In re: Jeans.com, Inc.

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: November 8, 2013
• Docket: 13-07491
• Status: Unknown

Opinion

IN THE UNITED STATES BANKRUPTCY COURT 1 FOR THE DISTRICT OF PUERTO RICO 2 IN RE: CASE NO. 13-07491 (ESL) 3 JEANS.COM, INC. 4 CHAPTER 11 Debtor 5

6 OPINION AND ORDER 7 8 This case is before the court upon the Motion to Dismiss and Requesting Order Barring 9 Debtor from Re-filing for Bankruptcy filed by DDR Norte LLC, S.E., DDR Palma Real LLC, 10 S.E., DDR Atlántico LLC, S.E., and DDR Rio Hondo LLC, S.E. (jointly and collectively 11 referred to as “DDR”) (the “Motion to Dismiss”, Docket No. 22) and the Opposition thereto 12 filed by the Debtor (Docket No. 49). On October 18, 2013 the court held a hearing to consider, 13 inter alia, the evidence to support DDR’s Motion to Dismiss. See Docket Nos. 55 (Audio File 14 of that hearing) and 64 (Minute Entry). For the reasons stated below, the court denies DDR’s 15 Motion to Dismiss. 16 Factual and Procedural Background 17 On March 9, 2012, the Debtor filed a Chapter 11 bankruptcy petition in the case 18 captioned In re Jeans.com, Inc, Case No. 12-01777 (ESL) (the “First Case”). 19 On February 19, 2013, the court held a hearing to consider the approval of the 20 Disclosure Statement. The court ordered the Debtor to either file an amended disclosure 21 statement or supplement the filed disclosure statement within forty five (45) days. See Docket 22 No. 288 of the First Case. 23 On May 8, 2013, the court issued an Order to Show Cause Re: Dismissal (Docket No. 24 328 of the First Case) for the Debtor to show cause within twenty-one (21) days as to why the 25 case should not be dismissed for failure to file a Disclosure Statement and Plan. 26 On May 13, 2013, the Debtor filed a Motion in Compliance with Order to Show Cause 27 (Docket No. 334 of the First Case) averring that it had been waiting for the unsecured creditors 1 committee’s input prior to filing an Amended Disclosure Statement. The Debtor further 2 requested 30 additional days to file the Amended Disclosures Statement, which the court 3 granted on May 14, 2013 (Docket No. 335 of the First Case). 4 On June 17, 2013, the court issued an Order (Docket No. 357 of the First Case) 5 dismissing the case for failure to file the Amended Disclosure Statement. 6 On June 18, 2013, the Debtor filed a Urgent Motion for Reconsideration (Docket No. 7 359 of the First Case) requesting the court to reconsider its previous Order (Docket No. 357 of 8 the First Case) under Fed. R. Civ. P. 59. Once more, Debtor requested fourteen (14) days to file 9 the Amended Disclosure Statement. 10 On June 19, 2013, the unsecured creditors committee filed an Opposition to Debtor’s 11 Request for Reconsideration of Dismissal Order (Docket. No. 360 of the First Case) arguing 12 that the Debtor had failed to provide adequate documentation regarding the credit cards and that 13 the Debtor had breached a court order by using four (4) credit cards instead of the two (2) it was 14 authorized to use (Docket No. 66 of the First Case). The unsecured creditors committee 15 requested that Debtor explain the post-petition accumulation of debt owed to the IRS, referring 16 to Claims Register No. 98-3 of the First Fase. The unsecured creditors committee also stated 17 that it had always acted in an amicable fashion and that the dismissal of the case was warranted 18 by Debtor’s actions. 19 On July 23, 2013, the court entered an Opinion and Order denying the Debtor’s Motion 20 for Reconsideration. See Docket No. 372 of the First Case. 21 On June 24, 2013, the Debtor filed the Amended Disclosure Statement and Amended 22 Plan for Reorganization (Docket Nos. 366 and 367 of the First Case). 23 On September 11, 2013, the Debtor filed the instant Chapter 11 bankruptcy petition. 24 See Docket No. 1. 25 On September 17, 2013, the Debtor filed a Motion Requesting Approval to Use Credit 26 Cards (the “Motion to Use Credit Cards”, Docket No. 12). 27 1 Also on September 17, 2013, the Debtor filed a Motion for Entry of (A) Bridge Order 2 and (B) Final Order (I) Prohibiting Utilities from Discontinuing, Altering or Refusing Service, 3 (II) Establishing Procedures for Providing Deposits to Utilities, (III) Deeming Utilities to Have 4 Adequate Assurance of Payment, and (IV) Establishing Procedures for Resolving Requests for 5 Additional Assurance Pursuant to 11 U.S.C. Sections 105 (A) and 366 (the “Motion for 6 Utilities”, Docket No. 13). 7 On September 20, 2013, the Debtor filed a Motion Requesting Authorization to 8 Denominate Critical Vendors (the “Motion to Denominate Critical Vendors”, Docket No. 16) 9 On September 27, 2013, DDR filed the Motion to Dismiss (Docket No. 22) claiming that 10 the instant bankruptcy petition was filed in bad faith, that nothing had changed between the two 11 (2) month period between the dismissal of the First Case and the filing of the instant one, and 12 therefore this case should be dismissed with a bar to re-file. 13 On September 30, 2013, the court entered an Order and Notice (Docket No. 32) 14 scheduling a hearing to consider DDR’s Motion to Dismiss and the Debtor’s motions to use 15 credit cards, utilities and critical vendors for October 18, 2013 at 10:30 a.m. 16 On October 3, 2013, DDR filed an Opposition to Debtor’s Motion for Authorization to 17 Pay Critical Trade Vendors (Docket No. 34) arguing that the Debtor had not advanced any 18 evidence whatsoever to support its motion and that it was actually a request to authorize post- 19 petition financing outside the ordinary course of business, despite Debtor’s failure to comply 20 with the requirements of section 364 of the Bankruptcy Code, as well as Fed. R. Bankr. P. 4001 21 and Local Bankr. R. 4001-2. 22 On October 10, 2013, PREPA filed an Opposition to Debtor’s Motion and Request for 23 Adequate Protection under 11 U.S.C. § 366 (Docket No. 40). 24 On October 15, 2013, DDR and the Debtor filed a Joint Agreed Deadlines to Respond to 25 DDR’s Motion to Dismiss and Opposition to Pay Critical Vendors (Docket No. 44). 26 On October 17, 2013, the Debtor filed an Opposition [to DDR’s] Motion to Dismiss 27 (Docket No. 45) arguing that the instant case was filed in good faith and that there had been a 1 change in circumstances that warrant its filing. Also on October 17, 2013, the Debtor filed a 2 Reply to Opposition to Motion Requesting Authorization to Denominate Critical Vendors 3 (Docket No. 46) sustaining that the products and services provided by the critical vendors are 4 necessary for it to continue operating and turn a profit. On that same day, the Debtor also filed 5 a Supplement to Opposition to [DDR’s] Motion to Dismiss (Docket No. 47) stating that it had 6 received several letters from several of its unsecured creditors in support of its reorganization. 7 The Debtor also argued that these creditors were not represented by counsel but had asked it to 8 submit said letters to the court in order for the court to take their positions into account. 9 Also on October 17, 2013, creditors BPP Retail Properties, LLC, PDCM Associates, 10 S.E., Regency Park Associates, S.E. and Yabucoa Development, S.E. filed Motions for Payment 11 of Administrative Expenses (Docket Nos. 50, 51, 52 and 53). 12 On October 18, 2013, the court held the scheduled hearing. See Docket Nos. 55 (Audio 13 File) and 64 (Minute Entry). During the hearing, the court made the following rulings: 14 1. DDR’s Motion to Dismiss was taken under advisement. A separate opinion and order 15 will be issued to rule upon it; 16 2. the Debtor and PREPA were ordered to file an agreement within 14 days and PREPA; 17 3. the Debtor’s Motion Requesting Approval to Use Credit Cards (Docket No. 12) was 18 granted as unopposed; and 19 4. the Motion Requesting Authorization to Denominate Critical Vendors (Docket No. 16) 20 would be granted through a separate order. The court partially disagreed with the legal 21 assumptions made by the Debtor in regards to In re Kmart Corp., 359 F.3d 866 (7th Cir. 22 2004), but the evidence during the hearing supports the request for critical vendors as to 23 the way they were designated and in the amounts they were designated as they have 24 been budgeted to be paid in the projections prepared (capped at $5,000). 25 See the Minute Entry (Docket No. 64, pp. 7-8). 26 27 1 Applicable Law and Analysis 2 DDR’s Motion to Dismiss is premised on the following grounds: (a) there is sufficient 3 “cause” to dismiss under 11 U.S.C. § 1112(b) for the Debtor’s lack of good faith in filing the 4 instant case only two months after the dismissal of the First Case; and (b) the Debtor’s attempts 5 to leverage its prior disobedience of court orders in the First Case, and non-compliance with its 6 various legal duties warrant the court to bar re-filing. DDR argues the Debtor’s “lack of good 7 faith” as follows: 8 a. the First Case was dismissed due to the Debtor’s continued disregard of the 9 court’s various deadlines and orders, its inability to effectively move towards 10 reorganization (such as failing to timely file a legally sufficient Disclosure 11 Statement and Plan), its failure to cure its numerous administrative and 12 operational deficiencies as raised, among others, by the unsecured creditors 13 committee (such as the Debtor’s apparent unauthorized use of credit cards and 14 Debtor’s failure to produce the corresponding addendums and/or amendments to 15 certain lease agreements), and Debtor’s failure to timely file its monthly 16 operating reports (“MOR”); 17 b. the Debtor’s failure to demonstrate which of these deficiencies (if any) have been 18 cured within the two-month period between the dismissal of the First Case and 19 the filing of the instant case; 20 c. the Debtor’s lack of valid reorganization purpose as the crucial issues which 21 impeded reorganization in the First Case (such as the identification of Debtor’s 22 source of funding for the purchase of merchandise for its operations, the 23 submission of the alleged addendums to certain of Debtor’s lease contracts, 24 whether Debtor’s income is sufficient to propose a Plan of reorganization, and 25 Debtor’s failure to comply with the provisions of the Code), remain continuing 26 and have not been cured to date. Particularly, and as raised by DDR at the First 27 Case (Docket No. 239 of the First Case), Debtor is still utilizing the same trite 1 strategy of shielding itself behind the guise of its related company Felix Fanti & 2 Michael J. Silva Enterprises, Inc. in order to avoid making payment as to the 3 leases for which Debtor itself continues to occupy and derive direct economic 4 benefit; 5 d. the instant case was filed exclusively as a litigation tactic given that, through the 6 dismissal of the First Case (which dismissal DDR sustains was a direct result of 7 Debtor’s own negligence and inability to reorganize, as well as Debtor’s failure 8 comply with court orders and provisions of the Bankruptcy Code), Debtor was 9 able to curtail the efforts of its two more active and vocal creditors in the First 10 Case, that is, the unsecured creditor committee and DDR. By filing this new 11 bankruptcy proceeding a mere two (2) months since the dismissal of the First 12 Case, the Debtor was attempting to eliminate the various concerns raised by the 13 unsecured creditor committee and DDR, while at the same time frustrating 14 DDR’s collection efforts of its administrative expenses; and 15 e. the instant case was filed as a means to frustrate the legitimate efforts of Debtor’s 16 creditors in enforcing their applicable non-bankruptcy law remedies, including 17 the continuation of DDR’s collection and eviction actions against the Debtor in 18 the Puerto Rico Court of First Instance. 19 See DDR’s Motion to Dismiss (Docket No. 22, pp. 8-10). 20 During the October 18, 2013 hearing, the court ruled that it would apply the analysis in 21 In re Costa Bonita Beach Resort, 479 B.R. 14 (Bankr. D.P.R. 2012), to consider the alleged lack 22 of good faith as a cause for dismissal under 11 U.S.C. § 1112(b): “[t]he determination of 23 whether the movant has established prima facie that there is a lack of good faith (or bad faith) in 24 the filing of a bankruptcy petition is a fact intensive inquiry in which the court analyzes the 25 totality of the circumstances.” Id. at 40. Furthermore: 26 [t]he totality of the circumstances test cannot be reduced to a mechanical checklist 27 (irrespective of the chapter or whether it is in the filing of the petition and/or the confirmation of the plan). See Berliner v. Pappalardo (In re Puffer), 674 F. 3d 78, 1 81 (1st Cir. 2012) (“The totality of the circumstances test cannot be reduced to a mechanical checklist, and we do not endeavor here to canvass the field and 2 catalogue the factors that must be weighed when determining whether a debtor 3 has submitted a Chapter 13 plan in good faith”). The First Circuit has determined that, “in all events, good faith is a concept not a construct. Importantly, it is a 4 concept that derives from equity. This matters because equitable concepts are particularly insusceptible to per se rules.” In re Puffer, 674 F. 3d at 82. Thus, this 5 court, in conformity with the determinations of the First Circuit in In re Puffer 6 rejects the mechanical checklist approach for a determination of lack of good faith (or bad faith) for all cases, irrespective of whether they are SARE cases. Good 7 faith is an abstract idea generalized from particular circumstances and not a working assumption. In re Costa Bonita Beach Resort, 479 B.R. at 40. 8 9 The legislative history of 11 U.S.C. § 1112(b) reveals that Congress intended to invest 10 the bankruptcy court with “wide discretion … to make an appropriate disposition of the case” 11 and “to consider other factors as they arise, and use its equitable powers to reach an appropriate 12 result in individual cases.” H.R. Rep. No. 595, 95th Cong., 2d Sess. 406, reprinted in 1978 13 U.S.C.C.A.N. 5963, 6361-62. Also see De Jounghe v. Lugo Mender (In re De Jounghe), 334 14 B.R. 760, 770 (B.A.P. 1st Cir. 2005); In re Torres de Jesus, 2012 Bankr. LEXIS 307 at *38, 15 2012 WL 195516 *12 (Bankr. D.P.R. 2012). 16 In the instant case, the parties were afforded the opportunity to present evidence to 17 support their respective contentions at the October 18, 2013 hearing. After considering the 18 evidence presented by DDR, the court initially ruled that “the events leading to the dismissal of 19 the First Case and the timing of the filing of the instant subsequent petition, in light of the 20 emergency motions filed regarding the use of credit cards and for payment of critical vendors, 21 the testimony that the Debtor continues to fail to make timely payments to DDR and the 22 motions for payment of administrative expenses (Docket Nos. 50, 51, 52 and 53), are sufficient 23 to establish a prima face showing of bad faith or lack of good faith, which therefore shifts to the 24 Debtor the burden of establishing that the instant petition was filed in good faith.” Minute 25 Entry, Docket No. 64, pp. 4-5. 26 The Debtor then presented its evidence to sustain that the instant case was not filed in 27 bad faith or lacking good faith. Its first witness was Mr. Jaime Acosta, Debtor’s comptroller, 1 whose duties include the financial and accounting responsibilities of the corporation. Mr. 2 Acosta explained the events leading up to the Debtor’s bankruptcy petition in the Frist Case, 3 including the following factors: banking problems, vendors not giving credit (which was 4 essential to the Debtor’s business), no manufacturing in Puerto Rico since the 1980’s, lack of 5 liquidity, line of credits with Eurobank, the foreclosing of Eurobank by the FDIC and 6 subsequent acquisition by Oriental, who requested additional collateral. He further declared 7 that he was the culprit of the late filings of the MORs and disclosure statement in the First Case 8 and explained that he was unable to timely prepare them for personal reasons, which he 9 satisfactorily detailed, and also because the U.S. Trustee did not allow the use of electronic 10 banking for the company, which translated to excessive manual reconciliation of the 30 stores 11 on a daily basis by himself, because he had no support staff. See Minute Entry, Docket No. 64, 12 p. 5. 13 The Debtor also called Mr. Michael Silva, its president, to the witness stand. Mr. Silva 14 was candid in acknowledging that he was not aware that he needed to change the leases that 15 were being held by Fanti & Silva Enterprises to the Debtor’s name, and declared that Fanti & 16 Silva Enterprises did not coexist with Jeans.com because, except for some old leases, financially 17 everything went to Jeans.com, Inc. He also explained how Jeans.com, Inc. was in no way 18 created as a scheme to defraud the landlords: they simply liked the catchier name. He also 19 declared that he did not want the First Case to be dismissed because no one wants to go through 20 these proceedings twice, that it has been hard in the market and that the dismissal of the First 21 Case only created disappointment in the creditors that wished the Debtor to re-emerge. In 22 addition, he indicated that he could not prepare the financial information required in the MORs 23 of the disclosure statement because he relies on Mr. Jaime Acosta and he would not even know 24 how to prepare them. He also testified that he met continuously with the unsecured creditors 25 committee during the First Case under the encouragement of the court to attempt to reach 26 agreements, but that those efforts turned hopeless and the disclosure statement kept on getting 27 delayed so they could make changes resulting from the different attempts to reach agreements. 1 || Mr. Silva also stated that the Debtor filed the instant second bankruptcy petition because he did 2 ||not want to have any personal lawsuits on his personal guarantees, and that the Debtor is really 3 || bankrupt and needs the protection of the court. See Minute Entry, Docket No. 64, pp. 6-7. 4 The court also finds that both Mr. Acosta and Mr. Silva presented credible testimonies 5 ||regarding the deficiencies of the First Case, including the late filings of MORs and the 6 || disclosure statement, and the filing of the instant one. Therefore, upon the evidence presented 7 || by the Debtor, and in consideration to the totality of the circumstances of the instant case, the 8 || court finds that the Debtor has satisfactorily demonstrated to the court that the instant case was 9 || not filed in bad faith or lacking good faith. 10 Conclusion 11 In view of the foregoing, the DDR’s Motion to Dismiss (Docket No. 22) is hereby 12 || denied. 13 SO ORDERED. 14 In San Juan, Puerto Rico, this gn day of November, 2013. 15 © a wile

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