MedSci Diagnostics, Inc. v. State Insurance Fund Corp., through its Administrator Zoime Alvarez Rubio, et als

Opinion

UNITED STATES BANKRUPTCY COURT 5 FOR THE DISTRICT OF PUERTO RICO IN RE: 4 5 MEDSCI DIAGNOSTICS, INC. | CASE NUMBER 10-04961- ESL | CHAPTER 11 □ 6 | DEBTORS | . 8 || MEDSCI DIAGNOSTICS, INC. | 9 fo Plaintiffs 10 | ADVERSARY PROCEEDING NUMBER: Vs. 1] | 10-0094 STATE INSURANCE FUND CORP., 12 | through itt ADMINISTRATOR ZOIME ALVAREZ RUBIO, 13 I et als 14 | Defendants 15 — 16 OPINION AND ORDER

8 This adversary proceeding is before the court upon the State Insurance Fund Corporation’s 19 (SIF) motion to stay proceedings pending appeal (dkt. # 186) filed on January 18, 2011, and the 50 opposition thereto filed by debtor/plaintiff, MEDSCI Diagnostic, Inc. (““MEDSCI”’). The SIF requests the stay of the Opinion and Order entered on December 23, 2010 (Dkt. #173) and appealed 9 on January 5, 2011(Dkt. #180). The SIF alleges that the court’s order contains clear errors of 53 as it rewrote the terms of the contract between the parties and adjudicated on the merits one of MEDSCT’s claims. For the reasons set forth below the motion is hereby denied.

35 Background The travel of this adversary proceeding, as well as of the bankruptcy petition, is found in the 57 orders entered by this court on November 24, 2010 (Dkt. # 148)(appealed on December 8, 2010, Dkt. 38 #157), and the appealed order that is the subject of SIF’s request for stay pending appeal being discussed herein.

1 □□□□ 2 A. Order entered on November 24, 2010 (Dkt. # 148): 3 On June 6, 2010 the debtor/plaintiff filed the instant adversary proceeding for damages 4 |! resulting from defendant’s [alleged] breach of contract. On June 14, 2010 the plaintiff filed an 5 || urgent motion for [the] turn over of property and injunctive relief (dkt. #9). Plaintiff requested that 6 || defendant be ordered to comply with the terms of the contract and pay amounts owed for services 7 || rendered. The motion was scheduled for a hearing on June 18, 2010 (dkt. #10). At the hearing the 8 || court entered the following bench orders: 1. Plaintiff will amend complaint to withdraw request for 9 || jury trial. 2. The Court denies the request to dismiss the complaint on sovereign immunity grounds 10 | for the reasons stated in open court. 3. The Court denies the request to dismiss the action on 11 || grounds that the contract is null and void for the reasons stated in open court. 4: The court approved 12 || the interim agreement between the parties for compliance with the terms of the contract. (See dkt. 13 || #29). The matter was continued for July 7, 2010. See minutes of hearing, dkt. #41. At the hearing, 14 || the court granted the SIF a period of five (5) days to supplement the motion for reconsideration. 15 After considering the pleadings filed by the SIF and MEDSCTI, the court scheduled an 16 || evidentiary hearing to determine the validity of the contract (dkt. #93). The SIF filed its proposed 17 | findings of fact and conclusions of law (dkt. #115) and so did MEDSCI (dkt. 18 || #116,117,118,119,120,121). The evidentiary hearing was held and the following witnesses testified: 19 | Ms. Rosemary Alayén Romero (Executive Assistant to the SIF Administrator), Mr. Carlos Ruiz 20 || Nazario (former SIF Administrator who signed contract for SIF), Mr. J orge Garcia Ortiz (Director 21 || of Medical Services for SIF), Dr. Felix Aponte La Luz(licensed radiologist specialized in diagnostic 22 || radiology) and Ralph Vallone, Jr., Esq. (Vice President, Treasurer and stockholder of MEDSCI). 23 || The contract was presented as a joint exhibit. 24 B. Order entered on December 23, 2010 (Dkt. #173): 25 On November 22, 2010 the debtor, MEDSCI Diagnostic, Inc. (MEDSCI), moved the court 26 || on an urgent basis for the payment of invoices owed by the SIF (dkt. #144). MEDSCI claims that 27 || the SIF’s failure to make payment will render it insolvent and unable to continue providing services 28 || pursuant to the contract between the parties. The SIF has challenged the validity of the contract. However, the court found that there is a valid contract between the parties (dkt. #148). The order

1 -3- 2 || has been appealed (dkt. #s 157, 159, 160); and the court denied the SIF’s request for stay pending 3 || appeal (dkt. #s 161, 166 ). There is no question that the payment of invoices for services rendered 4 || under the Contract are needed in order for MEDSCI to continue operating. Clearly, the funds are 5 || vital to MEDSCI’s operations. 6 The controversies, other than the validity of the contract, lie in the amounts owed and the 7 || time within which the SIF must pay the invoices. The court ordered the SIF to pay the invoices 8 | owed and “[i]f there are any amounts which the State Insurance Fund objects to or lack proper 9 | documentation for processing payment, the same shall be detailed and submitted to the court within 10 || seven (7) days.” The SIF has not complied with this order with specificity. The fact that payments 11 | have been made does not translate into a finding that all invoices due have been paid. 12 Decision on appeal 13 On December 23, 2010, the court entered an opinion and order (Dkt. # 173) denying the 14 | SIF’s motion for reconsideration of the order entered on November 24, 2010 (Dkt. # 147). 15 The court held the following: 16 1. The Contract 17 The relevant sections as to the timely payment of invoices are in Part Two, paragraphs B, C, and D of the contract. Clause A states that the provider (MEDSCI) 18 shall submit Form CFSE-2000 duly executed, including the signature of the patient and physician providing the service. Failure of the physician to sign the form will 19 cause its return. Clause C states that the corporation (SIF) will follow the Law of Accounting of the Government of Puerto Rico and applicable regulations. Clause C 20 also states that the corresponding payments by SIF to MEDSCI will be made in the least time possible. Clause D provides for the inclusion of standard language to 21 comply with OE 2001-73 regarding the services being provided and their correctness. The court assumes that both parties will comply with applicable law. FN 1. The 22 issue is what is “the least time possible”, or in the court’s view, as the term is undefined and the parties have not placed the court in a position to determine what 23 is the least time possible, within reasonableness, according to industry standards. FN 1. The Puerto Rico Government Accounting Act 24 is codified in 3 L.P.R.A. §§ 283, et seq. There are no allegations that its policies and provisions are being breached, either directly or 25 impliedly, by any party. Consequently, the SIF may not use the Puerto Rico Government Actas a shield to excuse failure to promptly 26 process invoices for payment. 27 28 2. Reasonable Period of Time to Make Payment The court finds that a reasonable period of time for the SIF to process and pay

1 -4- 2 the invoices submitted by MEDSCTis 40 working days from the date of submission of a proper invoice. If the invoice is defective, the SIF shall alert MEDSCI and 3 explain the deficiencies within 20 working days from submission. The court uses as a guideline the Prompt Payment Act, 31 U.S.C.A. §§ 3901 et seq., and its 4 implementing regulations (5 C.F.R. pt. 1315) requiring payment by federal agencies in 30 days; and the Down Payment System for Government Purveyors of Goods and 5 Service, 3 L.P.R.A. §§ 2301 et seq., and its implementing regulation, Regulation Number 55 (55-00-01 approved on November 17, 2008, and subsequently approved 6 by the Department of State on January 8, 2009, providing for payment within 40 working days. Certainly, the time frames set under Puerto Rico law are a sound 7 guideline to establish the maximum time for processing the invoices. Less time may be “the least amount of time” envisioned by the Contract, but the Court has not been 8 placed in a position to so decide at this time. (Footnotes omitted). 9 3. The Amounts Owed 10 The parties have not placed the court in a position to determine the amounts owed on account of properly submitted invoices, or if there are any invoices which 1] have not been paid for being deficient. Consequently, the court orders MEDSCI to submit to the SIF a detailed list of unpaid invoices within 10 days. The SIF shall 12 review the list and inform MEDSCI and the court within 15 days from receipt of MEDSCTI’s list why the invoices have not been paid, or do not proceed because the 13 same are deficient. If deficient, the deficiency shall be detailed. 14 Standard Under Fed. R. Bankr. P. 8005 15 . A motion for a stay pending appeal under Fed. R. Bankr. P. 8005 is determined pursuant to the four-part test for granting preliminary relief, that is, 17 44: . (1) there is a likelthood of success on the merits of the appeal; 18 . . . (2) the movant will suffer irreparable harm if a stay is not granted; 19 _. (3) the harm to the movant if the stay is not granted is greater than the injury to the opposing 20 party if the stay is granted; and 21 . (4) the public interest would not be affected by the issuance of the stay. 22 Pye v. Excel Case Ready, 238 F.3d 69 (1* Cir. 2001); In re Alfaro, 221 B.R. 927 (B.A.P. 1“ Cir. 23 1998). A motion for stay pending appeal is an extraordinary remedy and requires a substantial 25 . showing on the part of the movant. In re Lickman, 301 B.R. 739 (Bankr. M.D. Fla. 2003). In order 26 . . to grant the motion for stay pending appeal all four prongs must be satisfied. In re Handel, 242 B.R. 27 . . 789, 791 (Bankr. D. Mass. 1999). Failure to meet the four prongs dooms the motion, Eck v. Dodge 28 Chemical Co. (In re Power Recovery Sys., Inc.) 950 F. 2d 798, 804).

1 -5- 2 Discussion 3 A review of this court’s conclusions in the order entered on December 23, 2010 (Dkt. # 173), 4 | as outlined above, in light of the factual background, shows that the only conclusive, albeit 5 || interlocutory, decisions so far entered by this court in this adversary proceeding are: (1) denying the 6 || request to dismiss the complaint on sovereign immunity grounds (Dkt. # 29); and (2) that the 7 | contract between the parties is a valid contract and, consequently, both parties must comply with the 8 | same (Dkt. #s 29,148). The undefined provision in the contract of making the payments in “the least 9 || time possible” was interpreted by this court as being a reasonable period of time, using as a guideline 10 || federal and Puerto Rico statutes. This court did not rewrite the contract, it interpreted an undefined 11 |) term in which the parties could not agree to or illustrate the court on what was envisioned by the 12 || contract. To make payments in the least time possible cannot be when MEDSCI needs the payment 13 | or when the SIF decides to process the invoice, irrespective of celerity. 14 The court has specifically stated in its orders that compliance with all applicable statutes is 15 || assumed, including compliance with the Puerto Rico Accounting Act, 3 L.P.R.A. §§ 283 et seq.. 16 || However, compliance with applicable statutes is not an excuse to not processing the payment of 17 | invoices in the least time possible. The Puerto Rico Accounting Act and the contract terms of 18 || making payments in the least time possible are not inconsistent. The SIF should have accounting 19 || systems and procedures in place, 3 L.P.R.A. § 283(c ), that foster the Puerto Rico version of the 20 || Prompt Payment Act, as codified in 3 L.P.R.A. § 2901. 21 Also, the amounts owed, if any, have not been determined by the court. Such a determination 22 || is, ultimately, the main objective of the adversary proceeding as the contract is the main asset and 23°} source of revenue of MEDSCI. The court has not adjudicated whether MEDSCI has defaulted on 24 || the contract terms because a trial on the merits has not been held. The litigation up to this point has 25 || concentrated on MEDSCI’s requests for the SIF to make timely payment for services rendered under 26 | the contract, and SIF’s challenge to the validity of the contract. 27 The court takes no position on SIF’s allegations that it will suffer irreparable harm if it has 28 || to make payment to other suppliers within 40 working days. These contracts are not before the court. Furthermore, the court declines to dictate how the SIF is structured to insure that it processes

1 -6- 2 || invoices in the least amount of time possible in order to comply with the contract terms. 3 CONCLUSION 4 In view of the foregoing, the court finds that the SIF has failed to establish a likelihood to 5 || succeed on the merits or show irreparable harm, that is, harm that cannot be compensated with 6 || money. Also, the balancing of harm tilts to MEDSCI’s favor. If payment for duly services rendered 7 || is not received then it must cease operations and liquidate its assets. On the other hand, if MEDSCI 8 || complies with the terms of the contract and provides the services needed by the SIF, and which lead 9 || to the contract between the parties, then there is no harm. Lastly, the court does not find public 10 | policy to be an issue at this juncture. 11 Therefore, SIF’s motion for stay pending appeal is hereby denied. 12 SO ORDERED. 13 Dated this 24" of January, 2011, in San Juan, Puerto Rico. 14 15

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