In re: Hector Luis Ortiz Fuentes and Gladys Rivera Rivera

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: January 17, 2014
• Docket: 13-01080
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT 5 FOR THE DISTRICT OF PUERTO RICO

3 IN RE: CASE NO. 13-01080 4 || HECTOR LUIS ORTIZ FUENTES CHAPTER 13 AND GLADYS RIVERA RIVERA ° Debtors 6 7 8 OPINION AND ORDER 9 This case is before the court upon the Chapter 13 Trustee’s (hereinafter referred to as 10 || “Trustee’’) unfavorable report to the amended Chapter 13 plan dated June 11, 2013 (Docket No. 11 || 39) stating that the Debtors must assign a value to a particular cause of action filed in state court 12 || and which has been listed in Schedule B (Personal Property) because the Trustee is unable to 13 |} calculate the liquidation value and thus is unable to determine whether the Debtors comply with 14 11 U.S.C. §1325(a)(4), which is a requisite for confirmation of a plan. The Debtors filed their 15 || reply (Docket No. 40) arguing that in the instant case it is reasonable to list the value of the state 16 || lawsuit as “unknown” because it is difficult to assign a value to a pending or potential lawsuit 17 the Debtors have chosen the state exemptions which means that there is no exemption 18 || applicable to the cause of action of the Debtors at the state court. For the reasons set forth below 19 the court grants Trustee’s motion and thus finds that the Debtors must assign a current value to 20 || the legal claim which they have included in Schedule B. 21 Jurisdiction 22 The Court has jurisdiction pursuant to 28 U.S.C. §$ 1334(b) and 157(a). This is a cor 23 || proceeding pursuant to 28 U.S.C. $8157(b)(2)(B) and (L). Venue of this proceeding is prope 24 || under 28 U.S.C. §$1408 and 1409. 25 Facts and Procedural Background 26 The Debtors filed a bankruptcy petition under Chapter 13 of the Bankruptcy Code o 27 || February 13, 2013. On February 25, 2013, the Debtors filed their Chapter 13 plan (Docket □□□

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1 12). The 341 meeting was held on March 15, 2013 and the Trustee held the same open fo 2 || fourteen (14) days (Docket No. 15). On May 7, 2013, the Trustee filed a Notice of Closing 341 3 || Creditors’ Meeting After Failure to Comply with 11 U.S.C. $1308 because the Debtors failed t 4 || provide evidence of filing the applicable tax returns in compliance with 11 U.S.C. $130 5 || (Docket No. 23). 6 On May 7, 2013, the Trustee filed a Motion to Dismiss based upon the following: () 7 || failure to cooperate with the Trustee pursuant to 11 U.S.C. §521(a)(3) due to the Debtors failur 8 ||to provide documents and/or information requested at the meeting of creditors, omission tha 9 || constitutes cause for the dismissal of case under 11 U.S.C. $1307(c)(9) and (10); and (i) failur 10 || to resolve or act upon issues identified at the meeting of creditors causing an unreasonable dela 11 the bankruptcy proceedings prejudicial to creditors pursuant to 11 U.S.C. §1307(c)(1) (Docke 12 || No. 24). 13 On June 4, 2013, the Debtors filed Amended Schedules B (Personal Property) and 14 || (Property Claimed as Exempt) (Docket No. 28). Schedule B was amended to include the cause o 15 || action in state court and that any proceeds from this lawsuit will be used entirely to fund th 16 || plans, and to include some personal items not included in the original Schedule. The Debtors i 17 ||the Amended Schedule B included the following information regarding the state court action; 18 || “[c]ivil case No. DAC2012-0804 Teresita Arroyo Morales et als. V. Municipality of Catafio □□ 19 || Als. Complaint claiming torts and restitution of moneys paid to Scotiabank because mortgage 1 20 registered in Urb. Vista al Mar, Debtor Property and Residence.” The Debtors listed th 21 claim as a joint personal property with an unknown value (Docket No. 28). On June 4, 2013, th 22 || Debtors filed a Chapter 13 amended plan to include the provision that the reason for the step u 23 || payment and also to include that any proceeds from the civil case at local court in case □□□ 24 |} DAC2012-0804 will be devoted to fund the plan and the base will increase accordingly (Docke 25 || No. 29). 26 On June 4, 2013, the Debtors filed their Reply to Trustee Motion Requesting fo 27 || Dismissal and Request for Confirmation of Amended Chapter 13 Payment Plan Dated 6/01/201

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1 |} (Docket No. 30). On June 5, 2013, the Trustee filed an Unfavorable Report on Proposed Pla 2 || Confirmation under $1325 due to the following deficiencies: (i) the Debtors have failed t 3 || provide documents and/or information requested at the meeting of creditors pursuant to 11 4 ||U.S.C. §521 and §1302(b); Gi) the Debtors must submit the minute of presentation of th 5 || Notarial act at the Registry for evaluation and must disclose the status of the proceeding 6 || pending in local court; and (iii) the Debtors have failed to assign a value to the cause of actio 7 || pending in local court. The liquidation value cannot be determined until a value is assigned t 8 their legal claim (Docket No. 31). On June 6, 2013, the Debtors filed their Reply to Truste 9 || Unfavorable Report and Request for Confirmation of Amended Chapter 13 Payment Plan Date 10 6/1/2013 alleging as follows: □□□ the minute of presentation in the instant case is not necessar 11 because Debtors’ real estate property is not registered at the property registry because this is 12 || housing project in which the segregation of the lots was not properly made; (ii) the state cou 13 || proceedings at this stage are procedural in nature since there are new defendants that have bee 14 || sued, discovery being made, legal representations being announced for various defendants; an 15 || Gi) the Debtors list the value of their legal claim as “unknown” because there is no tangibl 16 |}amount determined and Debtors have not claimed an exemption on this claim and all th 17 || proceeds if any will be devoted to fund the plan (Docket No. 32). 18 On June 12, 2013, the plan confirmation hearing was held and the court determined tha 19 || the pending issue is the valuation of the pending cause of action which the Debtors claim canno 20 ||be ascertained. The court continued without a date the confirmation hearing and granted th 21 || Trustee 45 days to file a legal memorandum (Docket No. 34). On July 25, 2013, the Truste 22 || requested an extension of time (30 days) to file the legal memorandum (Docket No. 36). On Jul 23 || 26, 2013, the court granted the Trustee’s motion requesting an additional 30 days to file the lega 24 || memorandum (Docket No. 37). 25 On August 30, 2013, the Trustee filed his Sur-reply to Debtors’ Reply to Trustee’ 26 || Unfavorable Report; Docket No. 32 by which he argues the following: (i) the Trustee is unabl 27 ||to determine the liquidation value in this case pursuant to 11 U.S.C. §1325(a)(4) because th

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1 || Debtors have not assigned a value to their legal claim; (ii) causes of action are property of th 2 || estate and they have a value despite of the amount that can or will be awarded in the future; (111 3 || the Seventh Circuit in Polis v. Getaways, Inc. (In re Polis), 217 F. 3d 899, 903 7 Cir. 2000 4 || applied the following rationale to valuing legal claims; “[l]egal claims are assets whether or no 5 they are assignable, especially when they are claims for money; as a first approximation, th 6 || value of Polis’s claim is the judgment that she will obtain if she litigates and wins multiplied b 7 || the probability of that (to her) happy outcome. That is roughly how parties to money cases valu 8 || them for purposes of determining whether to settle in advance of trial. They do so whether or no 9 || the claim is assignable; unassignable claims (tort claims, for example) command positive price 10 the settlement ‘market;’” and (iv) since the liquidation value cannot be determined withou 11 || taking into account the value of the Debtors’ pending cause of action in local court, the Trustee i 12 unable to determine if the proposed plan is sufficiently funded to pay the liquidation value; (v) 13 ||the Chapter 13 Trustee has a limited time to administer the case, thus if the Debtors were t 14 receive the funds from the pending cause of action after receiving their discharge it would be 15 || windfall; (vi) if the Debtors refuse to list a value for their cause of action, the case should b 16 || converted to a Chapter 7 in which the Chapter 7 Trustee could pursue the cause of action withou 17 ||a time limit until its resolution and thus safeguard the estate’s and the creditors’ best interests; 18 || (vil) the Trustee requests an evidentiary hearing to determine the value of this legal action sinc 19 court has the authority under Section 105 to entertain the issue and determine a value; an 20 || (viii) Debtors’ insistence in not giving a value to the pending cause of action can be a sign o 21 || lack of good faith because they admit that under local law they cannot claim said asset exempt 22 || and that their plan would probably be insufficiently funded to pay the liquidation value tha 23 || would be determined if said cause of action were considered as part of the liquidation valu 24 || analysis (Docket No. 39). 25 On October 1, 2013, the Debtors filed their Reply to Trustee’s Sur-reply to Debtors 26 || Reply to Trustee’s Objection to Plan Confirmation and Request for Confirmation of Chapter 1 27 || Payment Plan Dated 6/1/2013 by which they argue the following: (i) this is not claim for mone

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1 || that has a mostly certain nature, this a torts claim that depends on the credibility awarded by th 2 || state court to the plaintiffs; (ii) there is no uniform procedure followed by the courts to value 3 || cause of action; (11) it is reasonable to list the value of the legal claim as “unknown” pursuant t 4 ||recent court decisions according to the case of Ingram v. Thompson, 141 Wn. App. 287 (Wash| 5 || Ct. App. 2007); and (iv) in this case the proceeds (if any) received by the Debtors from the lega 6 || claim will be devoted entirely to fund the Chapter 13 plan, and thus, are excluded and excepte 7 || pursuant to 11 U.S.C. §1327(b) and (c) (Docket No. 40). 8 Applicable Law and Analysis 9 || Property of the estate in a Chapter 13 Case 10 Property of the bankruptcy estate includes all legal or equitable interests of the debtor 1 11 || property as of the commencement of the case. 11 U.S.C. §541(a)(1). In a Chapter 13 case, 12 Section 1306! also includes as property of the estate property described in Section 541 that 1 13 || acquired by the debtor after the petition is filed and post-petition earnings from services earne 14 || by the debtor. A debtor’s pre-petition legal claim whether the same is unliquidated or settled a 15 || the time of the bankruptcy petition constitutes property of the estate. 16 || Confirmation of a Chapter 13 Plan 17 Confirmation of a Chapter 13 plan is governed by Section 1325. Section 1325(a)(4) 18 || provides in pertinent part: “[e]xcept as provided in subsection (b), the court shall confirm a pla 19 ||if—... (4) the value, as of the effective date of the plan, of property to be distributed under th 20 || plan on account of each allowed unsecured claim is not less than the amount that would paid o 21 such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date.’ 22 |/11 U.S.C. §1325(a)(4). Section 1325(a)(4), referred to as the “best interest of creditors □□□□□□ 23 || provides that unsecured creditors will be paid, at a minimum, the amount which they would b 24 25 section 1306(a) provides: “[p]roperty of the estate includes, in addition to the property specified in section 541 0 this tithe—(1) all property of the kind specified in such section that the debtor acquires after the commencement o 26 the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first; and (2) earnings from services performed by the debtor after the commencement of the cas 27 but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whicheve: occurs first.” 11 U.S.C. §1325(a). -5-

1 || paid if the case were a hypothetical chapter 7 liquidation case. The “best interest of creditors 2 test’ is designed to protect the unsecured creditors in Chapter 13 cases. “To determin 3 || compliance with the test, a hypothetical liquidation of the debtor’s estate under Chapter 7 on th 4 || ‘effective date of the plan’ must be compared to the value on ‘the effective date of the plan’ o 5 || what the debtor proposes to distribute to the holders of allowed unsecured claims. Tw 6 || mathematical calculations are required: (1) an estimate must be made of what would be availabl 7 for distribution to unsecured claim holders in a Chapter 7 case; and (2) the distributions t 8 unsecured claim holders under the proposed plan must be ‘present valued’ (discounted) as of th 9 || effective date of the plan.” See Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 10 || 4" Edition, $160.1 at {| [2], Rev. June 7, 2004, www. 3online.com. The proposed Chapter 13 11 || plan must be present valued to compensate unsecured creditors for the delay in payments the 12 || would receive immediately in a liquidation proceeding. Moreover, for a Chapter 13 plan t 13 satisfy the best interest of creditors test, “... the capitalized present value of all deferre 14 || payments proposed to be distributed, together with the present value of any other propert 15 || proposed to be distributed, to the holder of an allowed unsecured claim, must equal at least th 16 || liquidation value of the nonexempt property of the estate apportionable to the holder of suc 17 || allowed unsecured claim.” See Alan N. Resnick & Henry J. Sommer, 8 Collier on Bankruptc 18 91325.05[2][c] 6" ed. 2013). As part of the liquidation analysis calculation, the administrativ 19 || expenses and the trustee’s fees that would be incurred in a Chapter 7 must be deducted from th 20 || valuation of estate assets. However, it is important to note that the present value calculatio 21 |/under Section 1325(a)(4) is necessary only when the present valued (discounted) stream o 22 || payments to unsecured creditors is less than the Chapter 7 value. See In re Cook, 322 B.R. 336 23 || 339, fn. 6 (Bankr. N.D. Ohio 2005). 24 In order to compare these two figures; namely, the discounted stream of payments tha 25 || unsecured creditors would receive in a chapter 13 with the liquidation value of nonexempt estat 26 || assets in a chapter 7 asset case requires valuation of property. “The standard for valuing propert 27 purposes of $1325(a)(4) has been the subject of few reported decisions. Intuitively becaus

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1 ||the purpose of valuation is a hypothetical liquidation in a Chapter 7 case, property should b 2 || valued at what chapter 7 trustee would get—liquidation, foreclosure or forced sale value.” Se 3 || Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, qh Edition, $160.1 at 4 [27] 4 || Rev. June 7, 2004, www. Ch13online.com. “The valuation of claims in a hypothetical chapter 7 5 || liquidation is ‘not an exact science’ because the process entails a considerable degree o 6 || speculation.” In re W.R. Grace & Co., 475 B.R. 34, 142 (D. Del. 2012) (citing Affiliated Foods, 7 ||249 B.R. 770 at 788 (citing In re Sierra-Cal, 210 B.R. 168, 172 (Bankr. E.D. Cal. 1997)); 8 || Adelphia Comme’ns, Corp., 361 B.R. 337, 367 (Bankr. S.D.N.Y. 2007) (quoting □□ □ 9 || Crowthers, 120 B.R. 279, 297-98 (Bankr. S.D.N.Y. 1900)); In re PC Liquidation Corp., 383 B.R| 10 || 856, 868 (E.D.N.Y. 2008) ¢‘[T]he valuation of a hypothetical [C]hapter 7 liquidation is, b 11 ||nature, inherently speculative[.]”) (internal quotations and citations omitted). “Thus, the cour 12 |}need only make a well-reasoned estimate of the liquidation value that is supported by th 13 ||evidence on the record. It is not necessary to itemize or specifically determine precise value 14 || during the estimation procedure. Requiring such precision would be entirely unrealistic becaus 15 |} exact values could only be found if the debtor actually underwent Chapter 7 liquidation.” In r 16 || W.R. Grace & Co., 475 B.R. 34 at 258 citing Affiliated Foods, 249 B.R. at 788. 17 In the instant case, the Debtors have above median income and thus, the plan duration i 18 months. The proposed plan dated June 1, 2013 is a base plan with a base of $28,400 and th 19 || general unsecured will be paid pro-rata from any remaining funds. The Debtors in Schedule 20 || (Real Property) list a real property which they value at $95,000 and which has no mortgage (o 21 ||secured claim). Debtors list in their Amended Schedule B (Personal Property) assets in th 22 || amount of $13,047.92. The Debtors in their amended Schedule C (Property Claimed as Exempt 23 || list the total value of the claimed exemptions in the amount of $106,178 of which $95,000 i 24 || allocated to the homestead exemption pursuant to 31 P.R. Laws Ann. $§385(a); 1851-1857. Th 25 || Debtors list in their Schedule D (Creditors Holding Secured Claims) a claim in the amount o 26 27

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1 |}$1,7927 and in Schedule F (Creditors Holding Unsecured Nonpriority claims) Debtors lis 2 || unsecured claims which total $110,257.04, of which $91,500.00 is allocated to a loan with Banc 3 || Popular de Puerto Rico for the purchase of a residence which has not been registered at th 4 || Property Registry. The court notes that in Schedule F, the Debtors list three (3) claims wit 5 unknown amounts that correspond to credit card debts, two (2) of which are disputed becaus 6 they were paid off. The Debtors do not list any creditors holding unsecured priority claims i 7 Schedule E. In the instant case, without considering the value of the legal claim, the Debtors’ 8 || nonexempt assets (Schedule A + amended Schedule B — amended Schedule C) total $1,869.92, 9 || Thus, the liquidation analysis would entail a comparison between the present value of $26,60 10 || ($28,400 - $1,792 for a secured claim) plus the present value of the legal claim versus th 11 || liquidation value of the Debtors’ nonexempt assets in the amount of $1,869.92 plus th 12 |} liquidation value of the legal claim. 13 This court finds that for the proposed plan to be confirmed it must satisfy th 14 requirements of Section 1325(a)(4), thus all of the property of the estate must have an assigne 15 || value. The court notes that the Debtors in the state court complaint list their alleged contractua 16 and emotional damages in the total amount of $263,639 which is allocated in the followin 17 || manner: (i) $41,139 which constitutes the totality of the monthly mortgage payments paid b 18 || Debtors for a void mortgage loan; (ii) $40,000 in property improvements; (iii) $7,500 for th 19 || deposit and closing costs; (iv) $60,000 in damages for not being able to (being deprived) sell th 20 ||real property; (v) $65,000 in damages for not being able to refinance the property and thus 21 || benefit from lower interest rates; and (vii) $50,000 due to suffering and mental anguish becaus 22 || they are unable to fully enjoy their property and they are in a state of terrible uncertainty. 23 This court finds that the value the Debtors must assign to their legal claim is an estimat 24 || of the current value they deem that particular claim is worth. The court understands the difficult 25 assigning a current value to a legal claim, given that a market does not exist for such an asset, 26 27 |]? The court notes that pursuant to the claims register, the proof of claim filed for secured claim #4-1 is in the amount of $2,193.80. -8-

1 || The court finds that the best guide for establishing the current value of a particular cause o 2 |} action (legal claim) is to find out the monetary awards that the state courts have awarded t 3 || similar legal claims (causes of action) in the past. However, it must be noted that the Debtors ar 4 not required to personally fund distribution to unsecured creditors based upon the hypothetica 5 || recovery value of a legal claim. 6 Conclusion 7 For the foregoing reasons, the Trustee’s Sur-reply to Debtor’s Reply to Trustee’s 8 Unfavorable Report is granted and, thus this court orders the Debtors to assign a current value 9 to their legal claim listed in amended Schedule B (Personal Property) in order for the Trustee to 10 || be able to calculate the liquidation analysis. The Debtors must file with this court within 14 days 11 || of the entry of this Opinion and Order the current value they have assigned to their legal claim. 12 SO ORDERED. 13 In San Juan, Puerto Rico, this 17" day of January, 2014. 14 15 _

unitdh states Bankruptcy Judge 17 18 19 20 21 22 23 24 25 26 27

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