In re: Leonardo Portela Torres

Opinion

] IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: CASE NO. 10-11246 (ESL) LEONARDO PORTELA TORRES ‘ Debtor CHAPTER 11 5 6 OPINION AND ORDER 7 There are two contested matters before this court. The first is creditor Maria I. Blanco 8 || Garrido’s (hereinafter referred to as “Blanco’’) request for relief of stay (Docket Nos. 25, 59 & 84). 9 || The second is Blanco’s motion to dismiss the instant case for varied reasons, including Debtor’s 10 || alleged failure to timely pay his post-petition domestic support obligations (“DSO”) and tax 11 || obligations, the Rooker-Feldman doctrine’ and lack of good faith (Dockets Nos. 31, 70, 74, 77, 79, 12 || 80, 90, 94 & 104). Debtor opposed to both remedies sought by Blanco (Dockets Nos. 37, 54, 59, 13 || 75, 82, 83, 85, 86, 91,99 & 122). Two separate hearings were held regarding these matters: the first 14 || was held on January 25, 2011 (Dockets No. 29 & 40°) and the second one on March 14, 2011 15 || (Docket No. 61). For the reasons stated herein, this court grants Blanco’s motion to dismiss the 16 || instant case under 11 U.S.C. § 1112(b)(4)(). Consequently, Blanco’s request for lift of stay is 17 || moot. 18 Facts and Procedural Background 19 Prior to filing his bankruptcy petition, Debtor and Blanco were married and subsequently 20 || divorced in the judicial proceeding of Portela Torres v. Blanco Garrido, Case No. DDI2005-0748 21 || (4003) before the Puerto Rico Court of First Instance (“CFI”), Superior Court of Bayamon. During 22 || their marriage, Debtor and Blanco procreated three children, all of whom are currently minors. 23 || (Docket No. 25, Exhibit B, pg. 10) 24 After the divorce decree became final and unappealable, on May 14, 2007 the CFI issued 25 || a DSO Order upon Debtor for his three minor children in the amount of $9,388.44 per month 26 ' Although Blanco does not cite the source of the Rooker-Feldman doctrine in any of her motions, it arises 27 || from two separate cases: Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983). In essence, the doctrine holds that federal courts should not sit in direct 28 || review of state court decisions --unless Congress has specifically authorized such relief-- and that therefore federal courts should not become a court of appeals for state court decisions. * Docket No. 29 is the minute entry of that hearing; Docket No. 40 is the transcript of the same.

1 retroactive to April 5, 2005 (the “DSO Order”, Docket No. 25, Exhibit B, pgs. 11-12). 2 At Blanco’s request, on June 15, 2010, the CFI ordered Debtor inter alia to sell his property 3 at Dorado Beach East #8 (the “Dorado Beach Property”) located in Dorado, PR, to Mr. and Mrs. 4 Horacio Campolieto within 30 days, not subject to an extension, and to appear in any private or 5 public document required to execute the sale. If Debtor did not comply, the CFI empowered a 6 marshal of that Court to appear on Debtor’s behalf to urgently execute the sale within 30 days. 7 (Docket No. 62) 8 On November 30, 2010, Debtor filed a voluntary bankruptcy petition under Chapter 11 of 9 the Bankruptcy Code (Docket No. 1). A Chapter 11 status conference was held on January 25, 2011 10 (Dockets Nos. 29 & 40) in which the Court expressed its concerns regarding the challenges facing 11 an individual Chapter 11 debtor and a small business debtor.3 12 Motion for Relief of Stay 13 On January 21, 2011, Blanco filed a Motion for Relief of Stay (Docket No. 25) alleging that 14 Debtor had not complied with his DSO, that as a result she moved the CFI for an order to sell the 15 Dorado Beach Property in order for Debtor to comply with his DSO and that any excess of his DSO 16 be consigned with the CFI, that the order was issued by the CFI, and that on the verge of the sale 17 of said Property, Debtor filed the instant bankruptcy case. Blanco alleges that Debtor’s bankruptcy 18 petition was filed in bad faith inasmuch as it constitutes a clear attempt to stay his DSO and its 19 further execution Order by the CFI, that she is lacks adequate protection of her interests that amount 20 to the payment of accrued child support payments and that Debtor’s property is not necessary for 21 an effective reorganization. She also seeks super priority status under 11 U.S.C. § 507(b) and 22 preclusion of the assessment of costs or expenses of administrations, if any, under 11 U.S.C. § 23 506(c). 24 On February 10, 2011, Debtor answered Blanco’s request for relief from the automatic stay 25 (Docket No. 37) arguing that the DSO Order in which Blanco based her motion for relief from stay 26 27 3 See Docket No. 40 (transcript of the initial status conference held on January 25, 2011), where the court made reference to Sections 507(a)(1), 521(f), 523(a)(5), 1129(a)(14), 1129(a)(9)(b) and 1141(d)(5) of the 28 Bankruptcy Code. 2 1 is pending to be reduced at his request, which was initially denied by the CFI but subsequently 2 overturned by the Puerto Rico Court of Appeals in Case No. KLCE 200800434.4 Debtor also 3 affirms that the collateral property, referring specifically to the Dorado Beach Property, is necessary 4 to his effective reorganization, that Blanco is adequately protected, and that the Property, which has 5 sufficient equity cushion, must be sold at an adequate price to benefit all creditors. 6 Motion to Dismiss 7 On January 28, 2011, Blanco filed a Motion to Dismiss (Docket No. 31) under 11 U.S.C. 8 § 1112(b)(4)(P) alleging that Debtor then owed more than $200,000 in child support arrears, which 9 is sufficient cause for dismissal. In addition, Blanco argued that the Rooker-Feldman doctrine is 10 applicable to this case because Debtor ultimately seeks to overturn a prior State Court decision in 11 Federal Court. Blanco further averred that the bankruptcy petition was filed in bad faith, which also 12 warrants dismissal. 13 On February 22, 2011, Debtor filed his Answer to Motion to Dismiss (Docket No. 54) 14 contending that the DSO Order was pending to be reviewed at his request, as ordered by the PR 15 Court of Appeals in Case No. KLCE200800434, to take into consideration the payments in kind he 16 is contributing towards his DSO, which he averred exceed his DSO. He also argued that the 17 Rooker-Feldman doctrine is not applicable to this case because, since he only requested from the 18 CFI that the DSO be reduced in consideration of said payments in kind, he has not really “lost” in 19 the State Court and therefore is not inviting this Federal Court to review, reject or set aside the DSO 20 Order. In sum, he alleges that his plan for reorganization includes the rent or sale or the Property 21 at an adequate price and the sale of personal property4, options that he contends would benefit all 22 creditors. Thus, his bankruptcy petition was filed good faith. 23 On March 14, 2011, a second hearing was held to argue Blanco’s motion to dismiss. She 24 argued that Debtor was in arrears of post-petition DSO payments5 and reiterated the Rooker- 25 Feldman doctrine and lack his of good faith. Debtor presented the Court with his arguments in 26 27 4 Neither party sought review of that decision by the Supreme Court of Puerto Rico. 4 Debtor also sustains that Blanco has refused to turn over his personal property. 28 5 See 11 U.S.C. § 1112(b)(4)(P). 3 1 response to Blanco’s contentions. No evidence was presented by any party during that hearing and 2 on the contrary, both Debtor and Blanco proposed to the Court that if either would testify, their 3 testimony would only consist of what they had already alleged in their respective motions. 4 On April 1, 2011, Blanco filed an Addendum to [her] Motion to Dismiss (Docket No. 70) 5 alleging that the payment of $38,700 Debtor claimed to have made towards his DSO was actually 6 a donation made by a relative that should not be considered as a payment towards Debtor’s DSO. 7 No legal authority was cited to support that contention. A Second Addendum to Motion to Dismiss 8 was later filed on April 7, 2011 (Docket No. 74) insisting that the alleged donation cannot be 9 considered as Debtor’s payment towards his DSO and that he does not have the apparent ability to 10 pay his DSO as evidenced by his monthly operating reports, which warrants dismissal under 11 11 U.S.C. § 1112. 12 On April 15, 2011, Debtor filed a Motion to Strike Addendum to Motion Requesting 13 Dismissal (Docket No. 75) arguing that the referred donation was made to Debtor to pay his DSO 14 by virtue of a check to the order of ASUME (the PR DSO payment instrumentality) and that his 15 ability to pay his DSO is part of his reorganizational plan, whereby he intends to sell or rent the 16 Dorado Property and sell some of his personal property such as valued artwork. On April 18, 2011, 17 Blanco replied to that motion (Docker No. 77) and insisted that the donation cannot be considered 18 a payment of Debtor toward his DSO6. 19 On April 21, 2011, Blanco filed a Motion Requesting Order (Docket No. 79) in which she 20 again moved for the dismissal of this case for DSO arrears pursuant to 11 U.S.C. § 1112(b)(4)(P). 21 On April 24, 2011, Blanco replied to Debtor’s Motion to Strike Addendum (Docket No. 80) 22 sustaining that Debtor had not reported the alleged donation in the corresponding Monthly 23 Operating Report and that his actions constitute bad faith. 24 A few more motions were filed by Blanco requesting the dismissal of this case under 11 25 U.S.C. § 1112(4)(P) for Debtor’s lack of post-petition DSO payments for several periods, which 26 Debtor replied to. (Dockets No. 90, 91, 94 & 99) These motions and the documents attached 27 thereto show that Debtor has not been paying his post-petition DSO on time. 28 6 Again, no legal authority was cited to support that contention. 4 1 On July 26, 2011, the Puerto Rico Treasury Department (“PR Treasury”) filed a Request for 2 the Allowance and Payment of Administrative Expenses (Docket No. 101) informing that Debtor 3 has not paid post-petition tax liabilities in the amount of $3,223.94 and requesting that these taxes 4 be considered administrative expenses pursuant to 11 U.S.C. §§ 503(b) and 507. Shortly thereafter, 5 that is, on August 4, 2011, Blanco again moved for dismissal (Docket No. 104) claiming that 6 Debtor had not filed his monthly operating reports as of March of 2011 and that he was in arrears 7 with his post-petition tax obligations and DSO payments. Debtor then proceeded to untimely file 8 his Monthly Operating Reports7 for the months of March 2011 to July 2011 all at once on 9 September 7, 2011 (Dockets Nos. 112-116). As of today, Debtor has not filed the monthly 10 operating reports for the months of August and September 2011. 11 On September 1, 2011, this Court issued an Order to Show Cause re: Dismissal (Docket No. 12 110) directing Debtor to show cause within 14 days why the case should not be dismissed for the 13 reasons stated by Blanco in her motion to dismiss of August 14, 2011 (Docket No. 104). On 14 September 15, 2011, Debtor filed a Motion in Compliance with Court Order to Show Cause re: 15 Dismissal (Docket No. 122) sustaining that he is not in arrears of his DSO payments. 16 Notwithstanding, Debtor acknowledged that he is in arrears in his post-petition tax obligations and 17 that he intends to pay “opportunely in accordance with [his] plan”, making reference to Dockets 18 Nos. 118 & 119. Docket No. 122, ¶ 13, pg. 5. 19 Applicable Law 20 Cause for Conversion or Dismissal pursuant 11 U.S.C. § 1112(b) 21 11 U.S.C. § 1112(b)(1) provides as follows: 22 Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, the court shall convert a case under this 23 chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines 24 that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate. (Emphasis ours.) 25 26 7 11 U.S.C. § 308 imposes upon debtor in a small business, such as Debtor in the instant case, the responsibility to report periodic financial and other reports containing the information set therein. Rule 2015 of 27 Bankruptcy Procedure also requires debtors in possession, such as Debtor in the instant case, to file a statement of any disbursements made during that quarter. PR Local Bankruptcy Rule 2015-2 requires debtors in possession to 28 file with the court a monthly financial report due on the 20th of each subsequent month. 5 1 The Court’s discretion to dismiss or convert a Chapter 11 case is limited if cause is 2 || establised. See Gilroy v. Ameriquest Mortg. Co. (In re Gilroy), 2008 Bankr. Lexis 3968, 2008 WL 3 || 4531982 (B.A.P. 1* Cir. 2008); and AmeriCERT, Inc. v. Straight Through Processing, Inc. (In re 4 AmeriCERT, Inc.), 360 B.R. 398, 401 (Bankr. D. N.H. 2007) (“Prior to its amendment, the statute 5 || provided that a court ‘may’ dismiss the case upon finding cause, but amended section 1112(b) 6 || provides that a court ‘shall’ dismiss if cause is found, absent unusual circumstances.”). The initial 7 || burden is on the movant to argue and present evidence by a preponderance of the evidence standard 8 || to prove its position that there is cause for either conversion or dismissal of the Chapter 11 case, 9 || whichever is in the best interests of creditors and the estate. See Alan N. Resnick & Henry J. 10 || Sommer, 7 Collier on Bankruptcy 41 112.04[4] (16" ed. 2011). “Thus, until the movant carries this 11 || burden, the statutory direction that the court ‘shall convert the case to a case under chapter 7 or 12 || dismiss the case’ is not operative.” Id. Once cause is found, the burden shifts to the opposing party 13 || to show why dismissal or conversion would not be in the best interests of the estate and the 14 |] creditors. See Inre Dr. R. Samanta Roy Institute of Science Technology Inc., 2011 US App. Lexis 15 || 12148 (3 Cir. 2011). Once the movant establishes “cause”, the burden shifts to the debtor to 16 || demonstrate by evidence the “unusual circumstances” that establish that dismissal or conversion 17 || to Chapter 7 is not in the best interests of the creditors and the estate. See Alan N. Resnick & Henry 18 || J. Sommer, 7_Collier on Bankruptcy J 1112.05[1] (16" ed. 2011). The bankruptcy court retains 19 || discretion in determining whether unusual circumstances exist and whether conversion or dismissal 20 || is in the best interest of creditors and the estate. See Id.; Gilroy v. Ameriquest Mortg. Co. (In re 21 || Gilroy), 2008 Bankr. Lexis 3968 (1* Cir. B.A.P. 2008). A determination of unusual circumstances 22 || is fact intensive and contemplates facts that are not common to Chapter 11 cases. See Alan N. 23 || Resnick & Henry J. Sommer, 7 Collier on Bankruptcy 41112.05[1] (16" ed. 2011). Ifthe Chapter 24 || 11 case is devoid of “unusual circumstances”, then the bankruptcy court must apply the Section 25 || 1112(b)(2)* analysis to determine whether the Chapter 11 case is dismissed or converted. The 26 |) —— * Section 1112(b)(2) provides that: 27 [t]he court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under 28 this chapter if the court finds and specifically identifies unusual circumstances establishing that

1 || objecting party must establish all of the factual elements stated in subparagraphs (A) and (B) of 2 || section 1112(b)(2). See Alan N. Resnick & Henry J. Sommer, 7 Collier on Bankruptcy ]1112.05[1] 3 || (16" ed. 2011). Thus, the bankruptcy court may not convert or dismiss a case if: “(1) there is a 4 reasonable likelihood that a plan will be confirmed within a reasonable time; (2) the ‘cause’ for 5 || dismissal or conversion is something other than a continuing loss or diminution of the estate 6 || coupled with a lack of reasonable likelihood of rehabilitation; and (3) there is a reasonable 7 || justification or excuse for a debtor’s act or omission and the act or omission will be cured within 8 || areasonable time.” In re Orbit Petroleum, Inc., 395 B.R. 145, 148 (Bankr. D. N.M. 2008) aff'd, 9 || 421 B.R. 602 (B.A.P. 10 Cir. 2009). 10 Although Section 1112(b)(4) of the Bankruptcy Code fails to define what the term “cause” 11 || means, it provides a list of circumstances which constitute “cause” for conversion or dismissal. 12 || This list of causes is non-exhaustive and therefore a case may be converted or dismissed for other 13 || causes. See AmeriCERT, Inc. v. Straight Through Processing, Inc. In re AmeriCERT, Inc.), 360 14 | B.R. at 401, and Tuli v. US Trustee, 124 Fed. Appx. 830, 831 (5" Cir. 2005). See also 11 U.S.C. 15 | § 1112(b)(4) (using the term “includes” before listing various reasons for dismissing a case). 16 || Section 1112(b)(4)(1) specifically establishes that “failure timely to pay taxes owed after the date 17 || of the order for relief or to file tax returns due after the date of the order for relief” constitutes cause 18 || to dismiss or convert a Chapter 11 case. Thus, failure to file a tax return or pay taxes post-petition 19 || is ground for dismissal. See In re Dr. R. C. Samanta Roy Inst. of Sci. Tech. Inc., 2011 U.S. App. 20 || LEXIS 12148 (8" Cir. 2011). 21 Section 1112(b)(1) requires “notice and a hearing” prior to dismissal or conversion. The 22 || phrase “notice and a hearing” is defined as “after such notice is appropriate in the particular 230 converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor 24 or any other party in interest establishes that— (A) there is a reasonable likelihood that a plan will be confirmed within the time frames 25 established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and 26 (B) the grounds for converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)-- 27 (i) for which there exists a reasonable justification for the act or omission; 28 (ii) that will be cured within a reasonable period of time fixed by the court.

1 || circumstances, and such opportunity for a hearing 1s appropriate in the particular circumstances” 2 | (emphasis added). 11 U.S.C. § 102(A) See also Yehyd-Monosson USA, Inc. v. Fokkena (In re 3 || Yehyd-Monosson USA, Inc.), 2011 Bankr. LEXIS 3725 (8" Cir. 2011) (no evidentiary hearing was 4 || required under 11 U.S.C. § 1112 when the Court’s decision is supported in a Debtor’s admission 5 || ofa fact), In re De Jounghe, 334 B.R. 760, 766 (1* Cir. B.A.P. 2005) (‘‘a full evidentiary [hearing] 6 || is not required, so long as the parties had a fair opportunity to offer relevant facts and arguments 7 || to the court and to confront their adversaries’ submissions”), and In re C-TC 9" Ave. Partnership, 8 || 113 F. 3d 1304, 1312 (2"* Cir. 1997) (an evidentiary hearing was not necessary when “the record 9 |] is sufficiently well developed to allow the bankruptcy court to draw the necessary inferences to 10 || dismiss a Chapter 11 case for cause ...”). Even when a non-evidentiary hearing is conducted under 11 11 U.S.C. § 1112(b), “failure to offer evidence at the hearing may constitute a waiver by the 12 || debtors.” In re De Jounghe, 334 B.R. at 766 citing In re City Stores Co., 42 B.R. 685, 689 13 || (S.D.N-Y. 1984). 14 After the moving party establishes that there is cause to dismiss or convert the case to 15 || Chapter 7, the court must choose between dismissal or conversion, “whichever is in the best interest 16 || of creditors and the estate.” 11 U.S.C. § 1112(b)(1). The standard for choosing between conversion 17 || or dismissal based on “the best interest of creditors and the estate” implies application of a 18 || balancing test by the bankruptcy court. See In re De Jounghe, 334 B.R. at 770, and In re Staff Inv. 19 | Co., 146 B.R. 256, 260 (Bankr. E.D. Cal. 1992). The legislative history shows that Congress 20 || intended to invest the bankruptcy court with “wide discretion ... to make an appropriate disposition 21 || of the case” and “to consider other factors as they arise, and use its equitable powers to reach an 22 || appropriate result in individual cases.” In re De Jounghe, 334 B.R. at 770, citing H.R. Rep. No. 23 || 595, 95" Cong., 2d Sess. 406, reprinted in 1978 U.S.C.C.A.N. 5963, 6361-62. 24 Discussion 25 In the instant case, this court finds that the Debtor failed to timely pay his post-petition 26 || taxes. The finding is based upon the PR Treasury’s Request for the Allowance and Payment of 27 28

1 || Administrative Expenses (Docket No. 101)’, Blanco’s Supplement Motion to Dismiss (Docket No. 2 | 104), the Order to Show Cause re: Dismissal (Docket No. 110) and Debtor’s own admission in his 3 || Motion in Compliance with Court Order to Show Cause re: Dismissal (Docket No. 122, pgs. 4-5, 4 | 7 13: “As for the assessment of the 2011 Special Contribution over the property on the amount of 5 || $1,861.06, the total amount will be paid opportunely in accordance with Debtor’s plan.”) 6 Thus, this court concludes that there is sufficient cause to dismiss the instant case pursuant 7 || to 11 U.S.C. 1112(b)(4)(). 8 Due to Debtor’s own admission, no evidentiary hearing is necessary, especially since he did 9 || not request one after the tax controversy was raised by the PR Treasury and Blanco.'” See Yehyd- 10 || Monosson USA, Inc. v. Fokkena (In re Yehyd-Monosson USA, Inc.), 2011 Bankr. LEXIS 3725 (8" 11 || Cir. 2011), In re De Jounghe, 334 B.R. at 766, and In re C-TC 9" Ave. Partnership, 113 F. 3d at 12 || 1312. Moreover, the court in its Order to Show Cause Re: Dismissal (Docket No. 110) afforded 13 || the Debtor the opportunity to contest the allegations that he was not paying all post petition taxes. 14 || Counterwise, he admitted owing the same. 15 The next phase of the analysis the court must engage in is whether Debtor has demonstrated 16 || that there are “unusual circumstances” that establish that the dismissal or conversion is not in the 17 || best interests of the creditors and the estate. The court finds that the Debtor has not demonstrated 18 || nor alleged “unusual circumstances” in the instant case. The court also concludes that Debtor has 19 || not addressed the requirements under Section 1112(b)(2)(A) and (B). Thus the Debtor has not 20 || established all of the factual elements in conformity with this section. Debtor has failed to allege, 21 |} and much less meet his burden, that there are unusual circumstances showing that conversion or 22 || dismissal is not in the best interest of the estate and creditors. 23 Based on the foregoing, and considering the totality of the circumstances, this court 24 || concludes that dismissal is warranted and mandated pursuant to 11 U.S.C. § 1112(b)(4), which 25 26 ° Said Request was unopposed by the parties. '° Two hearings were conducted and in both Blanco’s motions to dismiss were argued on different grounds, 27 || none including the post-petition tax arrears. It is after the PR Treasury’s Request for the Allowance and Payment of Administrative Expenses (Docket No. 101) that Blanco requested for the first time dismissal under 11 U.S.C. § 28 |] 1112(b)(4)(1) (Docket No. 104).

1 || moots all other pending matters, including Adversary Proceeding No. 11-00059. 2 Conclusion 3 In view of the foregoing, the court finds that there is sufficient cause to dismiss this case 4 | pursuant to 11 U.S.C. §1112(b)(4)(); and there being no unusual circumstances under 11 U.S.C. 5 || §1112(b)(2)(A) and (B), the case is hereby dismissed. Upon the dismissal of the bankruptcy 6 || petition, all pending adversary proceedings shall also be dismissed. 7 Judgment shall be entered accordingly. 8 SO ORDERED. 9 In San Juan, Puerto Rico, this 21st day of October, 2011. 10 " Aprile 12 ~ ique $. Lamoutte B United States Bankruptcy Court 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10