In re: Heng Cheong Pacific Limited (BVI), World-Wide Investment Services Limited (BVI), New Century Properties Limited (BVI) v. RiverCliff Farm, Inc., United States of America, DOES 1-50

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2

3 IN RE: 4 Heng Cheong Pacific Limited (BVI), Case No. 19-04895-BKT15 5 World-Wide Investment Services Limited (BVI), Case No. 19-04897-BKT15 New Century Properties Limited (BVI), Case No. 19-04898-BKT15 6 7 Chapter 15 cases

8 Debtor(s) Jointly Administered Under Case No. 9 19-04895-BKT15 10 Cosimo Borrelli and Colin Wilson, collectively 11 as the Foreign Representatives,

12 Plaintiff 13 vs. Adversary No. 20-00040-BKT

14 RiverCliff Farm, Inc., FILED AND ENTERED ON 8/24/2020 15 United States of America, DOES 1-50

16 Defendants 17 OPINION AND ORDER 18 Before this court is a Motion to Dismiss [Dkt. No. 21], filed by Defendant, United States 19 20 of America (hereinafter, “Defendant”), an Opposition to Motion to Dismiss [Dkt. No. 26] filed by 21 Cosimo Borrelli and Colin Wilson (hereinafter, “Plaintiffs”) and a Reply to Opposition to Motion 22 to Dismiss [Dkt. No. 30] filed by Defendant. For the reasons set forth below, Defendant’s Motion 23 to Dismiss [Dkt No. 21] is DENIED. 24 25

1 1 I. Factual Background 2 The present adversary proceeding is the byproduct of involuntary chapter 7 cases against 3 the Debtors filed on August 27, 2019. The claims emanating from this Complaint arise against the 4 backdrop of an investment scheme which, in essence, defrauded foreign investors out of tens of 5 6 millions of dollars. The persons responsible for this fraudulent scheme allegedly used investor 7 funds to purchase a property located at 35701 NE Chamberlain Road in Corbett, Oregon (hereafter, 8 the “RiverCliff Property”). 9 Plaintiffs seek (1) a preliminary and permanent injunction against all parties prohibiting 10 11 them from taking any action with respect to ownership or control of the RiverCliff Property; (2) 12 to substantively consolidate a single purpose entity, RiverCliff Farm, Inc. (hereafter, “RFI”), which 13 was allegedly used to purchase and improve the RiverCliff Property by using the fraudulently- 14 derived funds from Heng Cheong Pacific Limited (hereafter, “HCPL”), World-Wide Investment 15 Services Limited (hereafter, “World-Wide”), and New Century Properties Limited (hereafter, 16 17 “NCPL”)(Collectively, the “Debtors”); (3) declaratory relief that the Debtors’ Estate holds 18 equitable title in the RiverCliff Property either through a constructive trust or, in the alternative, 19 an equitable lien; (4) turnover of the RiverCliff Property to allow for its liquitdation; and (5) 20 alternatively, to avoid and recover the fraudulent transfers related to the RiverCliff Property— 21 including the monies transferred from the Debtors to RFI and used to purchase and improve the 22 23 property. 24 Defendants, on the other hand, assert that (1) this Court lacks subject matter jurisdiction to 25 hear claims concerning the RiverCliff Property; (2) that venue is improper under 28 U.S.C. §§

1409 and 1410; (3) that Plaintiffs fail to state a claim and (4) claim preclusion resulting from a 2 1 previous judgment entered by the Oregon district court. The underlying basis for each of these 2 arguments is that the RiverCliff Property does not belong to the Debtors. As a result of the above, 3 Defendants have moved for dismissal of the adversary complaint pursuant to Fed. R. Civ. P. 4 12(b)(1), 12(b)(3), 12(b)(6) and Fed R. Bankr. P. 7012(b). 5 6 II. Standard of Review 7 Fed. R. Bankr. P. 7012(b) applies Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(b)(6) to 8 adversary proceedings. Ordinarily a court presented with motions to dismiss under both Rules 9 12(b)(1) and 12(b)(6) should decide jurisdictional questions before addressing the merits. Deniz 10 11 v. Municipality of Guaynabo, 285 F.3d 142, 149 (1st Cir. 2002). The Court also has an independent 12 duty to assess whether it has subject matter jurisdiction of an action. Id. See, Fed. R. Civ. P. 13 12(h)(3). 14 III. Legal Analysis 15 A. Fed. R. Civ. 12(b)(1): Subject Matter Jurisdiction 16 17 Pursuant to Fed. R. Civ. 12(b)(1), a party may request the dismissal of a complaint for lack 18 of subject matter jurisdiction. “The part[y] asserting jurisdiction [has] the burden of demonstrating 19 the existence of federal jurisdiction.” Acosta-Ramirez v. Banco Popular de Puerto Rico, 712 F. 3d 20 14, 20 (1st Cir. 2013). In effect, Rule 12(b)(1) is the proper vehicle for challenging a court's subject 21 matter jurisdiction. Valentin v. Hospital Bella Vista, 254 F.3d 358, 362-63 (1st Cir.2001). Under 22 23 this rule a variety of different types of challenges to the Court's subject matter jurisdiction may be 24 asserted. Id. Rule 12(b)(1) motions may be considered as a “facial attack” or a “factual attack” on 25 the allegations in the complaint. See, Vazquez v. Puerto Rico Police Dept., No. 01-2465, 2005

U.S. Dist. LEXIS 46235, 2005 WL 2406170, at *2 (D.P.R. September 29, 2005) (citing, Mortensen 3 1 v. First Federal Sav. and Loan Ass'n, 549 F.2d 884 (3rd Cir. 1977)). “In a facial attack, a defendant 2 argues that the plaintiff did not properly plead jurisdiction … whereas a factual attack asserts that 3 jurisdiction is lacking on the basis of facts outside of the pleadings.” Rivera Torres v. Junta de 4 Retiro para Maestros, 502 F.Supp.2d 242, 247 n.3 (D.P.R. 2007) (internal quotation marks and 5 6 citations omitted). The court must construe the complaint liberally, treating all well-pleaded facts 7 as true and indulging all reasonable inferences in favor of the plaintiff, and may consider whatever 8 evidence has been submitted on jurisdiction. Aversa v. United States, 99 F.3d 1200, 1209-10 (1st 9 Cir. 1996). 10 11 Plaintiffs assert that the present case is a core proceeding under 28 U.S.C. 157(b)(2) 12 because it is a proceeding concerning administration of the Estate and specifically concerns 13 turnover of property of the Estate [Dkt. No. 1]. Ordinarily, bankruptcy proceedings are divided 14 into two categories: “core” and “non-core.” Stern v. Marshall, 564 U.S. 462, 473-76 (2011). All 15 core proceedings, by definition, are within the bankruptcy court’s jurisdiction. Quincy Med. Ctr., 16 17 858 F.3d at 662. To be more precise, “[b]ankruptcy judges may hear and determine all cases under 18 title 11 and all core proceedings arising under title 11, or arising in a case under title 11.” 28 U.S.C. 19 § 157(b)(2). However, it’s important to note that there is no formal bankruptcy estate in a Chapter 20 15 proceeding, only what is referred to as “property of the debtor”. See, 11 U.S.C. § 103; 11 U.S.C. 21 § 1520(a); In re Atlas Shipping A/S, 404 B.R. 726, 739 (Bankr. S.D.N.Y. 2009). A bankruptcy 22 23 court’s jurisdiction over the debtor’s property in a Chapter 15 case under 28 U.S.C § 1334(e) is 24 expressly limited to property of the debtor located within the territorial jurisdiction of the United 25 States. In re JSC BTA Bank, 434 B.R. 334, 3465 (Bankr. S.D.N.Y. 2010).

B. Fed. R. Civ. P. 12(b)(6): Failure to State a Claim 4 1 A motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) is applied when there is “failure 2 to state a claim [upon which relief can be granted] only if it clearly appears, according to the facts 3 alleged, that the plaintiff cannot recover on any viable theory.” Gonzales-Morales v. Hernandez- 4 Arencibia, 221 F.3d 45, 48 (1st Cir. 2000) (citing, Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 5 6 49, 52 (1st Cir. 1990)). In order to survive a motion to dismiss, a complaint must plead “enough 7 facts to state claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 8 544, 570 (2007). A claim has facial plausibility when the pleaded factual content allows the court 9 to draw the reasonable inference that the defendant is liable for the misconduct alleged.” In re 10 11 Acosta, 464 B.R. 86, 90 (Bankr. D.P.R. 2011). The complaint “... must contain sufficient factual 12 matter to state a claim to relief that is plausible on its face.” Rodriguez-Reyes v. Molina-Rodriguez, 13 711 F.3d 49, 53 (1st Cir., 2013) citing, Grajales v. Puerto Rico Port Authority, 682 F.3d 40, 44 (1st 14 Cir., 2012). Moreover, “determining whether a complaint states a plausible claim for relief... can 15 be a context-specific task that requires the reviewing court to draw on its judicial experience and 16 17 common sense.” Ashcroft v. Iqbal, 556 U.S. 662 (2009). 18 When analyzing a motion to dismiss of this nature, “the court accepts as true well-pleaded 19 facts and draws all reasonable inferences in the plaintiff’s favor.” Ocasio-Hernandez v. Fortuno- 20 Burset, 639 F.Supp.2d 217, 221 (D.P.R. 2009); See also, Gagliardi v. Sullivan, 513 F. 3d 301, 305- 21 06 (1st Cir. 2008). It is not necessary for Plaintiffs to plead facts sufficient to establish a prima 22 23 facie case at the pleading stage. See, Rodriguez-Reyes v. Molina-Rodriguez, 711 F.3d 49, 54 (1st 24 Cir., 2013); citing, Swierkiewicz v. Sorema, 534 U.S. 506, 512 (2002).The Court can also consider 25 documents annexed to the complaint, documents fairly incorporated by reference in the complaint,

matters of public record, and other matters susceptible to judicial notice without converting a Rule 5 1 12(b)(6) motion into one for summary judgment. Id. at 306; Giragosian v. Ryan, 547 F. 3d 59, 65 2 (1st Cir. 2008). However, while it is true that a court may take judicial notice of another court’s 3 opinion “it may do so not for the truth of the facts recited therein,” but only “for the existence of 4 the opinion, which is not subject to reasonable dispute over its authenticity.” Lee v. City of Los 5 6 Angeles, 250 F.3d 48, 51 (1st Cir. 2008). 7 C. Res Judicata 8 In Puerto Rico, the concept of “res judicata” encompasses the doctrines of both claim and 9 issue preclusion, each with slightly different requirements. See, R.G. Financial Corp. v. Vergara- 10 11 Nunez, 446 F.3d 178, 182 (1st Cir. 2006). Under Puerto Rico’s res judicata scheme, claim 12 preclusion “binds parties from litigating or relitigating any claim that was or could have been 13 litigated in a prior adjudication and prevents claim splitting.” Gener-Villar v. Adcom Group, Inc., 14 417 F.3d 201, 205 (1st Cir. 2005); See also, Pérez v. Volvo Car Corp., 247 F.3d 303, 311 (1st Cir. 15 2001). The doctrine of claim preclusion is an affirmative defense that “can be adjudicated on a 16 17 motion to dismiss so long as (i) the facts establishing the defense are definitively ascertainable 18 from the complaint and the other allowable sources of information, and (ii) those facts suffice to 19 establish the affirmative defense with certitude.” Rodi v. S. New Eng. Sch. Of Law, 389 F.3d 5, 20 12 (1st Cir. 2004). When a “motion to dismiss is premised on a defense of [claim preclusion]… the 21 court may take into account the record in the original action.” Andrew Robinson Int’l, Inc. v. 22 23 Hartford Fire Ins. Co., 547 F.3d 48, 51 (1st Cir. 2008). 24 The federal doctrine of claim preclusion applies when there is, both in the previous and in 25 the present case, (1) identicality between the parties, (2) identicality between the causes of actions,

and (3) a final judgment on the merits entered for the first of the suits. Martinez Diaz v. E.L.A., 6 1 182 D.P.R. 580 (2011) (Citing, Haag v. U.S., 589 F.3d 43, 45 (1st Cir. 2009)); see also, Castro v. 2 Aponte-Dalmau, 243 F. Supp 3d 199, 201 (D.P.R. 2017); Coors Brewing Co. v. Mendez-Torres, 3 562 F.3d 3, 8 (1st Cir. 2009). When determining the identicality between causes of action, the Court 4 must question whether the two are based on the same transaction or factual nucleus. Id. See also, 5 6 AVX Corp v. Cabot Corp., 424 F.3d 28, 31 (1st Cir. 2005). On the other hand, a judgment is final 7 when it “ends the litigation on the merits and leaves nothing for the court to do but execute the 8 judgment.” Whitfield v. Municipality of Fajardo, 564 F.3d 40, 45 (1st Cir. 2009). 9 IV. Legal Analysis and Conclusion 10 11 In the case at hand, the Defendant’s motion to dismiss argues the dismissal standard of 12 Rule 12(b)(1) and Rule 12(b)(6), both made applicable to bankruptcy proceedings by Fed. R. 13 Bankr. P. 7012, by stating that this Court lacks subject matter jurisdiction and that the Complaint 14 falls short of the standards for stating a claim. Defendants further assert that the Complaint should 15 be dismissed due to claim preclusion. 16 17 We agree with Plaintiffs’ argument that this Court holds jurisdiction over the present 18 adversary proceeding as it arises in a case under Title 11. It is apparent that much of the controversy 19 hinges on whether the Plaintiffs possess a legitimate interest in the RiverCliff Property. Although 20 the Defendant has mounted a full-fledged defense against Plaintiff's allegations in the Complaint, 21 Defendant’s arguments are misplaced at this stage of the proceedings. We also find that the 22 23 requirements needed for the application of res judicata have not been met in the instant proceeding. 24 Finally, when evaluating a motion for dismissal pursuant to Rule 12(b)(6), the court must 25 construe the complaint liberally, treating all well-pleaded facts as true and indulging all reasonable

inferences in favor of the plaintiff, and may consider whatever evidence has been submitted on 7 1 || jurisdiction. Aversa v. United States, 99 F.3d 1200, 1209-10 (1 Cir. 1996). The complaint “..| must contain sufficient factual matter to state a claim to relief that is plausible on its face.’ Rodriguez-Reyes v. Molina-Rodriguez, 711 F.3d 49, 53 (1“ Cir., 2013). citing, Grajales v. Puert

Port Authority, 682 F.3d 40, 44 (1* Cir., 2012). In the instant adversary proceeding, th 6 || Plaintiffs have met this burden, because “it is not necessary to plead facts sufficient to establish 7 |! prima facie case at the pleading stage. See, Rodriguez-Reyes v. Molina-Rodriguez, 711 F.3d 49, ° 54 (1* Cir., 2013); citing, Swierkiewicz v. Sorema, 534 U.S. 506, 512 (2002). For the reasons previously stated, Defendant’ Motion to Dismiss [Dkt. No. 21] is DENIED, +1 || Defendant shall file its answer to the complaint within thirty (30) days. The Clerk to schedule a 12 || initial scheduling conference. SO ORDERED. In San Juan, Puerto Rico this 24" day of August 2020.

+8 Brian K. Tester 19 U.S. Bankruptcy Judge 20 21 22 23 24 25