0. Debto Gulfcoast Irrevocable Trust in said line item provides that, “[a]ll these years, Debtor has 9 suffered losses.” (Case. No. 12-06338, Docket No. 29). The court further notes tha Debtor Gulfcoast Irrevocable Trust does not list any trade creditors or other debts tha 10 customarily result from the operation of a business activity. The only claims Debto ll Gulfcoast Irrevocable Trust includes are listed on Schedule F. Debtor Gulfcoas Irrevocable Trust in its Schedule F (Creditors Holding Unsecured Nonpriority Claims) 12 includes only claims in which the Debtor is the guarantor for related entities and th claims are all listed as disputed and the creditor is the FDIC; namely; (i) JM Ponce III 13 L.P., SE in the amount of $11,490,783; (ii) Yasscar Development Corp. in the amount o $14,653,274; (iii) Yasscar Caguas Development, Corp. in the amount of $16,887,089; 14 (iv) Sabana Del Palmar, Inc. in the amount of $9,002,934; (v) Sabana Del Palmar, Inc. i 15 the amount of $32,002,112; and (vi) MJS Las Croabas Properties, Inc. in the amount o $20,452.186. (Case No. 12-06338, Docket No. 28). 16 Debtor Gulfcoast Irrevocable Trust XIV in line item 1 (Income from employment o 17 operation of business) provides that year to date gross income for this particular Trust i $0, last year’s gross income is $0 and the gross income from the year before is $0. □□□□□ 18 No. 12-06339, Docket No. 28). The court notes that Debtor Gulfcoast Irrevocable Trus 19 XIV does not list any trade creditors or other debts that customarily result from th operation of a business activity. The only claims Debtor Gulfcoast Irrevocable Trust XI 20 includes are listed on Schedule F. Debtor Gulfcoast Irrevocable Trust XIV in its Schedul F (Creditors Holding Unsecured Nonpriority Claims) includes only claims in which th 21 Debtor is the guarantor of related entities and the claims are all listed as disputed and th creditor is the FDIC; namely; ) Yasscar Development Corp. in the amount o 22 $14,653,274; (ii) Yasscar Caguas Development, Corp. in the amount of $16,887,089; an 23 (iii) MJS Las Croabas Properties, Inc. in the amount of $20,203,938. (Case No. 12- 06339, Docket No. 27). 24 Debtor Gulfcoast Irrevocable Trust XIX in line item 1 (Income from employment o 25 operation of business) provides that year to date gross income for this particular Trust i $0, last year’s gross income is $0 and the gross income from the year before is $0. (Case No. 12-06340, Docket No. 28). The court notes that Debtor Gulfcoast Irrevocable Trus 7 XIX does not list any trade creditors or other debts that customarily result from th operation of a business activity. The only claims Debtor Gulfcoast Irrevocable Trust X -5-

1 includes are listed on Schedule F. Debtor Gulfcoast Irrevocable Trust XIX in its Schedul F (Creditors Holding Unsecured Nonpriority Claims) includes only claims in which th 2 Debtor is the guarantor and the claims are all listed as contingent, unliquidated an 3 disputed; namely; (i) loan of JM Ponce III, LP, SE, in the amount of $11,490,783; and (ii) MJS Las Croabas Properties, Inc. in the amount of $20,203,938. (Case No. 12-06340, 4 Docket No. 27). 5 This court in the November 30, 2012 Opinion and Order concluded that the Trusts wer not business trusts based on the following: (i) the text of the trust agreements establis 6 prima facie that the Debtors are family trusts designed as an estate planning device; (ii 4 “Tt]he Debtors as a separate legal entity are not actually operating as a business as thei monthly report of operations on file show no or minimal expenses or cash flow. Th g Trusts are merely holding companies of affiliates operating in Puerto Rico;” and (ili “t]he fact that the Debtors may own the total or a percentage of shares in corporation 9 that have filed for or may be eligible to file a bankruptcy petition does not mean that th Trusts, as holders of the shares, are themselves eligible to file a bankruptcy petition.” Th 10 court’s reasoning for concluding that the Trusts are not business trusts was the following; M ‘[t]he text in the trust agreements for the debtors shows prima facie that the sam: 12 are family trusts designed as an estate planning device. As such, the Trusts are no business trusts that qualify to file a bankruptcy petition because the same may no 13 be considered to be a corporation. Moreover, even if related or affiliat corporations may be eligible to file for bankruptcy, ‘[t]he filing of a petition by 14 parent does not have the effect of filing a petition for bankruptcy on behalf o 15 subsidiary corporations. [] Each corporate entity is separate for bankruptc purposes.’ [Citations omitted] Hon. Nancy C. Dreher and Hon. Joan Feeney, 16 Bankruptcy Law Manual §3.4 5 ed. 2012). The fact that the Debtors may ow the total or a percentage of shares in corporations that have filed for or may b 17 eligible to file a bankruptcy petition does not mean that the Trusts, as holders o the shares, are themselves eligible to file a bankruptcy petition.”(Case No. 12 18 06338, Docket No. 54, Case No. 12-06339, Docket No. 53, Case No. 12-06340 19 Docket No. 53).’ 20 The Debtors argue that they are business trusts as they own shares in corporations which, in turn, do business as any regular corporation. However, such factual condition does no 21 make the holding trust a business trust. The corporations are separate entities. In addition 7 a “debtor-shareholder’s ownership of corporate stock does not vest the debtor’s estat with a pro rata share of the physical assets of the corporation itself.” 9 Am. Jur. 2 23 Bankruptcy $1314 (2013). The court finds that the Debtors have been unable to establis any business activity in which they are actively engaged.” (Case No. 12-06338, Docke 24 No. 98, Case No. 12-06339, Docket No. 97 and Case No. 12-06340, Docket No. 97). 25 The court finds that the Debtors have failed to clearly establish a manifest error of la

37 since they have not provided the court with a legal or factual basis that supports their positio

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1 || that the Debtors are actively engaged in a particular type of business. Moreover, the court in it 2 || previous Order discussed all the factors the Debtors argue that the court failed to consider. Th 3 court finds that the Debtors have simply presented the same arguments (rehashed the sam 4 || arguments) included in previous motions. 5 As to the Debtors’ Financial Statements and the Income Tax Returns” for previous year 6 || which were first provided (presented) to the court as part of the motion for reconsideration th 7 ||same does not constitute newly discovered evidence. The court notes that all of the Debtors’ 8 || Financial Statements lacked an Income Statement, a Cash Flow Statement and the Statement o 9 ||Changes in Net Worth or Stockholder’s Equity. Thus, the Trusts’ Financial Statements ar 10 || deficient (simply not informative/only provide a piece of the puzzle) since they included only 11 |} Balance Sheet and Notes to the Financial Statements. The Income Statement is an importan 12 ||component of any Financial Statement since it measures the performance of a business during a 13 || accounting period. The Cash Flow Statement is also an essential component of any Financia 14 || Statement since it records the amounts of cash and cash equivalents entering and leaving 15 ||company. Moreover, it allows investors to understand how a company’s operations are runnin 16 || since it provides the necessary information to understand where the money is coming from an 17 || how it is being spent. 18 Conclusion 19 For the reasons stated above, this court holds that the Debtors have not established a 20 || manifest error of law nor presented newly discovered evidence in its motion for reconsideration 21 || which would warrant this court to reconsider its Order entered on June 20, 2013, finding that an 22 evidentiary hearing is not necessary, as the proffered facts, even if established, do not evince 23 24 * The Debtors in their motions for reconsideration provided (presented) for the first time the following Financial Statements and Income Tax Returns: (1) Income Tax Returns for the years 2009, 2010 and 2011 for Gulfcoast 25 Irrevocable Trust I, Gulfcoast Irrevocable XIV, and Gulfcoast Irrevocable Trust XIX; (2) Income Tax Return for the year 2012 for the Gulfcoast Irrevocable Trust XIV; (3) Income Tax Extensions for Gulfcoast Irrevocable Trust I and 26 Gulfcoast Irrevocable Trust XIX; (4) Financial Statement for the year 2005 for the Gulfcoast Irrevocable Trust XIX; (5) Financial Statements for the years 2008 for all three (3) Trusts; (6) Financial Statements for the year 2009 for Gulfcoast Irrevocable Trust I and Gulfcoast Irrevocable Trust XIV; (7) Financial Statements for the year 2010 for all] 27 three (3) Trusts; and (8) Financial Statements for the year 2011 for Gulfocast Irrevocable Trust I and Gulfcoast Irrevocable Trust XIX. -7-

1 || that Debtors are business trusts since they fail to satisfy the crucial test of whether the trust was 2 || created to transact business or a commercial activity for a group of investors. Therefore, the 3 || motions for reconsideration in all three (3) cases are hereby denied. 4 SO ORDERED. 5 In San Juan, Puerto Rico, this 10° day of December, 2013. 6

g unitdd States Bankruptey Judge 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

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