Oliver C & I Corp. v. Carolina Developers Associates S. En C. Por A., S.E., Et Als.

Opinion

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

3 IN RE: CASE NO. 16-08311 (MCF) 4 OLIVER C & I CORP. CHAPTER 11 5 Debtor 6 7

OLIVER C & I CORP. 8

Plaintiff 9 ADVERSARY CASE No. 17-00166 (MCF)

10 V.

11 CAROLINA DEVELOPERS ASSOCIATES S. EN C. POR A., S.E., ET ALS. 12 Defendants 13

14 OPINION AND ORDER 15 16 This proceeding involves a chapter 11 bankruptcy debtor and its general partners in more 17 than a decade-long quarrel regarding the debtor’s economic rights to yearly distributions from 18 several partnerships. Subsequent to its bankruptcy filing, debtor filed the present adversary 19 proceeding to resolve the many disputes that were never addressed in any previous legal action. 20 Its general partners moved to dismiss for lack of subject-matter jurisdiction. For the reasons that 21 follow, the court lacks jurisdiction and therefore the case is dismissed. Alternatively, even if this 22 court has jurisdiction, it will abstain in deference to local law. 23 24 Procedural history and factual background 25 Debtor, Oliver C & I Corp. (“Debtor”) filed its chapter 11 petition in October 2016. At a 26 status conference held on January 11, 2017, Debtor informed the court of its dispute with the 27 partners since 2006 regarding pecuniary rights in a civil-law partnership. It described the dispute as an event that led to its bankruptcy filing. Debtor described the Puerto Rico Department of 1 2 Treasury’s foreclosure of accounts as the reason for filing (Docket No. 29). The deadline for 3 filing proofs of claim was set for April 17, 2017. The Puerto Rico Department of Treasury and 4 the Department of Labor filed claims for $317,049.16 and $37.18, respectively (See Proofs of 5 Claim No. 1 & No. 2, Claims Register). Additionally, Debtor listed an unsecured liquidated debt 6 to Memorial Capital Partners, LLC, an alleged insider, for $238,903.49. By the claims-filing bar 7 date, Debtor had a total of $555,989.83 in undisputed and liquidated debts and a total of 8 $29,947,824.99 in assets. 9 10 Several months later, Debtor filed its Disclosure Statement, Plan of Reorganization in the 11 lead case (Docket Nos. 77 & 78, Case No. 16-08311) and the complaint in this adversary 12 proceeding (Docket No. 1, Case No. 17-00166). Debtor proposes to pay 100% to its creditors 13 under the plan (Docket Nos. 77 & 78, Case No. 16-08311). Funding for the plan will be provided 14 through its accounts receivables (Docket No. 77, at 76, Case No. 16-08311). 15 Through this action, Debtor intends to collect the monies allegedly owed to it by its 16 partners since 2006. Debtor’s partners, the civil-law partnerships themselves, and other third 17 18 parties (“Defendants”) are sued in this action. 19 The Defendants filed a motion to dismiss for lack of subject-matter jurisdiction (Docket 20 No. 24). In it, they request that the court dismiss the proceeding on all counts based on this 21 court’s lack of jurisdiction to interpret the partnership agreements over which Debtor alleges a 22 breach. In the alternative, they request that the court abstain from hearing Debtor’s claims 23 against them. 24 25 Jurisdiction 26 This court has no basis for asserting jurisdiction over this proceeding under 28 U.S.C. 27 §§ 157(b)(2) and 1334. Standard for motion to dismiss due to lack of subject matter jurisdiction 1 2 Rule 12(b)(1) of the Federal Rules of Civil Procedure, made applicable in bankruptcy 3 proceedings pursuant to Fed. R. Bankr. P. 7012, permits a party to assert lack of subject matter 4 jurisdiction as a defense by way of a motion to dismiss. Fed. R. Civ. P. 12(b)(1). “The part[y] 5 asserting jurisdiction [has] the burden of demonstrating the existence of federal 6 jurisdiction.” Acosta–Ramirez v. Banco Popular de Puerto Rico, 712 F.3d 14, 20 (1st Cir. 2013). 7 The standard of review for a 12(b)(1) motion to dismiss turns on whether the defendant 8 has made a “facial” or “factual” jurisdictional attack on the plaintiffs complaint. In re Dinastia, 9 10 L.P., 381 B.R. 512, 518–19 (S.D. Tex. 2007). A defendant who makes a “facial” jurisdictional 11 attack challenges the sufficiency of the allegations of jurisdiction. The court is merely required to 12 assess the sufficiency of the allegations stated in the complaint alone. Id. When a “factual” 13 jurisdictional attack has been made by a defendant, the plaintiff is required to submit facts in 14 support of the court's jurisdiction and bears the burden of proving by a preponderance of the 15 evidence that the court has subject matter jurisdiction. In a “factual” attack, defendant provides 16 affidavits, testimony and other evidentiary materials challenging the court's jurisdiction. Id. See 17 18 also Aversa v. United States, 99 F.3d 1200, 1209–10 (1st Cir. 1996)(“In ruling on a motion to 19 dismiss for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1), the district court 20 must construe the complaint liberally, treating all well-pleaded facts as true and indulging all 21 reasonable inferences in favor of the plaintiff. In addition, the court may consider whatever 22 evidence has been submitted. . . .”)(internal citations omitted). Thus, the court’s inquiry is not 23 limited to the parties’ pleadings and may include whatever evidence has been presented in the 24 25 case. Aversa, 99 F.3d at 1210. 26 27 Discussion 1 2 Debtor intends to collect monies from third parties through the various causes of action 3 raised in the complaint. Its argument that the bankruptcy court has core jurisdiction for turnover 4 actions is not persuasive because complaints to recover property of the estate do not 5 automatically grant jurisdiction.1 “It is settled law that the debtor cannot use the turnover 6 provisions to liquidate contract disputes or otherwise demand assets whose title is in dispute.” 7 Hirsch v. London S.S. Owners' Mut. Life Ins. Ass'n Ltd. (In re Seatrain Lines, Inc.), 198 B.R. 45, 8 50 n. 7 (S.D.N.Y. 1996)(Sotomayor, J.)(quoting United States v. Inslaw, Inc., 932 F.2d 1467, 9 10 1472 (D.C. Cir. 1991)). See also In re Madison Williams & Co., LLC., 509 B.R. 791, 799 11 (Bankr. S.D.N.Y. 2014)(“. . .[Section] 542(b) cannot be used to recover a disputed pre-petition 12 debt.”); In re Teligent, Inc., 325 B.R. 134, 137 (Bankr. S.D.N.Y. 2005); Calka v. Chuu, 2003 WL 13 1344878, at *1 (S.D.N.Y. Mar. 19, 2003) (stating that “section 542(b) only applies to undisputed, 14 liquidated claims”). 15 Furthermore, the court’s “related to” jurisdiction is unsustained by the facts in this case 16 because the resolution of the complaint does not serve any bankruptcy purpose.2 According to 17 18 the Summary of Assets and Liabilities, Debtor has sufficient funds, e.g., $29,947,824.99, in 19 personal property assets of which $3,031,629.49 is accounts receivable, to pay in full its claims. 20 See Summary of Assets and Liabilities, item 1b; Schedule A/B, item 82, (Docket No. 1). Its 21 creditor constituency is composed of three main creditors, namely the Puerto Rico Department of 22 Treasury, Puerto Rico Department of Labor, and Memorial Capital Partners, LLC, an alleged 23 1 A turnover proceeding under section 542(b) of the Bankruptcy Code is an action to compel an entity to turn over to 24 the trustee a debt that is “property of the estate and that is matured, payable on demand, or payable on order.” 11 U.S.C. § 542(b). A turnover proceeding qualifies as core only when its purpose is the “collection rather than the 25 creation, recognition, or liquidation of a matured debt.” In re National Enterprises Inc., 128 B.R. 956, 959 (E.D. Va. 1991); Acolyte Electric Corp. v. City of New York, 69 B.R. 155, 172 (Bankr. E.D.N.Y. 1986). 26 2 Both the procedural history and factual background of the bankruptcy proceeding are pivotal in resolving the jurisdictional challenge raised by the Defendants. In view of the authority referenced above, the court may consider 27 the Debtor’s schedules, the claims register, and proposed reorganization plan alluded to in Defendants’ motion to dismiss and in Debtor’s opposition thereto. insider, for a total of $1,068,801.80 in liabilities.3 See Summary of Assets and Liabilities, item 4, 1 2 (Docket No. 1). It has no secured creditors. Id. Any potential recovery of assets through this 3 action would only benefit the Debtor. The remoteness of this proceeding to Debtor’s 4 reorganization is further accentuated by its proposition to fund its five-year plan through its 5 accounts receivables (Docket No. 77, Disclosure Statement, at 76-77). The creditors and the 6 estate stand to gain no benefit from this litigation, which may be otherwise instated in local 7 court. 8 Abstention 9 10 Even assuming the court did have jurisdiction on any of Debtor’s causes of action, or that 11 it be construed to have jurisdiction as urged by the Debtor, this court shall enter an order of 12 abstention. Section 1334(c)(1) provides: 13 Nothing in this section prevents a district court in the interest of justice, or 14 in the interest of comity with State courts or respect for State law, from 15 abstaining from hearing a particular proceeding arising under title 11 or 16 arising in or related to a case under title 11. 17 18 28 U.S.C. § 1334(c)(1). 19 Under the statute, three criteria exist for permissive abstention: “the interests of justice, 20 comity and respect for State law. In re Middlesex Power Equip. & Marine, Inc., 292 F.3d 61, 69 21 (1st Cir. 2002). Additional factors include “‘the extent to which state law issues predominate 22 over bankruptcy issues;’ ‘the presence of a related proceeding commenced in state court or other 23 nonbankruptcy court;’ and ‘the likelihood that the commencement of the proceeding in 24 25 3 The court used the stated amount of liabilities in Debtor’s schedules, which is higher than the amount reflected in 26 the proposed plan. In re Dorado, 2016 WL 6809068, at *4 (Bankr. D.P.R. Nov. 17, 2016)(citing In re Plourde, 418 B.R. 495, 505 (B.A.P. 1st Cir. 2009)(Bankruptcy schedules are executed under penalty of perjury and may be 27 treated as judicial admissions). Debtor proposes to pay a lesser amount through the plan to government claims (($365,281) (Docket No. 77, at 76)) than it reflects in its schedules (($829,892.31) (Docket No. 1)). 1 bankruptcy court involves forum shopping by one of the parties.’” Id., at 69 (citing Christense 9 Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166-67 (9th Cir. 1990). 3 Debtor’s complaint raises the interpretation of civil-law partnership agreements, whic 4 || involves issues of local law. Thus, this court concludes that abstention is warranted. Debtor has 5 had a local forum in which to assert its breach of partnership-contract claims since 2006, 6 something it has been free to do for the last decade and chose not to pursue. At this juncture 7 filing the complaint seems to be federal forum shopping. In view of the fact that Debtor ma 8 9 administer its estate and pay all creditors’ claims without need of this litigation, this court finds 10 that there is no bankruptcy purpose to this litigation. Accommodating to Debtor’s foru 11 || preference for the resolution of this litigation is not relevant to Debtor’s reorganization. Th 12 |! automatic stay does not prevent Debtor from asserting its alleged claims against Defendants i 13 the appropriate forum. 14 Conclusion 15 6 In view of the foregoing, the court shall enter an order dismissing the Debtor's complain 7 for lack of subject-matter jurisdiction, pursuant to Fed. R. Civ. P. 12(b)(1), and in the alternative 18 || the court abstains from hearing this complaint, pursuant to 28 U.S.C. § 1334(c)(1). Dismissal i 19 || without prejudice to whatever rights the Debtor may have to resolve its partnership dispute in th 20 appropriate forum. 21 IT IS SO ORDERED. 22 In San Juan Puerto Rico, this 1‘ day of November, 2017. 23

25 {LDRED CABAN FLORES 26 U.S. Bankruptcy Judge 27

-6-